RNS Number:8830Z
Gyrus Group PLC
16 March 2006
16 March 2006
Gyrus Group PLC
Gyrus completes transforming year with 73% increase in revenue
Gyrus Group PLC ("Gyrus" or "the Group"), a leading supplier of medical devices
which reduce trauma and complications in surgery, today announces its
preliminary results for the year ended 31 December 2005.
Financial Highlights
* Group revenues up 73% to #150.4 million (2004: #86.9 million) including 23
weeks' revenues from the acquisition of ACMI amounting to #50.4 million
* Gyrus businesses show organic growth of 15% to #99.9 million (2004: #86.9
million), 14% on constant currency
* Operating profit before restructuring costs, amortisation of acquired
intangible assets and one-off IFRS acquisition accounting items up 111% to
#21.3 million (2004: #10.1 million)
* Basic EPS of 5.6p (2004: 10.2p) ahead of expectations
* Adjusted EPS* rises 27% to 14.2p (2004: 11.2p); 0.7p of which derived from
lower than anticipated current tax charge
* Before acquired intangible asset amortisation, deferred tax, restructuring
costs and material non-recurring IFRS acquisition accounting items
Operating Highlights
* Surgical Division sales up 29% driven by growth in laparascopic
gynaecology and strong international performance
* Strong second half growth in Partnered Technologies to finish the year up
15%
* Good start for PlasmaCision products and development of laparascopic
surgery and visualisation products for introduction in 2006
* Integration of ACMI on track for annualised $22 million savings by mid
2008
* ACMI acquisition performs well with annualised revenue growth up to 6.5%
(2004: 4.3%)
Brian Steer, Executive Chairman, said:
"2005 was an outstanding year for Gyrus; our business performed extremely well,
we successfully acquired ACMI, which more than doubled our size, and we ended
the year in the FTSE-250 index having enjoyed a significant increase in equity
value since the mid year. 2006 is the foundation year for our long term goal of
becoming a leader in minimally invasive surgery and we have embarked on it with
due care and a high degree of confidence."
Enquiries:
Gyrus Group PLC On 16 March 2006:
Brian Steer, Executive Chairman Tel: 0207 831 3113
Simon Shaw, Chief Financial Officer Tel: 0207 831 3113
Financial Dynamics
Ben Atwell Tel: 0207 831 3113
Introduction
2005 was an outstanding year for Gyrus; our business performed extremely well,
we successfully acquired American Cystoscope Makers Inc ("ACMI"), which more
than doubled our size, and we ended the year in the FTSE-250 index having
enjoyed a significant increase in equity value since the mid year. Our business
divisions made substantial progress and we successfully organised the structure
of the enlarged business in time to capitalise on a strong finish to the year
and position ourselves for some important new product launches in 2006.
The Group's reported sales revenue increased by 73% to #150.4 million (2004:
#86.9 million). #50.4 million derived from the acquisition of ACMI in July,
however the existing Gyrus business posted revenue of #99.9 million, which
represented sterling growth of 15% (14% on a constant currency basis).
Our revenue performance together with continued management of operating costs
resulted in growth in adjusted earnings per share of 27% to 14.2p (2004: 11.2p)
which included 0.7p from a lower than anticipated current tax charge.
Acquisition of ACMI
During the year 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.
Business Review
Our business segments are presented on the same basis as 2004 with the addition
of ACMI, renamed the "Urology & Gynaecology" Division. 2005 saw revenue growth
across the Gyrus business. Since the acquisition of ACMI in July, we have
restructured our business so that it now comprises three principal divisions
which form our proprietary business. In addition we retain the Partnered
Technologies Division as a non-proprietary business. The divisions are as
follows:
Gyrus ACMI Urology & Gynaecology Division
This division focuses primarily on endoscopic surgery including cysto-resection,
lithotripsy, endometrial ablation and associated procedures. It represents the
acquired ACMI business, which is based in Boston and enjoys market leadership in
the Urology field. Revenue from this division comprised approximately #50.4
million during the period (2004: #Nil). ACMI had historically grown revenues at
an average of approximately 4.5% per annum for the last few years. In 2005 this
division increased year-on-year sales growth to approximately 6.5%. At the same
time the foundations were set for the Urology & Gynaecology Division to sell the
Gyrus PK SuperPulse product range for Urology from the beginning of 2006.
Gyrus ACMI Surgical Division
The Surgical Division is focused on the growing market for laparascopic surgery.
It has built on the strong position Gyrus had in the laparascopic bipolar
instruments market, particularly the hysterectomy procedure, and now has a
portfolio of products available and in development to address the much larger
general surgery market. Based in Minneapolis, the division posted global revenue
growth of 29% to #37.2 million (2004: #28.8 million). The continued increase in
the laparascopic hysterectomy market resulted in gynaecology revenues growing by
over 20% year-on-year, and the division successfully proved the benefit of the
first PlasmaCision-derived product, the PlasmaSpatula, with over $1 million in
revenues by the year-end. This was a good start for a peripheral instrument in
the gynaecology field and supported the Group's view of PlasmaCision as a key
technology for the future.
Gyrus ACMI ENT Division
This division focuses on providing a broad portfolio of surgical devices to Ear,
Nose and Throat specialists in otology, sinus and rhinology and head and neck
surgery. Based in Memphis, the division grew its global revenues by 4.5% to
#40.1 million (2004: #38.4 million) and ended the year with good market and
technique positions established for its new PK Technology products. The Diego
microdebrider range continued its strong performance with 16% growth, although
this was masked by a decline in sales of the Sepra nasal packing product. The
Otology and Head and Neck businesses grew by 2% and 4% respectively.
After the acquisition of ACMI, the division was restructured and a team, under
the new President Bob Hoxie, was put in place in November.
Gyrus ACMI Partnered Technologies Division
This division exploits the Group's technology in markets where the Group has no
proprietary presence, by out-licensing and manufacturing products for third
parties including Johnson & Johnson, Guidant and Conmed. The division, which is
run out of Minneapolis but with significant operations in Cardiff, showed a very
strong turnaround between the first half revenue decline of 0.5% to finish the
year showing global revenue growth of 15% to #22.7 million (2004: #19.7
million). This performance compares very favourably with the strong performance
the previous year.
Adoption of International Accounting Standards
This is the first set of annual results to be produced under International
Financial Reporting Standards as adopted by the EU (IFRS). In themselves IFRS
have a considerable impact upon reported earnings when compared to previous
periods under UK Generally Accepted Accounting Practice (UK GAAP). In addition,
the impact of IFRS on accounting for the ACMI acquisition is significant. In
order to help shareholders assess the effect of IFRS and the acquisition on the
Group's results, the Income Statement is presented to show the effect of the
acquisition of ACMI, associated restructuring costs and other material
non-recurring items separately. There are a number of material effects of these
items and associated deferred taxation adjustments on reported earnings per
share under IFRS so, in order to give a measure of the underlying performance of
the Group, we have presented adjusted earnings per share to eliminate their
distorting effect.
Gross Margin
The Group's reported gross margin under IFRS declined to 55.6% in 2005 (2004:
59.1%) but this substantially masks the underlying picture. The legacy Gyrus
business continued to increase its gross margin from 59.1% in 2004 to 61.8% in
2005 through volume increases and continued focus on the operating efficiency
improvement programme. The ACMI business produced a post-acquisition gross
margin of 52.8% compared with a 2004 margin of 49.8%. Finally the effect of IFRS
3, which requires the write up of inventory to market selling value on
acquisition and associated write down through cost of sales over the period of
inventory turn, resulted in a one-off non-cash charge against the margin of #4.7
million; this represented a reduction of 3.1% on the Group gross margin.
Operating Expenses
The Group's operating expenses increased as a percentage of sales revenue to
49.7% (2004: 48.2%); approximately 1.6% of the difference is a result of the
restructuring charges incurred in the first six months of the three-year
programme to integrate ACMI. In addition the amortisation of intangible assets,
recognised as a result of the acquisition, represented 2.6% of sales. In the
absence of these factors the like-for-like operating expense ratio improved to
45.5% (2004: 48.2%).
Sales and Marketing
Since the acquisition of ACMI the Group has re-branded its trading name to
reflect the combination of two strong businesses in the respective areas of "See
" (ACMI 's leading position in visualisation for surgery) and "Treat" (Gyrus's
leading position in minimally invasive tissue management). We now market under
the name "Gyrus ACMI". We have strengthened the marketing resource in each
Division, which now supports a US sales force providing the highest quality
package of products to surgeons in its core area of surgery. In total we now
have approximately 290 sales representatives in the US market and an additional
56 international sales staff looking after our direct and distributor-based
markets outside the United States. Selling and distribution expenses of #39.0
million, excluding restructuring costs and amortisation of acquired intangible
assets, reduced to 25.9% of sales revenue (2004: #23.2 million; 26.7%).
Internationally, we have been slower to consolidate our distributor base and
have focused primarily on integration in territories where we have a direct
presence. These now comprise: The UK, Holland, Belgium, Germany, Australia and
New Zealand. The latter two territories were added in 2005 through the
acquisition of Urology Solutions Pty Limited in Australia, since renamed Gyrus
Australasia Pty Limited, and a sister company in New Zealand. In addition we
have embarked upon the process of opening a direct representative office in
China, which we aim to build upon during 2006.
Research & Development
Research and development remains an important driver of our business and we
continue to invest substantially in creating future growth opportunities for the
Group.
Excluding amortisation of acquired intangible assets, in 2005 the Group
increased its R&D spend by over 84% to #13.1 million (2004: #7.1 million). This
represented 8.7% of sales (2004: 8.2%). This increase was partly associated with
the acquisition of ACMI, however research and development expenditure in the
legacy Gyrus business increased by 49% to #10.6 million (2004: #7.1 million).
Approximately #1.9 million (2004: #0.4 million) was expensed in the continuing
preparation and prosecution of the Group's legal defence against the previously
disclosed intellectual property infringement action brought against the ENT
division by Medtronic. The case is due to be heard in the third quarter of 2006
and there is robust Counsel's opinion in favour of Gyrus's intellectual property
position, which the Group will continue to defend vigorously. We regard
litigation costs of this type as a regrettable but necessary expense of
operating in the global medical devices industry, where our policy is to defend
our position strongly. Excluding these costs the underlying growth in Gyrus R&D
expenditure was 22% and reflected the significant expenditure on the Group's PK
PlasmaCision products for launch in 2006, including the new General Surgery
Generator and several instruments.
Our investment in R&D has produced some potentially significant new products
derived from our PK PlasmaCision and digital visualisation technologies which
will be introduced to the market during the course of 2006.
Profitability
The Group's reported operating profit for 2005 was #10.4 million representing a
6.9% operating margin (2004: #10.1 million representing a 11.6% margin). However
the post acquisition period in 2005 contained a number of significant
acquisition accounting and restructuring items as well as amortisation of
acquired intangible assets. Excluding these, the Group's underlying operating
profit rose 111% to #21.3 million, representing an operating margin of 14.2% of
sales revenue. Although restructuring charges will continue to have an impact
upon 2006 and 2007 the Group is on track to meet its goal of substantially
improving underlying operating performance.
Integration of ACMI and restructuring costs
Our first integration goal was to create the new divisions and align the
enlarged Group's product range and sales forces appropriately. Certain products
have been exchanged between the Urology & Gynaecology Division (former ACMI) and
the Surgical Division. These exchanges were completed by the year-end and did
not materially affect divisional performance in 2005.
In January 2006 we announced to employees that our plant in Racine, Wisconsin
would close over the next 18 months with products being transferred to
Minneapolis and Norwalk during that period. We are also at the final stage of
selecting the Group's new Global ERP system, a project whose implementation will
span the three-year integration period to mid 2008.
During the 23 weeks after the acquisition the Group recorded restructuring costs
of #2.4 million (2004: #nil). These costs represented a number of integration
expenses incurred during the first months of the Group's three-year integration
plan. At the time of the acquisition it was disclosed that integration was
expected by the directors of Gyrus to enhance annualised pre-tax earnings by $22
million (approximately #12.2 million) by the end of the three-year period
following the acquisition, at a total cost of approximately $33 million
(approximately #18.3 million) over the same period. The directors continue to
believe that these estimates are appropriate. The restructuring costs charged
during 2005 represented the cost of severance, short-term sales commission
alignment for the combined sales force, the write down of certain assets and
costs associated with the alignment of global IT systems and sundry integration
expenses.
In overall terms we have embarked successfully on the integration process, which
supports the potential value of the benefits that will accrue over the period.
However we recognise that these initiatives are significant and, carrying an
associated level of risk, require strong management focus to ensure a successful
outcome.
Earnings per share
The unusual integration costs, IFRS acquisition adjustments (including deferred
tax) and material non-recurring items associated with the acquisition serve to
mask the underlying performance of the Group. This can be seen in the IFRS basic
earnings per share of 5.6p in 2005 compared with 10.2p in 2004.
For these reasons, in addition to the prescribed measures of earnings per share,
the Group discloses adjusted earnings per share, which excludes the amortisation
of acquired intangible assets, integration costs (including the cost of the
one-off special LTIP award, but not "normal" annual awards), material
non-recurring items and deferred taxation. In 2005, adjusted EPS increased 27%
to 14.2p (2004: 11.2p) of which approximately 0.7p related to a lower current
taxation charge than was originally anticipated. It is this measure which most
closely matches the adjusted earnings per share figures disclosed under UK GAAP
in previous years, and so most readily enables longer term earnings comparisons
to be made.
The installed base of PK generators in the US
In 2005 the installed base of PK generators in the Surgical and ENT markets in
the US grew by 12% to 5248 units (2004: 4681 units). The value of the associated
revenues from the sale of disposable instruments increased by 22% to $46.3
million (2004: $37.9 million). During 2005 the Group continued to sell
approximately 50% of its generators which entered the US market. This continued
the trend established in 2004 and was associated with the broader utility of the
Group's newer generators for use as workstations in our areas of surgical
speciality.
Management and staff
Since the acquisition of ACMI we have restructured our management team in order
to deliver the integration plan and the future growth prospects of the combined
business. A new Executive Committee (comprising the three Executive Directors,
Tom Murphy the US-based Executive Vice President and Frank D'Amelio the Chief
Technology Officer) was formed to oversee integration and the development and
implementation of the enlarged Group's strategy.
Group activity is primarily directed by the eleven strong Operating Board, which
comprises Executive Committee members, the division Presidents, the US-based
Vice President of Finance and the Vice President of Legal Affairs.
The Group's performance in 2005 is a testament to the quality and skill of Gyrus
ACMI staff around the world; the Board thanks them for their enthusiasm and
commitment, particularly during this crucial post-acquisition period.
Board
Mark Goble has resigned as a non-executive director of Gyrus in order to devote
his energies to the development of Rhytec Limited, in which the Group continues
to hold an investment. Mark founded Gyrus in 1989 and the Board has valued his
technological drive and enthusiasm to change surgical practice throughout his
time with the Group. We wish him and the Rhytec team well in 2006.
As a result of the acquisition and the timing of the associated integration
process, the Nomination Committee of the Board has invited Brian Steer to extend
his tenure as Chairman by approximately 6 months to the end of 2007. This is
designed to ensure management stability and continued accountability during this
important period for the Group.
A resolution to approve the proposed contract extension will be considered at
the forthcoming Annual General Meeting in May.
Summary and Outlook
In 2005, Gyrus delivered very strong revenue and profit growth whilst
undertaking, and commencing integration of, a transforming acquisition. 2006
presents exciting opportunities for the Group through the continued integration
of Gyrus and ACMI, and the introduction of significant new products derived from
our PlasmaCision and digital visualisation technologies. These products will
expand our "See" and "Treat" surgical platform and support our entry into the
strategically important general surgery market.
2006 is the foundation year for our long-term goal of becoming a leader in
minimally invasive surgery and we have embarked on it with due care and a high
degree of confidence.
Gyrus Group PLC
Consolidated Income Statement
Year ended 31 December 2005
Note Year ended 31 Acquisition of Restructuring (Note
December 2005 American 4)
pre-acquisition of Cystoscope Makers
American Cystoscope Inc (Note 3)
Makers Inc and
restructuring costs
#000 #000 #000
Revenue 99,945 50,431 -
Cost of sales (38,201) (23,805) (57)
_____ _____ _____
Gross profit 61,744 26,626 (57)
Other operating income 1,501 - -
Selling and distribution expenses
- Selling and distribution (26,448) (12,507) (1,206)
- Amortisation of intangible assets - (2,524) -
Research and development expenses
- Research and development (10,618) (2,473) -
- Amortisation of intangible assets (57) (1,349) -
General and administrative (13,365) (3,057) (1,106)
expenses
_____ _____ _____
Operating profit 12,757 4,716 (2,369)
Financial income 151 104 -
Financial expenses (3,149) (2,569) -
_____ _____ _____
Profit before taxation 9,759 2,251 (2,369)
Taxation (3,783) 443 900
_____ _____ _____
Profit for the year 5,976 2,694 (1,469)
_____ _____ _____
Earnings per ordinary share
Basic 6
Diluted 6
Note Impact of fair value Year ended 31 Year ended 31
adjustments on December 2005 December 2004
acquired inventory
and option accounting
(Notes (a) and (b)
below)
#000 #000 #000
Revenue - 150,376 86,930
Cost of sales (4,686) (66,749) (35,570)
_____ _____ _____
Gross profit (4,686) 83,627 51,360
Other operating income - 1,501 641
Selling and distribution expenses
- Selling and distribution - (40,161) (23,158)
- Amortisation of intangible assets - (2,524) -
Research and development expenses
- Research and development - (13,091) (7,139)
- Amortisation of intangible assets - (1,406) -
General and administrative - (17,528) (11,629)
expenses
_____ _____ _____
Operating profit (4,686) 10,418 10,075
Financial income 2,972 3,227 932
Financial expenses (992) (6,710) (1,020)
_____ _____ _____
Profit before taxation (2,706) 6,935 9,987
Taxation 1,781 (659) (1,504)
_____ _____ _____
Profit for the year (925) 6,276 8,483
_____ _____ _____
Earnings per ordinary share
Basic 6 5.6p 10.2p
_____ _____
Diluted 6 5.4p 10.1p
_____ _____
All activities were in respect of continuing operations.
(a) Fair value adjustment on acquired inventory
As required by IFRS 3 "Business Combinations", at the date of acquisition of
American Cystoscope Makers Inc finished goods were valued at the selling price
less the costs of disposal and a reasonable profit allowance for the selling
effort. Work in progress was valued at the selling price of the finished goods
less costs to complete, costs of disposal and a reasonable profit allowance for
completing and selling the goods. Raw materials were valued at current
replacement cost. The fair value adjustment arising as a result of this
valuation exercise amounted to an increase in the value of inventories of
#4,686,000. This inventory uplift reversed through the income statement over the
inventory turn and the charge arising in the year ended 31 December 2005 was
#4,686,000.
(b) Option accounting
On 16 June 2005 Gyrus announced the proposed acquisition of ACMI for a total
consideration of $497 million. On the same date it entered a placing agreement
to raise #116 million (net). In order to ensure that #116 million proceeds of
the sterling capital raised would buy at least USD$ 206 million required for
settlement, regardless of movements in the USD$:GBP# exchange rate, Gyrus
entered into an option agreement. The cost of the option was #992,000 and the
terms of the option allowed for exercise up to the 15 August 2005.
On completion, the sale of option generated proceeds of #2,972,000 (a net gain
of #1,980,000). This has been deemed an ineffective hedge under the provisions
of IAS 39, and therefore the cost of the option and the sale proceeds thereof
have been taken to financial expense and financial income respectively.
Gyrus Group PLC
Statement of recognised income and expense
Year ended 31 December 2005
2005 2004
#000 #000
Exchange differences arising on translation of 18,807 (8,326)
operations
Deferred tax recognised on income and expenses 663 (187)
directly in equity
Cash flow hedges
Changes in accounting policy relating to the 115 -
first-time adoption of IAS 39
Effective portion of changes in fair value of cash 579 -
flow hedges net of recycling
Actuarial loss on defined benefit pension plan (35) -
_____ _____
20,129 (8,513)
Profit for the year 6,276 8,483
_____ _____
Total recognised income and expense for the year 26,405 (30)
_____ _____
Gyrus Group PLC
Consolidated Balance Sheet
As at 31 December 2005
2005 2004
#000 #000
Assets
Property, plant and equipment 20,057 10,396
Goodwill 288,027 90,709
Other intangible assets 110,288 265
Deferred tax asset - 4,403
_____ _____
Total non-current assets 418,372 105,773
_____ _____
Inventories 33,140 13,434
Trade receivables 35,509 13,834
Other current assets 8,849 2,480
Cash and cash equivalents 20,194 7,263
_____
Total current assets 97,692 37,011
_____ _____
Total assets 516,064 142,784
_____ _____
Equity
Share capital (2,785) (2,160)
Share premium (303,699) (152,447)
Merger reserve (3,860) (3,860)
Other reserves (10,467) 9,034
Retained earnings 19,306 27,780
_____ _____
Total equity (301,505) (121,653)
_____ _____
Liabilities
Bank loan (136,731) -
Obligations under finance leases and hire purchase (146) (126)
contracts
Deferred tax liabilities (22,801) -
Provisions (3,219) -
Other creditors - (8)
_____ _____
Total non-current liabilities (162,897) (134)
_____ _____
Bank overdrafts and loans due within one year (13,123) (8,928)
Trade and other payables (37,476) (11,685)
Current tax payable (929) (326)
Obligations under finance leases and hire purchase (134) (58)
contracts
_____ _____
Total current liabilities (51,662) (20,997)
_____ _____
Total liabilities (214,559) (21,131)
_____ _____
Total equity and liabilities (516,064) (142,784)
_____ _____
Gyrus Group PLC
Consolidated Cash Flow Statement
For the year ended 31 December 2005
2005 2004
#000 #000
Cash flows from operating activities
Profit for the year 6,276 8,483
Adjustments for:
Depreciation of property, plant and equipment 4,316 3,562
Amortisation of intangible assets 4,327 346
Loss/(profit) on disposal of property, plant and 85 (263)
equipment
Financial income and expenses 5,463 88
Exchange loss/(gain) included in financial income and (1,062) 762
expenses
Fair value adjustment on acquired inventory and option 2,705 -
accounting
Equity settled share based payment expense 1,570 324
Taxation 659 1,504
_____ _____
Operating cash flows before movement in working capital 24,339 14,806
(Increase)/decrease in inventories (1,263) 856
Increase in trade and other receivables (10,268) (1,578)
Increase in trade and other payables 948 1,963
_____ _____
Cash generated from operations 13,756 16,047
Interest paid (3,227) (787)
Tax paid (573) (185)
_____ _____
Net cash from operating activities 9,956 15,075
_____ _____
Cash flows from investing activities
Interest received 192 171
Proceeds on disposal of property, plant and equipment - 417
Acquisition of property, plant and equipment (4,238) (2,657)
Acquisition of patents, trademarks and other (56) -
intangibles
Expenditure on product development (253) (141)
Acquisition of subsidiaries (net of cash acquired) (289,775) 400
_____ _____
Net cash from investment activities (294,130) (1,810)
_____ _____
Cash flows from financing activities
Proceeds from issue of share capital 155,660 480
Proceeds from increase/(decrease) in borrowings 141,259 (10,380)
Repayment of obligations under finance leases (133) (113)
_____ _____
Net cash from financing activities 296,786 (10,013)
_____ _____
Net increase in cash and cash equivalents 12,612 3,252
Cash and cash equivalents at beginning of year 7,263 4,145
Effect of foreign exchange rate fluctuations on cash 319 (134)
held
_____ _____
Cash and cash equivalents at end of year 20,194 7,263
_____ _____
Bank balances and cash 20,194 7,263
_____ _____
Gyrus Group PLC
Notes to the Preliminary Announcement
Year ended 31 December 2005
1. Basis of preparation and accounting policies
The preliminary announcement for the full year ended 31 December 2005 has been
prepared in accordance with International Accounting Standards and International
Financial Reporting Standards (collectively "IFRS") as adopted by the European
Union (EU) at 31 December 2005. Details of the accounting policies applied are
set out below.
The Group is preparing its financial statements in accordance with IFRS for the
first time and consequently has applied certain transitional provisions of IFRS
1. An explanation of how the transition to adopted IFRS has affected the
reported financial position and financial performance of the Group is provided
in note 8.
The annual financial information presented in this preliminary announcement for
the year ended 31 December 2005 is extracted from, and is consistent with, the
Group's audited financial statements for the year ended 31 December 2005, and
those financial statements will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The auditors' report on those
accounts is unqualified and does not contain any statement under section 237 of
the Companies Act 1985.
Information in this preliminary announcement does not constitute statutory
accounts of the Group within the meaning of section 240 of the Companies Act
1985. Statutory accounts for the year ended 31 December 2004, which were
prepared under accounting practices generally accepted in the UK, have been
filed with the Registrar of Companies. The auditors' report on those accounts
was unqualified and did not contain any statement under section 237 of the
Companies Act 1985.
(a) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group
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 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) Transactions eliminated on consolidation
Intragroup balances, and any unrealised gains and losses or income and expenses
arising from intragroup transactions, are eliminated in preparing the
consolidated financial statements.
(b) 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. Monetary
assets and liabilities denominated in foreign currencies, are translated into
sterling at rates of exchange ruling at the balance sheet date. The resulting
exchange differences are charged to the income statement for the year.
(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.
(c) Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to foreign
exchange risks and interest rate 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 are taken to the income statement. However, where derivatives
qualify for hedge accounting, recognition of any resulting gain or loss depends
on the nature of the item being hedged. The fair value of forward foreign
exchange contracts is their quoted market price at the balance sheet date.
The fair value of interest rate swaps is the estimated amount that the Group
would receive or pay to terminate the swap at the balance sheet date, taking
into account current interest rates and the current creditworthiness of the swap
counterparties.
(d) 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 the hedging reserve. 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.
Comparative information for derivative financial instruments and hedging
The Group has taken advantage of the transitional arrangements of IFRS 1 not to
restate corresponding amounts in accordance with the above policies. Instead the
following policies were applied:
In the comparative period all financial assets and liabilities were carried at
cost. Gains and losses on forward exchange contracts treated as hedging
instruments were not recognised in the income statement. On recognition of the
hedged transaction the unrecognised gains and losses arising on the instrument
were recognised, either in the income statement or in the carrying value of the
associated asset or liability.
The following adjustments necessary to implement the revised policy have been
made as at 1 January 2005 with the net adjustment, to net assets, taken through
the 2005 statement of recognised income and expense. Corresponding amounts for
2004 are presented and disclosed in accordance with the requirements of the
Companies Act 1985 and FRS 4 in 2004. The main differences between the 2004 and
2005 bases of accounting are shown and described below.
Effect on the balance sheet at 1 January 2005
#000
Other financial assets
- Cash flow hedges 115
Hedging reserve
- Cash flow hedges (115)
Effect on the income statement of the new policies
Recognition in the income statement of a net gain of #1,980,000 as a material
non-recurring item in relation to what is recognised under IAS 39 as an
ineffective hedge in respect of the sterling denominated equity portion of the
consideration paid for ACMI.
Effect on the current year statement of recognised income and expense of the new
policies
Gains and losses arising on cash flow hedges (to the extent effective), net of
amounts recycled to the income statement for the period in respect of hedged
transactions, resulted in a net gain of #579,000 being taken directly to the
hedging reserve.
The effect of implementing the new policies on 1 January 2005 has resulted in a
net credit taken directly to equity of #115,000.
The cash flow statement is unaffected by the change in accounting policy.
(e) 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.
(f) Intangible assets
(i) Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the Group's 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 2004, 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 2004 has not been reconsidered in preparing the Group's
opening IFRS balance sheet at 1 January 2004.
On disposal of a subsidiary, the attributable amount of unamortised 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.
Development expenditure arising from the Group's development activities is
capitalised and amortised over the life of the product only if the Group can
demonstrate the following:
- The technical feasibility of completing the intangible asset so 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;
- That it is probable that the asset created will generate future economic
benefits;
- There is 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 intangible asset is recognised, development expenditure is recognised
as an expense in the period in which it is incurred. Capitalised development
costs 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 and amortisation
Subsequent expenditure on a capitalised intangible asset 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.
On acquisition, intangible assets are identified and valued in accordance with
IFRS 3.
Amortisation is charged to the income statement on a straight-line basis over
the estimated useful lives of the relevant intangible assets unless such life is
indefinite. Intangible assets with an indefinite useful life are systematically
tested for impairment at each balance sheet date. Other intangible assets are
amortised from the date they are available for use. The estimated useful lives
are as follows:-
Capitalised development costs 5 - 10 years
Acquired research and development As identified at acquisition date
Licensing agreements Life of the agreement or underlying patent
Intellectual property rights Life of the underlying right (e.g. patent)
Customer relationships As identified at acquisition date
Trademarks As identified at acquisition date
(g) Trade and other receivables
Trade and other receivables are stated at their fair value less impairment
losses.
(h) 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 in determining net realisable value.
Finished goods acquired as a result of business combinations are valued at the
selling price less the costs of disposal and a reasonable profit allowance for
the selling effort. Work in progress acquired as a result of business
combinations is valued at the selling price of the finished goods less costs to
complete, costs of disposal and a reasonable profit allowance for completing and
selling the goods. Raw materials acquired as a result of business combinations
are valued at current replacement cost. The fair value adjustment arising as a
result of the valuation exercise is reduced over the period of the stock turn of
the acquired company. The resulting charge is taken to the income statement.
(i) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank
overdrafts that are repayable on demand and form an integral part of the
Group's cash management are included as a component of cash and cash equivalents
for the purposes only of the statement of cash flows.
(j) Impairment
At each balance sheet date, the Group reviews the carrying amounts of its
tangible, intangible assets and financial assets 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.
(k) Interest-bearing borrowings
Interest-bearing bank loans and overdrafts are recognised initially at fair
value less attributable costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any difference
between cost and redemption value being recognised in the income statement over
the period of the borrowings on an effective interest basis.
(l) 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) Defined benefit plans
The Group has obligations to two defined benefit plans which were assumed on 21
July 2005 as part of the acquisition of American Cystoscope Makers Inc.
The Group's net obligation in respect of defined benefit pensions plans is
calculated separately for each plan by estimating the amount of future benefit
that employees have earned in return for their services in current and prior
periods; that benefit is discounted to determine the present value, and the fair
value of any plan assets is deducted. The discount rate is an actuarially
defined rate, based upon long term interest rates, used to determine the present
value of gross future obligations of the scheme. The calculation is performed by
a qualified actuary using the projected unit credit method.
Where the calculation results in a benefit to the Group, the recognised asset is
limited to the present value of any future refunds from the plan or reductions
in future contributions to the plan.
Actuarial gains and losses arising subsequent to the acquisition of American
Cytoscope Makers Inc are recognised directly in equity in the period that they
occur through the statement of recognised income and expense.
(iii) Share based payment transactions
In accordance with the transition provisions, IFRS 2 has been applied to all
grants of shares or share options made 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 Group
by participating in a share purchase plan. The option price for the UK Save As
You Earn 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 certain
performance conditions have been satisfied and provided that the participant
remains 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 based on the Group's
estimate of shares that will eventually vest.
(m) Provisions
Provisions are recognised when the Group has a present legal or constructive
obligation as a result of a past event and it is probable that an outflow of
economic benefits will be required to meet that obligation.
(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
by the balance sheet date. Future operating costs are not provided for.
(n) Trade and other payables
Trade payables are stated at their fair value.
(o) 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.
(p) Other income
Other income represents revenues derived from collaborative development
agreements and is recognised in accordance with the applicable contract terms.
(q) 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.
(r) 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 an effective interest 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) Financial expenses
Financial expenses comprise interest payable on borrowings, foreign exchange
losses and losses on hedging instruments that are recognised in the income
statement.
(iv) Financial income
Financial income comprises interest income recognised in the income statement as
it accrues, interest receivable on funds invested and foreign exchange gains on
hedging instruments that are recognised in the income statement.
(s) 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 between the carrying amount of assets and
liabilities in the financial statements and the corresponding tax basis used in
the computation of taxable profit. 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
taxable profit nor the accounting profit.
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 the income tax expense is included in note
5.
2. Segment reporting
Segment information is presented in respect of the Group's business divisions,
which are the primary basis of segment reporting. The business segment reporting
format reflects the Group's management and internal reporting structures for
2005 including the effects of the acquisition of American Cystoscope Makers Inc.
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 laparascopic surgery products
Urology & Design, development, marketing and sales of urology and gynaecology and visualisation
Gynaecology products. It represents the acquired American Cystoscope Makers Inc ("ACMI") business.
Partnered Out-licensing of the Group's proprietary technology in conjunction with a manufacturing
Technologies contract for markets outside the Group's core sales and marketing competence
From 1 January 2006 certain products have been swapped between the Surgical and
the Urology & Gynaecology divisions. In future years segment reporting will be
conducted on this divisional basis.
For the year ended 31 December 2005
ENT Surgical Partnered Urology & Total
Technologies Gynaecology
#000 #000 #000 #000 #000
Revenue
External sales 40,119 37,174 22,652 50,431 150,376
Inter-segment sales 1,715 1,750 1,501 622 5,588
_____ _____ _____ _____ _____
41,834 38,924 24,153 51,053 155,964
_____ _____ _____ _____ _____
Segment result before 1,946 7,967 4,172 3,863 17,948
restructuring charges
Restructuring charges (846) (876) (34) (613) (2,369)
Material non-recurring item - - - (4,686) (4,686)
_____ _____ _____ _____ _____
Segment result after 1,100 7,091 4,138 (1,436) 10,893
restructuring charges and
material non-recurring item _____ _____ _____ _____ _____
Unallocated corporate expenses (475)
_____
Profit from operations 10,418
Net finance costs (5,463)
Material non-recurring items 1,980
_____
Profit before tax 6,935
Income tax expense (659)
_____
Profit for the year 6,276
_____
As at 31 December 2005
ENT Surgical Partnered Urology & Unallocated Total
Technologies Gynaecology
#000 #000 #000 #000 #000 #000
Capital additions 1,197 1,409 653 921 114 4,294
_____ _____ _____ _____ _____ _____
Depreciation 2,221 939 546 555 55 4,316
_____ _____ _____ _____ _____ _____
Amortisation 128 63 32 4,104 - 4,327
_____ _____ _____ _____ _____ _____
Assets 130,402 45,901 25,835 319,695 (5,769) 516,064
_____ _____ _____ _____ _____ _____
Liabilities (59,907) (3,910) (3,497) (145,427) (1,818) (214,559)
_____ _____ _____ _____ _____ _____
For the year ended 31 December 2004
ENT Surgical Partnered Urology & Total
Technologies Gynaecology
#000 #000 #000 #000 #000
Revenue
External sales 38,369 28,822 19,739 - 86,930
Inter-segment sales 1,179 1,346 - - 2,525
_____ _____ _____ _____ _____
39,548 30,168 19,739 - 89,455
_____ _____ _____ _____ _____
Segment result 1,764 5,892 3,983 - 11,639
_____ _____ _____ _____ _____
Unallocated corporate expenses (1,564)
_____
Profit from operations 10,075
Net finance costs (88)
_____
Profit before tax 9,987
Income tax expense (1,504)
_____
Profit for the year 8,483
_____
As at 31 December 2004
ENT Surgical Partnered Urology & Unallocated Total
Technologies Gynaecology
#000 #000 #000 #000 #000 #000
Capital additions 1,145 927 570 - 15 2,657
_____ _____ _____ _____ _____ _____
Depreciation 2,106 792 585 - 79 3,562
_____ _____ _____ _____ _____ _____
Amortisation 85 - - - 261 346
_____ _____ _____ _____ _____ _____
Assets 98,409 38,432 17,943 - (12,000) 142,784
_____ _____ _____ _____ _____ _____
Liabilities (60,981) (2,686) (2,683) - 45,219 (21,131)
_____ _____ _____ _____ _____ _____
The average number of employees for the year for each of the Group's principal
divisions was as follows:
Year ended 31 December Year ended 31
2005 December 2004
ENT 235 223
Surgical 273 250
Partnered Technologies 139 133
Urology & Gynaecology 819 -
Head office & administration 32 26
_____ _____
1,498 632
_____ _____
Geographical Segments
Turnover by destination Year ended 31 December Year ended 31
2005 December 2004
#000 #000
North America 111,361 58,427
United Kingdom and rest of Europe 28,196 21,747
Rest of world 10,819 6,756
_____ _____
150,376 86,930
_____ _____
Assets 2005 2004
#000 #000
North America 467,545 116,525
United Kingdom and rest of Europe 47,234 25,882
Rest of world 1,285 377
_____ _____
516,064 142,784
_____ _____
Capital additions
2005 2004
#000 #000
North America 3,107 2,005
United Kingdom and rest of Europe 1,093 652
Rest of world 94 -
_____ _____
4,294 2,657
_____ _____
3. Acquisition of American Cystoscope Makers Inc
On 21 July 2005, Gyrus Group PLC acquired 100% of the share capital of American
Cystoscope Makers Inc ("ACMI"). ACMI designs, manufactures, markets and services
surgical visualisation and treatment systems 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$332 million plus
the assumption of debt and other obligations subsequently repaid by the company
of US$168 million less the assumption of cash balances on the date of
acquisition. The consideration was satisfied by the issue of 61,560,025 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 common stock of ACMI) were paid to the Sellers. New banking
facilities of US$280 million include a five year fixed term loan of US$250
million and a US$30 million revolving credit facility secured by a fixed and
floating charge over the assets of the Group.
Acquiree's book values Fair value adjustments Acquisition amounts
#000 #000 #000
Property, plant and equipment 10,440 (1,991) 8,449
Intangible assets 612 108,812 109,424
Inventories 15,938 4,686 20,624
Trade and other receivables 16,442 - 16,442
Deferred tax asset/(liability) 216 (27,009) (26,793)
Cash and cash equivalents 2,642 - 2,642
Trade and other payables (30,243) - (30,243)
Provisions (2,245) - (2,245)
Bank loan (83,365) - (83,365)
_____ _____ _____
Net identifiable assets and (69,563) 84,498 14,935
liabilities
_____ _____ _____
Goodwill on acquisition 180,351
_____
Total consideration including 195,286
costs
_____
Purchase price of US$332,460,951 186,368
Acquisition costs taken to cost of 6,938
investment
Funds from exercise of option* 1,980
_____
Total consideration 195,286
_____
*In order to ensure that #116 million of placing proceeds raised translated into
the minimum US$ amount required for the completion of the acquisition, Gyrus
Group PLC entered into an option agreement on the announcement date. The net
funds received from the sale of this option approximately one month later were
#1,980,000.
Satisfied by US$000 #000
Share placing 153,901
Cash 32,467
Purchase price 332,461 186,368
_____ _____
Cash acquired (4,712) (2,642)
ACMI debt paid on acquisition 167,763 94,052
Acquisition costs** 10,721
_____ _____
Net cash outflow as a result of the acquisition 495,521 288,499
_____ _____
** Includes #6,938,000 of acquisition costs taken to cost of investment and
#3,783,000 of acquisition costs relating to the share placing that were taken to
share premium account.
Fair value adjustments
A valuation study was commissioned to identify and value intangible assets. As a
result of the valuation, #108,812,000 of intangible assets were recognised which
can be analysed as follows:-
#000
Developed product technology - Urology 12,557
Developed product technology - Gynaecology 4,148
In process R&D - Urology 9,362
In process R&D - Gynaecology 2,915
Trademark/tradename portfolio - Urology 28,141
Trademark/tradename portfolio - Gynaecology 5,662
Customer relationships 46,471
Less: amounts included in opening balance sheet in (444)
connection with the above
_____
Total 108,812
_____
A valuation study was commissioned on the land and buildings owned by ACMI. As a
result of the valuation the value attributed to property, plant and equipment
was reduced by #1,991,000.
As required by IFRS 3, the fair value adjustment to stock for finished goods
represents the selling price of the goods less costs to dispose and a reasonable
profit allowance for the selling effort. Work in progress has been similarly
valued and includes an allowance for the costs to complete. The resulting fair
value adjustment of #4,686,000 has been recognised.
The acquisition of ACMI has provided Gyrus with the opportunity to combine
ACMI's urology, gynaecology and endoscopic expertise with Gyrus's tissue
management technology in these fields. This enables the enlarged Group to meet
two key requirements of surgeons - the ability to visualise the operative site
and the ability effectively to manipulate tissue with minimum collateral damage.
Goodwill of #180 million has arisen as a result of the synergistic and
integration benefits of combining the two organisations.
Since the date of acquisition, ACMI has contributed the following to the
operating profit of the Group:-
#000
Revenue 50,431
Cost of sales (23,805)
_____
Gross profit 26,626
_____
Selling and distribution expenses
- Selling and distribution (12,507)
- Amortisation of intangibles assets (2,524)
Research and development expenses
- Research and development (2,473)
- Amortisation of intangible assets (1,349)
General and administrative expenses (3,057)
_____
Operating profit 4,716
_____
Had the acquisition taken place on 1 January 2005, ACMI would have contributed
the following to the operating profit of the Group:-
#000
Revenue 111,920
Cost of sales (49,570)
_____
Gross profit 62,350
_____
Selling and distribution expenses
- Selling and distribution (27,805)
- Amortisation of intangibles assets* (5,706)
Research and development expenses
- Research and development (6,277)
- Amortisation of intangible assets* (3,050)
General and administrative expenses (8,511)
_____
Operating profit 11,001
_____
*Amortisation on intangible assets included from date of acquisition
4. Restructuring
As a result of the acquisition of American Cystoscope Makers Inc, a number of
restructuring costs have been incurred across the Group. The total charge for
the year ended 31 December 2005 amounted to #2,369,000 (2004: #nil). An analysis
of these costs is shown below.
2005
#000
Severance costs 1,320
Short term sales commission alignment 352
Demonstration equipment write-off 148
Alignment of global enterprise resource planning systems 456
Other costs 93
_____
2,369
_____
5. Income tax expense
Current tax expense
2005 2004
#000 #000
UK corporation tax charge on profits for the (379) (286)
year
Adjustments in respect of previous periods (54) -
_____ _____
(433) (286)
Foreign tax on profits for the year (487) (356)
Adjustments in respect of previous periods - -
_____ _____
Total current tax charge (920) (642)
_____ _____
Deferred tax credit/(expense)
Origination and reversal of temporary 6,175 (930)
differences
Benefit of tax losses recognised (5,914) 68
_____ _____
261 (862)
_____ _____
Total income tax expense in income statement (659) (1,504)
_____ _____
Reconciliation of effective tax rate
The total tax charge for the year is lower (2004: lower) than the standard rate
of corporation tax in the UK. The differences are explained below.
2005 2004
#000 #000
Profit before taxation 6,935 9,987
Profit before taxation multiplied by standard rate of 2,081 2,996
corporation tax in the UK 30% (2004:30%)
Effect of tax rates in foreign jurisdictions (rates higher than 319 67
UK taxation)
Expenses not deductible for tax purposes 216 885
Items not deductible until paid 12 (394)
Depreciation in excess of capital allowances 15 37
Other short term timing differences (1,909) 418
Adjustments arising on consolidation (111) (1,587)
Effect of tax losses utilised (239) (1,048)
US State taxes 221 130
Prior year adjustments 54 -
_____ _____
Total tax charge for the year 659 1,504
_____ _____
Deferred tax recognised directly in equity
Relating to foreign exchange (gain)/loss (220) 187
Relating to share option schemes (443) -
_____ _____
(663) 187
_____ _____
6. Earnings per share
Basic earnings per share
The calculation of basic earnings per share for the year ended 31 December 2005
was based on the profit attributable to ordinary shareholders of #6,276,000
(year ended 31 December 2004:#8,483,000) and a weighted average number of
ordinary shares outstanding as at 31 December 2005 of 111,601,948 (year ended 31
December 2004:83,426,097).
Diluted earnings per share
The calculation of diluted earnings per share for the year ended 31 December
2005 was based on the profit attributable to ordinary shareholders of #6,276,000
(year ended 31 December 2004:#8,483,000) and a weighted average number of
ordinary shares as at 31 December 2005 of 115,368,521 (year ended 31 December
2004:83,809,138).
Earnings
2005 2004
#000 #000
Earnings for the purposes of basic and diluted earnings per share 6,276 8,483
_____ _____
Weighted average number of ordinary shares
2005 2004
Number Number
Issued ordinary shares at 1 January 83,652,980 83,306,049
Effect of share options exercised 289,121 120,048
Effect of shares issued to acquire ACMI 27,659,847 -
_____ _____
Weighted average number of ordinary shares as at 31 December 111,601,948 83,426,097
Dilutive effect of share options in issue 3,766,573 383,041
_____ _____
Weighted average number of ordinary shares as at 31 December 115,368,521 83,809,138
(diluted)
_____ _____
Basic earnings per share 5.6p 10.2p
_____ _____
Diluted earnings per share 5.4p 10.1p
_____ _____
Adjusted earnings per share
In order to provide a clearer measure of the Group's 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 #15,835,000 (year ended
31 December 2004:#9,345,000) by the weighted average number of ordinary shares
outstanding as at 31 December 2005 of 111,601,948 (year ended 31 December 2004:
83,426,097). Adjusted diluted earnings per share has been calculated by
dividing adjusted profit attributable to ordinary shareholders of #15,835,000
(year ended 31 December 2004:#9,345,000) by the weighted average number of
ordinary shares outstanding as at 31 December 2005 of 115,368,521 (year ended 31
December 2004: 83,809,138).
Earnings on which adjusted earnings per share is based:
2005 2004
#000 #000
Earnings for the purpose of basic and diluted earnings per share 6,276 8,483
Net impact of fair value adjustments on acquired inventory and 2,706 -
option accounting
Restructuring charges 2,369 -
Amortisation of acquired intangible assets 3,873 -
Charge relating to "special" LTIP award* 872 -
Deferred taxation (261) 862
_____ _____
Earnings for the purposes of adjusted earnings per share 15,835 9,345
_____ _____
Adjusted basic earnings per share 14.2p 11.2p
_____ _____
Adjusted diluted earnings per share 13.7p 11.2p
_____ _____
*As part of the acquisition of American Cystoscope Makers Inc, a "special" award
of conditional shares under the Group's LTIP scheme was approved by shareholders
and was made to retain and incentivise approximately 25 key executives to
integrate the business effectively. The award will create a charge over
approximately three years until the potential vesting date of July 2008. The
charges relating to this are considered to be another form of integration/
restructuring cost.
7. Dividend
The Directors do not recommend the payment of a dividend.
8. Explanation of transition to IFRS
As stated in note 1 "Basis of preparation and accounting policies", these are
the Group's first annual financial statements prepared in accordance with
International Financial Reporting Standards as adopted by the EU ("IFRS").
The accounting policies disclosed have been applied in preparing the
consolidated financial information for the year ended 31 December 2005, the
comparative information 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 and comparative information for the
year ended 31 December 2004, the Group has adjusted amounts reported previously
in financial statements prepared in accordance with UK GAAP.
An explanation of how the transition from UK 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.
Consolidated Balance Sheets
UK GAAP Effect of transition to IFRS
IFRS
1 January 2004
#000 #000 #000
Non-current assets
Property, plant and equipment 12,097 - 12,097
Goodwill 96,680 (37) 96,643
Other intangible assets 870 - 870
Deferred tax asset - 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 6,160 (6,160) -
Other current assets 2,182 - 2,182
Cash and 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 (201) - (201)
purchase contracts
Deferred tax liabilities - - -
Provisions - - -
Other creditors (359) 17 (342)
_____ _____ _____
Total non-current liabilities (19,448) 17 (19,431)
_____ _____ _____
Trade payables (3,175) - (3,175)
Current tax payable (850) - (850)
Obligations under finance leases and hire (107) - (107)
purchase contracts
Bank overdrafts and loans due within one (1,667) - (1,667)
year
Other creditors (264) 20 (244)
Accruals and deferred income (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)
_____ _____ _____
Consolidated Balance Sheets
UK GAAP Effect of transition to IFRS
(restated) IFRS
31 December 2004
#000 #000 #000
Non-current assets
Property, plant and equipment 10,396 - 10,396
Goodwill 85,241 5,468 90,709
Other intangible assets 124 141 265
Deferred tax asset - 4,403 4,403
_____ _____ _____
95,761 10,012 105,773
_____ _____ _____
Current assets
Inventories 13,434 - 13,434
Trade receivables 13,834 - 13,834
Deferred tax asset 6,082 (6,082) -
Other current assets 2,480 - 2,480
Cash and 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 - 9,034 9,034
Retained earnings 40,749 (12,969) 27,780
_____ _____ _____
Total equity (117,718) (3,935) (121,653)
_____ _____ _____
Liabilities
Bank loan - - -
Obligations under finance leases and hire (126) - (126)
purchase contracts
Deferred tax liabilities - - -
Provisions - - -
Other creditors (8) - (8)
_____ _____ _____
Total non-current liabilities (134) - (134)
_____ _____ _____
Trade payables (2,285) - (2,285)
Current tax payable (593) - (593)
Obligations under finance leases and hire (58) - (58)
purchase contracts
Bank overdrafts and loans due within one (8,928) - (8,928)
year
Other creditors (1,624) 5 (1,619)
Accruals and deferred income (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)
_____ _____ _____
Consolidated Balance Sheets
UK GAAP Effect of transition to IFRS
IFRS
31 December 2005
#000 #000 #000
Non-current assets
Property, plant and equipment 20,057 - 20,057
Goodwill 343,664 (55,637) 288,027
Other intangible assets 4,499 105,789 110,288
Deferred tax asset 22,037 (22,037) -
_____ _____ _____
390,257 28,115 418,372
_____ _____ _____
Current assets
Inventories 33,140 - 33,140
Trade receivables 35,509 - 35,509
Deferred tax asset - - -
Other current assets 8,020 829 8,849
Cash and cash equivalents 20,194 - 20,194
_____ _____ _____
96,863 829 97,692
_____ _____ _____
Total assets 487,120 28,944 516,064
_____ _____ _____
Equity
Share capital (2,785) - (2,785)
Share premium (303,699) - (303,699)
Merger reserve (3,860) - (3,860)
Other reserves (5,543) (4,924) (10,467)
Retained earnings 20,056 (750) 19,306
_____ _____ _____
Total equity (295,831) (5,674) (301,505)
_____ _____ _____
Liabilities
Bank loan (136,731) - (136,731)
Obligations under finance leases and hire (146) - (146)
purchase contracts
Deferred tax liabilities - (22,801) (22,801)
Provisions (3,219) - (3,219)
Other creditors - - -
_____ _____ _____
Total non-current liabilities (140,096) (22,801) (162,897)
_____ _____ _____
Trade payables (9,546) - (9,546)
Current tax payable (929) - (929)
Obligations under finance leases and hire (134) - (134)
purchase contracts
Bank overdrafts and loans due within one (13,123) - (13,123)
year
Other creditors (6,890) (296) (7,186)
Accruals and deferred income (20,571) (173) (20,744)
_____ _____ _____
Total current liabilities (51,193) (469) (51,662)
_____ _____ _____
Total liabilities (191,289) (23,270) (214,559)
_____ _____ _____
Total equity and liabilities (487,120) (28,944) (516,064)
_____ _____ _____
Consolidated income statement
UK GAAP Effect of transition to IFRS
(restated) IFRS
31 December 2004
#000 #000 #000
Revenue 86,930 - 86,930
Cost of sales (35,570) - (35,570)
Restructuring - - -
_____ _____ _____
Gross profit 51,360 - 51,360
Other operating income 641 - 641
Selling and distribution expenses (23,158) - (23,158)
Restructuring - - -
Research and development expenses (7,280) 141 (7,139)
Restructuring - - -
General and administrative expenses (10,840) (789) (11,629)
Restructuring - - -
Goodwill amortisation (5,505) 5,505 -
_____ _____ _____
Net operating profit 5,218 4,857 10,075
Profit on sale of land 373 (373) -
Loss for period from terminated operations (400) 400 -
_____ _____ _____
5,191 4,884 10,075
Financial income 170 762 932
Financial expense (988) (32) (1,020)
_____ _____ _____
Profit before taxation 4,373 5,614 9,987
Income tax expense (485) (1,019) (1,504)
_____ _____ _____
Profit after taxation 3,888 4,595 8,483
_____ _____ _____
Earnings per ordinary share
Basic 4.7p 5.5p 10.2p
Diluted 4.6p 5.5p 10.1p
Adjusted basic 11.1p 0.1p 11.2p
_____ _____ _____
Consolidated income statement
UK GAAP Effect of transition to IFRS
IFRS
31 December 2005
#000 #000 #000
Revenue 150,376 - 150,376
Cost of sales (62,006) (4,686) (66,692)
Restructuring (57) - (57)
_____ _____ _____
Gross profit 88,313 (4,686) 83,627
Other operating income 1,501 - 1,501
Selling and distribution expenses (38,955) (2,524) (41,479)
Restructuring (1,206) - (1,206)
Research and development expenses (13,344) (1,153) (14,497)
Restructuring - - -
General and administrative expenses (17,310) 888 (16,422)
Restructuring (1,106) - (1,106)
Goodwill amortisation (11,334) 11,334 -
_____ _____ _____
Net operating profit 6,559 3,859 10,418
Profit on sale of land - - -
Loss for period from terminated operations - - -
_____ _____ _____
6,559 3,859 10,418
Financial income 3,227 - 3,227
Financial expense (5,648) (1,062) (6,710)
_____ _____ _____
Profit before taxation 4,138 2,797 6,935
Income tax expense (659) - (659)
_____ _____ _____
Profit after taxation 3,479 2,797 6,276
_____ _____ _____
Earnings per ordinary share
Basic 3.1p 2.5p 5.6p
Diluted 3.0p 2.4p 5.4p
Adjusted basic 16.1p (1.9)p 14.2p
_____ _____ _____
(i) 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, under the Save As You Earn Scheme,
the US Employee Stock Purchase Plan and the Group's Long Term Incentive 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 31 December 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. Under FRS 20 "Share based payments" a charge must also be recognised for
any share based payments. FRS 20 was effective for accounting periods beginning
on or after 1 January 2005. As a result the UK GAAP comparatives for the year
ended 31 December 2005 include a charge for share based payments and, in
accordance with FRS 20, prior year comparatives have been restated.
(ii) 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 charged 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 2005 confirmed that there had been no
impairment of goodwill.
(iii) 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 31 December 2005 capitalised development
expenditure amounted to #253,000 (2004:#141,000). Development expenditure
capitalised since 1 January 2004 has been amortised over a period of 5 years.
This policy has not been applied retrospectively.
(iv) 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.
(v) Deferred consideration
An adjustment for interest on deferred consideration required under IFRS 3.
(vi) Reclassification of deferred tax asset as a non current-asset
Deferred tax is shown in the balance sheet as a non-current asset or liability
under IFRS, rather than a current asset or liabillity under UK GAAP.
(vii) 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 on the face of the income statement. The net exceptional item of
#27,000 has been included within the General and Administration heading of the
income statement under IFRS. The IFRS adjustment of #4,686,000 for material
non-recurring items represents the write down of the IFRS 3-derived uplift in
acquired inventory as a result of the American Cystoscope Makers Inc
acquisition.
(viii) Tax effect
Many of the above adjustments require an adjustment to the tax charge. The
aggregate adjustment represents a net additional non-cash deferred tax
provision.
(ix) Reserve movements
As a result of the adoption of IFRS, a hedging reserve and a translation reserve
have been created. The hedging reserve comprises the effective portion of the
cumulative net change in the fair value of cash flow hedging instruments related
to hedged transactions that have not yet occurred. The translation reserve
comprises all foreign exchange differences arising from the translation of the
financial statements of foreign operations. These reserves are shown as "Other
reserves" for the purpose of the transition balance sheets.
(x) Gain/(loss) on foreign exchange
Gains and losses arising on foreign exchange through the profit and loss account
were reported within General and Administration expenses under UK GAAP. Under
IFRS, gains and losses have been reclassified to financial income and financial
expenses within the income statement.
Gyrus Group PLC has taken advantage of the following exemptions:
1. Under IFRS 3, Business Combinations, no restatement of business
combinations prior to adopting IFRS.
2. 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.
3. Under IAS 32, Financial Instruments: Disclosure and Presentation,
and IAS 39, Financial Instruments: Recognition and Measurement, no restatement
of comparatives for 2004 so such information is disclosed in line with UK GAAP.
9. Approval
This statement was approved by the Board of Directors on 15 March 2006.
10. Copies of the Preliminary Announcement and Annual Report and Accounts
This Preliminary Announcement will be sent to all shareholders and copies are
available at the company's registered office, Fortran Road, St. Mellons,
Cardiff, CF3 0LT.
Copies of the Annual Report and Accounts will be sent to all shareholders and
further copies will be available at the company's registered office, Fortran
Road, St. Mellons, Cardiff, CF3 0LT.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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