20th Sep 2005 07:02
Medical Solutions PLC20 September 2005 For further information, please contact: Medical Solutions plc Charles Green Chief Executive Officer Neil Johnston Chief Financial Officer Tel: 0115 973 9010 www.medical-solutions.co.uk Bell Pottinger Ann-Marie Wilkinson/Geoff Callow Tel: 0207 861 3232 Medical Solutions plc Interim results for the six months ended 30 June 2005 Medical Solutions plc (LSE: MLS) announces its unaudited interim results for thesix months ended 30 June 2005 prepared under International Financial ReportingStandards ("IFRS's") in accordance with the basis of preparation set out in Note1. Financial Highlights •Turnover from continuing operations up 56% to £5.0 million (H1 2004: £3.2 million) •Gross profit improved to £1.9 million (H1 2004: £1.0 million;gross profit margin up to 39% (H1 2004: 33%; 2004: 22%) •Operating expenses (excluding gain on sale of fixed assets, restructuring costs and other one-off costs in 2004) reduced by £0.9 million to £3.1 million from £4.0 million in H2 2004 •Operating loss from continuing operations (excluding restructuring costs of £0.3 million) of £0.7 million (H1 2004: loss of £0.9 million) •Loss for the period of £1.1 million (H1 2004: £1.5 million) •Net cash of £2.7 million (30 June 2004: £1.7 million) Operational Highlights •Awarded three Liquid Based Cytology ("LBC") agreements worth £7.1 million over five years; England & Wales LBC target market share raised from 35% to 40% •LBC UK Distribution Agreement with Tripath Imaging Inc. renewed until 31 December 2008 •Acquisitions of Dubai Medical Laboratories and Specialised Clinical Laboratories formally completed, both earnings enhancing during period •Certain intellectual property rights sold to Hamamatsu Photonics KK for initial consideration of £450,000 •Further steps taken to reduce costs including consolidation of UK diagnostic pathology in Nottingham, closure of Harley Street facility and significant reduction in UK headcount Charles Green, Chief Executive Officer, said:"We have seen strong progress during the first half of 2005. Medical Solutionshas been awarded three significant LBC contracts and, in addition, we have seengood revenue growth in our Drug Development Services division and in our Dubaibusiness. We remain focused on becoming a profitable business and theimplementation of various cost reduction initiatives at the beginning of theyear is yielding positive results. Our key objective for the second half of the year is to maintain this level ofprogress, continue to reduce costs and improve efficiency whilst positioning thebusiness for organic growth in 2006 and beyond." Chairman's Statement Introduction Following the successful Placing and Open Offer in January, the Board of MedicalSolutions implemented a number of initiatives aimed at improving the Group'sperformance at both the financial and operational level. Our financialperformance for the first six months of 2005 has begun to reflect these changesand the Board is encouraged by the progress made to date. Financial and operational review Financial review Turnover for the six months ended 30 June 2005 from continuing operationsincreased by 56% to £5.0 million compared with £3.2 million in the first half of2004. The increase in turnover during the period has been driven by significantgrowth in our Liquid Based Cytology ("LBC") and Drug Development Servicesbusiness streams in the UK and by strong growth in Dubai. Sales in our UKDiagnostic Pathology business have been flat compared to the same period in2004. As expected, revenue from other Technology sales (excluding LBC) havedeclined vindicating the Board's decision to exit this area of our business. Gross margins from continuing operations have improved significantly from £1.0million (33%) for the first six months of 2004 to £1.9 million (39%) as a resultof the increased efficiency of our operations during the period followingheadcount reductions in our UK workforce. Operating expenses (excluding gains on sales of fixed assets, restructuringcosts and other one-off items in 2004) have been reduced by £0.9 million to £3.1million compared with £4.0 million in H2 2004. Operating expenses (excludinggains on sale of fixed assets and restructuring costs) have increased to £3.1million for the six months ended 30 June 2005 from £2.9 million in H1 2004. Operating losses from continuing operations (excluding restructuring costs of£0.3 million) for the six months ended 30 June 2005 were £0.7 million (H1 2004:£0.9 million). Operating expenses includes an exceptional restructuring chargeof £287,000 (H1 2004: £nil) relating principally to the closure of the HarleyStreet facility and a charge of £124,000 relating to a share option basedcompensation charge as required by IFRS 2 (H1 2004: £158,000), (see Note ii inthe Appendix). Management has made good progress on the identification and realisation of costsavings as set out at the time of the Placing and Open Offer, particularlywithin its UK business. During the period, we have terminated or restructuredarrangements with our network of tissue banks to reduce fixed costs whilstensuring there is no impact on customers. In June, we announced our decision toconsolidate our UK Diagnostic Pathology business in Nottingham and close theHarley Street site. We have moved rapidly to execute this decision and theHarley Street business has now been fully integrated into our Nottinghamoperation. As at 31 August 2005, we have reduced UK headcount by 36% since 1January 2005. We expect that the financial impact of these and other actionstaken will become apparent over the full year and into 2006. Net finance costs of £97,000 for the six months ended 30 June 2005 includes£113,000 (H1 2004: £115,000) related to the unwinding of the discount applied tothe contingent deferred consideration payable to Varkey Group (see Appendix). In May, we completed the sale of certain intellectual property assets in thearea of virtual microscopy to Hamamatsu Photonics KK, generating a profit ondisposal of £0.4 million. We have retained a non-exclusive licence, at no cost,to continue to utilise the intellectual property concerned within the DrugDevelopment Services division. In January 2005, the Company successfully raised £6.4 million before expenses(£5.7 million net of expenses), through a Placing and Open Offer. Net cash usedin operating activities during the six months ended 30 June 2005 was £1.8million (H1 2004: £1.6 million). Capital expenditure of £0.2 million wasincurred during the period (H1 2004: £0.8 million) in connection with LBCmachines and laboratory equipment in Dubai. The Group had a net cash balance of£2.7 million as at 30 June 2005 (30 June 2004: £1.7 million). Operational review The LBC division has performed strongly during the six months ended 30 June 2005. During the period we have announced agreements with the Lancashire & CumbriaStrategic Health Authority, the North East, Yorkshire and Humber regions, the Greater Lincolnshire Primary Care Trusts, Path Links Cytology Service and theNorthern Lincolnshire and Goole NHS Trust amounting to total revenues of £7.1million over five years at full run rate. Together with the agreements announcedin 2004, this brings the total value of LBC agreements signed to date toapproximately £12.8 million over a five year period on a full run rate basis. Wehave now secured 29% of the LBC market in England and Wales and as we expect tosign further LBC agreements we have revised our targeted market share upwardsfrom 35% to 40%. We have also signed an exclusive LBC distribution agreement forthe UK and Ireland with Tripath Imaging Inc., extending the original agreementfor a further three years until 31 December 2008. Our Drug Development Services business has made solid progress. At the beginningof 2005, we invested in additional business development resource and operationalmanagement. In May, we announced an agreement worth approximately £300,000 toprovide biomarker analysis in support of one of AstraZeneca's key therapeuticprogrammes. We have also signed smaller contracts with a number of otherpharmaceutical and biotechnology companies during the period. Relationships withnon-essential tissue banks have been restructured or terminated with no impactupon customers. We have now achieved Good Laboratory Practice ("GLP") status,increasing the range of studies we are capable of carrying out for customers.Our research and development activities have been focused in the area ofautomated, high throughput quantitative protein expression. In the UK Diagnostic Pathology business, revenue during the first half of 2005has been in line with that during the same period in 2004. With our operationsnow successfully consolidated and integrated in Nottingham, the Board expectsthat Medical Solutions will play an important role in the outsourcing ofpathology services which is expected to increase significantly over the next12-24 months. In Dubai, the Dubai Medical Laboratory ("DML") and Specialised ClinicalLaboratories ("SCL") acquisitions have been integrated and both have beenearnings enhancing during the period. Our business at Welcare Hospital andHistopathology & Speciality Laboratory ("HSL") performed in line with ourexpectations during the first half of 2005. The Board has decided not toconsolidate all of its businesses onto a single site at this stage, but will betaking an administrative office on the Dubai Healthcare City site to establish astrategic position in this important region. In line with our previously stated intention to exit the Virtual Microscopyequipment area of our business, we concluded the sale of certain intellectualproperty assets to Hamamatsu Photonics KK in May. Board and management Following this announcement, Mr Charles Green, Chief Executive Officer, intendsto concentrate his efforts on the Group's Dubai business with a view tomaximising shareholder value. In the interim, Dr Neil Johnston will be assumingMr Green's responsibilities in the UK. Financial reporting These interim results have been prepared under those IFRS's expected to beapplicable at 31 December 2005 on the basis as set out in Note 1. During theperiod PricewaterhouseCoopers have been appointed auditors to the Company. Prospects During the six months ended 30 June 2005, the Board believes significantprogress has been made towards its main objective of creating a profitable andcash generative pathology-based services group. We have continued to focus ouractivities on those areas of our business capable of scalable, long-term growth.Where we have identified underperformance issues, we have taken decisive actionbased upon objective analysis and the results of our actions are beginning topositively impact. Our key objective for the second half of the year is to maintain this level ofprogress, continue to reduce costs and improve efficiency whilst positioning thebusiness for organic growth in 2006 and beyond. Sir Gareth RobertsChairman20 September 2005 Unaudited consolidated income statementFor the six months ended 30 June 2005 6 months 6 months ended Year ended ended 30 June 31 December 30 June 2004 2004 Note 2005 (as restated*) (as restated*) £'000 £'000 £'000Revenue from continuingoperations 4,975 3,189 6,026Cost of sales (3,026) (2,152) (4,710) ----------- --------- ---------Gross profit 1,949 1,037 1,316Selling and distribution expenses (458) (456) (866) ----------- --------- ---------Administrative expenses:- normal (2,380) (2,252) (5,609)- share based compensation ii (124) (158) (320)- restructuring costs 4 (287) - (181)- aborted acquisition - - (240)- impairment of goodwill &development costs - - (3,049) ----------- --------- ---------Administrative expenses (2,791) (2,410) (9,399)Research and development (109) (77) (103)Gain on sale of fixed assets 383 1,000 607 ----------- --------- ---------Operating loss from continuingoperations (1,026) (906) (8,445) Interest receivable 51 - -Interest payable and similarcharges (148) (168) (264) ----------- --------- ---------Loss before tax fromcontinuing operations (1,123) (1,074) (8,709) Taxation - - (90) ----------- --------- ---------Loss after tax but before lossfrom discontinued operations (1,123) (1,074) (8,799) Loss from discontinuedoperations - (456) (636) ----------- --------- ---------Loss for the period (1,123) (1,530) (9,435) =========== ========= ========= Attributable to:Equity holders of the parent (1,141) (1,530) (9,435)Minority interest 18 - - ----------- - -------- ---------Loss for the period (1,123) (1,530) (9,435) =========== ========= ========= Basic and diluted loss perordinary share from continuing operations 5 (0.60)p (1.20)p (9.50)pBasic and diluted total lossper ordinary share 5 (0.60)p (1.71)p (10.19)p * See Note 6 for details of the restatement Unaudited consolidated statement of changes in shareholders' equity Minority Total Attributable to equity holders of the Company interest Equity Merger Profit and and Share Share other Translation loss capital premium reserves reserve reserve £'000 £'000 £'000 £'000 £'000 £'000 £'000Balance at 1January 2004 1,788 25,059 4,558 (136) (13,157) 18,112Currencytranslationadjustments - - - (20) - - (20) ------- -------- -------- --------- -------- ------- --------Net expenserecogniseddirectly toequity - - - (20) - - (20)Loss for theperiod - - - - (1,530) - (1,530) ------- -------- -------- --------- -------- ------- --------Totalrecognisedexpensefor the period - - - - (1,530) - (1,530) Employeeshareoptionscheme:- value ofservicesprovided - - - - 158 - 158 ------- -------- -------- --------- -------- ------- --------Balance at 30June 2004 1,788 25,059 4,558 (156) (14,529) - 16,720 ------- -------- -------- --------- -------- ------- --------Balance at 1July 2004 1,788 25,059 4,558 (156) (14,529) - 16,720Currencytranslationadjustments - - - (34) - - (34) ------- -------- -------- --------- -------- ------- --------Net expenserecogniseddirectly toequity - - - (34) - - (34)Loss for theperiod - - - (7,905) - (7,905) ------- -------- -------- --------- -------- ------- --------Totalrecognisedexpense forthe period - - - - (7,905) - (7,905)Shares issued 177 2,853 - - - - 3,030Shares in EBT (5) - 50 - (45) - -Employeeshare optionscheme:- value ofservices provided - - - - 162 - 162 ------- -------- -------- --------- -------- ------- --------Balance at 31December 2004 1,960 27,912 4,608 (190) (22,317) - 11,973 ------- -------- -------- --------- -------- ------- --------Balance at 1January 2005 1,960 27,912 4,608 (190) (22,317) - 11,973Currencytranslationadjustments - - - 13 86 1 100 ------- -------- -------- --------- -------- ------- --------Net incomerecogniseddirectly toequity - - - 13 86 1 100(Loss)/profitfor the period - - - - (1,141) 18 (1,123) ------- -------- -------- --------- -------- ------- --------Total recognised(expense)/ income for theperiod - - - - (1,141) 18 (1,123)Shares issued 2,044 4,170 - - - - 6,214 Employee shareoption scheme:- value ofservicesprovided - - - - 124 - 124 ------- -------- -------- --------- -------- ------- --------Balance at 30June 2005 4,004 32,082 4,608 (177) (23,248) 19 17,288 ------- -------- -------- --------- -------- ------- -------- Unaudited consolidated balance sheet As at 30 June 2005 As at As at 31 As at 30 June December 30 June 2004 2004 2005 (as restated *) (as restated *) Note £'000 £'000 £'000Non-current assetsGoodwill 14,348 13,070 11,131Other intangible assets 273 1,363 339Property, plant and equipment 2,484 3,271 2,679 ------- --------- ---------- 17,105 17,704 14,149 ------- --------- ----------Current assetsInventories 749 1,419 878Trade and other receivables 3,322 3,503 4,348Financial assets- cash and cash equivalents 3,457 2,528 1,990 ------- --------- ---------- 7,528 7,450 7,216Current liabilitiesTrade and other payables 3,349 2,672 3,790Financial liabilities- borrowings 1,039 1,171 3,039Provisions 2,533 1,464 1,197 ------- --------- ---------- 6,921 5,307 8,026 ------- --------- ----------Net current assets/(liabilities) 607 2,143 (810) ------- --------- ----------Total assets less currentliabilities 17,712 19,847 13,339 ------- --------- ---------- Non-current liabilitiesFinancial liabilities- borrowings 424 2,354 540Provisions - 773 826 ------- --------- ---------- 424 3,127 1,366 ------- --------- ----------Net assets 17,288 16,720 11,973 ======= ========= ========== Equity Issued share capital 3 4,004 1,788 1,960Share premium 3 32,082 25,059 27,912Other reserves 4,431 4,402 4,418Profit and loss reserve (23,248) (14,529) (22,317) -------- --------- ----------Total equity attributable to equityholders of the parent company 17,269 16,720 11,973 Minority interest 19 - - -------- --------- ----------Total equity 17,288 16,720 11,973 ======== ========= ========== * See Note 6 for details of the restatement Unaudited consolidated cashflow statement For the six months ended 30 June 2005 Six Year Six months ended months 30 June 31 Dec 30 June 2004 2004 2005 (as restated) (as restated) Note £'000 £'000 £'000Cashflows from operatingactivitiesCash used in operations 7 (1,694) (1,563) (2,836)Interest paid (35) (53) (20)Tax paid (29) - (61) ------- --------- ----------Net cash used in operatingactivities (1,758) (1,616) (2,917) ------- --------- ---------- Cashflows from investingactivitiesAcquisition of subsidiaries, net ofcash acquired 2 (450) - (2,230)Purchases of property, plant andequipment (155) (786) (789)Purchases of intangible assets (30) (172) (248)Proceeds from sale of property,plant and equipment 21 4,600 4,600Proceeds from sale of intangibleassets 225 - -Proceeds from sale of discontinuedoperations - 450 555Interest received 51 - - ------- --------- ----------Net cash (used in)/generated frominvesting activities (338) 4,092 1,888 ------- --------- ---------- Cashflows from financingactivitiesProceeds from the issue of sharecapital 3 6,365 - 3,030Repayment of borrowings (2,121) (2,333) (2,172)Payment of transaction costs (695) - -Finance lease principal repayments (37) - (26) ------- --------- ----------Net cash generated from/(used in)financing activities 3,512 (2,333) 832 ------- --------- ---------- Net increase/(decrease) in cash andcash equivalents 1,416 143 (197)Cash and cash equivalents atbeginning of period 1,312 1,509 1,509Exchange gains on cash and cashequivalents 9 - -Cash and cash equivalents at end ofperiod 2,737 1,652* 1,312* ======= ========= ========== * including a £2 million restricted cash deposit Notes to the consolidated interim financial statements 1. Basis of preparation The consolidated interim financial statements have been prepared in accordancewith the IFRS accounting policies that are set out below and are those that areexpected to apply for the full year 2005 financial statements. A summary ofthese key accounting policies is set out in the Appendix to the interimfinancial statements. In selecting the accounting policies, the directors have made assumptions aboutthe IFRS's expected to be applied when the first annual IFRS financialstatements are prepared for the year ending 31 December 2005. Further standards and interpretations may be issued that could be applicable forfinancial years beginning on or after 1 January 2005 or that are applicable tolater accounting periods but with the option for companies to adopt for earlierperiods. The Group's first annual financial statements prepared under IFRS may,therefore, be prepared in accordance with different accounting policies to thoseused in the preparation of the financial information in this document. Inaddition, IFRS is currently being applied in the European Union and othercountries for the first time and contains many new and revised standards.Therefore practice on which to draw in applying the standards may develop. Atthis preliminary stage, before the Group's first annual financial statementsprepared under IFRS are completed, it should be noted that the financialinformation prepared under IFRS in this document could be subject to change. These interim financial statements do not constitute statutory financialstatements within the meaning of section 240 of the Companies Act 1985. Ourprevious auditors, Deloitte and Touche, LLP have issued unqualified opinions onthe Group's UK GAAP financial statements for the years ended 31 December 2003and 31 December 2004 and did not include a statement under section 237(2) or (3)of the Companies Act 1985. Restatement of prior period comparatives As explained in Note 6 below, certain balances previously reported under UK GAAPhave been restated prior to the application of IFRS. The Directors believe theseadjustments were necessary to more accurately reflect the nature and substanceof those transactions. 2. Acquisitions of subsidiaries On 14 January 2005, the Group completed the acquisitions of Dubai MedicalLaboratories ('DML') and Specialised Clinical Laboratories ('SCL'). Theacquisitions were made by two newly established 100% subsidiaries of MedicalSolutions FZ LLC, DML FZ LLC and SCL FZ LLC respectively. These subsidiariesentered into civil partnership agreements with the existing laboratory owners toeffectively acquire 80% (DML) and 100% (SCL) of the existing laboratorybusinesses. Medical Solutions FZ LLC is a 100% owned subsidiary of the Company.Each of the acquisitions was deemed unconditional on 14 January 2005. Dubai Medical Laboratories DML FZ LLC acquired an 80% shareholding in DML, a clinical analytical anddiagnostic services laboratory which operates as a civil partnership registeredin the Emirate of Dubai. DML FZ LLC acquired the 80% holding in DML for totalconsideration of approximately £1.8 million. The total purchase considerationcan be broken down into cash of £1.2 million and 3,887,853 new ordinary sharesin Medical Solutions plc, with a fair value of £267,000 (based on the Company'sshare price at the date of acquisition). The Group incurred legal andprofessional costs of £261,000 in connection with the acquisition of DML. At thedate of acquisition DML had net assets of £77,000. In the period between 14 January 2005 and 30 June 2005, DML contributed netprofits of £73,000 to the consolidated net profit for the period. Specialised Clinical Laboratories SCL FZ LLC acquired 100% of SCL, a provider of clinical laboratory services. SCLoperates as a civil partnership registered in the Emirate of Dubai. SCL FZ LLCacquired the 100% holding in SCL for total consideration of approximately £1.2million. The total purchase consideration can be broken down into cash of £0.9million and 3,575,730 new ordinary shares in Medical Solutions plc, with a fairvalue of £246,000 (based on the Company's share price at the date ofacquisition). The Group incurred legal and professional costs of £52,000 inconnection with the acquisition of SCL. At the date of acquisition SCL had netassets of £18,000. In the period between 14 January 2005 and 30 June 2005, SCL contributed netprofits of £51,000 to the consolidated net profit for the period. Had the acquisitions of DML and SCL occurred on 1 January 2005, Group revenuesand net profit would have been £29,000 and £9,000 higher respectively. Effect of acquisitions The acquisition had the following effect on the Group's assets and liabilities. Acquiree's net assets at date of acquisition DML SCL Recognised Recognised value and value and carrying carrying amount amount £'000 £'000 Property, plant and equipment 22 12Inventories 55 6 --------- ---------Net identifiable assets and liabilities 77 18Goodwill on acquisition 1,693 1,161 Satisfied in cash* 1,503 933Satisfied in shares 267 246 --------- ---------Consideration paid 1,770 1,179 --------- --------- * Includes legal fees and costs amounting to £261,000 and £52,000 in respect ofDML and SCL respectively. In accordance with IFRS 3 Business Combinations and IAS 38 Intangible Assets,the acquiring party is required to recognise separately an intangible asset ofthe acquiree if it meets the definition of an intangible asset and its fairvalue can be measured reliably. The Board has not identified any exchangetransactions in respect of the same or similar non-contractual customerrelationships which might otherwise have provided evidence of fair value orseparability. As such, the Board does not believe it would be appropriate torecognise any intangible assets separately from goodwill at the date ofacquisition. 3. Fundraising On 22 December 2004, the Group announced that it intended to raise £6.4 millionbefore expenses through a Placing and Open Offer. The net proceeds of thePlacing and Open Offer would be used to invest in specialist equipment requiredto drive future revenue growth within the Group's drug development and liquidbased cytology operations, reduce the Group's debt position, pay deferredconsideration in respect of historic acquisitions and to fund the Group'sgeneral working capital requirements. At an Extraordinary General Meeting of theCompany held on 14 January 2005, all resolutions necessary to approve thePlacing and Open Offer together with certain other matters were duly passed anddealings in the new shares issued commenced on 19 January 2005. As a result ofthe Placing and Open Offer, the Group raised net proceeds of £5.7 million. 4. Consolidation of the Group's UK Diagnostic Pathology operations and otherrestructuring costs As set out in the Chairman's Statement, the Board took the decision during theperiod to consolidate its UK Diagnostic Pathology operations in Nottingham andclose its facility in Harley Street, London. The decision to transfer operationsand make a number of staff redundant was implemented during July 2005 and theGroup has provided a total of £220,000 during the six months ended 30 June 2005in connection with the closure. In addition, the Group provided a further£67,000 in respect of redundancies made at its Nottingham and London operationsduring the six months ended 30 June 2005. 5. Earnings per share The calculation of basic and diluted earnings per share for the six months ended30 June 2005 was based on the loss attributable to ordinary shareholders of£1,141,000 (Six months ended 30 June 2004: loss of £1,530,000; year ended 31December 2004: loss of £9,435,000) and on 190,205,933 ordinary shares (30 June2004: 89,403,240; 31 December 2004: 92,597,733) being the weighted averagenumber of ordinary shares in issue. IAS 33 Earnings per share requires presentation of diluted earnings per sharewhen a company could be called upon to issue shares that would decrease netprofit or increase net loss per share. Net loss per share in a loss-makingcompany would only be increased by the exercise of share options which wereout-of-money. Assuming that option holders will not exercise out-of-moneyoptions, no adjustment has been made to the diluted loss per share forout-of-money share options. 6. Restatement of prior period comparatives Grant income In the interim financial statements for the six months ended 30 June 2004, theGroup recognised grant income of £177,000 as a credit against administrativeexpenses for the period. At 31 December 2004, a review of the terms of the grantconcerned concluded that it was inappropriate to recognise any income from thegrant in the year then ended. In the financial statements for the year ended 31December 2004, the Group's balance sheet included the full amount of the grant(£195,000) within creditors due within one year and no income was recognisedduring the period from the grant. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimatesand Errors, the Group has corrected this error by restating its consolidatedincome statement for the six months ended 30 June 2004 and its consolidatedbalance sheet as at 30 June 2004. For the six months ended 30 June 2004, this has resulted, under UK GAAP, in anincrease in administrative expenses of £177,000 (from £2,651,000 to £2,828,000),an increased operating loss by the same amount (from £2,112,000 to £2,289,000)and an increased loss for the period (from £1,454,000 to £1,631,000). At 30 June 2004, this resulted in an increase in trade and other creditors of£177,000 (from £2,495,000 to £2,672,000) and an increase in total liabilities(from £8,620,000 to £8,797,000). Deferred consideration In the interim financial statements for the six months ended 30 June 2004, theGroup recognised £2.0 million of the total deferred consideration of £2.3million in respect of the acquisition of Welcare as due after more than oneyear. Following a review of the amounts expected to become payable and inaccordance with IAS 8, a sum of £1 million, previously categorised as fallingdue after one year, has been reclassified in current liabilities in the restatedconsolidated balance sheet as at 30 June 2004. The Group also notes that underUK GAAP, deferred contingent consideration of £2.5 million as at 30 June 2004and £2.2 million as at 31 December 2004 payable in cash or shares at theCompany's option should have been reflected within Shareholder's funds ratherthan as a liability. However, under IFRS the correct treatment is to reflectsuch amounts within Liabilities and thus no net adjustment has been made to thefinancial statements concerned. The adjustments to the interim financial statements for the six months ended 30June 2004 in respect of these items can be shown as follows: Consolidated income statement for the 6 months ended 30 June 2004 Correction Before of prior restatement period As restated (UK GAAP) errors (UK GAAP) £'000 £'000 £'000Administrative expenses (2,651) (177) (2,828)Operating loss (2,112) (177) (2,289)Loss for the period attributable toequity shareholders (1,454) (177) (1,631)Basic and diluted loss per ordinaryshare (1.63)p (0.19)p (1.82)p Consolidated balance sheet at 30 June 2004 Correction Before of prior restatement period As restated (UK GAAP) errors (UK GAAP) £'000 £'000 £'000 Creditors: amounts falling duewithin one year 4,266 1,177 5,443Creditors: amounts falling dueafter one year 4,354 (1,000) 3,354Net assets 16,638 (177) 16,461EquityProfit and loss reserve (14,611) (177) (14,788)Total equity 16,638 (177) 16,461 7. Cash (used in)/generated from operations Six months Six months Year ended ended ended 30 31 Dec 30 June June 2004 2004 2005 (as requested) (as restated) £'000 £'000 £'000Loss for the period from operations (1,123) (1,530) (9,435)Taxation - - 90Depreciation of tangible fixed assets 339 279 895Impairment of goodwill - - 1,823Amortisation of other intangible fixedassets 32 105 225Impairment of development costs - - 1,226Profit on sale of property, plant andequipment (383) (1,000) (607)Loss on sale of discontinuedoperations - 289 469Interest payable 148 168 264Interest receivable (51) - -Share based payments - value ofemployee service 124 158 320Decrease in inventories 195 42 272(Increase)/decrease in trade andother receivables (709) (615) 467(Decrease)/increase in creditors (266) 541 1,155 -------- ---------- ----------Cash used in operations (1,694) (1,563) (2,836) ======== ========== ========= All of the cash used in the six months ended 30 June 2005 was used in continuingoperations. Cash used in continuing operations in the six months to June 2004and the year ended 31 December 2004 was £1,330,000 and £2,603,000 respectively. 8. Interim results Copies of the interim results for the six months ended 30 June 2005 will be sentto all shareholders and will be posted on the Company's website,www.medical-solutions.co.uk. In addition, copies may be obtained the Company'sregistered office at 1 Orchard Place, Nottingham Business Park, Nottingham NG86PX. Independent review report to Medical Solutions plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2005 which comprises the consolidated balance sheetas at 30 June 2005, the consolidated income statement, consolidated cash flowstatement and consolidated statement of changes in shareholder's' equity for thesix months then ended and related notes. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in Note 1, the next annual financial statements of the Group willbe prepared in accordance with accounting standards adopted for use in theEuropean Union. This interim report has been prepared in accordance with thebasis set out in Note 1. The accounting policies are consistent with those that the directors intend touse in the next annual financial statements. As explained in Note 1, there is,however, a possibility that the directors may determine that some changes arenecessary when preparing the full annual financial statements for the first timein accordance with the accounting standards adopted for use in the EuropeanUnion. The IFRS standards and IFRIC interpretations that will be applicable andadopted for use in the European Union at 31 December 2005 are not known withcertainty at the time of preparing this interim financial information. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of Group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for theCompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. 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 30 June 2005. PricewaterhouseCoopers LLP Chartered AccountantsEast Midlands20 September 2005 Notes: (a) The maintenance and integrity of the Medical Solutions plc website isthe responsibility of the directors; the work carried out by the auditors doesnot involve consideration of these matters and, accordingly, the auditors acceptno responsibility for any changes that may have occurred to the interim reportsince it was initially presented on the website. (b) Legislation in the United Kingdom governing the preparation anddissemination of financial information may differ from legislation in otherjurisdictions. Appendix Reporting under International Financial Reporting Standards (IFRS) For the year ended 31 December 2005, Medical Solutions plc will produce itsconsolidated financial statements in accordance with IFRS for the first time.The financial information presented in its interim financial statements for thesix months ended 30 June 2005 has been prepared on the basis of the IFRSexpected to be applicable at 31 December 2005. These standards are subject toongoing review and endorsement by the EU or possible amendment by interpretativeguidance from the International Accounting Standards Board and are thereforestill subject to change. We will update our restated information for the yearended 31 December 2004 for any such changes if and when they are made. The commentary below highlights the key changes that have arisen due to thetransition from reporting under UK GAAP to reporting under IFRS. The Group'sdate of transition to IFRS is 1 January 2004 which is the beginning of thecomparative period for the 2005 financial year. As such, the opening balancesheet for IFRS purposes is that reported at 1 January 2004 as amended forchanges due to IFRS. The UK GAAP financial information contained in this document does not constitutestatutory accounts as defined in Section 240 of the Companies Act 1985. Ourprevious auditors, Deloitte & Touche LLP, have issued unqualified opinions onthe Group's UK GAAP financial statements for the years ended 31 December 2003and 31 December 2004 and did not include a statement under section 237(2) or (3)of the Companies Act 1985. To help understand the impact of the likely transition to IFRS, reconciliationshave been produced to show the changes made to statements previously reportedunder UK GAAP in arriving at the equivalent statements under IFRS. The followingare the six unaudited reconciliations which are included in this Appendix: a) Consolidated balance sheet and equity at 1 January 2004b) Consolidated income statement for the six months ended 30 June 2004c) Consolidated balance sheet and equity at 30 June 2004d) Consolidated income statement for the year ended 31 December 2004e) Consolidated balance sheet at 31 December 2004f) Consolidated cashflows The net effect of presenting the 2004 full year financial statements under IFRSrather than UK GAAP is to decrease the loss after tax reported from £9.5 millionto £9.4 million and increase net assets from £11.6 million to £12.0 million. Thekey areas of change are outlined in the footnotes to the IFRS reconciliationsbelow. First time adoption IFRS 1 First Time Adoption of International Financial Reporting Standards setsout the approach to be followed when IFRS are applied for the first time. Ingeneral, IFRS 1 requires that accounting policies be applied retrospectivelyalthough there are certain exceptions where the cost of compliance is deemed toexceed the benefits to users of financial statements. Where applicable, theoptions selected by management under IFRS 1 are set out in the footnotes to theIFRS reconciliations and later in this Appendix. Reconciliation of previously reported UK GAAP to IFRS a) Reconciliation of consolidated balance sheet and equity at 1 January 2004 Effect of UK transition Foot GAAP to IFRS IFRS note £'000 £'000 £'000Non-current assetsGoodwill i 13,934 (478) 13,456Other intangible assets 1,700 - 1,700Property, plant and equipment 6,594 - 6,594 ------- -------- ------- 22,228 (478) 21,750 ------- -------- -------Current assetsInventories 1,461 - 1,461Trade and other receivables 2,783 - 2,783Financial assets- cash and cash equivalents 3,250 - 3,250 ------- -------- ------- 7,494 - 7,494Current liabilitiesTrade and other payables 2,287 - 2,287Financial liabilities- borrowings 2,678 - 2,678Provisions i 600 (30) 570 ------- -------- ------- 5,565 (30) 5,535 ------- -------- -------Net current assets 1,929 30 1,959 ------- -------- -------Total assets less current liabilities 24,157 (448) 23,709 ------- -------- ------- Non-current liabilitiesFinancial liabilities- borrowings 4,045 - 4,045Provisions i 2,000 (448) 1,552 ------- -------- ------- 6,045 (448) 5,597 Net assets 18,112 - 18,112 ======= ======== ======= EquityIssued share capital 1,788 - 1,788Share premium 25,059 - 25,059Other reserves 4,422 - 4,422Profit and loss reserve ii (13,157) - (13,157) -------- -------- --------Total equity attributable to equityholders of the parent 18,112 - 18,112 Minority interest - - - -------- -------- --------Total equity 18,112 - 18,112 ======== ======== ======== b) Reconciliation of the consolidated income statement for the 6 months ended 30June 2004 Effect of UK GAAP transition Foot (as restated*) to IFRS IFRS note £'000 £'000 £'000 Revenue from continuing operations 3,749 (560) 3,189Cost of sales (2,575) 423 (2,152) ---------- -------- -------Gross profit 1,174 (137) 1,037 Selling and distribution expenses (513) 57 (456)Administrative expenses i,ii (2,828) 418 (2,410)Research and development (122) 45 (77)Gain on sale of fixed assets 1,000 - 1,000 ---------- -------- -------Operating loss from continuingoperations (1,289) 383 (906) Interest receivable - - -Interest payable and similar i (53) (115) (168)charges ---------- -------- -------Loss before tax from continuingoperations (1,342) 268 (1,074) Taxation - - - ---------- -------- -------Loss after tax but before lossfrom discontinued operations (1,342) 268 (1,074) Loss from discontinued operations iii (289) (167) (456) ---------- -------- -------Loss for the period (1,631) 101 (1,530) ========== ======== ======= Attributable to:Equity holders of the parent (1,631) 101 (1,530)Minority interest - - - ---------- -------- --------Loss for the period (1,631) 101 (1,530) ========== ======== ======== * See Note 6 for details of the restatement c) Reconciliation of consolidated balance sheet and equity at 30 June 2004 Effect of UK GAAP transition Foot (as restated*) to IFRS IFRS note £'000 £'000 £'000Non-current assetsGoodwill i 13,174 (104) 13,070Other intangible assets 1,363 - 1,363Property, plant and equipment 3,271 - 3,271 --------- -------- ------- 17,808 (104) 17,704 --------- -------- -------Current assetsInventories 1,419 - 1,419Trade and other receivables 3,503 - 3,503Financial assets- cash and cash equivalents 2,528 - 2,528 --------- -------- ------- 7,450 - 7,450Current liabilitiesTrade and other payables 2,672 - 2,672Financial liabilities- borrowings 1,171 - 1,171Provisions i 1,600 (136) 1,464 --------- -------- ------- 5,443 (136) 5,307 --------- -------- -------Net current assets 2,007 136 2,143 --------- -------- -------Total assets less current 19,815 32 19,847liabilities --------- -------- ------- Non-current liabilitiesFinancial liabilities- borrowings 2,354 - 2,354Provisions i 1,000 (227) 773 --------- -------- ------- 3,354 (227) 3,127 --------- -------- -------Net assets 16,461 259 16,720 ========= ======== ======= EquityIssued share capital 1,788 - 1,788Share premium 25,059 - 25,059Other reserves 4,402 - 4,402Profit and loss reserve i,ii (14,788) 259 (14,529) --------- -------- --------Total equity attributable to equityholders of the parent 16,461 259 16,720 Minority interest - - - --------- -------- --------Total equity 16,461 259 16,720 ========= ======== ======== See Note 6 for details of the restatement d) Reconciliation of the consolidated income statement for the year ended 31December 2004 Effect of UK GAAP transition Foot (as restated*) to IFRS IFRS note £'000 £'000 £'000 Revenue from continuing operations 6,586 (560) 6,026Cost of sales (5,133) 423 (4,710) ---------- ------- ------Gross profit 1,453 (137) 1,316 Selling and distribution expenses (923) 57 (866)Administrative expenses i,ii (9,885) 486 (9,399)Research and development (148) 45 (103)Gain on sale of fixed assets 607 - 607 ---------- ------- ------Operating loss from continuingoperations (8,896) 451 (8,445) Interest receivable - - -Interest payable and similar i (20) (244) (264)charges ---------- ------- ------Loss before tax from continuingoperations (8,916) 207 (8,709) Taxation (90) - (90) ---------- ------- ------Loss after tax but before lossfrom discontinued operations (9,006) 207 (8,799) Loss from discontinued operations iii (469) (167) (636) ---------- ------- ------Loss for the period (9,475) 40 (9,435) ========== ======= ====== Attributable to:Equity holders of the parent (9,475) 40 (9,435)Minority interest - - - ---------- ------- ------Loss for the period (9,475) 40 (9,435) ========== ======= ====== * See Note 6 for details of the restatement e) Reconciliation of consolidated balance sheet and equity at 31 December 2004 Effect of UK GAAP transition Foot (as restated*) to IFRS IFRS note £'000 £'000 £'000Non-current assetsGoodwill i 11,005 126 11,131Other intangible assets 339 - 339Property, plant and equipment 2,679 - 2,679 --------- -------- ------- 14,023 126 14,149 --------- -------- -------Current assetsInventories 878 - 878Trade and other receivables 4,348 - 4,348Financial assets- cash and cash equivalents 1,990 - 1,990 --------- -------- ------- 7,216 - 7,216Current liabilitiesTrade and other payables 3,790 - 3,790Financial liabilities- borrowings 3,039 - 3,039Provisions i 1,257 (60) 1,197 --------- -------- ------- 8,086 (60) 8,026 --------- -------- -------Net current liabilities (870) 60 (810) --------- -------- -------Total assets less current 13,153 186 13,339liabilities --------- -------- ------- Non-current liabilitiesFinancial liabilities- borrowings 540 - 540Provisions i 1,000 (174) 826 --------- -------- ------- 1,540 (174) 1,366 --------- -------- -------Net assets 11,613 360 11,973 ========= ======== ======= EquityIssued share capital 1,960 - 1,960Share premium 27,912 - 27,912Other reserves 4,418 - 4,418Profit and loss reserve i,ii (22,677) 360 (22,317) --------- -------- --------Total equity attributable toequity holders of the parent 11,613 360 11,973 Minority interest - - - --------- -------- --------Total equity 11,613 360 11,973 ========= ======== ======== * See Note 6 for details of the restatement f) Reconciliation of cashflows There is no difference between the cashflows previously reported under UK GAAPand those reported under IFRS. Certain presentational differences between UKGAAP and IFRS have been reflected in the 30 June 2005 cashflow statement. Footnotes to the reconciliation of equity i) Business combinations and goodwill The Directors have elected, under IFRS 1, not to apply IFRS 3 BusinessCombinations to acquisitions which occurred prior to 1 January 2004. Thecarrying value of goodwill at 1 January 2004 represents the £13.9 millionrecognised under UK GAAP at the date of transition subsequently adjusted for theimpact of discounting the deferred consideration (see below). The Group hasapplied IFRS 3 to acquisitions that have occurred since 1 January 2004. Goodwill on business combinations (from date of transition to IFRSs) is notamortised under IFRS 3, but is tested annually for impairment. Goodwillamortisation charged under UK GAAP has been written back by: • £374,000 for the 6 months ended 30 June 2004 and • £715,000 for the year ended 31 December 2004. Annual impairment reviews have resulted in the following adjustments to thecarrying values of goodwill: • £1.8 million as at 31 December 2004 - being the impairment required to reduce the goodwill to the carrying value indicated by the impairment reviews. Further, under IFRS 39 Financial Instruments: Recognition and Measurement, whensettlement of a liability is deferred, the fair value of the deferred elementpayable is discounted to its fair value. Accordingly, the deferred considerationpayable on the acquisition of the Welcare Laboratories ('Welcare') andHistopathology and Speciality Laboratory ('HSL') by the Group during 2003 hasbeen discounted and classified as a current and non-current liability asappropriate. The cost of the discount is systematically charged to profit andloss as a finance cost over the period until the deferred consideration issettled. The effect is to decrease goodwill at 1 January 2004, 30 June 2004 and 31December 2004 by £478,000. The additional finance cost charged to profit andloss in respect of the discount is: • £115,000 for the 6 months ended 30 June 2004 and • £244,000 for the year ended 31 December 2004. Summary As a result of the above adjustments, the carrying value of goodwill has been: • decreased by £478,000 at 1 January 2004, being the discount applied to the deferred consideration of which £30,000 is relates to deferred consideration payable within one year and £448,000 to that payable after one year; • decreased by £104,000 at 30 June 2004, being the net effect of the discount applied (£478,000) and the goodwill amortised during the period under UK GAAP being written back (£374,000); and • increased by £126,000 at 31 December 2004, being the net effect of the discount applied (£478,000), the goodwill amortised during the period under UK GAAP written back (£715,000) and an additional impairment charge of £111,000 being that element of the £715,000 which relates to fully impaired goodwill at 31 December 2004. ii) Share based payment Share-based payments included executive and employee share option schemes. Fairvalue is determined at the date of grant and is calculated using theBlack-Scholes option pricing model. Under UK GAAP an expense would have beenrecorded in respect of share options granted based upon their intrinsic value(which was considered to be nil as options were granted at market value). Inrestating the financial results of the Group, an expense has been recorded basedupon the fair value of the share options granted. IFRS 2 Share-based Payment requires the fair value of all share-based payment tobe charged against the income statement over the respective vesting periods. TheGroup has taken advantage of the transitional provisions of IFRS 1 not torecalculate equity settled awards granted before 7 November 2002.The effect of accounting for equity-settled share-based payment transactions atfair value on the consolidated income statement is to increase administrativeexpenses by: • £158,000 for the 6 months ended 30 June 2004 and • £320,000 for the year ended 31 December 2004. A charge of £124,000 has been recognised in respect of the six months ended 30June 2005. The effect of accounting for equity-settled share-based transactions at fairvalue on the consolidated balance sheet at 1 January 2004 is to increase theloss to that date by £248,000, but also to increase retained earnings by thesame amount. The impact on equity of accounting for share based payments underIFRS is therefore neutral. iii) Disclosure of continuing operations The income statement is required to show the results of continuing operations.Accordingly, the income and expenditure relating to discontinued operations hasbeen excluded and the net loss combined with the loss on disposal ofdiscontinued operations. The effect of the above adjustments on total equity is as follows: 1 Jan 30 Jun 31 Dec Foot 2004 2004 2004 note £'000 £'000 £'000Goodwill - write back of amortisation i - 374 715Goodwill - discounting of deferredconsideration i (478) - -Goodwill - impairment i - - (111)Employee benefit costs ii - (158) (320)Finance costs - discount on deferredconsideration i 478 (115) (244) ------ ------ ------Adjustment to loss for period - 101 40 Reserve adjustments for share based payments ii - 158 320 ------ ------ ------ Total adjustment to equity (attributable toequity holders of the parent) - 259 360 ====== ====== ====== The effect of the above adjustments on net income is as follows: 30 Jun 31 Dec Foot 2004 2004 note £'000 £'000Goodwill - write back of amortisation i 374 715Goodwill - impairment i - (111)Administrative expenses ii (158) (320)Finance costs i (115) (244) ------ ------Adjustment to the loss for the period 101 40 Loss on discontinued operations 167 167Adjustment to the loss before discontinued operations 268 207 ====== ====== Significant accounting policies The significant accounting policies adopted in the preparation of the interimfinancial statements for the six months ended 30 June 2005 are set out below. Basis of consolidation The Group's consolidated financial statements include the results of the parentcompany and all its subsidiaries up to the relevant balance sheet date. Theresults of subsidiaries acquired or sold are included in the financialstatements for the periods from or to the date on which the transaction becameunconditional. Intra-group sales, profits and balances are eliminated fully onconsolidation. Intangible assets Goodwill Goodwill represents the excess of fair value of the purchase consideration overthe Group's share of the fair value of the identifiable net assets acquired.Goodwill is recognised as an asset and reviewed for impairment at least annuallyand whenever there is an indicator of impairment. Goodwill is carried at costless accumulated impairment losses. Any impairment is recognised in the periodin which it is identified. On disposal, the attributable amount of goodwill isincluded in the determination of the profit or loss on disposal. Development costs and acquired computer software Development costs are written off as incurred except where the Directors aresatisfied as to the technical, commercial and financial viability of individualprojects. In such cases, the identifiable expenditure is deferred and amortisedfrom the point of sale or use of the product on a straight-line basis over theperiod during which the Group is expected to benefit, usually 4 years.Development costs on projects in progress are not amortised. Provision is madefor any impairment in the carrying value of such development costs. Acquiredcomputer software is capitalised on the basis of the costs incurred to acquireand bring into use the specific software and are amortised over theiroperational lives. Tangible assets Tangible fixed assets are stated at cost, net of depreciation and any provisionfor impairment. Depreciation is provided on all tangible fixed assets at ratescalculated to write off the cost less estimated residual value of each assetevenly over its expected operational life as follows: •Leasehold improvements: lower of 10 years and remaining lease term •Plant and machinery: 5-15 years •Fixtures, fittings and computer software: 3-10 years •Motor vehicles: 4 years Impairment of assets Assets that have an indefinite useful economic life are not subject toamortisation and are tested at least annually or whenever there is an indicatorof impairment. Assets that are subject to amortisation or depreciation arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss isrecognised whenever the carrying amount of an asset or its cash-generating unitexceeds its recoverable amount. Impairment losses recognised in respect ofcash-generating units are allocated first to reduce the carrying amount of anygoodwill allocated to the cash-generating unit and then to reduce the carryingamount of the other assets in the unit on a pro rata basis. Impairment lossesare recognised in the income statement. Government grants Government grants of a capital nature are released to the profit and lossaccount by equal annual instalments over the expected useful economic lives ofthe relevant assets. Leasing and hire purchase commitments Assets obtained under finance leases and hire purchase contracts that transfersubstantially all the risks and rewards of ownership to the Group arecapitalised in the balance sheet and depreciated over the shorter of the leaseterm and their useful economic lives. The interest element of the rentalobligation is charged to the income statement over the period of the lease andrepresents a constant proportion of the balance of the capital repaymentsoutstanding. Costs in respect of operating leases are charged to the profit and loss accounton a straight line basis over the period of the lease. Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined on a first-in-first-out basis and includes transport and handlingcosts. In the case of manufactured products cost includes all direct expenditureand production overheads based on a normal level of activity. Net realisablevalue is the price at which inventory can be sold in the normal course ofbusiness after allowing for the cost of realisation and, where appropriate, thecost of conversion from their existing state to a finished condition. The groupcapitalises certain external costs in relation to processed human tissue. Suchcosts are averaged over the number of samples acquired and written off to theincome statement as the samples are utilised within the business or after aperiod of three years from acquisition if not used during that period. Provisionis made where necessary for obsolete, slow-moving and defective inventory. Taxation Current tax, including UK corporation tax and foreign tax, is provided atamounts expected to be paid (or recovered) using tax rates and laws that havebeen enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method inrespect of temporary timing differences arising from differences between thecarrying value of assets and liabilities in the financial statements and thecorresponding tax bases used in the computation of taxable profit. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against the temporary difference can beutilised. Their carrying amount is reviewed at each balance sheet date on thesame basis. Deferred tax is calculated at the tax rates that are expected to apply in theperiod in which the liability is settled or the asset is realised, on anon-discounted basis, and is charged in the income statement, except where itrelates to items charged or credited in the statement of recognised income andexpense, in which case the deferred tax is also dealt with in equity and isshown in the statement of recognised income and expense. Revenue recognition Turnover (excluding VAT) comprises the value of sales of contract pathologyservices, processed human tissue, the sale of telepathology hardware systems andassociated software, support services and the sales of liquid based cytologysystems and consumables. Amounts received or receivable for services providedunder contract pathology services are recognised as revenue when obligations arefulfilled. Revenue from sales of processed human tissue, liquid based cytologysystems and consumables and telepathology hardware systems is recognised whengoods are delivered. Revenue from liquid based cytology system rental andmaintenance is recognised over the period in which the customer is expected tobenefit from the provision of such items. Revenue for post contract support isrecognised on a straight-line basis over the period for which support andmaintenance is provided to the customer. Employee benefits Defined contribution pension plans Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. Differencesbetween contributions payable in the year and contributions actually paid areshown as either accruals or prepayments in the balance sheet. Share-based payments The Group operates a number of share option and share save schemes. For allgrants of share options and awards, the fair value as at the date of grant iscalculated using the Black-Scholes option pricing model and the correspondingexpense is recognised over the vesting period. Foreign currency Transactions in foreign currencies are recorded at the date ruling at the dateof the transaction. Monetary assets and liabilities denominated in foreigncurrencies are translated at the rate of exchange ruling at the balance sheetdate. All differences are taken to the income statement. The results of overseas operations are translated at the closing rate ofexchange at the end of the period and their balance sheets at the rate ruling atthe balance sheet date. Exchange differences arising on the translation ofopening net assets and results of overseas operations are reported in theforeign currency translation reserve. Financial instruments Borrowings are measured at amortised cost, except where they are hedged by aneffective fair value hedge, in which case the carrying value is adjusted toreflect the fair value movements associated with the hedged risk. Trade and other receivables are measured at amortised cost less any provisionfor impairment. Trade and other receivables are discounted when the time valueof money is considered material. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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