RNS Number:9339Q
Gyrus Group PLC
07 September 2005
7 September 2005
Gyrus Group PLC
Profit rises 79% to #4.3 million, Revenues up 14% at CER
Gyrus Group PLC ("Gyrus" or "the Group"), a leading supplier of medical devices
which reduce trauma and complications in surgery, announces its interim results
for the six months ended 30 June 2005, the first report under International
Financial Reporting Standards ("IFRS").
Financial Highlights
* Group revenues up 11% (14% on a constant exchange rate basis "CER") to
#47.3 (H1 2004: #42.5m)
* IFRS profit after tax up 79% to #4.3m (H1 2004: #2.4m)
* UK GAAP Profit Before Tax and Goodwill Amortisation (PBTA) increases by
35% to #5.0m (H1 2004: #3.7m)
* Gross margin increased to 61.3% (H1 2004: 60.1%) despite continued weaker
dollar
* Basic EPS rises 82% to 5.1p (H1 2004: 2.8p)
Operating Highlights
* Surgical Division revenues up 31% to $32.7m (H1 2004: $25.0m)
* ENT Division revenues up 11% to $38.1m (H1 2004: $34.3m)
* Integration of July acquisition of ACMI proceeding well
Commenting on the results, Brian Steer, Executive Chairman, said:
"To have produced such strong revenue and profit growth at the same time as
conducting a transforming acquisition is a major achievement and evidence of the
strength of our products and our business management. We are now focused on
integrating Gyrus and ACMI to make the combination of the two organisations' "
see" and "treat" technologies a commercial reality. With an increased product
portfolio and an enlarged sales force we look forward to the rest of the year
with confidence."
Enquiries:
Gyrus Group PLC On 7 September 2005:
Brian Steer, Executive Chairman Tel: 0207 831 3113
Simon Shaw, Chief Financial Officer Tel: 0207 831 3113
Financial Dynamics
David Yates / Ben Atwell Tel: 0207 831 3113
A meeting for analysts will be held at the offices of Financial Dynamics,
Holborn Gate, 26 Southampton Buildings, London WC2A 1PB at 10.30am. Please call
Mo Noonan on 020 7269 7116
Overview
Gyrus has had an excellent half year. Trading was very strong with local
currency revenues growing by 14% and IFRS profits up 79%. On 21st July we
completed the acquisition of American Cystoscope Makers Inc. ("ACMI") for $497
million. This transforming acquisition is disclosed as a post balance sheet
event in this first financial report under International Financial Reporting
Standards (IFRS). This report represents solely the results of the Gyrus Group
pre-acquisition and financial information for comparative periods has been
restated from UK GAAP to IFRS using consistent policies.
Local currency revenue growth of approximately 14% was consistent with our
target for the period. After taking account of the continued depreciation of the
US Dollar, reported revenue grew by 11% to #47.3 million (H1 2004: #42.5
million). Our operating efficiency programme continued to yield results with the
Group's profit before tax increasing 31% to #4.7 million (H1 2004: #3.6
million).
The Surgical Division performed strongly, posting local currency revenue growth
of 29%, with good performances across all product areas. The ENT Division showed
local currency growth of over 9% with encouraging revenues in otology and sinus
and rhinology and promising evaluations of the new PlasmaCision-based Tonsil
PlasmaKnife in the head and neck market. These divisions compensated for the
anticipated weaker period for the Partnered Technologies Division as the effect
of lower priced product sales to two partners showed in a 0.5% reduction in
revenues, notwithstanding an encouraging increase in the underlying volume of
products supplied.
The Group continued to generate cash during the period, which enabled two small
acquisitions of distributorships in Australia and New Zealand to be financed out
of cash resources to the value of #1.3 million.
Financial Review
Strong revenue in the first half of #47.3 million (H1 2004: #42.5 million),
alongside the results of the Group's continuing margin improvement programme,
helped to raise the gross margin to 61.3% (H1 2004: 60.1%). Significant margin
improvements were achieved in the Minneapolis plant and improvements were also
evident in Cardiff.
Net operating expenses, excluding development cost reimbursements classified as
other operating income, increased 11.6% to #24.0 million (H1 2004: #21.5
million). Approximately 1% of the increase resulted from the non-cash charge for
equity incentive (share options) scheme costs required under IFRS 2. Overall,
operating expenses remained stable at approximately 50.6% of revenue. Operating
profit increased by 22% to #5.0 million (H1 2004: #4.1 million).
Basic earnings per share (EPS) rose by 82% to 5.1p (H1 2004: 2.8p). Adjusted EPS
under UK GAAP, which excludes goodwill amortisation and deferred tax credits and
was the measure normally disclosed by the Group before the adoption of IFRS,
would have increased by 44% to 5.9p (H1 2004: 4.1p). The H1 2005 effective tax
rate of approximately 9.6% comprises approximately 12% taxes payable (H1 2004:
7.5%) and a 2.4% deferred tax credit (H1 2004: 26.4% deferred tax charge). This
non-cash item represents the net effect of various deferred tax charges and
credits around the Group.
During the period, the Group increased the installed base of surgical instrument
generators in the US market by 19% to 4861 units (H1 2004: 4075 units) of which
approximately 50% were sold rather than placed. This continued the trend towards
sale rather than placement, which began to increase during 2004. Approximately
$1 million was spent on generator placement during the period which, after
depreciation and retirements, resulted in the net book value of the placed
generator base reducing to $4.5 million (H1 2004: $5.5 million). Sales of the
related disposable instruments increased 23% to $22.2 million (H1 2004: $18.1
million).
Implementation of IFRS
The Group has prepared this report under IFRS for the first time. For the
purposes of this report the term IFRS also includes International Accounting
Standards ("IAS"). Comparative figures have been restated under IFRS and a full
reconciliation of the results under IFRS to those that would have been reported
under UK GAAP is included in note 11 to the interim financial report. Your
attention is also drawn to note 1 of the financial report which sets out the
Group's accounting policies in full.
Business Review
The performance of each business unit during the first half of 2005 is shown
below. As the effect of currency change clouds the underlying operational growth
of each business unit comparisons are made in the principal billing currency.
Analysis of Revenues
Business H12004 H12005 Growth
Gynaecology US $m 15.4 19.0 23.4%
International #m 1.3 2.1 61.5%
Urology US $m 2.6 3.4 30.8%
International #m 1.0 1.1 10.0%
General Surgery US $m 1.0 1.1 10.0%
International #m 1.0 1.7 70.0%
Total Surgical US $m 19.0 23.5 23.7%
International #m 3.3 4.9 48.5%
Otology US $m 12.0 13.3 10.8%
International #m 2.3 2.4 4.3 %
Sinus & Rhinology US $m 7.0 8.4 20.0%
International #m 0.9 0.9 0.0%
Head & Neck US $m 4.9 5.1 4.1%
International #m 2.5 2.7 8.0%
Total ENT US $m 23.9 26.8 12.1%
International #m 5.7 6.0 5.3%
Partnered Technologies $m 13.0 16.1 23.8%
#m 2.8 1.1 (60.7)%
$/# rate 1.82 1.88 (3.3)%
Total Revenue #m 42.5 47.3 11.3%
SURGICAL DIVISION
This division, representing 37% of group turnover, continues to grow strongly in
each of its business units. The US Gynaecology business continued to grow well
on the back of strong performances across the PK product range. Cutting forceps
continued strongly with over 20% growth on the same period last year. The
PlasmaCision-based PlasmaSpatula, launched in late March, performed well with
initial sales of over $0.3 million. The PK Seal ("Open Forceps") continued to
gain ground in the open gynaecological procedure market showing revenue growth
of over 36%. Internationally, the Gynaecology division posted strong growth of
over 60% as direct sales initiatives in Germany and Benelux began to yield
results.
The US Urology business continued to increase sales of SuperPulse products,
including generators, which resulted in over 30% revenue growth. International
growth was more modest off a low base, and the effect of the acquisition of
Urology Solutions Pty Ltd, the Group's Australian distributor, was limited
within the period.
The General Surgery business remained relatively small as the Group continued to
have an insufficiently broad portfolio and lacked a focused route to market. It
is anticipated that the acquisition of ACMI will help meet both of these
requirements.
ENT DIVISION
This division, representing 43% of Group turnover in the first half of 2005,
showed a step up in growth during the period. The US Otology business grew well
posting an increase in sales of over 10% helped by the return of some of the
instrument business which was lacking in the previous year. Internationally, the
business returned a 4% growth in sales which is nearer the norm for this mature
market.
The US Sinus and Rhinology business grew revenues by 20% over the comparable
period. Key drivers of this growth were the continued performance of the Diego
microdebrider system, which was enhanced with PK technology in March, and the
return to growth of conventional instrument sales as a result of the integration
of Explorent's products into the portfolio.
The US Head and Neck Business grew by just over 4% despite the continued
reimbursement-based decline in the somnoplasty business. The contributors to
growth were Haemostatix, a cutting and sealing forerunner to PK PlasmaCision,
laryngoscopy instruments from the former Explorent portfolio and the small, but
encouraging, initial sales of the Tonsil PlasmaKnife. This new
PlasmaCision-based device was launched at the end of March and consequently was
primarily involved in evaluations by hospitals during the period. The
International Head and Neck business grew mainly as a result of increased sales
by Gyrus Medical GmbH, the Group's Tuttlingen-based subsidiary which sources and
supplies conventional ENT instruments.
PARTNERED TECHNOLOGIES DIVISION
Gyrus's Partnered Technologies Division represented 20% of Group revenues during
the period. The Division consists of technology licence, marketing and supply
relationships with Johnson & Johnson (Depuy Mitek, Ethicon Endo-Surgery,
Gynecare and lately Guidant), Bard, and Rhytec, the cosmetic and dermatological
surgery business spun out of the Group at the end of 2004. Overall, the
Division's revenues reduced slightly, by approximately 0.5%, to $18.2 million in
the first half of 2005. This compares with a very strong performance in 2004 and
the reduction was anticipated at the end of last year as the Group developed and
commenced supply of reduced cost product to two of its partners. The revenue
comparison with the prior period masks an encouraging underlying growth in
volume, which is expected to improve the profitability of the Division in the
future.
The first product developed for Rhytec was shipped at the end of June. The
development contract resulted in fees of #0.89 million being accounted for as
other operating income, with an equal and opposite charge to research and
development expense.
Research & Development
The Group's gross investment in R&D for the first half was #5.1 million (10.8%
of sales) compared to #3.9 million (9.1% of sales) in the same period of 2004.
Excluding the amount reimbursed by Rhytec, the R&D spend was consistent at 8.9%
of sales. The Group has maintained its level of R&D spend on product and
procedural development initiatives, particularly those associated with the
Group's novel proprietary simultaneous "cut and seal" technology known as PK
PlasmaCision. There are some potentially significant PlasmaCision-based product
launches scheduled for the latter part of the winter which will ultimately take
the Group into new markets in general abdominal surgery for the first time.
Throughout the remainder of the year, R&D activities will continue to focus on
both incremental expansion of product lines and the development of key new
products aimed at delivering growth from our core technologies.
Operations
During the first half of 2005 the Group has continued to take steps to improve
operating profitability. Central to this is the implementation of "lean
manufacturing" across the Group.
The benefits of lean manufacturing include increased productivity, reduced
inventories, improved product quality and space utilisation. These and other
related initiatives improved the Group's operating margin to 10.6% (H1 2004:
9.6%), despite a further reduction in the value of the US dollar during the
period.
Acquisition of ACMI
Towards the end of the period the Group announced the acquisition of ACMI, a
market leader in urology and a leading developer and manufacturer of endoscopy
systems. The rationale for the acquisition centred around the combined Group's
leading market positions in Urology and Gynaecology. The combination of Gyrus
and ACMI's core technologies in PK tissue management and digital visualisation
respectively enables the Group to provide class leading "see" and "treat"
products to surgeons focused on minimally invasive, or "keyhole", surgery.
The acquisition was completed after the half year on 21 July 2005, and therefore
has no impact upon this report. The effect of IFRS accounting on the second half
results will be significant, particularly in the accounting treatment of certain
non-cash balance sheet items created by the fair value and purchase price
allocation process. These include the fair value of acquired stocks and the
valuation of certain intangible assets such as customer relationships, in
process R&D, technology assets, brand names and trademarks, each of which may
have a different valuation basis and amortisation life.
As at the date of this report, we have had some six weeks of ownership of ACMI.
We have commenced the restructuring process with initial focus on ensuring that
the enlarged sales organisation retains strong leadership and clarity of
purpose, and that ACMI's own operational improvement programme continues to
generate results into the second half of the year. We continue to be very
excited by the future prospects for the enlarged Gyrus Group.
Outlook
Following the acquisition of ACMI, Gyrus is a significantly larger and stronger
business. We have more powerful positions in the US Urology and Gynaecology
markets and, with a broader portfolio of products being sold through an enlarged
sales force, Gyrus is well placed to continue to grow its business
substantially.
The trading of the combined business has continued well since the end of June
and although there is a risk of some short term disruption as we integrate the
businesses, we remain confident in Gyrus's outlook. We anticipate that the Group
will trade in accordance with expectations in the second half.
Brian Steer
Executive Chairman
Gyrus Group PLC
Consolidated Interim Income Statement
For the six months ended 30 June 2005
Note 6 months ended 6 months ended 30 Year ended 31
30 June 2005 June 2004 December 2004
(unaudited) (unaudited) (audited)
#000 #000 #000
Revenue 1 47,271 42,452 86,930
Cost of Sales (18,317) (16,938) (35,570)
_____ _____ _____
Gross Profit 28,954 25,514 51,360
Other Operating Income 892 - 641
Selling and distribution expenses (13,335) (11,828) (23,158)
Research and development expenses (5,071) (3,842) (7,139)
General and administrative expenses (6,438) (5,783) (10,867)
_____ _____ _____
Net Operating Profit 5,002 4,061 10,837
Financial income 80 74 170
Financial expense (369) (579) (1,020)
_____ _____ _____
Profit before taxation 4,713 3,556 9,987
Income Tax Expense 3 (454) (1,203) (1,504)
_____ _____ _____
Profit for the period 4,259 2,353 8,483
_____ _____ _____
Earnings per ordinary share
Basic 6 5.1p 2.8p 10.2p
Diluted 6 5.0p 2.8p 10.1p
Gyrus Group PLC
Consolidated statement of changes in equity
For the six months ended 30 June 2005
Share Share Merger Hedging and Retained Total
Capital Premium Reserve Translation Profits
Reserve
#000 #000 #000 #000 #000 #000
At 31 December 2003
As originally stated 2,156 151,971 3,860 - (36,400) 121,587
Changes in accounting policy - - - (708) - (708)
relating to first-time adoption of
IFRS _____ _____ _____ _____ _____ _____
As restated 1 January 2004 2,156 151,971 3,860 (708) (36,400) 120,879
_____ _____ _____ _____ _____ _____
Changes in equity for 2004
Exchange differences arising on (1,741) -
translation of foreign operations (1,741)
Profit for the period - 2,353 2,353
_____ _____ _____
Total recognised income and expense (1,741) 2,353 612
for the period
Issue of share capital 2 157 - - - 159
Equity share options issued - - - - 139 139
_____ _____ _____ _____ _____ _____
Balance at 30 June 2004 2,158 152,128 3,860 (2,449) (33,908) 121,789
_____ _____ _____ _____ _____ _____
Exchange differences arising on (6,772) - (6,772)
translation of foreign operations
Profit for the period - 6,130 6,130
_____ _____ _____
Total recognised income and expense (6,772) 6,130 (642)
for the period
Issue of share capital 2 319 - - - 321
Equity share options issued - - - - 185 185
_____ _____ _____ _____ _____ _____
Balance at 31 December 2004 2,160 152,447 3,860 (9,221) (27,593) 121,653
_____ _____ _____ _____ _____ _____
Changes in equity for 2005
Cash flow hedges
Changes in accounting policy 115 - 115
relating to first-time adoption of
IAS 39
Hedging losses taken to equity (222) - (222)
Hedging losses transferred to the (115) - (115)
income statement for the period
Exchange differences arising on 7,414 - 7,414
translation of foreign operations
_____ _____ _____
7,192 - 7,192
Profit for the period - 4,259 4,259
_____ _____ _____
Total recognised income and expense 7,192 4,259 11,451
for the period
Issue of share capital 3 466 - - - 469
Equity share options issued - - - - 281 281
_____ _____ _____ _____ _____ _____
Balance at 30 June 2005 2,163 152,913 3,860 (2,029) (23,053) 133,854
_____ _____ _____ _____ _____ _____
Gyrus Group PLC
Consolidated Balance Sheets
Note As at 30 June As at 30 June As at 31 December
2005 (unaudited) 2004 (unaudited) 2004 (audited)
#000 #000 #000
Assets
Property, plant & equipment 4 11,003 11,462 10,396
Goodwill 96,154 95,181 90,709
Other intangible assets 755 833 265
Deferred tax asset 3 4,643 4,524 4,403
_____ _____ _____
Total non-current assets 112,555 112,000 105,773
_____ _____ _____
Inventories 16,217 16,754 13,434
Trade receivables 16,620 12,046 13,834
Other current assets 3,920 1,920 2,480
Cash and cash equivalents 7,524 7,050 7,263
_____ _____ _____
Total current assets 44,281 37,770 37,011
_____ _____ _____
Total assets 156,836 149,770 142,784
_____ _____ _____
Equity
Share capital 5 (2,163) (2,158) (2,160)
Share premium 5 (152,913) (152,128) (152,447)
Merger reserve (3,860) (3,860) (3,860)
Other reserves 2,029 2,449 9,221
Retained earnings 23,053 33,908 27,593
_____ _____ _____
Total equity (133,854) (121,789) (121,653)
_____ _____ _____
Liabilities
Bank loan - (14,924) -
Obligations under finance leases and (215) (165) (126)
hire purchase contracts
Other creditors - - (8)
_____ _____ _____
Total non-current liabilities (215) (15,089) (134)
_____ _____ _____
Trade and other payables (3,138) (3,700) (2,878)
Current tax payable (527) (273) (865)
Obligations under finance leases and (134) (81) (58)
hire purchase contracts
Bank overdrafts and loans due within 7 (8,087) - (8,928)
one year
Other creditors (2,861) (2,196) (734)
Accruals and deferred income (8,020) (6,642) (7,514)
_____ _____ _____
Total current liabilities (22,767) (12,892) (20,997)
_____ _____ _____
Total liabilities (22,982) (27,981) (21,131)
_____ _____ _____
Total equity and liabilities (156,836) (149,770) (142,784)
_____ _____ _____
Gyrus Group PLC
Consolidated Cash Flow Statement
6 months ended 30 6 months ended 30 Year ended 31
June 2005 June 2004 December 2004
(unaudited) (unaudited) (audited)
#000 #000 #000
Cash flows from operating activities
Profit before taxation 4,713 3,556 9,987
Adjustments for:
Depreciation of property, plant & equipment 1,735 1,963 3,562
Amortisation of intangible assets 77 76 345
Loss/(profit) on disposal of property, plant & 44 63 (263)
equipment
Finance income and expense 289 505 850
Share based payment expense 281 139 324
_____ _____ _____
Operating cash flows before movement in working 7,139 6,302 14,805
capital
(Increase)/decrease in inventories (3,850) (138) 856
(Increase)/decrease in trade and other (2,736) 80 (1,578)
receivables
Increase in trade and other payables 3,688 3,032 1,964
_____ _____ _____
Cash generated from operations 4,241 9,276 16,047
Interest paid (384) (400) (787)
Taxation (631) (364) (185)
_____ _____ _____
Net cash from operating activities 3,226 8,512 15,075
_____ _____ _____
Cash flows from investing activities
Interest received 80 74 171
Proceeds on disposal of property, plant & - - 417
equipment
Purchases of property, plant & equipment (1,656) (1,517) (2,657)
Purchases of patents & trademarks & other (296) (1) -
intangibles
Expenditure on product development - (40) (141)
Acquisition of subsidiary (765) - 400
_____ _____ _____
Net cash used in investment activities (2,637) (1,484) (1,810)
_____ _____ _____
Cash flows from financing activities
Issue of share capital 469 159 480
Repayment of borrowings (841) (3,733) (10,380)
Repayment of obligations under finance leases (59) (58) (113)
_____ _____ _____
Net cash used in financing activities (431) (3,632) (10,013)
_____ _____ _____
Net increase in cash and cash equivalents 158 3,396 3,252
Cash and cash equivalents at beginning of period 7,263 4,145 4,145
Effect of foreign exchange rate changes 103 (491) (134)
_____ _____ _____
Cash and cash equivalents at end of period 7,524 7,050 7,263
_____ _____ _____
Bank balances and cash 7,524 7,050 7,263
_____ _____ _____
Notes to the condensed interim financial statements
For the six months ended 30 June 2005
Significant Accounting Policies
Gyrus Group PLC is a company domiciled in the United Kingdom. The condensed
consolidated interim financial statements of the Company for the six months
ended 30 June 2005 comprise the Company and its subsidiaries (together referred
to as the "Group").
The comparative figures for the financial year ended 31 December 2004 are not
the Group's audited statutory accounts for that financial year. Those accounts,
which were prepared under UK Generally Accepted Accounting Practices, have been
reported on by the Group's auditor and delivered to the registrar of companies.
The report of the auditors was unqualified and did not contain statements under
section 237(2) or (3) of the Companies Act 1985.
The condensed consolidated interim financial statements were authorised for
issuance on 7 September 2005.
(a) Statement of compliance
European Union (EU) law requires that the next annual consolidated financial
statements of the Group for the year ended 31 December 2005 be prepared in
accordance with IFRSs adopted for use in the EU ("adopted IFRSs"). This interim
financial information has been prepared on the basis of the recognition and
measurement requirements of IFRSs in issue that either are endorsed by the EU
and effective at 30 June 2005 or are expected to be adopted and effective 31
December 2005, the Group's first annual reporting date at which it is required
to use adopted IFRSs.
(b) Basis of Preparation
The financial statements are presented in sterling, rounded to the nearest
thousand. They are prepared on the historical cost basis except for derivative
financial instruments that are stated at their fair value.
The adopted IFRSs that will be effective at 31 December 2005 are still subject
to change and to additional interpretations and therefore cannot be determined
with certainty. Accordingly, the accounting policies for that annual period will
be determined finally only when the annual financial statements are prepared for
the year ended 31 December 2005.
The preparation of the condensed consolidated interim financial statements in
accordance with IFRSs resulted in changes to the accounting policies as compared
with the most recent annual financial statements prepared under UK GAAP. The
accounting policies set out below have been applied consistently to all periods
presented in these condensed consolidated interim financial statements except
for IAS 39 "Financial Instruments: Recognition and Measurement" which is applied
from 1 January 2005. They have also been applied in preparing an opening IFRS
balance sheet at 1 January 2004 for the purposes of the transition to IFRS, as
required by IFRS 1. The impact of the transition from previous GAAP to IFRS is
explained in note 11.
(c) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Company. Control exists when the
Company has the power, directly or indirectly, to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. In
assessing control, potential voting rights that are presently exercisable or
convertible are taken into account. The financial statements of subsidiaries are
included in the condensed consolidated financial statements from the date that
control commences until the date that control ceases.
On acquisition, the identifiable assets, liabilities and contingent liabilities
of a subsidiary are measured at their fair values at the date of acquisition.
The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate.
(ii) Transaction eliminated on consolidation
Intragroup balances, and any unrealised gains and losses or income and expenses
arising from intragroup transactions, are eliminated in preparing the condensed
consolidated interim financial statements.
(d) Foreign currency
(i) Foreign currency transactions
Transactions denominated in foreign currencies are recorded at the exchange rate
ruling on the date of the transaction. Foreign currencies received are
translated at the exchange rate ruling on the date of conversion or at a forward
contract rate if hedged. Monetary assets and liabilities expressed in foreign
currencies, are translated into sterling at rates of exchange ruling at the end
of the financial year. The resulting exchange differences are charged to the
income statement for the year except in the case of loans to finance equity
investment in overseas subsidiaries where both the investment and loan are
translated at the exchange rate ruling at the balance sheet date and the
differences are taken directly to the Group's translation reserve. Such
translation differences are recognised as income or as expenses in the period in
which the operation is disposed of.
(ii) Foreign statements of foreign operations
On consolidation, the results of overseas operations are translated at the
average rates of exchange during the period and their balance sheets at the
rates ruling at the balance sheet date. Exchange differences arising on
translation of the opening net assets and on the difference between the results
of overseas operations translated at average monthly exchange rates and year end
rates are dealt with through the Group's translation reserve.
(e) Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to foreign
exchange risks arising from operational and financing activities. In accordance
with its treasury policy, the Group does not hold or issue derivative financial
instruments for trading purposes.
Derivatives are recorded at fair value and any gains or losses on remeasurement
of fair values is taken to the income statement unless hedge accounting is
sought. The fair value of forward exchange contracts is their quoted market
price at the balance sheet date being the present value of the quoted forward
price.
(f) Cash Flow Hedging
When a derivative financial instrument is designated as a hedge of the
variability in cash flows of a recognised asset or liability or highly probable
forecast transaction, the effective part of any gain or loss on the derivative
financial instruments is recognised directly in equity. If a hedge of a
forecasted transaction subsequently results in the recognition of a financial
asset or a financial liability, then the associated gains or losses that were
recognised directly in equity are reclassified into the income statement in the
same period or periods during which the asset acquired or liability assumed
affects the income statement (i.e. when interest income or expense is
recognised).
The ineffective part of any gain or loss is recognised immediately in the income
statement.
When a hedging instrument expires or is sold, terminated or exercised, or the
Group revokes designation of the hedge relationship but the hedged forecast
transaction is still expected to occur, the cumulative gain or loss at that
point remains in equity and is recognised in accordance with the above policy
when the transaction occurs. If the hedged transaction is no longer expected to
take place, then the cumulative unrealised gain or loss recognised in equity is
recognised immediately in the income statement.
(g) Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated
depreciation and impairment losses.
(ii) Leased assets
Where the group enters into a lease which entails taking substantially all the
risks and rewards of ownership of an asset, the lease is treated as a finance
lease. The lease is recorded in the balance sheet as a tangible fixed asset and
is depreciated over its estimated useful life or the term of the lease,
whichever is the shorter. Future instalments under such leases, net of finance
charges, are included in creditors.
(iii) Depreciation
Depreciation is provided to write off the cost less the estimated residual value
of tangible fixed assets by equal instalments over their estimated useful
economic lives. Land is not depreciated. The estimated useful lives are as
follows:
Fixtures, fittings and office equipment 3-10 years
Buildings 20 years
Leasehold improvements Term of lease
Plant and machinery 3-10 years
Placed equipment 3 years
Placed equipment relates to equipment placed in clinical settings to generate a
stream of "disposables" revenue. Utilisation of such equipment is measured and
provision made where appropriate for impairment.
(h) Intangible assets
(i) Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the Group's fair interest in the fair value of the identifiable
assets, liabilities and contingent liabilities of a subsidiary at the date of
acquisition. Goodwill is recognised as an asset and is tested for impairment
annually, or on such other occasions that events or changes in circumstances
indicate that it might be impaired.
In respect of acquisitions prior to 1 January 2003, goodwill is included on the
basis of its deemed cost, which represents the amount recorded under UK GAAP.
The classification and accounting treatment of business combinations that
occurred prior to 2003 has not been reconsidered in preparing the Group's
opening IFRS balance sheet at 1 January 2004 (see note 11).
On disposal of a subsidiary, the attributable amount of unamortized goodwill
which has not been subject to impairment is included in the determination of the
profit or loss on disposal.
(ii) Research and development
Expenditure on research activities is recognised as an expense in the period in
which it is incurred.
An internally-generated intangible asset arising from the Group's development
activities is recognised only if the Group can demonstrate the following:
- The technical feasibility of completing the asset so that it will be available
for use or sale;
- The intention to complete the intangible asset and use or sell it;
- The ability to use or sell the intangible asset;
- It is probable that the asset created will generate future economic benefits;
- The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset; and
- The development cost of the asset can be measured reliably.
Where no internally-generated intangible asset can be recognised, development
expenditure is recognised as an expense in the period in which it is incurred.
Internally-generated intangible assets are amortised over the life of the
product, which is usually no more than 10 years.
(iii) Licensing agreements
Licensing agreements are included at cost and depreciated over their useful
economic life. Provision is made for any impairment.
(iv) Intellectual property rights
Patents and trademarks are measured initially at purchase cost and amortised on
a straight-line basis over their estimated useful lives.
(v) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when
it increases the future economic benefits embodied in the specific asset to
which it relates. All other expenditure is expensed as incurred.
(i) Trade and other receivables
Trade and other receivables are stated at their nominal value as reduced by
appropriate allowances for estimated irrecoverable amounts.
(j) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined on a first in first out basis and includes transport and handling
costs. In the case of manufactured products, cost includes all direct
expenditure and production overheads based on the normal level of activity. Net
realisable value is the price at which the stocks can be sold in the normal
course of business after allowing for the costs of realisation and, where
appropriate, the cost of conversion from their existing state to a finished
condition. Provision is made where necessary for obsolete, slow-moving and
defective stocks.
(k) Impairment
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets with finite lives to determine whether there is
any indication that those assets have suffered an impairment loss. If any such
indication exists, the recoverable amount of the asset is estimated in order to
determine the extent of the impairment loss (if any). Where it is not possible
to estimate the recoverable amount of an individual asset, the Group estimates
the recoverable amount of the cash-generating unit to which the asset belongs.
Goodwill arising on acquisition is allocated to cash-generating units. The
recoverable amount of the cash-generating unit to which goodwill has been
allocated is tested for impairment annually, or on such other occasions that
events or changes in circumstances indicate that it might be impaired.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. Impairment losses
are recognised as an expense immediately, unless the relevant asset is land or
buildings at a revalued amount, in which case the impairment loss is treated as
a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable
amount, but such that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognised
for the asset (cash-generating unit) in prior years. A reversal of an impairment
loss is recognised as income immediately, unless the relevant asset is carried
at a revalued amount, in which case the reversal of the impairment loss is
treated as a revaluation increase. However, impairment losses relating to
goodwill may not be reversed.
(l) Interest bearing borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds
received. Finance charges, including premiums payable on settlement or
redemption, are accounted for on an accrual basis and are added to the carrying
amount of the instrument to the extent that they are not settled in the period
in which they arise.
(m) Employee benefits
(i) Defined contribution plans
Obligations for contributions to defined contribution pension plans are
recognised as an expense in the income statement as incurred.
(ii) Share based payment transactions
On 1 January 2005, Gyrus Group PLC applied the requirements of IFRS 2,
Share-based Payments. In accordance with the transition provisions, IFRS 2 has
been applied to all grants after 7 November 2002 that were unvested as of 1
January 2005.
The Group issues equity-settled share-based payments to certain employees.
Equity-settled share-based payments are measured at fair value at the date of
grant. The fair value determined at the grant date of the equity-settled
share-based payments is expensed on a straight-line basis over the vesting
period, based on the Group's estimate of shares that will eventually vest.
The fair value of services received in return for share options granted to
employees is measured by reference to the fair value of share options granted.
The estimate of the fair value of the services received is measured based on a
stochastic option pricing model. This model takes into account the following
variables: exercise price, share price at grant, expected term, expected
volatility of share price, risk-free interest rate and expected dividend yield.
The Group also gives employees the opportunity to purchase shares in the Company
by participating in a share purchase plan. The option price for the UK scheme is
the market price on the day preceding the invitation date discounted by a
maximum of 80%. The share options under this plan are also treated as equity
settled share based payments and the fair value calculated using a stochastic
model.
In May 2005, the Group issued the first grant under the Gyrus 2005 Long Term
Incentive Plan. This is a discretionary plan which provides for the grant of
conditional awards or nil cost options over 1p Ordinary Shares in the company.
Awards normally vest following the third anniversary of grant once the
performance conditions have been satisfied and provided that the participant is
employed by the Group. The performance conditions are based on earnings per
share growth. The fair value of grants under this scheme are determined as being
the mid market quote on the day preceding grant which is charged to the income
statement evenly over the 3 year vesting period.
(n) Provisions
Provisions are recognised when the Group has a present obligation as a result of
a past event which it is probable will result in an outflow of economic benefits
that can be reasonably estimated.
(i) Restructuring
Provisions for restructuring costs are recognised when the Group has a detailed
formal plan for the restructuring and it has been notified to affected parties.
Future operating costs are not provided for.
(o) Trade and other payables
Trade payables are stated at their nominal value.
(p) Revenue
Product sales are recognised upon shipment of product.
Royalty revenue relating to licensed technology is recognised upon shipment of
product or when advised by the other party to the royalty contract that the
royalty is earned.
Revenue excludes VAT and similar taxes.
(q) Other income
Other income represents revenues derived from collaborative development
agreements and is recognised in accordance with the contract agreed.
(r) Cost of Sales
Cost of sales represents the material, labour and production overheads incurred
in manufacturing the products sold or the purchase cost and directly
attributable handling costs of products bought for re-sale.
(s) Expenses
(i) Operating lease payments
Payments made under operating leases are recognised in the income statement on a
straight line basis over the life of the lease.
(ii) Finance lease payments
Minimum lease payments are apportioned on a sum of digits basis, between the
finance element, which is charged to the income statement account, and the
capital element, which reduces the outstanding obligations for future
instalments.
(iii) Net financing costs
Net financing costs comprise interest payable on borrowings calculated using the
effective interest rate method, interest receivable on funds invested, foreign
exchange gains and losses, and gains and losses on hedging instruments that are
recognised in the income statement.
Interest income is recognised in the income statement as it accrues using the
effective interest rate method.
The interest expense component of finance lease payments is recognised in the
income statement using the effective interest rate method.
(t) Income tax
The charge for current tax is based on the results for the period as adjusted
for items which are non-assessable or disallowed. It is calculated using rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of taxable profit. In principle,
deferred tax liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill (or negative goodwill) or from the initial
recognition (other than in a business combination) of other assets and
liabilities in a transaction which affects neither the tax profit nor the
accounting period.
Where the Group is able to control the distribution of reserves from
subsidiaries, and there is no intention to distribute the reserves, deferred tax
is not recognised for these temporary differences.
Deferred tax is calculated at the rates that are expected to apply when the
asset or liability is settled. Deferred tax is charged or credited in the income
statement, except when it relates to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes
levied by the same taxation authority, and the Group intends to settle its
current tax assets and liabilities on a net basis.
Information as to the calculation of income tax on the profit and loss for the
interim periods presented is included in note 3.
1 Segment Reporting
Segment information is presented in the condensed consolidated interim financial
statements in respect of the Group's business segments, which are the primary
basis of segment reporting. The business segment reporting format reflects the
Group's management and internal reporting structure.
Inter-segment pricing is determined on an arm's length basis.
Segment results include items directly attributable to a segment as well as
those that can be allocated on a reasonable basis.
Business Segments
The Group is comprised of the following main business segments:
ENT Design, development, manufacture, marketing and sales of
otology, sinus and rhinology and head and neck products
Surgical Design, development, manufacture, marketing and sales of
gynaecology, urology and general surgery products
Partnered Technologies Out-licensing of the Group's proprietary technology in
conjunction with a manufacturing contract for markets outside
the Group's core sales and marketing competence
For the six months ended 30 June 2005 (unaudited)
ENT Surgical Partnered Eliminations Total
Technologies
#000 #000 #000 #000 #000
Revenue
External sales 20,190 17,378 9,703 - 47,271
Inter-segment sales - 505 2,246 (2,751) -
_____ _____ _____ _____ _____
20,190 17,883 11,949 (2,751) 47,271
_____ _____ _____ _____ _____
Segment result 1,818 4,229 1,725 (582) 7,190
_____ _____ _____ _____ _____
Other income 892
Unallocated corporate expenses (3,080)
_____
Profit from operations 5,002
Finance costs (289)
_____
Profit before tax 4,713
Income tax expense (454)
_____
Profit for the year 4,259
_____
For the six months ended 30 June 2004 (unaudited)
ENT Surgical Partnered Eliminations Total
Technologies
#000 #000 #000 #000 #000
Revenue
External sales 18,669 13,884 9,899 - 42,452
Inter-segment sales - 850 1,020 (1,870) -
_____ _____ _____ _____ _____
18,669 14,734 10,919 (1,870) 42,452
_____ _____ _____ _____ _____
Segment result 2,269 2,853 1,990 46 7,158
_____ _____ _____ _____ _____
Unallocated corporate expenses (3,097)
_____
Profit from operations 4,061
Finance costs (505)
_____
Profit before tax 3,556
Income tax expense (1,203)
_____
Profit for the year 2,353
_____
2 Acquisition of subsidiary
On 16th March 2005, the Group acquired 100% of the equity of Urology Solutions
Pty Limited (renamed Gyrus Australasia Pty Limited), the exclusive distributor
of Gyrus's surgical products in Australia and New Zealand for total
consideration of #1,170,000 satisfied by cash and deferred consideration. In
the three months to 30 June 2005 the subsidiary contributed profit of #112,000
to the consolidated profit for the interim period.
Effect of acquisitions
The acquisition had the following effect on the Group's assets and liabilities.
Acquirees net assets at the acquisition date
Recognised Fair value Carrying amounts
values adjustments
#000 #000 #000
Property, plant and equipment 34 - 34
Intangible assets - 387 387
Inventories 318 18 336
Trade and other receivables 125 - 125
Cash and cash equivalents 32 - 32
Trade and other payables (351) - (351)
_____ _____ _____
Net identifiable assets and liabilities 158 405 563
Goodwill on acquisition 607
_____
Total consideration 1,170
_____
Satisfied by:
Cash 797
Deferred consideration 373
_____
Total consideration 1,170
_____
Cash consideration 797
Less: Cash acquired on acquisition (32)
_____
Net cash outflow arising on acquisition 765
_____
The acquisition of the Australian distributor, Urology Solutions Pty Ltd
(renamed Gyrus Australasia Pty Ltd), provides Gyrus with the opportunity to sell
its range of ENT products through this distribution channel. Goodwill of
#607,000 has arisen on this transaction as a result of the potential for
generating additional sales.
On 12 May 2005, Gyrus Australasia Pty Ltd took over the distribution of ENT
products in Australia from Global Scientific Pty Ltd and purchased business
records and stock for cash consideration of #511,000.
Recognised Fair value Carrying amounts
values adjustments
#000 #000 #000
Intangible assets - 161 161
Inventories 346 (103) 243
____ ____ ____
Net identifiable assets and liabilities 346 58 404
Goodwill on acquisition 107
____
Total consideration satisfied by cash 511
____
The acquisition of business records and stock from Global Scientific Pty Ltd
provides Gyrus with a further opportunity to sell its range of ENT products
through established distribution channels. Goodwill of #107,000 has arisen on
this transaction as a result of the potential for generating additional sales.
3 Income Tax Expense
Current tax for the interim period is the expected tax payable on the taxable
income for the period, calculated at the standard rate of corporation tax in the
relevant country applied to estimated taxable profits of the interim period. The
Group has considerable tax losses still available for use against future profits
earned in the US. The full value of these losses has not been recognised. The
benefit of these losses will be reflected in future years' tax charges.
Current tax for the current and prior periods is classified as a current
liability to the extent that it is unpaid.
6 months ended 30 6 months ended 30
June 2005 June 2004
(unaudited) (unaudited)
#000 #000
Current taxation
Domestic 197 -
Foreign 367 266
_____ _____
564 266
_____ _____
Deferred tax
Current year (110) 937
_____ _____
Taxation attributable to the company and its subsidiaries 454 1,203
_____ _____
Deferred taxation
#000
Net deferred tax asset recognised at 30 June 2004 4,524
Charge to income for the period (261)
Exchange differences 140
_____
Net deferred tax asset recognised at 31 December 2004 4,403
Credit to income for the period 110
Exchange differences 130
_____
Net deferred tax asset recognised at 30 June 2005 4,643
_____
The amount of deferred tax provided is based on the expected manner of
realisation or settlement of the carrying amount of assets and liabilities,
using the standard rate of corporation tax for the interim period presented.
The primary components of the Group's recognised deferred tax assets include
temporary differences related to provisions and reserves, accrued interest
payments on loans to US subsidiaries and tax loss carry forwards.
The primary components of the Group's deferred tax liabilities include temporary
differences related to fixed assets and tax relief for goodwill obtained in
relation to the acquisition of the assets of Smith & Nephew Inc.'s ENT division
('ENT').
Deferred tax movements arise from the origination and reversal of temporary
differences, the effects of changes in tax rates and the benefits of tax losses
recognised. The overall movement in the period is a deferred tax credit, which
relates to an increase in provisions, reserves and accrued interest arising on
inter-company loans. However there is also an equally significant deferred tax
charge in relation to the goodwill relief from the acquisition of the assets of
ENT. As a result of translating the deferred tax associated with goodwill
relief, a foreign exchange loss has been recognised through reserves.
The quantum of US losses recognised has remained unchanged in local currency
however the sterling deferred tax asset has increased as a result of translation
at the exchange rate prevailing at the period end. This foreign exchange
difference has been recognised through reserves.
Reconciliation of effective tax rate
The current tax expense for the six months for the period ended 30 June 2005 was
#454,000, which gives rise to an effective income tax rate of 9.6% (30 June
2004: 33.8%), as compared to the standard UK corporation tax charge of 30%.
Differences between the standard UK income tax rate used and the rate achieved
include, but are not limited to, the effect of tax rates in foreign
jurisdictions, non-deductible expenses and the effect of tax losses utilised.
4 Property, plant and equipment
Capital commitments
During the six months ended 30 June 2005, the Group entered into a contract to
purchase property, plant and equipment of #693,000 (six months ended 30 June
2004 #nil).
5 Capital and reserves
Share capital and share premium
The Group recorded the following amounts within shareholder's equity as a result
of the issuance of ordinary shares.
For the six months ended 30 June Share capital Share premium
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
#000 #000 #000 #000
Issuance of ordinary shares 3 2 466 157
_____ _____ _____ _____
Dividends
The directors do not propose the payment of a dividend (30 June 2004 #nil).
6 Earnings per share
Basic earnings per share
The calculation of basic earnings per share for the six months ended 30 June
2005 was based on the profit attributable to ordinary shareholders of #4,259,000
(year ended 31 December 2004 #8,483,000 and six months ended 30 June 2004
#2,353,000) and a weighted average number of ordinary shares outstanding during
the six months ended 30 June 2005 of 83,766,128 (year ended 31 December 2004
83,426,097 and six months ended 30 June 2004 83,352,353).
Diluted earnings per share
The calculation of diluted earnings per share for the six months ended 30 June
2005 was based on the profit attributable to ordinary shareholders of #4,259,000
(year ended 31 December 2004 #8,483,000 and six months ended 30 June 2004
#2,353,000) and a weighted average number of ordinary shares outstanding during
the six months ended 30 June 2005 of 84,631,581 (year ended 31 December 2004
83,809,138 and six months ended 30 June 2004 83,675,226).
Earnings 6 months ended 30 6 months ended 30 Year ended 31
June 2005 June 2004 December 2004
(unaudited) (unaudited) (audited)
#000 #000 #000
Earnings for the purpose of basic and diluted 4,259 2,353 8,483
earnings per share
_____ _____ _____
6 months ended 30 6 months ended 30 Year ended 31
June 2005 June 2004 December 2004
(unaudited) (unaudited) (audited)
Number Number Number
Weighed average number of shares for the 83,766,128 83,352,353 83,426,097
purposes of calculating basic earnings per
share
Effect of dilutive options 865,453 322,873 383,041
_____ _____ _____
Weighted average number of shares for purposes 84,631,581 83,675,226 83,809,138
of calculating diluted earnings per share
_____ _____ _____
Basic earnings per share 5.1p 2.8p 10.2p
Diluted earnings per share 5.0p 2.8p 10.1p
In order to provide a trended measure of underlying performance, profit
attributable to ordinary shareholders is adjusted to exclude items which
management consider will distort comparability. Adjusted basic earnings per
share has been calculated by dividing adjusted profit attributable to ordinary
shareholders (see table below for adjustments made) of #4,149,000 (year ended 31
December 2004 #9,344,000 and six months ended 30 June 2004 #3,290,000) by the
weighted average number of ordinary shares outstanding during the six months
ended 30 June 2005 of 83,766,128 (year ended 31 December 2004 83,426,097 and six
months ended 30 June 2004 83,352,353).
Earnings on which adjusted earnings per share is based:
6 months ended 30 6 months ended 30 Year ended 31
June 2005 June 2004 December 2004
(unaudited) (unaudited) (audited)
#000 #000 #000
Basic earnings for the period 4,259 2,353 8,483
Deferred taxation (110) 937 861
_____ _____ _____
Earnings for the period excluding deferred 4,149 3,290 9,344
taxation
_____ _____ _____
Adjusted basic earnings per share 5.0p 3.9p 11.2p
7 Interest-bearing loans and borrowings
As at 30 June 2005 the Group had a loan of #8,087,000 under a revolving credit
facility of #15,000,000 which would have expired in December 2005 but has
subsequently been replaced by a new facility (see note 10 subsequent events).
Each advance drawn under the revolving loan is repaid on the last business day
of each fixed term interest period (typically 3 to 6 months) but is
automatically redrawn unless the Group gives notice to the contrary or an event
of default or potential default has occurred. The interest rate for each advance
drawn under the revolving facility is fixed on the date of the advance for the
agreed interest period at LIBOR plus 1.25%. The loan is secured by a fixed and
floating debenture on the assets of the Group.
Repayments on the loan over the period from 1 January 2005 to 30 June 2005 were
as follows:
Sterling Euro US Dollar Total
#000 #000 #000 #000
Loan balance as at 1 January 2005 (audited) 1,500 3,964 3,464 8,928
Repayments (500) (415) - (915)
Foreign exchange movements - (172) 246 74
_____ _____ _____ _____
Loan balance as at 30 June 2005 (unaudited) 1,000 3,377 3,710 8,087
_____ _____ _____ _____
8 Employee benefits
Pension Plans
The Group operates a defined contribution scheme. The assets of the scheme are
held separately from those of the Group in an independently administered fund.
The pension charge represents contributions payable by the Group to the fund.
Share based payments
Share Option Plans
At 30 June 2005 certain directors and employees had options to subscribe for
ordinary shares of 1p each under the schemes described below.
Gyrus 1997 Approved Share Option Plan and Gyrus 1997 Unapproved Share Option
Plan
Discretionary schemes under which UK directors and employees are granted options
to purchase shares in the Company. The exercise price of the option is based on
the market price on the day of grant for all grants before October 2003 and on
the day preceding the grant for those issued thereafter. There is no discount.
Options are capable of exercise after three years and within ten years of the
date of grant. Those granted since November 2001 are subject to performance
targets, except for those issued to all employees on a formula basis on
achieving their six month anniversary with the Group. Performance conditions on
these options are disclosed in the Remuneration Committee Report in the Annual
Report and Accounts for the year ended 31 December 2004.
Gyrus PLC US Stock Option Plan
Discretionary scheme used to award share options to US employees. The option
price is based on the market price on the day preceding grant and there is no
discount. Options are generally exercisable after three years (but the plan does
allow for variable vesting), and within ten years. Performance conditions are
not normally imposed on US share options except for PLC Board directors.
(a ) Share Option Plans (continued)
Gyrus Group Qualifying Non-Employee Stock Option Plan
A plan approved by shareholders in 2002 to enable Gyrus to grant share options,
within strict guidelines, to independent sales people, consultants and members
of the scientific advisory panel. The option price is the market price on the
day preceding grant and there is no discount. All grants to independent sales
people have sales-related performance conditions. Options are exercisable after
three years and within ten years.
Save As You Earn Scheme
A scheme under which UK employees can enter into savings contracts with a
building society for a period of three or five years and use the proceeds of
their savings account to purchase shares in the Company on the exercise of
options. The option price is the market price on the day preceding the
invitation date discounted by a maximum of 20%.
US Employee Stock Purchase Plan
A scheme under which US employees can participate in a 12 month purchase plan
during which they can elect to have a percentage of their compensation withheld,
subject to a maximum of 10% of gross basic salary, capped at a maximum
contribution of US $375 per month. After the end of the 12 month offering period
the contributions are used to purchase ordinary shares in the Company at the
lower of the market price at the opening of the offering period or the closing
of the offering period, discounted by 15%.
Share option grants issued prior to 7 November 2002 have not been subject to the
measurement principles in IFRS 2 in accordance with the transitional provisions
in IFRS 1 and IFRS 2.
There have been no new issues of share options in the six month period to 30
June 2005.
Fair value of share options and assumptions
The fair value of services received in return for share options granted to
employees is measured by reference to the fair value of share options granted.
The estimate of the fair value of share options granted is measured based on a
stochastic option pricing model. This model takes into account the following:
exercise price, share price at grant, expected term, expected volatility of
share price, risk-free interest rate and expected dividend yield.
For share option grants between 26 March 2003 and 25 October 2004 under the 1997
approved and unapproved schemes, US stock option plan and the UK Save As You
Earn scheme the following assumptions have been made.
2005 2004
Share price 169.5p to 240.0p 169.5p to 240.0p
Exercise price 169.5p to 240.0p 169.5p to 240.0p
Volatility 29.2% to 31.4% 29.2% to 31.4%
Dividend yield Nil Nil
Risk free rate (based on UK Gilts) 4.2% to 5.0% 4.2% to 5.0%
Number of years until vesting 3 to 5 years 3 to 5 years
The expected volatility is based on historic share price movements over a period
immediately prior to the date of grant. For Save As You Earn options volatility
has been calculated over 3.25 years and 5.25 years for 3 and 5 year options
respectively and for all other share option schemes volatility has been
calculated over a 6 year period.
Market based performance conditions, including TSR, are incorporated into the
fair value calculation. No subsequent adjustments are possible in relation to
this condition.
For the approved and unapproved 1997 plans that are subject to Total Shareholder
Return (TSR) conditions, the Groups' TSR performance was modelled against the
constituents of the comparator group over a significant number of simulations.
From this, the extent to which an award is expected to vest is then calculated
and the gain derived. Fair value is then calculated as the average of the gains,
discounted back to a present value using a risk-free rate of return.
The charge to the income statement is based on the fair value of share options
granted, adjusted for the number of awards expected to vest.
Long Term Incentive Plan
Gyrus 2005 Long Term Incentive Plan (LTIP)
A discretionary plan which provides for the grant of either conditional awards
of 1p Ordinary Shares or nil cost options over 1p Ordinary Shares in the
company. Awards normally vest following the third anniversary of grant once the
performance conditions have been satisfied and provided the participant is still
employed by the Group.
On 1 June 2005 conditional awards were granted to senior employees totalling
246,580 shares. The vesting of the awards is based on the growth in the
Company's Earnings Per Share (EPS) from a 2004 base as follows:
Average Annual Adjusted EPS Growth over Three Proportion of Award Vesting
Financial Years
8% (i.e. 24% over 3 years) 25%
18% (i.e. 54% over 3 years) 100%
8% to 18% Between 25% and 100% on a pro rata basis
The fair value of each share has been determined as being the closing mid market
price on the day preceding grant. The fair value of the number of shares
expected to vest is charged to the income statement over the 3 year vesting
period.
9 Financial instruments
Hedging fluctuations in foreign currency
From time to time the Group enters into forward foreign exchange contracts to
reduce the currency exposures that arise on sales denominated in foreign
currencies. The Group hedges between 80% and 100% of the UK manufacturing
company's forecast USD$ sales up to 3 months out, 50% to 80% up to 6 months out
and between 25% and 50% up to 12 months out. The forward foreign exchange
contracts have maturities of less than one year after the balance sheet date.
In December 2004, the Group entered into an enhanced forward window transaction
agreement. The exchange rate for the agreement is dependent upon the prevailing
spot rate three working days prior to the Settlement Date. If the spot rate is
greater than 1.96 then the Group has the option to to convert US dollars to
sterling at 1.96. If the spot rate is between 1.7790 and 1.9559 then the Group
has the option to convert US dollars to sterling at spot. If the spot rate is
less than 1.7790 then the Group has the obligation to convert US dollars to
sterling at 1.8993. As at 30 June 2005 the Group had amounts outstanding under
this contract totalling USD$6,564,000. The contract terminates on 30 December
2005.
Estimation of fair values
The fair value of forward foreign exchange contracts has been determined by
calculating the cost of settling the contracts at 30 June 2005. The fair value
of forward foreign exchange contracts at 30 June 2005 is a loss of #83,000 (six
months ended 30 June 2004 a gain of #84,000 and year ended 31 December 2004 a
gain of #152,000). The fair value of the enhanced forward window transaction
agreement has been determined using a mark to market valuation and the fair
value of this contract at 30 June 2005 is a loss of #139,000 (six months ended
30 June 2004 #nil and year ended 31 December 2004 a loss of #37,000).
10 Subsequent events
On 16 June 2005 Gyrus Group PLC announced that it had agreed to acquire American
Cytoscope Makers Inc ("ACMI"). The acquisition was completed on 21 July 2005.
ACMI designs, manufactures, markets and services surgical systems to be used by
surgeons and physicians primarily for diagnosis and minimally invasive surgery
in the field of urology and gynaecology. ACMI was acquired for a consideration
of US$332million plus the assumption of debt and other obligations subsequently
repaid by the company of US$165million resulting in a total consideration of
US$497m. The consideration was satisfied by the issue of 61,250,025 placing
shares at 250p per placing share and new banking facilities. The entire proceeds
of the allotment of the placing shares (which were issued in consideration for
the outstanding shares of common stock of ACMI) were paid to the Sellers. New
banking facilities of US$280m include a five year fixed term loan of
US$250million and a US$30million revolving facility secured by a fixed and
floating debenture over the assets of the Group. The new bank facility attracts
interest at US LIBOR plus a margin of 1.75%.
As this transaction did not complete until 21 July 2005 the acquisition has been
treated as a post balance sheet event.
11 Explanation of transition to IFRS
As stated in note 1(a), these are the Group's first condensed consolidated
interim financial statements for part of the period covered by the first IFRS
annual consolidated financial statements prepared in accordance with IFRS.
The accounting policies in note 1 have been applied in preparing the condensed
consolidated interim financial information for the six months ended 30 June
2005, the comparative information for the six months ended 30 June 2004, for the
year ended 31 December 2004 and the preparation of an opening IFRS balance sheet
at 1 January 2004 (the Group's date of transition).
In preparing its opening IFRS balance sheet, comparative information for the six
months ended 30 June 2004 and for the year ended 31 December 2004, the Group has
adjusted amounts reported previously in financial statements prepared in
accordance with previous GAAP.
An explanation of how the transition from previous GAAP to IFRS has affected the
Group's financial position and financial performance is set out in the following
tables and the notes that accompany the tables.
As reported in the 2004 Annual Report and Accounts the goodwill arising on
consolidation of foreign subsidiaries held in sterling was restated to local
currency and retranslated to closing rate in accordance with FRS 23. The effect
of this adjustment on the UK GAAP comparatives for 30 June 2004 was to reduce
net assets by #22,007,000 and increase profit after tax by #663,000.
Gyrus Group PLC
Notes to the condensed interim financial statements
Explanation of transition to IFRS (continued)
Effect of
UK GAAP transition IFRS
Note (audited) to IFRS (audited)
1 January 2004
#000 #000 #000
Non- Current Assets
Property, Plant & Equipment 12,097 - 12,097
Goodwill 2,5 96,680 (37) 96,643
Other intangible assets 3 870 - 870
Deferred tax assets 4,6 - 5,452 5,452
_____ _____ _____
109,647 5,415 115,062
_____ _____ _____
Current Assets
Inventories 16,814 - 16,814
Trade receivables 12,061 - 12,061
Deferred tax asset 6 6,160 (6,160) -
Other current assets 2,182 - 2,182
Cash & cash equivalents 5,392 - 5,392
_____ _____ _____
42,609 (6,160) 36,449
_____ _____ _____
Total Assets 152,256 (745) 151,511
_____ _____ _____
Equity
Share capital (2,156) - (2,156)
Share Premium (151,971) - (151,971)
Merger reserve (3,860) - (3,860)
Other reserves - 708 708
Retained earnings 36,400 - 36,400
_____ _____ _____
Total equity (121,587) 708 (120,879)
_____ _____ _____
Liabilities
Bank loan (18,888) - (18,888)
Obligations under finance leases and hire purchase (201) - (201)
contracts
Other creditors (359) 17 (342)
_____ _____ _____
Total non-current liabilities (19,448) 17 (19,431)
_____ _____ _____
Trade and other payables (3,175) - (3,175)
Current tax payable (850) - (850)
Obligations under finance leases and hire purchase (107) - (107)
contracts
Bank overdrafts and loans due within one year (1,667) - (1,667)
Other creditors (264) 20 (244)
Accruals and deferred income 5 (5,158) - (5,158)
_____ _____ _____
Total current liabilities (11,221) 20 (11,201)
_____ _____ _____
Total liabilities (30,669) 37 (30,632)
_____ _____ _____
Total equity and liabilities (152,256) 745 (151,511)
_____ _____ _____
Effect of
UK GAAP transition IFRS
Note (unaudited) to IFRS (unaudited)
30 June 2004
#000 #000 #000
Non- Current Assets
Property, Plant & Equipment 11,462 - 11,462
Goodwill 2,5 92,438 2,743 95,181
Other intangible assets 3 793 40 833
Deferred tax assets 4,6 - 4,524 4,524
_____ _____ _____
104,693 7,307 112,000
_____ _____ _____
Current Assets
Inventories 16,754 - 16,754
Trade receivables 12,046 - 12,046
Deferred tax asset 6 5,780 (5,780) -
Other current assets 1,920 - 1,920
Cash & cash equivalents 7,050 - 7,050
_____ _____ _____
43,550 (5,780) 37,770
_____ _____ _____
Total Assets 148,243 1,527 149,770
_____ _____ _____
Equity
Share capital (2,158) (2,158)
Share Premium (152,128) (152,128)
Merger reserve (3,860) (3,860)
Other reserves - 2,449 2,449
Retained earnings 37,906 (3,998) 33,908
_____ _____ _____
Total equity (120,240) (1,549) (121,789)
_____ _____ _____
Liabilities
Bank loan (14,924) - (14,924)
Obligations under finance leases and hire purchase (165) - (165)
contracts
Other creditors - - -
_____ _____ _____
Total non-current liabilities (15,089) - (15,089)
_____ _____ _____
Trade and other payables (3,700) - (3,700)
Current tax payable (273) - (273)
Obligations under finance leases and hire purchase (81) - (81)
contracts
Bank overdrafts and loans due within one year - - -
Other creditors (2,218) 22 (2,196)
Accruals and deferred income 5 (6,642) - (6,642)
_____ _____ _____
Total current liabilities (12,914) 22 (12,892)
_____ _____ _____
Total liabilities (28,003) 22 (27,981)
_____ _____ _____
Total equity and liabilities (148,243) (1,527) (149,770)
_____ _____ _____
Effect of
UK GAAP transition IFRS
Note (audited) to IFRS (audited)
31 December 2004
#000 #000 #000
Non- Current Assets
Property, Plant & Equipment 10,396 - 10,396
Goodwill 2,5 85,241 5,468 90,709
Other intangible assets 3 124 141 265
Deferred tax assets 4,6 - 4,403 4403
_____ _____ _____
95,761 10,012 105,773
_____ _____ _____
Current Assets
Inventories 13,434 - 13,434
Trade receivables 13,834 - 13,834
Deferred tax asset 6 6,082 (6,082) -
Other current assets 2,480 - 2,,480
Cash & cash equivalents 7,263 - 7,263
_____ _____ _____
43,093 (6,082) 37,011
_____ _____ _____
Total Assets 138,854 3,930 142,784
_____ _____ _____
Equity
Share capital (2,160) - (2,160)
Share Premium (152,447) - (152,447)
Merger reserve (3,860) - (3,860)
Other reserves - 9,221 9,221
Retained earnings 40,749 (13,156) 27,593
_____ _____ _____
Total equity (117,718) (3,935) (121,653)
_____ _____ _____
Liabilities
Bank loan - - -
Obligations under finance leases and hire purchase (126) - (126)
contracts
Other creditors (8) - (8)
_____ _____ _____
Total non-current liabilities (134) - (134)
_____ _____ _____
Trade and other payables (2,285) - (2,285)
Current tax payable (593) - (593)
Obligations under finance leases and hire purchase (58) - (58)
contracts
Bank overdrafts and loans due within one year (8,928) - (8,928)
Other creditors (1,624) 5 (1,619)
Accruals and deferred income 5 (7,514) - (7,514)
_____ _____ _____
Total current liabilities (21,002) 5 (20,997)
_____ _____ _____
Total liabilities (21,136) 5 (21,131)
_____ _____ _____
Total equity and liabilities (138,854) (3,930) (142,784)
_____ _____ _____
Effect of
UK GAAP transition IFRS
Note (audited) to IFRS (unaudited)
30 June 2005
#000 #000 #000
Non- Current Assets
Property, Plant & Equipment 11,003 11,003
Goodwill 2,5 87,876 8,278 96,154
Other intangible assets 3 639 116 755
Deferred tax assets 4,6 - 4,643 4,643
_____ _____ _____
99,518 13,037 112,555
_____ _____ _____
Current Assets
Inventories 16,217 - 16,217
Trade receivables 16,620 - 16,620
Deferred tax asset 6 6,815 (6,815) -
Other current assets 3,920 - 3,920
Cash & cash equivalents 7,524 - 7,524
_____ _____ _____
51,096 (6,815) 44,281
_____ _____ _____
Total Assets 150,614 6,222 156,836
_____ _____ _____
Equity
Share capital (2,163) - (2,163)
Share Premium (152,913) - (152,913)
Merger reserve (3,860) - (3,860)
Other reserves - 2,029 2,029
Retained earnings 31,105 (8,052) 23,053
_____ _____ _____
Total equity (127,831) (6,023) (133,854)
_____ _____ _____
Liabilities
Bank loan - - -
Obligations under finance leases and hire purchase (215) - (215)
contracts
Other creditors - - -
_____ _____ _____
Total non-current liabilities (215) - (215)
_____ _____ _____
Trade and other payables (2,916) (222) (3,138)
Current tax payable (527) - (527)
Obligations under finance leases and hire purchase (134) - (134)
contracts
Bank overdrafts and loans due within one year (8,087) - (8,087)
Other creditors (2,884) 23 (2,861)
Accruals and deferred income 5 (8,020) - (8,020)
_____ _____ _____
Total current liabilities (22,568) (199) (22,767)
_____ _____ _____
Total liabilities (22,783) (199) (22,982)
_____ _____ _____
Total equity and liabilities (150,614) (6,222) (156,836)
_____ _____ _____
Gyrus Group PLC
Notes to the condensed interim financial statements
Explanation of transition to IFRS (continued)
Effect of
UK GAAP transition IFRS
Note (unaudited) to IFRS (unaudited)
For six months ended 30 June 2004
#000 #000 #000
Revenue 42,452 - 42,452
Cost of sales 1 (16,930) (8) (16,938)
_____ _____ _____
Gross Profit 25,522 (8) 25,514
Other Operating Income - - -
Selling and distribution expenses 1 (11,801) (27) (11,828)
Research & development expenses 1,3 (3,877) 35 (3,842)
General & administrative expenses 1 (5,684) (99) (5,783)
Goodwill amortisation 2 (2,761) 2,761 -
_____ _____ _____
Net Operating Profit 1,399 2,662 4,061
Financial income 74 - 74
Financial expense (579) - (579)
_____ _____ _____
Profit before tax 894 2,662 3,556
Income tax expense 4 (646) (557) (1,203)
_____ _____ _____
Profit for the period 248 2,105 2,353
_____ _____ _____
Earnings per ordinary share
Basic 0.3p 2.5p 2.8p
Diluted 0.3p 2.5p 2.8p
Adjusted Basic 4.1p (0.1)p 4.0p
Effect of
UK GAAP transition IFRS
Note (audited) to IFRS (audited)
For year ended 31 December 2004
#000 #000 #000
Revenue 86,930 - 86,930
Cost of sales 1 (35,551) (19) (35,570)
_____ _____ _____
Gross Profit 51,379 (19) 51,360
Other Operating Income 641 - 641
Selling and distribution expenses 1 (23,089) (69) (23,158)
Research & development expenses 1,3 (7,262) 123 (7,139)
General & administrative expenses 1 (10,649) (218) (10,867)
Goodwill amortisation 2 (5,505) 5,505 -
_____ _____ _____
Net Operating Profit 5,515 5,322 10,837
Financial income 170 - 170
Financial expense (988) (32) (1,020)
_____ _____ _____
Profit before tax 4,697 5,290 9,987
Income tax expense 4 (485) (1,019) (1,504)
_____ _____ _____
Profit for the period 4,212 4,271 8,483
_____ _____ _____
Earnings per ordinary share
Basic 5.0p 5.1p 10.2p
Diluted 5.0p 5.1p 10.1p
Adjusted Basic 11.5p (0.3)p 11.2p
Effect of
UK GAAP transition IFRS
Note (unaudited) to IFRS (unaudited)
For six months ended 30 June 2005
#000 #000 #000
Revenue 47,271 - 47,271
Cost of sales 1 (18,299) (18) (18,317)
_____ _____ _____
Gross Profit 28,972 (18) 28,954
Other Operating Income 892 - 892
Selling and distribution expenses 1 (13,265) (70) (13,335)
Research & development expenses 1,3 (5,035) (36) (5,071)
General & administrative expenses 1 (6,266) (172) (6,438)
Goodwill amortisation 2 (2,664) 2,664 -
_____ _____ _____
Net Operating Profit 2,634 2,368 5,002
Financial income 80 - 80
Financial expense (369) - (369)
_____ _____ _____
Profit before tax 2,345 2,368 4,713
Income tax expense 4 (85) (369) (454)
_____ _____ _____
Profit for the period 2,260 1,999 4,259
_____ _____ _____
Earnings per ordinary share
Basic 2.7p 2.4p 5.1p
Diluted 2.7p 2.4p 5.1p
Adjusted Basic 5.9p (0.9)p 5.0p
(1) Charge for share based payments
Under IFRS 2 a charge must be recognised for any share based payments including
awards under the Group's share option plans and under the Save As You Earn
Scheme and the US Employee Purchase Plan. The cost of the option is based on the
fair value of the option at the date of grant and is charged to the income
statement over the vesting period. A charge has been recognised for all awards
granted since 7 November 2002 and not vested by 30 June 2005. It is charged to
the same income statement expense category as the costs of the employee to whom
the share award has been made. An equivalent amount is credited to the profit
and loss reserve in the balance sheet.
(2) Goodwill
The Group's policy under UK GAAP regarding the amortisation of goodwill was to
amortise the goodwill over 20 years. Under IFRS 3, there is no amortisation of
goodwill so this adjustment removes the goodwill amortisation charge under UK
GAAP. An annual impairment review is performed under IFRS and any reduction in
the carrying value is to be written down through the income statement. The
impairment review at 31 December 2004 confirmed that there had been no
impairment of goodwill.
(3) Capitalised Development Expenditure
Under UK GAAP all research and development expenditure was charged to the profit
and loss account as incurred. Under IAS 38 development expenditure which meets
certain specified criteria is required to be capitalised and amortised over its
useful life. For the period to 30 June 2005 no new development expenditure has
been capitalised (Year ended 31 December 2004 :#141,000 and period ended 30 June
2004: #40,000). Development expenditure capitalised since 1 January 2004 has
been amortised over a period of 5 years. This policy has not been applied
retrospectively due to the non-availability of relevant information.
(4) Recognition of deferred tax liability where goodwill amortisation is
eligible for a tax deduction
A deferred tax liability is recognised on goodwill which is eligible for a tax
deduction in the US but for which, under IFRS, there is no amortisation charge
in the income statement.
(5) Deferred consideration
Adjustment for interest on deferred consideration required under IFRS 3.
(6) Reclassification of deferred tax asset as a non current-asset
Deferred tax is shown in the balance sheet as a non-current asset under IFRS,
rather than as a current asset as under UK GAAP.
(7) Treatment of exceptional items
The audited profit and loss account for the year ended 31 December 2004 includes
an exceptional item of #27,000. Under IFRS, there is no concept of "exceptional
" items. Material non-recurring items, for example, those of a type that under
UK GAAP would be exceptional items, may not be aggregated but may be disclosed
separately below operating profit. There are no such items for the six month
period to 30 June 2005.
(8) Tax effect
Many of the above adjustments require an adjustment to the tax charge. The
aggregate adjustment represents additional deferred tax provided and does not
involve an additional liability to be paid in cash.
Gyrus Group PLC has taken advantage of the following exemptions:
Under IFRS 3, Business Combinations, no restatement of business combinations
prior to adopting IFRS.
Under IAS 21, The effects of changes in foreign exchange rates, no prior
adjustment for cumulative translation differences that existed at the date of
transition to IFRS.
Under IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39,
Financial Instruments: Recognition and Measurement, no restatement of
comparatives for 2004 so the information is disclosed in line with UK GAAP.
Independent review report by KPMG Audit Plc to Gyrus Group PLC
Introduction
We have been engaged by the company to review the financial information set out
on pages 8 to 34 and we have read the other information contained in the interim
report and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the company those matters we are required to state to it
in 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
for our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules which require that the accounting policies and presentation applied to the
interim figures should be consistent with those applied in preparing the
preceding annual accounts except where any changes, and the reasons for them,
are disclosed.
The accounting policies that have been adopted in preparing the financial
information are consistent with those that the directors currently intend to use
in the next annual financial statements. There is, however, the possibility that
the directors may determine that some changes to these policies are necessary
when preparing the full annual financial statements for the first time in
accordance with those International Financial Reporting Standards adopted for
use by the European Union. This is because, as disclosed in Signficant
Accounting Policies (b) Basis of Preparation, the directors have anticipated
that certain standards, which have yet to be formally adopted for use in the
European Union, will be so adopted in time to be applicable to the next annual
financial statements.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/
4: Review of interim financial information issued by the Auditing Practices
Board for use in the United Kingdom. A review consists principally of making
enquiries of group management and applying analytical procedures to the
financial information and underlying financial data and, based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review is substantially less
in scope than an audit performed in accordance with Auditing Standards and
therefore provides a lower level of assurance than an audit. Accordingly we do
not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2005.
KPMG Audit PLC
Chartered Accountants
7 September 2005
This information is provided by RNS
The company news service from the London Stock Exchange
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