AORTECH INTERNATIONAL PLC ANNUAL REPORT AND ACCOUNTS 07_08 01 CONTENTS CHAIRMAN’S STATEMENT 02 BOARD OF DIRECTORS AND ADVISERS 06 REPORT OF THE DIRECTORS 07 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 12 CORPORATE GOVERNANCE 13 ACCOUNTABILITY AND AUDIT 14 REPORT OF THE REMUNERATION COMMITTEE 15 REPORT OF THE INDEPENDENT AUDITOR 18 CONSOLIDATED INCOME STATEMENT 20 CONSOLIDATED BALANCE SHEET 21 CONSOLIDATED CASH FLOW STATEMENT 22 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 23 NOTES TO THE FINANCIAL STATEMENTS 24 45 REPORT OF THE INDEPENDENT AUDITOR ON THE PARENT COMPANY FINANCIAL STATEMENTS 47 PARENT COMPANY BALANCE SHEET 48 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 52 NOTICE OF THE ANNUAL GENERAL MEETING AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 02 CHAIRMAN’S STATEMENT// Once again I am pleased to report another year of progress for the Group. RESULTS AND KEY PERFORMANCE INDICATORS_ Following the August 2007 fundraising with institutional investors that raised £4.8m after expenses, the net cash balance at 31 March 2008 was £5.3m, which is expected to provide adequate financial resources to support the Group’s development plans for the immediate future. The number of shares in issue increased from 3,810,278 at the start of the financial year, to 4,832,778 on 31 March 2008. This year, for the first time, the presentation of the financial statements of the Group reflects the adoption of International Financial Reporting Standards (IFRS). Group revenue for the year to 31 March 2008 was £1.5m, an increase of £1.2m over that achieved in the twelve months to 31 March 2007. Licensing fees, bulk material, components and AorTech’s first earned royalties are reflected in this year’s reported revenues. Operating expenses increased by £409,000 from £2,716,000 in the corresponding period last year to £3,125,000, but the loss before taxation was reduced from £2.1m in the previous year to £1.2m. In this period of early commercialisation, licensing fees and sales of bulk polymers are the primary elements of the revenue stream. Looking forward, we would expect royalty income and the supply of components to become major sources of income. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 CHAIRMAN’S STATEMENT// CONTINUED STRATEGY AND CURRENT TRADING_ AorTech’s proprietary medical polymer, Elast-Eon™, has seen a rapid increase in recognition and use in the period. Patient implants now number in the hundreds of thousands. Elast-Eon™ has entered into the human use phase as a material of construction for pacing leads, gastroenterological stents and cardio- pulmonary cannula. In July 2008, the first of these implants will have been in clinical use for more than two years. Based upon the success of this period of human use and progress, within various customer development programmes, the Group is optimistic regarding the early application of Elast-Eon™ materials to other component applications, especially for orthopædic and neurostimulation devices. The Elast-Eon™ material licensing and supply business continues to grow in terms of the numbers of product evaluations. The time required for these evaluations is also becoming shorter. By way of comparison, the St. Jude licence announced in March 2006 came after 5 years of research, testing, and regulatory filings. As part of business development, the Company anticipates announcing new licences in due course that, on average, have been in development for 30 months or less. This improvement in licensing turnover time comes as a function of ever growing awareness in the marketplace of the performance of the Elast-Eon™ polymer and the high standards of product quality and operational performance at AorTech. The anticipated increase in polymer licensing and supply revenue should provide the financial, technological and human resources that will support further development of the Group’s owned polymer heart valve and breast implant products. These are major targets for our medium term strategy. 03 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 04 OPERATIONAL HIGHLIGHTS OF THE FINANCIAL YEAR_ The $32.8 million co-development program announced in July 2007 continues to proceed on plan. Heart valve pilot manufacturing has been established and 75 units have been produced for evaluation by an outside party. Reaction Injection Moulded (RIM) prototypes have been supplied to various cardiology and orthopædic customers at their request. These prototypes are targeted for potential use in current and next-generation products. AorTech has published data on the exceptional bond strength achieved through the use of RIM with Elast-Eon™ in conjunction with PEEK™, ceramic and various medical-grade metals. AorTech’s Elast-Eon™/RIM initiative is intended to provide the basis for a significant expansion of our component business. The Group’s production unit continued to operate at an exceptionally high standard of quality. Projected demand for polymer in 2008 can adequately be covered by the capacity of the existing plant. The PDMS reactor has come on-line and is producing, in house, a key raw material for the manufacture of Elast-Eon™, thus improving the strength of our supply chain and reducing overall costs. This reactor will be qualified at increased levels of output throughout the remainder of the financial year and is expected to be able to produce at levels at least sufficient for our current and foreseeable needs. Progress has been made in the externally funded joint venture with Allium-Medical Limited evaluating the incorporation of anti-bacterial and anti-inflammatory drugs into Elast-Eon™. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 05 CHAIRMAN’S STATEMENT// CONTINUED Across the board, the Group continues to make progress, which is beginning to show in financial results. Clinical use of Elast-Eon™ is expanding into an ever-increasing range of applications; manufacturing efficiency and capability has improved; and new grades of Elast-Eon™ are coming through the pipeline. We will particularly focus on the development of component business and the exploitation of our heart valve and breast implant intellectual property and technology. The Group continues to enjoy an enviable delivery and quality record with its customers. To date, the Group has successfully navigated the risk factors typical for any emerging medical technology business, including registration of intellectual property, regulatory requirements, the recruitment of outstanding staff and demonstration to potential customers of manufacturing and technological expertise that is able to offer customers the necessary levels of support and delivery. Elast-Eon™ is now well established as an important and attractive material for many medical devices. The team at our laboratory and plant in Melbourne and staff in the USA have proved that they can turn this recognition into firm and growing sales. We therefore continue to view the future with confidence. Jon Pither Chairman AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 06 BOARD OF DIRECTORS AND ADVISERS// DIRECTORS_ Jon Pither Frank Maguire Eddie McDaid Dr Stuart Rollason Gordon Wright Non-Executive Chairman Chief Executive Non-Executive Director Non-Executive Director Non-Executive Director COMPANY SECRETARY_ REGISTERED OFFICE_ David Parsons ACIS Dalmore House, 310 St Vincent Street, Glasgow G2 5QR HEAD OFFICE_ Prestige Travel Suite, Barclays Bank House, 81-83 Victoria Road, Surbiton, Surrey KT6 4NS web: www.aortech.com email: info@aortech.com NOMINATED ADVISER & BROKERS_ Evolution Securities Limited, 100 Wood Street, London EC2V 7AN REGISTRARS_ Equiniti Limited Aspect House, Lancing, West Sussex, BN99 6ZL INDEPENDENT AUDITOR_ Grant Thornton UK LLP, Registered Auditors, Chartered Accountants 8 West Walk, Leicester LE1 7NH Registered in Scotland, Company No.170071 Financial statements will be circulated to Shareholders and copies of the announcement will be made available from the Company’s registered office. Dealings permitted on Alternative Investment Market (AIM) of the London Stock Exchange. A O R T E C H I N T E R N AT I O N A L P L C | A N N U A L R E P O R T & A C C O U N T S 0 7 _ 0 8 07 REPORT OF THE DIRECTORS// The Directors present their report and the audited financial statements for the year ended 31 March 2008. PRINCIPAL ACTIVITIES_ The Company is the holding company of a Group whose principal activities are the development and exploitation of a range of innovative biomaterials. REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS_ During the financial year under review the Group continued to achieve key operational milestones in the use of its core product Elast-Eon™ polymer. These included the development and refinement of this material for the medical community with the aim of providing a wide range of high performance Elast-Eon™ materials in a variety of application specific formulations and densities for use in medical devices. The Group, however, at present principally remains focused on the use of Elast-Eon™ in new cardio-vascular and orthopædic applications alongside existing licensing and supply agreements. During the year costs of £1,023,000 (2007: £821,000) were charged to the Income Statement as development expenditure. The consolidated Income Statement is set out on page 20 indicating the Group’s loss for the financial year of £1,159,000 (2007: £2,121,000) which will be added to the deficit on reserves. On a Group basis, the business review and future prospects are contained within the Chairman’s Statement. No dividends have been paid or proposed for the years ended 31 March 2008 and 31 March 2007. DIRECTORS AND THEIR INTERESTS_ At 31 March 2008 the Chairman of the Company was J Pither; the Executive Director was F Maguire and the non- Executive Directors were E McDaid, Dr S Rollason and G Wright. No other Director served during the year ended 31 March 2008. At each Annual General Meeting one third of the Directors shall be subject to retirement by rotation. Edward McDaid retires from the Board at the Annual General Meeting and, being eligible, offers himself for re-election. The interests of the Directors at 31 March 2008 and 31 March 2007 in the ordinary share capital of the Company (all beneficially held) were as follows: J Pither F Maguire E McDaid S Rollason G Wright 31 March 2008 31 March 2007 Number of shares Number of shares - 1,200 363,383 8,825 335,107 - 1,200 375,383 - 347,107 During the year Dr S Rollason subscribed for 8,825 placing shares at a price of £5.10 each, representing 0.18% of the Company’s issued share capital following the placing. No other Director increased his interest in the issued ordinary share capital of the Company. On 26 April 2007 E McDaid and G Wright each transferred 4,000 ordinary shares to each of three former Directors of the Company. These transfers were effected at nil consideration. A O R T E C H I N T E R N AT I O N A L P L C | A N N U A L R E P O R T & A C C O U N T S 0 7 _ 0 8 08 SUBSTANTIAL SHAREHOLDERS_ With the exception of the following shareholdings the Directors have not been advised of any individual interest or group of interests held by persons acting together which at 3 June 2008 exceeded 3% of the Company’s issued share capital: Chase Nominees Limited* Mr Edward McDaid and Mrs Kathleen McDaid Credit Agricole Cheuvreux 3439 International Limited Caricature Investments Limited** The Bank of New York DBV303 (Nominees) Limited The Bank of New York 585665 (Nominees) Limited Number of shares % 1,064,435 363,383 347,500 335,107 270,987 157,000 22.03% 7.52% 7.19% 6.93% 5.61% 3.25% * the holding of Chase Nominees Limited includes 962,841 shares held by Bluehone Investors LLP which accounts for 19.9% of the Company’s issued share capital. Dr Stuart Rollason is also a Director of Bluehone Investors LLP. Dr Stuart Rollason owns 8,825 shares in the Company. **Caricature Investments Limited is a company wholly owned by Mr Gordon Wright, a Director of the Company. The percentage of shares not in public hands (as defined in the AIM rules) at 3 June 2008 was 34.6%. EMPLOYEES_ The Group places considerable value on the involvement of its employees and they are regularly briefed on the Group’s activities through consultative meetings. Equal opportunities are given to all employees regardless of their gender, colour, race, religion or ethnic origin. Applications for employment from disabled persons are always considered fully bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment within the Group continues and that appropriate training is arranged. It is the policy of the Group that training, career development and promotion of disabled persons should, as far as possible, be identical with that of other employees. MARKET RISK_ Market risk encompasses two types of risk, being currency risk and fair value interest rate risk. The Group’s policies for managing fair value interest rate risk are considered along with those for managing cash flow interest rate risk and are set out in the sub-section entitled “interest rate risk” below. CURRENCY RISK_ The Group is exposed to translation and transaction foreign exchange risk. The majority of the Group’s sales are to customers in the United States. These sales are priced and invoiced in US dollars. The Group policy is to try and match the timing of the settling of these sales and purchase invoices so as to eliminate, as far as possible, currency exposures. The tables below show the extent to which the Group has residual financial assets and liabilities. Foreign exchange differences on retranslation of these assets and liabilities are taken to the Income Statement of the Group, other than in respect of the retranslation of foreign subsidiary balances arising on consolidation which are taken through the foreign exchange reserve. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 09 REPORT OF THE DIRECTORS// CONTINUED Net foreign currency monetary assets Australian Dollar £000 Euro £000 US Dollar £000 3,762 449 9 8 15 564 total £000 3,786 1,021 2008 Sterling 2007 Sterling LIQUIDITY RISK_ The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. INTEREST RATE RISK_ The Group finances its operations through retained cash reserves. The interest rate exposure of the financial assets and liabilities of the Group as at 31 March 2008 is shown in the table below. The table includes trade receivables and payables as these do not attract interest and are therefore subject to fair value interest rate risk. Financial assets Cash Trade receivables Financial liabilities Trade payables CREDIT RISK_ Interest rate Fixed £000 3,611 - 3,611 - - Floating £000 1,714 - 1,714 - - Zero £000 23 194 217 75 75 Total £000 5,348 194 5,542 75 75 The Group’s principal financial assets are cash and trade receivables. The credit risk associated with the cash is limited as the counterparties have high credit ratings assigned by international credit-rating agencies. The principal credit risk arises therefore from its trade receivables. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 10 PAYABLES PAYMENT POLICY_ The Group’s current policy concerning the payment of the majority of its trade payables is to follow the ‘Better Payment Practice Code’ issued by the Better Payment Practice Group (copies available from the DTI). For other suppliers, the Group policy is to: a) b) Settle the terms of payment with those suppliers when agreeing the terms of each transaction; Ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and Pay in accordance with its contractual and other legal obligations. c) The payment policy applies to all payables for revenue and capital supplies of goods and services without exception. Wherever possible UK subsidiaries follow the same policy and the overseas subsidiaries are encouraged to adopt a similar policy applying local best practice. The Group’s average payables payment period at 31 March 2008 was 16 days (2007: 23 days). CHARITABLE AND POLITICAL DONATIONS_ During the year the Group made no charitable or political donations (2007: nil). ANNUAL GENERAL MEETING_ The notice convening the Annual General Meeting for 10:00 am on Wednesday, 27 August 2008 in the Mansfield Room of the Renaissance Chancery Court Hotel, 252 High Holborn, London WC1V 7EN is set out on page 52. There are a number of resolutions to be passed and further information in relation to these resolutions is set out below. RESOLUTIONS 1 TO 6_ Resolution 1 provides for the approval of the Company's financial statements for the year ended 31 March 2008. Resolution 2 provides for approval of the Report of the Remuneration Committee for the year ended 31 March 2008. The vote is advisory and the Directors entitlement to remuneration is not conditional on the resolution being passed. Resolution 3 deals with the re-appointment of the one Director required by the Company's Articles of Association to retire this year. Resolution 4 deals with the re-appointment of Grant Thornton UK LLP as the Company's auditor. Following assessment by the Audit Committee the Board considers the auditor to be effective and independent in their role. Resolution 5 provides under the Companies Act 1985 (Section 80) the directors of a company may only allot unissued shares if authorised to do so. Passing this Resolution will continue the Directors’ flexibility to act in the best interests of shareholders when opportunities arise by issuing new shares. In Resolution 5, the Company is seeking authority to allot shares with a nominal value of up to £4,027,315 which represents one third of the Company’s issued ordinary share capital. The Directors intend to use this authority, which will lapse at the conclusion of the next Annual General Meeting of the Company (to be held in 2009), or, if earlier, 30 November 2009, for general corporate purposes. Resolution 6 provides if shares are to be alloted for cash, the Companies Act 1985 requires that those shares are offered first to the existing shareholders in proportion to the number of shares they hold at the time of the offer. However, it may sometimes be in the interests of the Company for the Directors to allot shares other than to shareholders in proportion to their existing holdings. At last year’s Annual General Meeting shareholders authorised the Board, subject to specified limits: AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 11 REPORT OF THE DIRECTORS// CONTINUED • • to allot shares in connection with a rights issue, defined in summary as, an offer of equity securities to shareholders which is open for a period decided by the Board subject to any limits or restrictions which the Board thinks are necessary or appropriate. to allot shares not in connection with a rights issue up to a specific amount so that the pre-emption requirement does not apply to the allotments of shares for cash up to that amount. This authority is required to be renewed annually. The Directors will be empowered by Resolution 6 to allot equity securities (within the meaning of Section 94 of the Companies Act 1985) for cash without complying with the statutory pre-emption rights of shareholders under seciton 89 of the Companies Act 1985, up to a maximum nominal amount of approximately £604,092. This disapplication is limited to allotments made to ordinary shareholders and holders of any other class of equity security in proportion (as nearly as may be) to their holdings and, otherwise, to allotments up to a maximum of 5% of the Company’s issued ordinary share capital. There are no current plans to allot shares except in connection with the employee share schemes. Resolutions 1 to 4 are termed ordinary business. Resolutions 5 and 6 are termed special business. J C D Parsons Company Secretary Surbiton 16 June 2008 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 12 STATEMENT OF DIRECTORS' RESPONSIBILITIES// The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the parent company financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) and the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the Group and parent company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: • • • • select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards and International Financial Reporting Standards as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and the parent company and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of both the Group and the parent company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as the Directors are aware: • • there is no relevant audit information of which the Company's auditor is unaware; and the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. AUDITOR_ The auditor, Grant Thornton UK LLP, will be proposed for re-appointment in accordance with Section 385 of the Companies Act 1985. BY ORDER OF THE BOARD: J C D Parsons Company Secretary Surbiton 16 June 2008 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 13 CORPORATE GOVERNANCE// The Group currently has a reduced Corporate Governance structure, reflecting the present stage of development, the size of the business and the Directors’ assessment of the cost / benefit balance of full Corporate Governance. The situation will however continue to be kept under review in the light of ongoing corporate developments and scaling up of activities. DIRECTORS_ The Company is controlled by the Board of Directors which, at 31 March 2008, comprised one Executive and three non-Executive Directors and a non-Executive Chairman. All Directors are able to take independent financial advice in furtherance of their duties if necessary. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 14 ACCOUNTABILITY AND AUDIT// The Board includes a detailed review of the performance of the Group in the Chairman’s Statement on pages 2 to 5. Reading this alongside the Report of the Directors on pages 7 to 11 the Board seeks to present a balanced and understandable assessment of the Group’s position and prospects. INTERNAL CONTROL_ The Board has formalised the review and reporting of the main internal controls within the business. In previous periods, the Directors commissioned a risk review exercise in the course of which the key risk factors facing the Group were identified. These areas included regulatory, research and development, commercial, human resources and information technology. The Board will continue to review the system of internal controls within the Group. The Board of Directors is responsible for the Group’s system of financial controls. However, it should be recognised that such a system can provide only reasonable and not absolute assurance against material misstatement of loss. The principal elements of the system include: • • • • A clearly defined structure which delegates authority, responsibility and accountability. A comprehensive system for reporting financial results. Actual results are measured monthly against budget which together with a commentary on variances and other unusual items allows the Board to monitor the Group’s performance on a regular basis. A comprehensive annual planning and budgeting programme. A revision of annual forecasts on a periodic basis. There is no independent internal audit function. The Directors believe that such a function would not be cost effective given the current size of the Group but they will continue to monitor the situation as the Group goes forward. The Board has reviewed the effectiveness of the system of internal controls as outlined above and considers the Group has an established system which the Directors believe to be appropriate to the business. AUDIT COMMITTEE_ The Audit Committee, comprising the non-Executive Directors, meets at least twice per year and overviews the monitoring of the Group’s internal controls, accounting policies, financial reporting and provides a forum through which the external auditor reports. It meets at least once a year with the external auditor without Executive Board members present. GOING CONCERN_ After making appropriate enquiries and reviewing budgets, profit and cash flow forecasts and business plans, the Directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors consider that the adoption of the ‘going concern’ basis in preparing the Group financial statements is appropriate. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 15 REPORT OF THE REMUNERATION COMMITTEE// This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002, which introduced new statutory requirements for the disclosure of Directors’ remuneration in respect of periods on or after 31 December 2002. The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance relating to Directors’ remuneration. In accordance with best practice, notwithstanding that these regulations do not strictly apply to AIM companies, a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be approved. REMUNERATION COMMITTEE_ The Remuneration Committee comprises the non-Executive Directors as follows: Dr S Rollason (Chairman) E McDaid J Pither G Wright As appropriate, the Committee may invite the Chief Executive to participate in some of its discussions. No Director plays a part in any discussion about his own remuneration. The Committee is responsible for determining the terms and conditions of employment of Executive Directors. It is also responsible for considering management recommendations for remuneration and employment terms of the Company’s staff, including incentive arrangements for bonus payments and grants of share options. The constitution and operation of the Committee is in compliance with the provisions of the Combined Code on Corporate Governance. When setting its remuneration policy the Committee gives full consideration to the provisions and principles of the Combined Code. In setting the policy it considers a number of factors including: • • • The basic salaries and benefits available to executive Directors and senior management of comparable companies. The need to attract and retain Directors and senior management of an appropriate calibre. The need to ensure Executive Directors’ and senior management’s commitment to the future success of the Company by means of incentive schemes. REMUNERATION OF NON-EXECUTIVE DIRECTORS_ The remuneration of the non-executive Directors is determined by the Board with reference to the annual survey of independent Directors carried out by Independent Remuneration Solutions. The non-Executive Directors do not receive any pension or other benefits from the Company, nor do they participate in any of the bonus schemes. The non-Executive Directors have service agreements, which are reviewed by the Board annually, and they are also included in the one third of Directors subject to retirement by rotation at each Annual General Meeting. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 16 REMUNERATION OF EXECUTIVE DIRECTORS_ The Executive Directors have service contracts, which can be terminated on one year’s notice by either party. The Remuneration Committee will review each case of early termination individually in order to ensure compensation settlements are made which are appropriate to the circumstances, taking care to ensure that poor performance is not rewarded. The most recent executed contract for the Executive Director was for F Maguire – 6 December 2002. The Company’s remuneration policy for Executive Directors is to: • • • • Have regard to the individual’s experience and the nature and complexity of their work in order to pay a competitive salary that attracts and retains management of the highest quality. Link individual remuneration packages to the Group’s long term performance through the award of share options and bonus schemes. Provide post retirement benefits through defined contribution pension schemes. Provide employment related benefits including the provision of a company car, life assurance, medical insurance and insurance relating to the individual’s duties. SALARIES AND BENEFITS_ The Remuneration Committee meets twice each year to consider and set the annual salaries and benefits for Executive Directors, having regard to personal performance and independent advice concerning comparable organisations PERFORMANCE RELATED BONUSES_ An annual performance related bonus scheme is operated by the Group. Under the scheme bonuses are payable to Executive Directors subject to terms laid down by the Remuneration Committee from time to time. SHARE OPTIONS_ The Company operates an Approved Share Option Scheme and an Unapproved Share Option Scheme. Only Executive Directors and employees of the Group resident in the UK are eligible to participate in the Approved Share Option Scheme, which has been approved by HM Revenue and Customs under the provisions of Schedule 9 to the Income and Corporation Taxes Act 1988. Any person who at the date of grant is approved by the Board is entitled to participate in the Unapproved Share Option Scheme. The award of options under both schemes is at the discretion of the Remuneration Committee. The options issued to date under both schemes will only be exercisable if the average mid market closing price of the Company’s shares on the five business days prior to the date of exercise exceeds the option price by 15% or more and after the elapse of three years from the date of grant of the option. PENSIONS_ The Group made contributions to a personal pension plan for F Maguire at the rate of 10% of pensionable salary. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 17 REPORT OF THE REMUNERATION COMMITTEE// CONTINUED DIRECTORS’ EMOLUMENTS_ Details of individual Director’s emoluments for the year are as follows: Executive F Maguire Non-executive J Pither (Chairman) Dr S Rollason E McDaid G Wright Salary & fees £ Benefits in kind Pension contributions £ £ 2008 Total £ 2007 Total £ 203,331 30,000 25,000 18,000 18,000 294,331 7,200 - - - - 7,200 15,000 225,531 228,688 - - - - 15,000 30,000 25,000 18,000 18,000 316,531 32,000 20,500 20,000 18,000 319,188 Benefits in kind include the provision of a company car and medical insurance. J Pither is employed by Surrey Management Services Limited (Surrey) in the provision of services to the Company. All of the emoluments of J Pither above are represented by payments made by the Company to Surrey in respect of those services. Dr S Rollason is employed by Bluehone Investors LLP (Bluehone) in the provision of services to the Company. All of the emoluments of Dr S Rollason above are represented by payments made by the Company to Bluehone in respect of these services. DIRECTORS’ INTERESTS IN SHARES_ The interests of Directors in shares of the Company are included in the Report of the Directors on page 7. DIRECTORS’ INTERESTS IN SHARE OPTIONS_ The details of options held by Directors are set out below: (i) Approved Share Option Scheme F Maguire (ii) Unapproved Share Option Scheme F Maguire J Pither Dr S Rollason At 1 April 2007 12,000 7,000 19,000 25,000 200,000 20,000 13,000 Number of options Granted / At expired 31 March Exercise price 2008 during year Date from which exercisable Expiry date - - - - - - - 12,000 £2.50 11/07/2005 11/07/2012 7,000 19,000 25,000 200,000 20,000 13,000 £2.50 £2.80 £2.50 £2.50 £3.25 £3.25 11/07/2005 08/08/2005 14/07/2006 30/06/2007 01/09/2009 01/09/2009 10/07/2012 07/08/2012 13/07/2013 29/06/2014 01/09/2016 01/09/2016 The range in the mid market price of the Company’s shares during the year ended 31 March 2008 was from £3.385 to £5.61. The mid market price on 31 March 2008 was £3.385. On behalf of the Board Dr Stuart Rollason, Chairman of the Remuneration Committee 16 June 2008 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 18 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF AORTECH INTERNATIONAL PLC// We have audited the Group financial statements of AorTech International Plc for the year ended 31 March 2008 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and notes 1 to 23. These Group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of AorTech International Plc for the year ended 31 March 2008. This report is made solely to the company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor's 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 and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR_ The Directors' responsibilities for preparing the Annual Report and the Group financial statements in accordance with United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors' Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the Group financial statements. The information given in the Report of the Directors includes that specific information presented in the Chairman’s Statement that is cross referred from the Business Review section of the Report of the Directors. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Report of the Directors, the Chairman's Statement, the Corporate Governance statement, the Accountability and Audit statement and the Report of the Remuneration Committee. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. BASIS OF AUDIT OPINION_ We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 19 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF AORTECH INTERNATIONAL PLC// We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements. OPINION_ In our opinion: • • • the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group's affairs as at 31 March 2008 and of its loss for the year then ended; the Group financial statements have been properly prepared in accordance with the Companies Act 1985; and the information given in the Report of the Directors is consistent with the Group financial statements. GRANT THORNTON UK LLP REGISTERED AUDITORS CHARTERED ACCOUNTANTS Leicester 16 June 2008 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 CONSOLIDATED INCOME STATEMENT// Revenue Other income - grants received Cost of sales Administrative expenses Other expenses - development expenditure Other expenses - amortisation of intangible assets Operating loss Finance cost Finance income Loss before taxation Taxation Loss attributable to equity holders of the parent company Loss per share Basic and diluted – (pence per share) 20 Year ended Year ended 31 March 2008 31 March 2007 £000 £000 Notes 4 4 9 8 10 1,484 268 (205) (1,789) (1,023) (108) (1,373) - 214 (1,159) - (1,159) 276 213 (158) (1,589) (821) (148) (2,227) (3) 109 (2,121) - (2,121) 11 (25.84) (55.67) AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 21 Year ended Year ended 31 March 2008 31 March 2007 £000 £000 Notes 13 12 14 16 17 18 18 21 640 1,302 1,942 240 312 5,348 5,900 7,842 (581) (581) (147) (147) (728) 472 1,262 1,734 89 374 1,480 1,943 3,677 (527) (527) (189) (189) (716) 7,114 2,961 12,082 2,340 (2,003) 391 (5,696) 7,114 9,526 - (2,003) (25) (4,537) 2,961 CONSOLIDATED BALANCE SHEET// Assets Noncurrentassets Property, plant and equipment Intangible assets Total non current assets Currentassets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Currentliabilities Trade and other payables Total current liabilities Noncurrentliabilities Other non current liabilities Total non current liabilities Total liabilities Net assets Equity Issued capital Share premium Other reserve Foreign exchange reserve Profit and loss account Equity shareholders' funds The financial statements were approved by the Board on 16 June 2008 and were signed on its behalf by J Pither, Chairman F Maguire, Chief Executive AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 CONSOLIDATED CASH FLOW STATEMENT// Cash flows from operating activities Group loss after tax Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible assets Loss on disposal of property, plant and equipment Decrease in trade and other receivables (Increase)/decrease in inventories Increase in trade and other payables Net cash flow from operating activities Cash flows from investing activities Purchase of property, plant and equipment Net cash flow from investing activities Cash flows from financing activities Proceeds from issue of share capital, net of issue costs Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Foreign exchange differences Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 22 Year ended Year ended 31 March 2008 31 March 2007 £000 £000 (1,159) (2,121) 185 108 18 62 (151) 12 (925) (312) (312) 4,896 4,896 3,659 209 1,480 5,348 133 148 55 930 51 63 (741) (420) (420) - - (1,161) (75) 2,716 1,480 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 23 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY// Share capital £000 9,526 - - - - Balance at 1 April 2006 Exchange difference on translation of foreign operations Net expense recognised directly in equity Loss for the year Total recognised income and expense for the year Balance at 31 March 2007 9,526 Exchange difference on translation of foreign operations Net income recognised directly in equity Loss for the year - - - Share premium account £000 Other reserve £000 Foreign exchange reserve £000 Profit and loss account £000 Total equity £000 (2,003) - (2,416) 5,107 - - - - - - - - - - - - - (2,003) - - - - - (25) (25) - (25) (25) 416 416 - 416 - 391 - (25) - (2,121) (25) (2,121) (2,121) (2,146) (4,537) 2,961 - 416 - (1,159) 416 (1,159) (1,159) - (743) 4,896 (5,696) 7,114 Total recognised income and expense - for the year Issue of share capital (net of issue costs) 2,556 - 2,340 Balance at 31 March 2008 12,082 2,340 (2,003) AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 24 NOTES TO THE FINANCIAL STATEMENTS// 1. BASIS OF PREPARATION_ The Group financial statements are for the year ended 31 March 2008. They have been prepared in compliance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union as at 31 March 2008. The Group financial statements have been prepared under the historical cost convention except for certain financial instruments which are carried at fair value. In the current year the Group has adopted International Financial Reporting Standards for the first time and has applied IFRS 1 ‘First time adoption of IFRS’ from the transition date of 1 April 2006. Please refer to note 3 for the details of the adjustments required to present the accounts under IFRS. Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group in the 31 March 2008 financial statements At the date of authorisation of these financial statements, certain new Standards, amendments and Interpretations to existing standards have been published but are not yet effective. The Group has not early adopted any of these pronouncements. The new Standards, amendments and Interpretations that are expected to be relevant to the Group’s financial statements are as follows: IAS 1 Presentation of Financial Statements (Revised 2007) (effective for reporting periods beginning on or after 1 January 2009) This amendment affects the presentation of owner changes in equity and introduces a statement of comprehensive income. Preparers will have the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of other comprehensive income). This amendment does not affect the financial position or results of the Group but will give rise to additional disclosures. Management are currently assessing the detailed impact of this amendment on the Group’s financial statements. IFRS 3 Business Combinations (Revised 2008) and IAS 27 Consolidated and Separate Financial Statements (Revised 2008) (effective for reporting periods beginning on or after 1 July 2009) The revised Standards introduce major changes to the accounting treatment for business combinations, transactions with non-controlling interests (a new term for minority interests) and a loss of control of a subsidiary. Management are currently assessing the detailed impact of this amendment on the Group’s financial statements. IFRS 8 Operating segments (effective for reporting periods beginning on or after 1 January 2009) This IFRS specifies how an entity should report information about its operating segments in its financial statements. Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. Implementation of this standard may change the number of reportable segments as well as the manner in which the segments are reported; ie in a manner that is consistent with the internal reporting provided to the chief operating decision-maker. Management anticipate that all the above pronouncements will be adopted in the Group’s financial statements for the period beginning 1 April 2009. Other new Standards and Interpretations have been issued but are not expected to have a material impact on the Group’s financial statements. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 25 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED 2. PRINCIPAL ACCOUNTING POLICIES_ Basis of consolidation The Group financial statements consolidate those of the Company and all of its subsidiary undertakings. Subsidiaries are entities over which the Group has the power to control the financial and operating policies so as to obtain benefits from its activities. The Group obtains and exercises control through voting rights. Unrealised gains on transactions between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Goodwill Goodwill, representing the excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired, is capitalised and was fully written off at 31 March 2006. Goodwill written off to reserves prior to the date of transition to IFRS remains in reserves. There is no re instatement of goodwill that was amortised prior to transition to IFRS. Goodwill previously written off to reserves is not written back to profit or loss on subsequent disposal. Revenue Revenue is measured by reference to the fair value of consideration received or receivable by the Group for goods supplied and services provided, excluding VAT, sales between Group companies and trade discounts, as follows: (a) (b) (c) (d) Supply of materials, services and finished goods: Revenue from the supply of materials and finished goods is recognised when the significant risks and benefits of ownership of the product have transferred to the buyer, which may be on shipment, receipt of the goods by the customer or upon completion of the product and the product being ready for delivery, based on the specific contract terms. Revenue from the supply of services is recognised upon completion of the service, based on the specific contract terms. Licence fees: Upfront payments in respect of licence revenues for access by third parties to the Group’s technology, are recognised once a third party has a binding contractual obligation to the Group based on the specific contract terms. Milestone payments: Milestone payments are recognised once the Group’s obligations for each milestone have been met and the Group has achieved a right to be paid in return for their contractual performance. Royalty revenues: Royalty revenues are recognised as earned in accordance with third parties’ sales of the underlying products. Government grants / assistance Government grants in respect of capital expenditure are credited to a deferred income account and are released to the income statement on a diminishing value basis over the expected useful lives of the relevant assets. As such, a proportion of deferred income is shown on the balance sheet as a non current liability. Government grants which are income in nature are credited to the income statement in the same period as the related expenditure so as to match them with the related costs which they are intended to compensate, on a systematic basis. Interest Interest income is the interest earned on cash or cash equivalents held with the Group’s bankers and recognised within the period earned, accrued on a time basis by reference to the principal outstanding and at the effective rate applicable. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 26 Employee benefits Defined contribution pension scheme: The pension costs charged against profits are the contributions payable to the scheme in respect of the accounting period. Intangible assets Patents and trademarks (intellectual property): (a) Patents and trademarks (intellectual property) are included at cost less estimated residual amount and are amortised on a straight line basis over their useful economic lives, which corresponds to the lives of the individual patents. (b) Research and development: Research costs are expensed as incurred. An intangible asset arising from development expenditure on an individual project is recognised only when the Group can demonstrate all of the following: • • • • • the technical feasibility of the intangible asset so that it will be available for use or sale. be when the Group is satisfied that the appropriate regulatory hurdles have been or will be achieved. In practice this will its intention to complete and its ability to use or sell the asset. how the asset will generate future economic benefits. the availability of economic resources to complete the asset. the ability to measure the expenditure during development. The Group does not currently have any such internal or external development costs that qualify for capitalisation as intangible assets. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset It is amortised over the period of expected begins when development is complete and the asset is available for use. future sales. Assets are tested for impairment on an annual basis. Careful judgement by the Directors is applied when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any product development is uncertain and may be subject to future technical problems at the time of recognition. Judgements are based on the information available at each balance sheet date. Property, plant and equipment Property, plant and equipment is stated at cost, including any incidental costs of acquisition, net of accumulated depreciation and any accumulated provision for impairment. No depreciation is charged until the asset is brought into use. Disposal of assets The gain or loss arising on the disposal of an asset is determined as the difference between the disposal proceeds and the carrying amount of the asset and is recognised in the income statement. The gain or loss arising from the sale or revaluation of held for sale assets is included in "other income" or "other expense" in the income statement. Any revaluation surplus remaining in equity on disposal of the asset is transferred to the profit and loss reserve. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 27 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED Depreciation Depreciation is calculated to write off the cost of all property, plant and equipment less estimated residual value by the reducing balance method where it reflects the basis of consumption of the asset over their estimated useful economic lives. The periods generally applicable are: Leasehold property improvements: Period of lease Plant and equipment Fixtures and fittings 2½ years 2½ - 5 years Material residual value estimates are updated as required, but at least annually. Impairment testing of goodwill, other intangible assets and property, plant and equipment For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result some assets are tested individually for impairment and some are tested at a cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors the related cash flows. Goodwill, other individual assets or cash-generating units that include goodwill, other intangible assets with an indefinite useful life, and those intangible assets not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Leased assets The Group has a property lease on its facility in Melbourne and an equipment lease on a photocopier/fax printer. Both leases are regarded as operating leases and the payments made under them are charged to the income statement on a straight line basis over the lease term. Inventories and work in progress Inventories are stated at the lower of cost and net realisable value. Costs of ordinarily interchangeable items are assigned using the first in, first out cost formula. Cost includes materials, direct labour and an attributable proportion of manufacturing overheads based on normal levels of activity. Net realisable value is based on estimated selling prices less any further costs expected to be incurred to completion and disposal. Financial assets Financial assets are divided into the following categories: Trade and other receivables; and cash and cash equivalents. All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument. Financial assets other than those categorised as at fair value through profit or loss are recognised at fair value plus transaction costs. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 28 Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade and other receivables are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the income statement. Provision against trade receivables is made when there is objective evidence that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows. An assessment for impairment is undertaken at least at each balance sheet date. Cash and cash equivalents comprise cash on hand and demand deposits together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Financial liabilities Financial liabilities are divided into the following categories: Tradeandotherpayables; and othernoncurrentliabilities. Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the instrument. All financial liabilities are recorded initially at fair value, net of direct issue costs. All financial liabilities are recorded at amortised cost using the effective interest method, with interest related charges recognised as an expense in finance cost in the income statement. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the income statement on an accruals basis using the effective interest method 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. A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged or cancelled or expires. Taxation Current tax is the tax currently payable based on taxable profit for the accounting period. Deferred taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided if reversal of these temporary differences can In addition, tax be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity in which case the related deferred tax is also charged or credited directly to equity. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 29 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED Equity Equity comprises the following: • • “Share capital” represents the nominal value of equity shares. "Share premium" represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. "Other reserve" represents the difference arising on consolidation between the nominal value of AorTech International plc shares issued (£3,206,884) and the nominal value of AorTech Biomaterials Limited (formerly AorTech Europe Limited) shares acquired (£1,001,884) and the associated share premium account (£201,857) in the company. "Foreign exchange reserve" represents the differences arising from translation of investments in overseas subsidiaries. "Profit and loss account" represents retained profits. • • • Share based employee compensation The Group operates equity settled share based compensation plans for the remuneration of its employees. All employee services received in exchange for the grant of any share based compensation are measured at their fair values. These are indirectly determined by reference to the fair value of the share option awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or sales growth targets). All share based compensation is ultimately recognised as an expense in the income statement with a corresponding credit to the other reserve, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expense recognised in prior periods is made if fewer share options ultimately are exercised than originally estimated. Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium. At this time, the appropriate balance in the other reserve relating to the share options exercised is transferred to retained earnings by way of a transfer within reserves. Foreign currencies Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Non-monetary items that are measured at historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Any exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognised in the income statement in the period in which they arise. Exchange differences on non-monetary items are recognised in the statement of changes in equity to the extent that they relate to a gain or loss on that non-monetary item taken to the statement of changes in equity, otherwise such gains and losses are recognised in the income statement. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 30 The assets and liabilities in the financial statements of foreign subsidiaries and related goodwill are translated at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at the average of exchange rates in force at the end of each month of the reporting period. On disposal of a foreign operation the cumulative translation differences (including, if applicable, gains and losses on related hedges) are transferred to the income statement as part of the gain or loss on disposal. The Group has taken advantage of the exemption in IFRS 1 and has deemed cumulative translation differences for all foreign operations to be nil at the date of transition to IFRS. The gain or loss on disposal of these operations excludes translation differences that arose before the date of transition to IFRS and includes later translation differences. Use of accounting estimates and judgements Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the financial statements and the key areas are summarised below: Judgements in applying accounting policies: a) b) c) d) Capitalisation of development costs requires analysis of the technical feasibility and commercial viability of the project. Assessment of the impairment of assets is a judgement based on analysis of the likely future cash flows from the relevant income generating unit and an estimate of value in use. The Directors must judge whether future profitability is likely in making the decision whether or not to create a deferred tax asset. Identification of functional currencies requires analysis of the economic environments of the subsidiaries of the Group and the selection of the presentational currency must reflect the requirements of the users of those statements. Sources of estimation uncertainty: a) b) c) Depreciation rates are based on estimates of the useful lives and residual values of the assets involved. Estimates of future profitability are required for the decision whether or not to create a deferred tax asset. Estimates are required as to asset carrying values and impairment charges. 3. IFRS TRANSITION_ AorTech International Plc's consolidated financial statements were prepared in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) until 31 March 2007. The date of transition to IFRS was 1 April 2006. The comparative figures in respect of 2007 have been restated to reflect changes in accounting policies as a result of the adoption of IFRS. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRS are given in the reconciliation schedules below. The accounting policies have been applied consistently throughout the Group for the purposes of preparation of these consolidated financial statements. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 31 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED Firsttimeadoption The following optional exemptions have been adopted in accordance with IFRS 1 ‘First time adoption of IFRS’: (a) (b) Cumulative translation differences which existed at the date of transition have been transferred into the profit and loss account reserve, and the foreign exchange reserve therefore only shows differences arising after transition. Upon disposal pre-transition foreign exchange differences will not be recycled. The Group has elected not to apply IFRS 3 ‘Business Combinations’ retrospectively to business combinations prior to 1 April 2006. Accordingly the classification of the combination (acquisition, reverse acquisition or merger) remains unchanged from that used under UK GAAP. Assets and liabilities are recognised at date of transition as they would be recognised under IFRS, and are measured using their UK GAAP carrying amount immediately post acquisition as deemed cost under IFRS, unless IFRS requires fair value measurement. The Group’s date of transition to IFRS was 1 April 2006. The main items contributing to the change in financial information compared with that reported previously under UK GAAP are shown below. IAS 20 - ‘Accounting for government grants and disclosure of government assistance’. In accordance with IAS 20, grants received are recognised as a credit in the Income Statement under the category ‘Other income’, whereas under UK GAAP these were shown as part of Revenue. IAS 21 – ‘The effects of changes in foreign exchange rates’. Under UK GAAP, the Group reported differences in exchange rates on consolidation within the profit and loss account reserve. Under IFRS, the Group has claimed the exemption from retrospective application of IAS 21. The Group is now required to show all post transition differences on consolidation as a separate item within Equity, being the foreign exchange reserve. Explanationofmaterialadjustmentstothecashflowstatement Application of IFRS has resulted in reclassification of an item in the cash flow statement as follows: Under UK GAAP, payments to acquire tangible fixed assets were classified as part of 'Capital expenditure and financial investment'. Under IFRS, payments to acquire property, plant and equipment have been classified as part of 'Investing activities'. There are no other material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 32 Reconciliation of income statement_ Twelve months to 31 March 2007 Revenue Grants received Group revenue Other income - grants received Cost of sales Administrative expenses Other expenses - development expenditure Other expenses - amortisation of intangible assets Operating loss Finance costs Finance income Loss before taxation Taxation Loss attributable to equity holders of the parent company UK GAAP £000 276 213 489 - (158) (1,589) (821) (148) (2,227) (3) 109 (2,121) - (2,121) Adjustments IAS 20 £000 - (213) (213) 213 - - - - - - - - - - IFRS £000 276 - 276 213 (158) (1,589) (821) (148) (2,227) (3) 109 (2,121) - (2,121) AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 33 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED Reconciliation of equity at 1 April 2006_ Assets Noncurrentassets Property, plant and equipment Intangible assets Total non current assets Currentassets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Currentliabilities Trade and other payables Total current liabilities Noncurrentliabilities Other non current liabilities Total non current liabilities Total liabilities Net assets Equity Issued capital Other reserve Profit and loss account Equity shareholders' funds 1 April 2006 UK GAAP Adjustments £000 240 1,360 1,600 140 1,304 2,716 4,160 5,760 (509) (509) (144) (144) (653) 5,107 9,526 (2,003) (2,416) 5,107 £000 - - - - - - - - - - - - - - - - - - 1 April 2006 IFRS £000 240 1,360 1,600 140 1,304 2,716 4,160 5,760 (509) (509) (144) (144) (653) 5,107 9,526 (2,003) (2,416) 5,107 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 34 Reconciliation of equity at 31 March 2007_ Assets Noncurrentassets Property, plant and equipment Intangible assets Total non current assets Currentassets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Currentliabilities Trade and other payables Total current liabilities Noncurrentliabilities Other non current liabilities Total non current liabilities Total liabilities Net assets Equity Issued capital Other reserve Foreign exchange reserve Profit and loss account Equity shareholders' funds 31 March 2007 UK GAAP £000 472 1,262 1,734 89 374 1,480 1,943 3,677 (527) (527) (189) (189) (716) 2,961 9,526 (2,003) - (4,562) 2,961 Adjustments IAS 21 £000 - - - - - - - - - - - - - - - - (25) 25 - 31 March 2007 IFRS £000 472 1,262 1,734 89 374 1,480 1,943 3,677 (527) (527) (189) (189) (716) 2,961 9,526 (2,003) (25) (4,537) 2,961 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 35 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED 4. SEGMENTAL REPORTING_ The principal activity of the AorTech International Plc Group currently is the development and exploitation of a range of innovative biomaterials. This forms the Group’s only primary reporting segment and therefore no additional information is given. The Group’s secondary reporting segments are based on geographical location of operations. Year ended 31 March 2008 £000 Year ended 31 March 2007 £000 Analysis of revenue by destination United Kingdom Supply of materials, services and finished goods Australia Supply of materials, services and finished goods USA and Rest of the World Supply of materials, services and finished goods Milestone payments Licence fees Royalty revenue Analysis of result - operating loss United Kingdom Australia USA and Rest of the World Analysis of assets by location United Kingdom Australia USA and Rest of the World Additions to property, plant and equipment and intangible assets Australia (1) 11 521 935 17 1 1,484 (780) (459) (134) (1,373) 1,413 5,701 - 7,114 312 312 58 - 218 - - - 276 (818) (1,368) (41) (2,227) 445 2,503 13 2,961 420 420 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 36 5. REMUNERATION OF DIRECTORS AND KEY MANAGEMENT PERSONNEL_ Emoluments Pension costs 2008 £000 522 35 557 2007 £000 495 31 526 The key management personnel whose remuneration is included in the table above are a Director / Company Secretary of Aortech Biomaterials Pty Limited; a Director, Aortech Biomaterials Pty Limited; the Vice President of Research & Development, AorTech Medical Devices (USA), Inc and the five Directors of the parent company. 6. LOSS BEFORE TAX_ Loss before tax has been arrived at after charging / (crediting): Foreign exchange differences Depreciation and amortisation: Depreciation of property, plant and equipment Amortisation of intangible assets Employee benefits expense: Employee costs (Note 7) Land and buildings held under operating leases: Other operating leases Audit and non-audit services: Fees payable to the Company’s auditor for the audit of the Group financial statements Fees payable to the Company’s auditor and its associates for other services: The audit of the company’s subsidiaries pursuant to legislation Tax services Other services 2008 £000 212 185 108 956 131 22 13 5 17 2007 £000 (75) 133 148 898 139 29 4 6 - AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 37 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED 7. EMPLOYEES_ Employee costs (including Directors): Wages and salaries Pension costs Social security costs 2008 £000 894 62 - 956 2007 £000 814 25 59 898 The average number of employees (including Directors) during the year was made up as follows: Numbers Numbers Production Sales Development and quality control Administration 8. FINANCE INCOME_ Bank interest receivable 9. FINANCE CHARGES_ Other interest payable 10. INCOME TAX EXPENSE_ 4 1 12 10 27 2008 £000 214 2008 £000 - 3 - 11 8 22 2007 £000 109 2007 £000 3 No current tax or deferred tax expense arises on the loss for the year. The tax assessed for the year differs from the standard rate of corporation tax as applied in the respective trading domains where the Group operates. The differences are explained below: Loss for the year before tax Loss for year multiplied by the respective standard rate of corporation tax applicable in each domain (average 30%) Effects of: Depreciation for the year differs from capital allowances and other timing differences Expenses not deductible for tax purposes and other permanent tax differences Losses not utilised Tax on loss for the year 2008 £000 (1,159) 2007 £000 (2,121) (348) (636) (6) 68 286 - 17 59 560 - AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 38 Unrelieved tax losses remain available to offset against future taxable profits. These losses have not been recognised as deferred tax assets within the financial statements as they do not meet the conditions required in accordance with IAS 12. Losses carried forward in the UK total £3,603,000 – tax effect is £1,009,000 (2007: £2,401,000 – tax effect £720,000). Losses carried forward in Australia total £4,048,000 – tax effect £1,133,000 (2007: £4,305,000 – tax effect £1,291,000). Losses in the USA total £134,000 – tax effect £37,000 (2007: £41,000 - tax effect £12,000). 11. LOSS PER SHARE_ Loss for the year attributable to equity shareholders Loss per share Basic and diluted (pence per share) Issued ordinary shares at start of the year Ordinary shares issued in the year Issued ordinary shares at end of the year Weighted average number of shares in issue for the year 2008 £000 (1,159) 2007 £000 (2,121) (25.84) (55.67) Shares 3,810,278 1,022,500 4,832,778 4,484,875 Shares 3,810,278 - 3,810,278 3,810,278 The diluted loss per share does not differ from the basic loss per share as the exercise of share options would have the effect of reducing the loss per share and is therefore not dilutive under the terms of IAS 33. 12. INTANGIBLE ASSETS_ Valuation At 1 April 2006 Exchange differences At 31 March 2007 Exchange rate adjustment At 31 March 2008 Amortisation At 1 April 2006 Charge for the year At 31 March 2007 Charge for the year At 31 March 2008 Net book value At 1 April 2006 At 31 March 2007 At 31 March 2008 Intellectual property £000 Goodwill £000 1,943 50 1,993 178 2,171 583 148 731 108 869 1,360 1,262 1,302 19,501 - 19,501 - 19,501 19,501 - 19,501 - 19,501 - - - Total £000 21,444 50 21,494 178 21,672 20,084 148 20,232 108 20,370 1,360 1,262 1,302 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED 13. PROPERTY, PLANT AND EQUIPMENT_ Property improvements £000 Plant & equipment £000 Fixtures & fittings £000 Cost At 1 April 2006 Transfers Additions Disposals At 31 March 2007 Disposals Additions Exchange differences At 31 March 2008 Depreciation At 1 April 2006 Transfers Charge for the year Disposals Exchange differences At 31 March 2007 Charge for the year Disposals Exchange differences At 31 March 2008 Net book value At 1 April 2006 At 31 March 2007 At 31 March 2008 14. INVENTORIES_ Raw materials Finished goods 2 196 307 (188) 317 (12) 143 38 486 1 129 53 (137) 1 47 74 (4) 5 122 1 270 364 509 - 87 - 596 (11) 149 72 806 361 - 68 - 1 430 96 (1) 50 575 148 166 231 302 (196) 26 (8) 124 (1) 20 15 158 211 (129) 12 (6) - 88 15 (1) 11 113 91 36 45 2008 £000 190 50 240 39 Total £000 813 - 420 (196) 1,037 (24) 312 125 1,450 573 - 133 (143) 2 565 185 (6) 66 810 240 472 640 2007 £000 89 - 89 In 2008 a total of £152,000 of inventories was included in the income statement as an expense (2007: £108,000). There was no amount resulting from writedowns of inventories in either 2008 or 2007. There were no reversals of previous writedowns that were recognised in the income statement in either 2008 or 2007. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 40 15. FINANCIAL INSTRUMENTS_ Risk management The Group’s financial instruments comprise cash and cash equivalents, trade and other receivables and trade and other payables. These arise directly from the Group’s operations and it is the Group’s policy that no trading in financial instruments shall be undertaken. The Board reviews and agrees policies to manage risk to ensure that the entities within the Group will be able to continue as a going concern whilst maximising the return to stakeholders through the effective management of liquid resources raised through share issues. Categories of financial instrument Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Liabilities at amortised cost 2008 £000 5,348 312 5,660 (728) (728) 2007 £000 1,480 374 1,854 (716) (716) Foreign currency risk The Group has an Australian subsidiary whose functional currency is the Australian dollar and a US subsidiary whose functional currency is the US dollar. The Board considers that the exposure to foreign currency risk is not currently significant and no steps have yet been undertaken to minimise this risk. However, the Board will continue to monitor the situation and review the exposure to this risk on a regular basis as activity in these subsidiaries increases. Substantial cash balances are carried within the Group in interest earning accounts, which comprise the following currency holdings: Sterling US dollars Australian dollars Euros 2008 £000 1,566 13 127 9 1,715 2007 £000 459 19 172 8 658 In addition to cash holdings the following short term deposits are placed for up to 12 months depending on the Group’s funding requirements: US dollars Australian dollars 2008 £000 - 3,610 3,610 2007 £000 527 246 773 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 41 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED Interest rate risk The Group finances its operations through equity fundraising and does not currently carry significant borrowings. The cash balances and short term deposits are held at both fixed and floating as follows: Cash Short term deposits Interest rate % 0% 5.00% 2.00% 4.40% 3.00% 7.71% 8.10% 7.64% Interest rate % 0% 5.25% 2.00% 4.66% 3.00% 5.05% 6.23% 2008 £000 23 1,566 13 127 9 2,185 965 460 5,348 2007 £000 49 459 19 172 8 527 246 1,480 Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In order to minimise this risk the Group endeavours only to deal with companies which are demonstrably creditworthy and this, together with the aggregate financial exposure, is continuously monitored. The maximum exposure to credit risk in the cae of both the cash and short term deposits is the value of the outstanding amount. The Group has trade receivables resulting from sales and other receivables from provision of other services which the management consider to be of low risk. The management do not consider that there is any concentration of risk within either trade or other receivables. Liquidity risk The Group currently holds substantial cash balances and short term deposits in Sterling, US dollars and Australian dollars. These balances provide funding for the Group’s trading activities. The Group relies on equity fundraising to provide any additional liquid funds and management expects to continue this method successfully in the future. There is no material difference between the fair values and the book values of these financial instruments. 16. TRADE AND OTHER RECEIVABLES_ Current assets Trade receivables Other receivables Prepayments There were no financial assets overdue at 31 March 2008. 2008 £000 194 58 60 312 2007 £000 68 194 112 374 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 42 2008 £000 1,738 3,610 5,348 2008 £000 75 152 71 283 581 147 147 2007 £000 707 773 1,480 2007 £000 188 86 58 195 527 189 189 17. CASH AND CASH EQUIVALENTS_ Cash at bank and in hand Short term deposits 18. TRADE AND OTHER PAYABLES_ Current liabilities Trade payables Other payables Deferred income (government grants) Accruals Non-current liabilities Deferred income (government grants) Government grants received towards capital expenditure are released to the profit and loss account on a diminishing value basis over a period equal to the useful economic life of the assets to which they relate. On average this period is 5 years. 19. OPERATING LEASE COMMITMENTS_ The Group had the following total commitments under non-cancellable operating leases at 31 March: The following payments are due to be made on operating lease commitments: Within one year Two to five years 2008 £000 142 315 457 2007 £000 126 454 580 20. SHARE BASED PAYMENTS_ The Group has an approved share option plan for the benefit of employees resident in the UK and Executive Directors. Options in issue 12,000 600 Exercise Price (£) 2.50 2.95 Exercise period on or before: 10 July 2012 25 July 2012 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 43 NOTES TO THE FINANCIAL STATEMENTS// CONTINUED 20. SHARE BASED PAYMENTS_CONTINUED Details of the number of share options and the weighted average exercise price (WAEP) outstanding during the year are as follows: Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited during the year Expired during the year Outstanding at the year end Exercisable at the year end 2008 WAEP Number 12,600 - - - - 12,600 12,600 £ £2.52 - - - - £2.52 £2.52 2007 WAEP Number 12,600 - - - - 12,600 12,600 £ £2.52 - - - - £2.52 £2.52 The Group has an unapproved share option plan for the benefit of other employees. Options in issue 2,000 1,500 5,000 1,050 1,600 1,350 7,000 19,000 25,000 8,000 200,000 20,000 78,000 50,000 Exercise Price (£) 56.25 81.00 74.25 90.35 41.75 17.25 2.50 2.80 2.50 2.50 2.50 2.50 3.25 4.28 Exercise period on or before: 16 December 2009 15 June 2010 10 July 2010 17 December 2010 28 May 2011 17 December 2011 10 July 2012 7 August 2012 13 July 2013 29 June 2014 29 June 2014 21 November 2014 1 September 2016 21 January 2018 Details of the number of share options and the weighted average exercise price (WAEP) outstanding during the year are as follows: Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited during the year Expired during the year Outstanding at the year end Exercisable at the year end 2008 WAEP Number 393,000 50,000 (22,500) - (1,000) 419,500 279,000 £ £4.52 £4.28 £2.50 - £10.25 £4.63 £2.52 2007 WAEP Number 364,000 78,000 - (40,000) (9,600) 393,000 271,000 £ £4.21 £3.25 - £1.96 £12.50 £4.52 £2.50 The options issued to date under both schemes will only be exercisable if the average mid market closing price of the Company’s shares on the five business days prior to the date of exercise exceeds the option price by 15% or more and after the elapse of three years from date of Option Grant. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 44 The fair value of options granted after 7 November 2002 but not vested at 1 April 2006 has been arrived at using the Black-Scholes model. The assumptions inherent in the use of this model are as follows: • • • • The option life is assumed to be at the end of the allowed period There are no vesting conditions No variables change during the life of the option (e.g. dividend yield). Volatility has been calculated over the 3 years prior to the balance sheet date Date of grant 14.07.03 30.06.04 30.06.04 22.11.04 01.09.06 21.01.08 Vesting Period (years) 3 3 3 3 3 3 Date of vesting 14.07.06 30.06.07 30.06.07 22.11.07 01.09.09 21.01.11 Exercise Price (£) 2.50 2.50 2.50 2.50 3.25 4.28 Risk-free Rate 3.83% 5.04% 5.04% 4.56% 4.61% 4.21% Share price at grant (£) 1.32 1.62 1.62 1.89 3.18 4.02 Volatility of Share price 63% 63% 63% 63% 63% 45% Fair value (£000) 12 24 132 18 118 44 Number outstanding 25,000 8,000 200,000 20,000 78,000 50,000 The Group has not recognised any expense related to equity-settled share based payment transactions during the year (2007: nil). 21. SHARE CAPITAL_ In issue at 1 April 2006 31 March 2007 Exercise of share options* Issue of shares (net of issue costs)** 31 March 2008 Shares Number 3,810,278 3,810,278 22,500 1,000,000 4,832,778 Nominal Value (£2.50) £000 9,526 9,526 56 2,500 Premium net of costs £000 - - - 2,340 Total £000 9,526 9,526 56 4,840 12,082 2,340 14,422 * On 16 October 2007, a total of 9,000 share options held by staff menbers under the Company’s Unapproved Share Option Scheme were exercised at an option price of £2.50 per share. A further 13,500 options held under the Scheme were exercised at an option price of £2.50 per share on 20 December 2007. ** A Placing of 1,000,000 new Ordinary shares with institutional investors at a price of £5.10 per share was approved by shareholders at an EGM held on 20 August, thereby raising £5,100,000 before expenses of £260,000. At an EGM of Members held on 20 August 2007, the Company’s authorised share capital was increased from £14,000,000 comprising 5,600,000 Ordinary shares of £2.50 each to £17,500,000, comprising 7,000,000 shares of £2.50 each. 22. CONTINGENT LIABILITIES_ There are no contingent liabilities at 31 March 2008 or at 31 March 2007. 23. CAPITAL COMMITMENTS_ There are no significant capital comments other than contracted amounts of £87,000 required to complete the PDMS syntheses facility in AorTech Biomaterials Pty Ltd, Australia. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 45 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF AORTECH INTERNATIONAL PLC// We have audited the parent company financial statements of AorTech International Plc for the year ended 31 March 2008 which comprise the parent company balance sheet and notes 1 to 10. These parent company financial statements have been prepared under the accounting policies set out therein. We have reported separately on the Group financial statements of AorTech International Plc for the year ended 31 March 2008. This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor's 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 and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR_ The Directors' responsibilities for preparing the Annual Report and the parent company financial statements in accordance with United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors' Responsibilities. Our responsibility is to audit the parent company financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the financial statements. The information given in the Report of the Directors includes that specific information presented in the Chairman’s Statement that is cross referred from the Business Review section of the Report of the Directors. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited parent company financial statements. The other information comprises only the Report of the Directors, the Chairman's Statement, the Corporate Governance statement, the Accountability and Audit statement and the Report of the Remuneration Committee. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any other information. BASIS OF AUDIT OPINION_ We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 46 We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements. OPINION_ In our opinion: • • • the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the company's affairs as at 31 March 2008; the parent company financial statements have been properly prepared in accordance with the Companies Act 1985; and the information given in the Report of the Directors is consistent with the parent company financial statements. GRANT THORNTON UK LLP REGISTERED AUDITORS CHARTERED ACCOUNTANTS Leicester 16 June 2008 AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 47 PARENT COMPANY BALANCE SHEET// Fixed assets Investment in subsidiary undertakings Current assets Debtors – amounts falling due within one year Debtors – amounts falling due after one year Cash at bank Creditors: amounts falling due within one year Net assets Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders' funds 31 March 2008 31 March 2007 £000 £000 Notes 3 4 4 5 6 8 8 7 - - 103 12,681 1,558 14,342 (271) 14,071 12,082 2,340 (351) 14,071 152 8,715 458 9,325 (180) 9,145 9,526 - (381) 9,145 The parent company financial statements were approved by the Board on 16 June 2008 and were signed on its behalf by J Pither, Chairman F Maguire, Chief Executive AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 48 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS// 1. ACCOUNTING POLICIES_ Accounting convention The parent company financial statements were prepared under the historical cost convention and in accordance with applicable United Kingdom accounting standards (United Kingdom Generally Accepted Accounting Practice) up to and including Financial Reporting Standard (FRS) 28. A summary of the more important accounting policies, which have been applied consistently, is set out below. The principal accounting policies represent the most appropriate in accordance with FRS 18. Investments Investments held as fixed assets are stated at the lower of cost and net realisable value, less provision for any impairment. In the opinion of the Directors the value of such investments is not less than that shown at the balance sheet date. Deferred tax Deferred tax is recognised on all timing differences where the transactions or events that give the Company an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance sheet date. Foreign currencies Assets and liabilities in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the date of transaction. Exchange differences are taken into account in arriving at the operating result. Share based payments All share based payment arrangements granted after 7 November 2002 that had not vested prior to 1 April 2006 are recognised in the financial statements. All goods and services received in exchange for the grant of any share based payment are measured at their fair values. Where employees are rewarded using share based payments the fair values of their services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (e.g. profitability and sales growth targets). All equity settled share based payments are ultimately recognised as an expense in the profit and loss account with a corresponding credit to ‘other reserves’. Upon exercise of share options the proceeds received, net of attributable transaction costs, are credited to share capital and, where appropriate, share premium. 2. COMPANY PROFIT AND LOSS ACCOUNT_ The parent company has taken advantage of section 230 of the Companies Act 1985 and has not included its own profit and loss account in these financial statements. The parent company’s loss for the year ended 31 March 2008 was £1,073,000 (2007: £610,000). AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 49 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS// CONTINUED 3. FIXED ASSET INVESTMENTS_ Investment in subsidiary undertakings Cost Historical cost Provision for impairment Net book value at 31 March Interest in subsidiary undertakings Name of undertaking (i) (ii) (iii) (iv) AorTech Biomaterials Limited (formerly AorTech Europe Limited) AorTech Critical Care Limited AorTech Biomaterials Pty Limited AorTech Medical Devices (USA), Inc 31 March 2008 31 March 2007 £000 £000 23,159 23,159 (23,159) - (23,159) - Country of registration or incorporation Description of shares held Proportion of nominal value of shares held % Ordinary £1 Scotland Ordinary £1 Scotland Australia Ordinary Aus. $1 Common US $1 USA 100 92 100 100 The principal business activities and country of operations of the above undertakings are: (i) (ii) (iii) (iv) A non-trading company in the UK A dormant company in the UK The development of new biostable polyurethanes operating principally in Australia Marketing in the Americas 4. DEBTORS_ Amounts falling due within one year Other debtors Prepayments Amounts falling due after more than one year Amounts owed by Group undertakings* 2008 £000 50 53 103 12,681 12,784 2007 £000 44 108 152 8,715 8,867 * AorTech International plc has agreed not to seek repayment of the amount owing by its subsidiary AorTech Biomaterials Pty Limited within 12 months of the balance sheet date. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 50 2008 £000 11 260 271 2007 £000 10 170 180 5. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR_ Trade creditors Accruals 6. SHARE CAPITAL_ See Note 21 in the Group financial statements. 7. SHARE BASED PAYMENTS_ See Note 20 in the Group financial statements. 8. STATEMENT OF MOVEMENT IN SHAREHOLDERS’ FUNDS_ 1 April 2006 Loss for the year Exchange differences At 31 March 2007 Loss for the year Share issue Exchange differences At 31 March 2008 Share capital £000 9,526 - - 9,526 - 2,556 - 12,082 Share premium £000 - - - - - 2,340 - 2,340 Profit and loss account £000 224 (610) 5 (381) (1,073) - 1,103 (351) Total shareholders’ funds £000 9,750 (610) 5 9,145 (1,073) 4,896 1,103 14,071 9. DIRECTORS’ REMUNERATION_ Aggregate emoluments Company pension contributions to money purchase schemes 2008 £000 302 15 317 2007 £000 305 14 319 The average number of employees (including Directors) during the year was made up as follows: Administration 5 5 Included in the aggregate emoluments for the year ended 31 March 2008 are payments of £55,000 (2007: £52,500) made by the Company to third parties. The highest paid Director received total emoluments of £225,531 including pension contributions of £15,000 (2007: total emoluments of £228,688 including pension contributions of £13,810). AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 51 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS// CONTINUED 10. RELATED PARTY TRANSACTIONS_ In accordance with FRS 8, “Related Party Disclosures”, AorTech International plc has taken advantage of the exemption for over 90% owned subsidiaries not to disclose any transactions or balances between group entities including those that have been eliminated on consolidation. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 52 NOTICE OF THE ANNUAL GENERAL MEETING// Notice is hereby given that the eleventh Annual General Meeting of AorTech International plc will be held in the Mansfield Room of the Renaissance Chancery Court Hotel, 252 High Holborn, London, WC1V 7EN on 27 August 2008 at 10:00am for the following purposes: AS ORDINARY BUSINESS_ 1. 2. 3. 4. To receive and adopt the financial statements of the Company for the year ended 31 March 2008 together with the Reports of the Directors and Auditor thereon. To approve the Report of the Remuneration Committee for the year ended 31 March 2008. To re-elect as a Director Edward McDaid, who is retiring by rotation. To re-appoint Grant Thornton UK LLP as auditor of the Company and to authorise the Directors to fix their remuneration. AS SPECIAL BUSINESS_ To consider, and if thought fit, pass the following resolution as an Ordinary Resolution: 5. That the Directors be hereby generally and unconditionally authorised for the purpose of section 80 of the Companies Act 1985 (“the Act”) to exercise all the powers of the Company to allot relevant securities (within the meaning of said Section 80) up to an aggregate nominal amount of £4,027,315 which authority will expire on the earlier of the conclusion of the next Annual General Meeting of the Company and the date falling 15 months after the passing of this Resolution save that the Company may, before such expiry, make an offer or agreement which would, or might, require relevant securities to be allotted after such expiry and the Directors may allot such securities in pursuance of such offer or agreement as if the authority so conferred had not expired. To consider, and if thought fit, pass the following resolution as a Special Resolution: 6. (a) (b) That subject to the passing of Resolution 5 above as an Ordinary Resolution, in substitution for any existing power under Section 95 of the Act, the Directors be and are hereby empowered until the conclusion of the next Annual General Meeting of the Company or the date falling 15 months after the passing of this Resolution, whichever is the earlier (“the period of the Section 95 power”), pursuant to Section 95 of the Act to allot equity securities (as defined by Section 94(2) of the Act) pursuant to the authority granted by Resolution 5 above in accordance with Section 80 of the Act as if Section 89(1) of the Act did not apply to such allotment, provided that this power shall be limited to: the allotment of equity securities in connection with or pursuant to an offer by way of rights issue, open offer or any other pre-emptive offer in favour of ordinary shareholders and in favour of holders of any other class of equity security in accordance with the rights attached to such class where the equity securities respectively attributable to the interests of such persons on a fixed record date are proportionate (as nearly as may be) to the respective numbers of equity securities held by them or are otherwise allotted in accordance with the rights attaching to such equity securities subject to such exclusions or arrangements as the Directors may deem necessary or expedient to deal with fractional entitlements or legal or practical problems under the laws of any territories or requirements of any recognized regulatory body or stock exchange in any territory; and the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities consisting of or related to Ordinary shares up to an aggregate nominal amount of £604,097, or if less, five percent of the issued Ordinary share capital of the Company from time to time but so that this power shall allow the Company to make an offer or enter into an agreement before the expiry of the period of the Section 95 power which would, or might, require equity securities to be allotted after such expiry and the Directors may allot equity securities in pursuance of any such offer or agreement as if the power conferred thereby had not expired. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 53 NOTICE OF THE ANNUAL GENERAL MEETING// CONTINUED By order of the Board, J C D Parsons Company Secretary Victoria Road, Surbiton Surrey KT6 4NS 16 June 2008 1. 2. 3. 4. 5. (a) (b) (c) Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, members will be entitled to attend and vote at the meeting if they are registered on the Company’s register of members by 6.00 pm on 25 August 2008 or by 6.00 pm two days prior to the date of any adjournment of the meeting. Changes to entries on the Register of Members after that time shall be disregarded in determining the rights of any person to attend and vote at the meeting. Any member of the Company who is entitled to attend and vote at the Annual General Meeting may appoint another person or persons (whether a member or not) as their proxy to attend and, on a poll, to vote on their behalf. To be valid, Forms of Proxy must be lodged with the Company's Registrars, Equiniti Limited, Aspect House, Lancing, West Sussex, BN99 6ZL not later than 48 hours before the time appointed for the holding of the meeting or any adjourned meeting together with any documentation required. corporation, the Form of Proxy should be executed under its common seal or signed by a duly authorised officer or attorney of the corporation. In the case of a Completing and returning a Form of Proxy will not prevent any member from attending the meeting in person and voting should they so wish. In order to faciltate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that (a) if a corporate shareholder has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all of the other corprorate representatives for that shareholder at the meeting, then on a poll those corporate representatives will give voting directions to the Chariman and the Chariman will vote (or withhold a vote) as corproate reprsentative in accordance with those directions; and (b) if more than one corporate representative for the same corporate shareholder attends the meeting but the corporate shareholder has not appointed the Chariman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those corporate representatives who attend, who will vote on a poll and the other corproate representatives will give voting directions to that designated corporate representative. Corporate shareholders are refrred to the guidance issued by the Instituate of Chartered Secretaries and Administrators on proxies and corporate representaitives – www.icsa.org.uk – for further details of this procedure. The guidance includes a sample form of representation letter if the Chairman is being appointed as described in (a) above. The following documents will be available at the registered office of the Company on any weekday (except Saturday) during normal business hours from the date of this notice until the date of the Annual General Meeting: A copy of the service agreements for the Executive Directors. A copy of the letters of appointment for the non-Executive Directors. The Memorandum and Articles of Association of the Company. These documents will also be available for inspection during the Annual General Meeting and for at least fifteen minutes before it begins. AORTECH INTERNATIONAL PLC | ANNUAL REPORT & ACCOUNTS 07_08 . K U O C . W D B R Y B D E C U D O R P & D E N G S E D I INTERNATIONAL PLC Prestige Travel Suite, Barclays Bank House, 81-83 Victoria Road, Surbiton, Surrey, England KT6 4NS Tel: +44(0)870 850 8286 Fax: +44(0)208 399 3897 E-mail: info@aortech.com Web: www.aortech.com