7th Mar 2006 07:01
Provalis PLC07 March 2006 Provalis plc Interim Results for the six months period ended 31 December 2005Chairman's & Chief Executive Officer's Statement Overview Total Group revenues for the six months to 31 December 2005 were £2.6m (2004:£6.7m). For continuing activities in the 6 months to 31 December 2005, Grouprevenues were £0.4m (2004: £0.6m). Group loss for the period was £4.8m (2004:£1.7m). The loss per ordinary share was 1.3p (2004: 0.5p) As indicated at Provalis preliminary results on 19 October 2005, the Board hasundertaken a strategic review aimed at optimising the commercialisation of theGroup's products and achieving the repayment or replacement of bank funding. Oneof the options being considered was the possible sale of assets to realise valuefor the Group. On 16 November 2005 the Group announced that the Board had received indicativeoffers for the Pharmaceuticals division. As per previous guidance, the Boardalso noted that sales of in2it into the US market continued to be disappointingand significant sales were unlikely to be achieved until certain technicalissues were resolved. In December 2005 the Group implemented a cost-cutting programme which resultedin a number of redundancies in the Medical Diagnostics business and thecorporate staff. These measures have reduced the cost base. Also in this period,the Group's ADR programme and the NASDAQ listing in the USA were successfullyterminated thus reducing compliance costs significantly, freeing management timeand avoiding unnecessary and onerous commitments. On 1 February 2006 Provalis announced the sale of certain assets of thePharmaceuticals business to Kogen Limited. The transaction was approved byshareholders at the EGM held on 20 February 2006. Total consideration was £9.5m,plus approximately £0.8m for the stock of the products, which was received incash in February 2006. Transaction costs were approximately £0.5m. The Group retained the infrastructure, employees and certain working capitalbalances of Provalis Healthcare. The closure costs associated with theseemployees and infrastructure are expected to be up to £1.0m. The net cash proceeds of approximately £9.8m have been used primarily to repaythe entire borrowings of the Group and to fund the closure costs. Review of Operations Medical Diagnostics Sales in the Medical Diagnostics business were £0.4m (2004: £0.6m). These saleswere predominantly of Glycosal, the Group's first generation diagnostic test,for which demand appears to be steady. The loss for the business over the period was £2.6m (2004: £2.4m), this slightincrease is attributable to the increased manufacturing overhead built inanticipation of the expected growth of in2it. The flagship product of the Medical Diagnostics business is the in2it analyser,an automated platform for carrying out diagnostic tests at the point-of-careusing a disposable test cartridge. As we have previously advised, sales ofin2it, whilst still continuing at a very low level, will continue to bedisappointing until certain technical issues are resolved. During the period theGroup identified the causes of these technical issues and developed plans fortheir resolution. However, these issues do need resolving before commercialexploitation of in2it can be achieved and accordingly meaningful sales of in2itcannot be expected for a number of months. During the period the business significantly reduced its cost base whichresulted in redundancies across the organisation including the termination ofthe US sales management team and closure of the Provalis Medical Diagnostics USoperations. A short term arrangement has been entered into with a Florida basedUS physicians office laboratory distributor to maintain supplies to existingusers of the in2it system. The Medical Diagnostics R&D resources are nowexclusively focussed on resolving the technical issues with in2it A1C andfurther development work on additional assays has been suspended. Pharmaceuticals Sales in the Pharmaceuticals business were £2.2m (2004: £6.1m) a decline of£3.9m on the same period last year. £2.5m of the decline was due to the agreedcessation from December 2004 of the distribution of Dr Falk Pharma products, and£1.3m of the decline was due to lower sales of Diclomax following theintroduction of a generic competitor in October 2004. The loss for the period was £1.1m compared to a profit of £1.5m in the sameperiod last year. The £2.6m adverse movement was primarily the result of reducedgross profit of £2.6m from the lower sales and lower percentage gross margin. As described in the Overview, the sale of certain assets of this business wascompleted on 20 February 2006 and the remaining infrastructure has been closed. Vaccines Whilst the Group has negligible exposure to any costs associated with its formervaccines programmes, it does have potential income from milestone payments androyalties. No such income was recorded during the period. IFRS The 2005 Interim Report is the first in which Provalis has reported underInternational Financial Reporting Standards (IFRS) as adopted by the EU.Previously all reporting was under United Kingdom Generally Accepted AccountingPrinciples (UK GAAP). Although the Group's Accounting Policies have been revisedto comply with IFRS the restatement of the results has not resulted in anymaterial adjustments to either the consolidated income statement or theconsolidated balance sheet other than with respect to the presentation of thesestatements. Outlook Following the completion of the disposal of the Pharmaceuticals business, theentire borrowings of the Group were repaid in February 2006 leaving the Groupdebt free. The resulting cash balance, of circa £4.0m is being used to continuethe resolution of the technical issues associated with in2it. The Board has reviewed in detail the Group's cash flow forecast for the currentfinancial year and its projections for the subsequent financial year and hasconcluded that, in the absence of further equity funding and, given thatborrowing facilities are unlikely to be available at this time, Provalis is notin a position on its own to exploit the opportunities that in2it presents.Accordingly a number of options for the Medical Diagnostics division are beingconsidered including the possible sale of the business or assets, or a jointventure, licensing or partnering agreement with a third party. The Board is in discussions with a number of interested parties regarding thepossible sale of the business or assets of the Medical Diagnostics division.These discussions are at an early stage and there can be no certainty that theywill have a successful conclusion. In the event the business or the assets ofthe Medical Diagnostics division are sold, the transaction would be conditionalon shareholder approval and if sold it would be the intention of the Board todistribute, if applicable, the cash remaining within the Group to shareholdersas part of a solvent winding-up of the Group. As discussed above, the directors have formed a judgement that the Group hasstrategies in place for the future, certain of which would, if successfullyimplemented, generate sufficient resources to enable the Group to continueoperating for the foreseeable future. Although there can be no certainty as tothe outcome either of the current discussions or of the Board's strategicreview, for these reasons the directors continue to prepare the financialinformation on a going concern basis. Board and Management In August 2005 Mr Peter Woodford, a non executive director, agreed to becomeInterim Chief Executive Officer for a minimum of six months. We are pleased toadvise that this arrangement has been extended and Mr Woodford will becontinuing in that role at least until 30 June 2006. On 20 February Mr Frank Harding stood down as Chairman and director followingthe EGM to approve the sale of the Pharmaceuticals business. The Board recordsits sincere thanks for his contribution to the Group over the last seven years. Dr Alan Aikman, who joined the Board as a non-executive director in February2005 has assumed the role of Chairman. In the light of the reduced size of the Group, Mr Peter Bream will step down on31 March 2006 as Group Finance Director. The Board would like to thank him forhis commitment and effort and wish him well for his future endeavours. Mr MarkKeen, the current Director of Finance (Operations), a non-Board position, willassume overall responsibility for Provalis' finance functions. Mr Lee Greenbury, Provalis' Company Secretary and Group Legal Advisor, has beenappointed as a director on 7 March 2006. 6 months 6 months Year ended ended ended 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) Notes £'m £'m £'mContinuing operationsRevenue 2 0.4 0.6 1.3 0.4 0.6 1.3Cost of sales (1.1) (0.7) (1.7)Gross loss (0.7) (0.1) (0.4)Selling and distribution expenses (0.8) (0.9) (1.4)Administration expenses Administration costs (1.5) (0.9) (2.1) Research and development costs (0.6) (1.6) (2.3) (2.1) (2.5) (4.4) Operating loss (3.6) (3.5) (6.2)Financial expenses (0.1) - -Loss before tax 2 (3.7) (3.5) (6.2)Income tax income 4 - 0.3 0.3Loss for the period from continuing activities (3.7) (3.2) (5.9)Discontinued operations(Loss) profit for the period from discontinued operations net of tax 3 (1.1) 1.5 0.6Loss for the period (4.8) (1.7) (5.3)Attributable to: Equity holders of parent company (4.8) (1.7) (5.3) Loss per ordinary share - basic and diluted 5 (1.3)p (0.5)p (1.5)pFor continuing activities (1.0)p (0.9)p (1.7)p Consolidated Statement of Recognised Income and ExpenseFor the six months ended 31 December 2005 6 months 6 months Year ended ended ended 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) £'m £'m £'mExchange differences on translation of foreign currency net investments 0.1 0.1 -Net income recognised directly in equity 0.1 0.1 -Loss for the period (4.8) (1.7) (5.3)Total recognised Income and Expense for the period (4.7) (1.6) (5.3) Attributable to:Equity holder of the parent company (4.7) (1.6) (5.3) 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) Notes £'m £'m £'mAssetsNon-current assetsIntangible assets 6 - 10.3 9.6Property, Plant & Equipment 1.9 2.1 2.2Assets held for resale 6 9.0 - -Total non current assets 10.9 12.4 11.8Current assetsInventories 1.9 2.1 1.9Trade and other receivables 1.4 4.5 1.7Cash and cash equivalents - 1.1 0.6Total current assets 3.3 7.7 4.2Total assets 14.2 20.1 16.0 Equity and LiabilitiesEquity attributable to holders of the parent:Issued capital 7 3.6 3.6 3.6Share premium account 7 26.3 26.3 26.3Other reserves 7 96.4 96.4 96.3Retained earnings 7 (118.8) (110.4) (114.0)Total equity attributable to equity holders of the parent 7.5 15.9 12.2 Non-current liabilitiesDeferred government grants 0.1 0.1 0.1Securitised debt 0.1 - -Total non current liabilities 0.2 0.1 0.1 Current liabilitiesTrade and other payables 2.4 4.0 2.3Short term borrowings 4.0 - 1.3Current tax payable - - -Deferred government grants 0.1 0.1 0.1Total current liabilities 6.5 4.1 3.7Total liabilities 6.7 4.2 3.8Total equity and liabilities 14.2 20.1 16.0 Unaudited Unaudited Audited 6 months to 6 months to 12 months to 31 December 31 December 30 June 2005 2004 2005 Notes £'m £'m £'mCash flows from operating activitiesLoss before tax (4.8) (2.0) (5.6)Adjustments for:Depreciation 0.4 0.3 0.6Amortisation of intangible fixed assets 0.6 0.8 1.5Interest expense 0.1 - -Operating profit before changes in working capital (3.7) (0.9) (3.5)Decrease in inventories - - 0.2Decrease (increase) in trade and other receivables 0.3 (0.8) 0.5Increase in trade and other payables 0.3 0.9 0.7Cash generated from operations (3.1) (0.8) (2.1)Interest paid (0.1) - -Taxes paid - - (0.1)Net cash flows from operating activities (3.2) (0.8) (2.2)Cash flows from investing activitiesCapital expenditure - intangible assets - (1.8) (1.8)Capital expenditure - tangible assets (0.1) (0.6) (1.0)Net cash flows from investing activities (0.1) (2.4) (2.8)Cash flows from financing activitiesProceeds from issue of ordinary share capital - 2.5 2.5Securitised debt finance - - -Net cash received from financing activities - 2.5 2.5Net decrease in cash and cash equivalents (3.3) (0.7) (2.5)Cash and cash equivalents at the beginning of the period (0.7) 1.8 1.8Cash and cash equivalents at the end of the period 8 (4.0) 1.1 (0.7) For the purposes of the Consolidated Cash Flow Statement, cash and cash equivalents comprise thefollowing: Unaudited Unaudited Unaudited 31 December 31 December 30 June 2005 2004 2005 £'000 £'000 £'000Cash and cash equivalents - 1.1 0.6Short term borrowings (4.0) - (1.3) (4.0) 1.1 (0.7) 1. Principal accounting policies Basis of preparation The financial information has been prepared on the historical cost basis, exceptfor the revaluation of certain financial instruments. The going concern basis has been used for the preparation of the financialinformation. A summary of the issues and the basis on which the directors havereached their conclusion that this basis is appropriate is included in the "Outlook" section of the Chairman's and Chief Executive Officer's Statement. EU Law (IAS Regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements for the company, for the year ending 30 June 2006, beprepared in accordance with International Financial Reporting Standards (IFRSs)as adopted by the EU ("adopted IFRSs"). This interim financial information has been prepared on the basis of therecognition and measurement requirements of adopted IFRSs as at 31 December 2005that are effective (or available for early adoption) at 30 June 2006, theGroup's first annual reporting date at which it is required to use adoptedIFRSs. Based on these adopted IFRSs, the directors have applied the accountingpolicies, as set out below, which they expect to apply when the first annualIFRS financial statements are prepared for the year ending 30 June 2006. However, the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 30 June 2006are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the year ending 30 June 2006. (a) Basis of consolidation The consolidated financial statements incorporate the financial statement of theCompany and its subsidiaries made up to 30 June each year. Subsidiaries areentities controlled by the Company. Control is achieved where the Company hasthe power to govern the financial and operating policies of an investeeenterprise so as to obtain benefits from its activities. On acquisition, the identifiable assets, liabilities and contingent liabilitiesof a subsidiary are measured at their fair values at the date of acquisition.The interest of minority shareholders is stated at the minority's proportion ofthe fair values of the identifiable assets, liabilities and contingentliabilities recognised. The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the date control commences or up tothe date control ceases, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used byother members of the Group. All inter-company transactions and balances between group enterprises areeliminated on consolidation. (b) Intangible fixed assets Acquisition of product distribution rights, technology rights and brands areshown at cost less amortisation and provision is made for any impairment. Costsare amortised over the period in which future benefits are expected to arise. The amortisation period of Diclomax(R) is 10 years on a straight-line basis. Patents and trademarks are measured initially at purchase cost and amortised ona straight-line basis over their estimated useful lives, which is on average tenyears. (c) Research and Development Expenditure Expenditure on research activities, undertaken with prospect of gaining newscientific or technical knowledge, is recognised in the income statement as anexpense as incurred. Expenditure on development activities, whereby research findings are applied toa plan or design for the production of new or substantially improved productsand processes, is capitalised if the product or process is technically orcommercially feasible and the Group has sufficient resources to completedevelopment. The expenditure capitalised includes the cost of materials, directlabour and an appropriate proportion of overheads. Other development expenditureis recognised in the income statement as an expense as incurred. Capitaliseddevelopment expenditure is stated at cost less accumulated amortisation andimpairment losses (see accounting policy g). Capitalised development expenditureis amortised on a straight-line basis over the useful lives, which is usually nomore than seven years. (d) Property, Plant and Equipment Property, plant and equipment are stated at cost, net of depreciation and anyprovision for impairment. Depreciation is provided at rates calculated to writeoff the cost, less estimated residual value, of each asset on a straight-linebasis over its expected useful life, as follows: Plant and machinery 2-10 years Equipment, fixtures and fittings 5-10 years Computer equipment 3 years (e) Leased assets (i) Finance leases Assets which are financed by leasing agreements that transfer substantially allthe risks and rewards of ownership to the lessee (finance leases) arecapitalised in tangible fixed assets and the corresponding capital cost is shownas an obligation to the lessor in borrowings. Depreciation is charged to theincome statement over the shorter of the estimated useful life and the term ofthe lease. The capital element of lease payments reduces the obligation to thelessor and the interest element is charged to the income statement over the termof the lease in proportion to the capital amount outstanding. (ii) Operating leases Leases where the lessor retains substantially all the risks and rewards ofownership are classified as operating leases. Lease payments are charged to theincome statement on a straight line basis over the term of the lease. (f) Investments Fixed asset investments are shown at cost less provision for impairment. (g) Impairment At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets with finite lives to determine whether there isany indication that those assets have suffered an impairment loss. If any suchindication exists, the recoverable amount of the asset is estimated in order todetermine the extent of the impairment loss (if any). Where it is not possibleto estimate the recoverable amount of an individual asset, the Group estimatesthe recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. Impairment lossesare recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairmentloss is recognised as income immediately. (h) Inventories Inventories are valued at the lower of cost and net realisable value. The costof manufactured goods includes materials, direct labour and an appropriateportion of fixed and variable overheads, based on normal levels of activity.Costs are assigned on a first-in-first-out basis. (i) Taxation The charge for current tax is based on the results for the year as adjusted foritems which are non-assessable or disallowed for taxation purposes. It iscalculated using rates that have been enacted or substantively enacted by thebalance sheet date. Deferred tax is accounted for using the balance sheet liability method inrespect of temporary differences arising from differences between the carryingamount of assets and liabilities in the financial statements and thecorresponding tax basis used in the computation of taxable profit. Deferred taxliabilities are recognised for all taxable temporary differences and deferredtax assets are recognised to the extent that it is probably that taxable profitswill be available against which deductible temporary differences can beutilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill (or negative goodwill) or from the initialrecognition of other assets and liabilities in a transaction which affectsneither the tax profit nor the accounting profit. Deferred tax is calculated at the rates that are expected to apply when theasset or liability is settled. Deferred tax is charged or credited in the incomestatement, except when it relates to items credited or charged directly toequity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxeslevied by the same taxation authority, the Group intends to settle its currenttax assets and liabilities on a net basis and there is a legally enforceableright to settle on a net basis. (j) Retirement Benefit Costs The Group operates a defined contribution retirement benefit plan for allemployees. Contributions are charged as an expense when they fall due. (k) Foreign Currencies Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in such currencies are retranslated at the rates prevailing on thebalance sheet date. Foreign exchange differences arising on translation arerecognised in the income statement. In order to hedge its exposure to certain foreign exchange risks, the Groupenters into forward contracts and options (see below for details of the Group'saccounting policies in respect of such derivative financial investments). On consolidation, the assets and liabilities of the Group's overseas operationsare translated at the exchange rates prevailing at the balance sheet date.Income and expense items are translated at the exchange rates at the date of thetransaction. Exchange differences arising, if any, are classified as equity andtransferred to the Group's translation reserve. Such translation differencesare recognised as income or as expenses in the period in which the operation isdisposed of. Any differences that have arisen since 1 July 2004, the date oftransition to IFRS, are presented as a separate component of equity. As allowedby IFRS 1 the cumulative translation differences are deemed to be zero at thedate of the transition to IFRS. (l) Revenue Recognition Group revenue comprises the value of sales (excluding VAT and similar taxes,trade discounts and intra-group transactions) of goods and services in thenormal course of business. Revenue also includes the sale of product rights,royalties and milestone payments. Product Sales • Revenue from product sales is recorded as sales in our financial statements and valued at the invoiced amount (excluding sales and value added taxes). Revenue is recognised when risks and rewards of ownership transfers. Income recognition criteria for non-product sales • Royalties are recognised on a time accrual basis unless there remains uncertainty over their collection, in which case recognition is deferred until such uncertainties are removed which is typically on cash receipt. • Revenue under research and development reimbursement contracts, where there is no obligation to repay such amounts, is recognised as the related costs are incurred and is recorded as revenue under IFRS. • Income associated with performance milestones is recognised based upon the occurrence of the event that triggers the milestone payment, as defined in the respective agreement, and is recorded as revenue when there is an unconditional entitlement to the income and there are no further obligations in respect of the milestone. • Income in relation to the disposal of a product right is recognised when title passes and the income is non-refundable. Revenue recognition is a critical accounting policy as it can involve difficultjudgements. This is particularly the case where there is a multiple elementarrangement and/or the Group retains certain obligations. Under IFRSnon-refundable licence fee revenue is recognised when earned and when the Grouphas no future obligation pursuant to the licence fee, in accordance with theterms of the relevant contract. Interest income is accrued on a time basis, by reference to the principaloutstanding and at the interest rate applicable. (m) Borrowing Costs Borrowing costs are recognised as an expense when incurred. (n) Government Grants Government grants in respect of capital expenditure are credited to a deferredincome account and are released to profit over the expected useful lives of therelevant assets by equal annual instalments. Grants of a revenue nature arecredited to income by netting off directly against the expenditure to which theyrelate. (o) Financial Instruments Cash and cash equivalents Cash equivalents are defined as including short term deposits with originalmaturity within 3 months. For the purposes of the consolidated cash flowstatement, cash and cash equivalents consist of cash and cash equivalents net ofoutstanding bank overdrafts. Trade receivables and payables Trade receivables do not carry any interest and are stated at amortised cost asreduced by appropriate allowances for estimated irrecoverable amounts. There isno intention to trade the receivables. Trade payables are not interest bearingand are stated at their amortised cost. Derivative financial instruments The group uses derivative financial instruments such as foreign currencycontracts to hedge its risks associated with foreign currency fluctuations. Suchderivative financial instruments are stated at fair value. The fair value offorward exchange contracts is calculated by reference to current forwardexchange rates for contracts with similar maturity profiles. Any gains or lossesarising from changes in fair value are taken directly to the income statement. (p) Equity settled share based payments The company operates a savings related share option scheme under which optionshave been granted to employees. The fair value of options granted is recognisedas an expense in the income statement with a corresponding credit to equity. The total amount which is expensed over the specified period until the optionscan be exercised (the vesting period) is determined by the fair value of theoption at the date of the grant. The fair value of the option calculated isdetermined by use of mathematical modelling including the Black Scholes optionpricing model. The company re-assesses its estimate of the number of options that are expectedto become exercisable at each balance sheet date. Any adjustments to theoriginal estimates for non-market conditions are recognised in the incomestatement (and equity). No expense is recognised for awards that do notultimately vest. Awards under the Long Term Incentive Plan have two separate vesting conditions,both of which are dependent on market-based conditions. The market-basedconditions of the award are taken into account in valuing the award at the grantdate. At each subsequent balance sheet date the Group revises its estimate ofthe number of employees who will receive awards. No adjustment is made forchanges in the likelihood of meeting the market conditions. It recognizes theimpact of the revision of original estimates, if any, in the income statement,and a corresponding adjustment to equity over the remaining vesting period. IFRS2 has been applied to equity instruments granted after 7 November 2002 thathad not vested at 1 July 2004. (q) Segmental reporting The Group's primary reporting format is its business segments and its secondaryformat is geographical segments. A segment is a component of the Group whichcan be distinguished separately as providing a product or service within aparticular environment which is subject to risks and rewards that are differentfrom those of other segments. The group has identified two business segments: • Pharmaceuticals• Medical Diagnostics Transfer pricing between business segments is set on an arms length basissimilar to transactions with third parties. The Group's geographical segments are determined by the location of the Group'sassets and operations. (r) Non-current assets held for sale and discontinued operations Immediately before classification as held for sale the measurement of the assets(and all assets and liabilities in a disposal group) is brought up-to-date inaccordance with applicable IFRSs On classification as held for sale, non-current assets are recognised at thelower of carrying amount and fair value less costs to disposal. Impairmentlosses on initial classification as held for sale are included in profit orloss, as are any gains and losses on subsequent re-measurement. A discontinued operation is a component of the Group's business that representsa separate major line of business or geographical area of operations or is asubsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when theoperation meets the criteria to be classified as held for sale, if earlier. Adisposal group that is to be abandoned may also qualify. IFRS These are the Group's first IFRS Consolidated Interim Statements covering thefirst half of the year in which the Group's Annual Report will be reported underIFRS as adopted by the EU. These consolidated interim statements are notrequired to and do not comply with all the disclosures required under IAS 34. Reconciliations between UK GAAP and IFRS for the results for the year ended 30June 2005 are included in these consolidated interim statements as are thereconciliations for the results for the period ended 31 December 2004 which canbe found in notes 10 and 11 of these consolidated interim statements. The interim financial statements have been reviewed by the Group's auditors. Acopy of the auditors' review report is attached to this interim report. 2. Segmental analysis by class of business The analysis by class of business of the Group's revenue, loss on ordinaryactivities before taxation and net assets is set out below: 6 months 6 months Year ended ended ended 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) £'m £'m £'mRevenueContinuing activities - Medical Diagnostics 0.4 0.6 1.3Discontinued operations - Pharmaceuticals 2.2 6.1 9.1 2.6 6.7 10.4 Profit (loss) before taxationContinuing activities - Medical Diagnostics (2.6) (2.4) (4.5) - Central (1.0) (1.1) (1.7)Net interest payable (0.1) - -Discontinued operations - Pharmaceuticals (1.1) 1.5 0.6 (4.8) (2.0) (5.6) 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) £'m £'m £'mNet assets- Medical Diagnostics 1.3 2.5 2.5- Pharmaceuticals 6.2 13.4 9.7Net assets 7.5 15.9 12.2 Central assets and liabilities have been allocated to the two business segmentson the basis of the underlying net assets of each segment prior to theallocation. 3. Discontinued operations On 1 February 2006 the Group entered into a sale agreement to dispose of thebusiness assets and product rights of Provalis Healthcare Limited. The disposalwas effected in order to generate cash flow for the Medical Diagnosticsbusiness. The disposal was completed on 20 February 2006. The results of the Pharmaceuticals business for the period from 1 July 2005 to31 December 2005 which have been included in the consolidated financialstatements were as follows: Income statement for discontinued operations 6 months 6 months Year ended ended ended 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) £'m £'m £'mRevenue 2.2 6.1 9.1Cost of sales (1.2) (2.5) (3.9)Gross Profit 1.0 3.6 5.2Selling and distribution costs (1.2) (1.7) (3.2)Administration expenses Amortisation of intangible assets (0.6) (0.8) (1.5) Administration costs (0.3) (0.3) (0.6) Compensation arising from Dimethaid Arbitration - 0.1 0.1 Profit on variation of distribution agreement - 0.6 0.6 (0.9) (0.4) (1.4)(Loss) Profit before tax (1.1) 1.5 0.6Income tax expense - - -(Loss) Profit from ordinary activities after tax (1.1) 1.5 0.6 Cash flow statement for discontinued operations 6 months 6 months Year ended ended ended 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) £'m £'m £'mCash flows from operating activitiesProfit (loss) before tax (1.1) 1.5 0.6Adjustments for:Amortisation of intangible fixed assets 0.6 0.8 1.5Operating profit before changes in working capital (0.5) 2.3 2.1Decrease in inventories 0.2 0.1 0.6Decrease in trade and other receivables 0.5 - 0.7Increase (decrease) in trade and other payables - 0.6 (0.9)Net cash flows from operating activities 0.2 3.0 2.5Cash flows from investing activitiesCapital expenditure - intangible assets - (1.8) (1.8)Net cash flows from investing activities - (1.8) (1.8)Net increase in cash and cash equivalents 0.2 1.2 0.7 4. Taxation In December 2003 the Inland Revenue rejected a claim for R&D tax credits in theMedical Diagnostics business for the year ended 30 June 2002 and a provision of£0.3m was included in the tax charge for the year ended 30 June 2004. The Groupreached agreement with the Inland Revenue and the provision was released in thetax charge for the period ended 31 December 2004. 5. Loss per share The loss per share is based on the loss for the period of £4.8m (6 months ended31 December 2004: loss £1.7m; full year 2005: loss £5.3m) and the weightedaverage number of ordinary shares in issue during the period of 363,726,929 (6months ended 31 December 2004: 348,828,313; full year 2005: 356,297,655). 6. Intangible assets The intangible assets represent the cost of acquisition of Diclomax(R) on 3December 2001, for £14.9m. The asset was being amortised over a period of tenyears and the Consolidated Income Statement for the six months ended 31 December2005 contains an amortisation charge of £0.6m (six months ended 31 December2004: £0.8m). Amortisation charged ceased in November 2005 when the asset was classed as heldfor resale. In February 2006 the intangible asset held for resale was sold. 7. Movements in equity shareholders' funds Called-up Share Profit share premium Merger Translation and loss capital account reserve reserve account Total £'m £'m £'m £'m £'m £'mBalance at 1 July 2005 3.6 26.3 96.3 - (114.0) 12.2Loss for the period - - - - (4.8) (4.8)Currency translation - - - 0.1differences on foreigncurrency net investments - 0.1Balance at 31 December 2005 3.6 26.3 96.3 0.1 (118.8) 7.5 8. Cash flow information (a) Reconciliation of net cash flow to movements in net funds 6 months 6 months Year ended ended ended 31 December 31 December 30 June 2005 2004 2005 (Unaudited) (Unaudited) (Audited) £'m £'m £'m(Decrease) increase in cash in the period (0.6) (0.7) (1.1)Cash inflow arising from increase in debt financing (2.7) - (1.3)Decrease in short term deposits - - (0.1)Movement in net funds in the period (3.3) (0.7) (2.5)Net funds at start of period (0.7) 1.8 1.8Net funds at end of period (4.0) (1.1) (0.7) (b) Analysis of changes in net funds As at As at 1 July Cash 31 December 2005 Flow 2005 (Audited) (Unaudited) (Unaudited) £'m £'m £'mCash 0.6 (0.6) -Short term deposits (1.3) (2.7) (4.0)Net funds (0.7) (3.3) (4.0) Short term deposits have a maturity of more than 24 hours but less than 12months. They are repayable on demand subject, in some instances, to therepayment of certain expenses. Cash includes cash in hand and deposits repayableon demand. 9. Publication of non-statutory accounts The comparative figures for the financial year ended 30 June 2005 are not thecompany's statutory accounts for that financial year. Those accounts which wereprepared under UK GAAP have been reported on by the company's auditors anddelivered to the registrar of companies. The report of the auditors was (i)unqualified, (ii) included a reference to the uncertainty over going concern towhich the auditors drew attention by way of emphasis without qualifying theirreport, and (iii) did not contain a statement under section 237(2) or (3) of theCompanies Act 1985. 10. Reconciliation of UK GAAP to Preliminary IFRS Consolidated Income Statementfor the year ended 30 June 2005 and for the six months ended 31 December 2004 There are no material differences between the UK GAAP and Preliminary IFRSConsolidated Income Statement. 11. Reconciliation of Equity from UK GAAP to Preliminary IFRS ConsolidatedBalance Sheet as at 30 June 2005 and at 31 December 2004. There are no material differences between the UK GAAP and Preliminary IFRSConsolidated Balance Sheet. Independent review report to Provalis plc Introduction We have been engaged by the company to review the financial information set outon pages 4 to 13 and we have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the group will be prepared in accordance with IFRSs as adopted bythe European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the directors currently intend to usein the next annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs as adopted by in the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiriesof group management and applying analytical procedures to the financialinformation and underlying financial data and, based thereon, assessing whetherthe accounting policies and presentation have been consistently applied unlessotherwise disclosed. A review is substantially less in scope than an auditperformed in accordance with Auditing Standards and therefore provides a lowerlevel of assurance than an audit. Accordingly, we do not express an auditopinion on the financial information. Going concern In arriving at our review conclusion, we have considered the adequacy ofdisclosures made in the financial information concerning the uncertainty as tothe outcome of the directors' strategic review, including of their currentdiscussions with potential purchasers of the business or assets of the group,and consequently as to the ability of the group to continue in operationalexistence. Details of the circumstances relating to this fundamentaluncertainty are described in note 1. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 December 2005. KPMG Audit PlcChartered Accountants8 Princes ParadeLiverpoolL3 1QH6 March 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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