Dechra Pharmaceuticals
Annual Report 2002

Plain-text annual report

DECHRA PHARMACEUTICALS PLC DECHRA PHARMACEUTICALS PLC INNOVATION, DEVELOPMENT AND DELIVERY D E C H R A P H A R M A C E U T C A L S P L C I A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 2 Dechra House Jamage Industrial Estate Talke Pits Stoke-on-Trent ST7 1XW T: +44 (0)1782 771100 F: +44 (0)1782 773366 E: corporate.enquiries@nvs-ltd.co.uk www.dechra.com ANNUAL REPORT AND ACCOUNTS 2002 REGISTRARS Computershare Services PLC PO Box 82 The Pavillions Bridgwater Road Bristol BS99 7NH FINANCIAL PR Citigate Dewe Rogerson 9 The Apex 6 Embassy Drive Edgbaston Birmingham B15 1TP ADVISERS STOCKBROKER & FINANCIAL ADVISER ING Barings 60 London Wall London EC2M 5TQ PRINCIPAL BANKERS Bank of Scotland 55 Temple Row Birmingham B2 5LS AUDITORS KPMG Audit Plc 2 Cornwall Street Birmingham B3 2DL SOLICITORS DLA Victoria Square House Victoria Square Birmingham B2 4DL CONTENTS 01. Highlights 02. Dechra Pharmaceuticals: At a glance 04. Chairman’s Statement 05. Board of Directors 06. Chief Executive’s Review 08. National Veterinary Services 12. Arnolds Veterinary Products 14. Dales Pharmaceuticals 16. North Western Laboratories / Cambridge Specialist Laboratory Services 18. Financial Review 20. Financial Contents Dechra Pharmaceuticals operates in the healthcare/pharmaceuticals and related markets. It is the only listed pharmaceutical company which derives a substantial part of its income from the UK and international veterinary and animal healthcare markets. Dechra comprises: National Veterinary Services Arnolds Veterinary Products Dales Pharmaceuticals North Western Laboratories / Cambridge Specialist Laboratory Services HIGHLIGHTS > Significant achievements > Introduction by Arnolds of two new veterinary licensed products > Completion of two acquisitions > £2.8 million capital investment programme at Dales completed > Vetcom windows® launch and roll-out > Exclusive disposables distribution contract secured > Turnover > Profit before tax* > Earnings per share* † > Total dividend per share * pre-exceptional and goodwill amortisation † after FRS 19 re-statement 02002 £170m £7.6m 10.59p 4.12p 2001 £156m £5.85m 9.29p 3.75p +9% +30% +14% +10% 1 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 OUR STRATEGY > Development of the veterinary pharmaceutical portfolio > Increasing export opportunities > Further penetration of existing markets > Exploitation of contract manufacturing opportunities BUSINESS DESCRIPTION KEY PRODUCTS AND SERVICES National Veterinary Services NVS is the UK market leader in the supply of pharmaceuticals, pet related products, instruments, consumables, accessories, IT and business services to the veterinary profession. Arnolds Veterinary Products Suppliers of licensed branded pharmaceuticals, instruments and equipment used by the veterinary profession worldwide; focusing on the small animal and equine markets. • Highest Market Service Levels • Electronic Ordering Systems • Vetcom® Practice Management Systems • National Next Day Delivery • Branded Veterinary Pharmaceuticals • Veterinary Instruments • Surgical Equipment • Pharmaceutical Development Dales Pharmaceuticals Licensed manufacturer of human and veterinary pharmaceuticals for Arnolds and third party customers. It specialises in the manufacture of liquids, ointments and solid dose pharmaceuticals. • Manufacturing • Clinical Trials and Specials • Packing • Technical Support North Western Laboratories/ Cambridge Specialist Laboratory Services NWL is the only veterinary pathology laboratory with UKAS accreditation. A multi-disciplined commercial veterinary laboratory, providing diagnostic and clinical pathology services covering over 500 test options to veterinary surgeons throughout the UK. CSLS is the UK’s leading endocrine specialist. Arnolds utilises the skills and knowledge of CSLS in its product development programme. • Diagnostic and Clinical Services • Assay Innovation • Research and Development • Clinical Trials 2 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 3 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CHAIRMAN’S STATEMENT “Our core veterinary and third party contract manufacturing markets continue to grow and offer opportunities that we can exploit.” Michael Redmond, Chairman INTRODUCTION The Group has produced a good performance especially when considering the outside influences which have clearly impacted on our business, in particular the foot and mouth outbreak and the on-going decline in Agriculture. Significant achievements include the introduction of two new veterinary licensed products to our pharmaceutical portfolio and the completion of two acquisitions, the first since our Stock Market Listing. We have also completed a £2.8 million capital investment programme at Dales. The two acquisitions were largely funded from the Group’s own cash resources; their contribution to this year’s results is negligible as we completed these transactions towards the end of the financial year. We expect both to be earnings enhancing in the year ending 30 June 2003. Further details are provided within the Chief Executive’s Review. FINANCIAL HIGHLIGHTS Group turnover increased by 8.8% from £156 million to £170 million whilst operating profit (pre-goodwill and exceptional items) improved from £8.23 million to £8.77 million. Pre-tax profit (pre-goodwill and exceptional items) was £7.6 million (2001: £5.85 million), an increase of 29.9%. Earnings per share, on the same basis, was 10.59 pence compared to 9.29 pence last year, an increase of 14.0%. the acquisitions and the costs of upgrading our pharmaceutical manufacturing facilities. DIVIDEND In light of these results and in line with the Group’s progressive dividend policy, the Board is recommending a final dividend of 2.75 pence (2001: 2.5p), an increase of 10%. This, together with the interim dividend of 1.37 pence paid in April 2002 gives a total for the year of 4.12 pence (2001: 3.75 pence). The total dividend is covered 2.4 times by profit after tax. If approved at the Annual General Meeting on 16 October 2002, the final dividend will be paid to shareholders on the Register as at 1 November 2002, on 27 November 2002. PEOPLE In November 2001, Ian Page was appointed Chief Executive following the resignation of Gary Evans. Prior to this he was Managing Director of NVS and played a major role in establishing this division’s leading position within its marketplace. Martin Roach replaced Ian as Managing Director at NVS in January this year. He has extensive experience within the distribution and veterinary pharmaceuticals industries both in Europe and North America. In January we also announced, with great sadness, the sudden death of Peter Redfern who from 1997, as Chairman, guided the Group through the MBO to flotation. Although he is missed, he has left with us a strong legacy upon which we shall build further. joined the Group over the last 12 months. I also wish to place on record our thanks to all our employees throughout our subsidiaries for their hard work and dedication in delivering a good result in a challenging year which has seen many achievements. PROSPECTS Our core veterinary and third party contract manufacturing markets continue to grow and offer opportunities that we can exploit. We will further expand our licensed veterinary product portfolio through our own in-house development capabilities whilst, at the same time, continuing to look for product acquisition opportunities. The merger between Dales and Anglian is progressing well and the strengthened management team is already starting to realise the exciting potential for this business. North Western Laboratories ("NWL") and Cambridge Specialist Laboratory Services ("CSLS") have made encouraging progress since acquisition with results to date in line with our pre-acquisition expectations. Trading in the first two months of the new financial year is in line with our expectations and we remain confident in the prospects for growth being realised from our strategic development plans. Net debt at the year-end increased to £14.94 million and reflects the cash consideration for On behalf of the Board and shareholders I would like to welcome all the staff who have Michael Redmond Chairman 3 September 2002 4 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 BOARD OF DIRECTORS 06 04 01 02 05 03 07 01. IAN PAGE CHIEF EXECUTIVE Aged 41, Ian joined the Group’s principal trading subsidiary NVS at its formation in 1989 and was appointed Managing Director in 1998. He joined the Board in 1997 and became Chief Executive in November 2001. Ian has played a key role in the development of the Group’s growth strategy. Prior to joining the Company, he gained extensive knowledge and experience through various positions he held within the pharmaceutical and medical arena. 02. SIMON EVANS B.COM, ACA GROUP FINANCE DIRECTOR Aged 38, Simon qualified as a Chartered Accountant in 1988 and spent seven years at KPMG. He joined NVS in 1992 and, was appointed Group Finance Director in 1997 following the MBO. 03. ED TORR EXECUTIVE DIRECTOR Aged 42, Ed joined NVS as Sales Director in 1997 and was part of the MBO team. In 1998, he was appointed Managing Director of Arnolds and Dales. Prior to joining the Group, he worked within the animal healthcare sector for a number of companies including ICI, Wellcome and Alfa Laval Agri. 04. MICHAEL ANNICE BSC(HONS), M.R. PHARM.S. EXECUTIVE DIRECTOR Aged 42, Mike graduated from The School of Pharmacy at Aston University in 1980. Prior to joining Dales in 1990 as Site Manager he worked within the Hospital Pharmacy Service, Glaxo and SSS International (formerly Cupal Pharmaceuticals). He was appointed Production Director at the time of the MBO and joined the Board in 1997. Mike was appointed Managing Director at Dales in March 2002. 05. MICHAEL REDMOND NON-EXECUTIVE CHAIRMAN Aged 58, Michael joined the Group as a Non-Executive Director in April 2001, and was appointed Chairman in July 2002. He has extensive pharmaceutical industry experience having begun his career with Glaxo and through senior positions with Schering Plough Corporation. In 1991, he joined Fisons plc and in 1993 was appointed to the Board as Managing Director of the Group’s Pharmaceuticals Division. Michael left Fisons in 1995 following its takeover by RPR. Mr Redmond is currently also a Non-Executive Director and Chairman at Microscience Ltd, Synexus Ltd and Arakis Ltd and a Non-Executive Director at Strakan Ltd. Former Non-Executive Directorships include Biocompatibles International plc, CeNeS plc and Cantab Pharmaceuticals plc. 06. MALCOLM DIAMOND MBE SENIOR NON-EXECUTIVE DIRECTOR Aged 53, he joined the Board in August 2000 prior to the Group’s flotation in September of the same year. Malcolm retired after 18 years as Chief Executive of Trifast plc in March 2002 although he will continue to be involved with the Company until September 2003. Currently, he is also advising a number of private businesses on their strategic planning, management development programmes and marketing initiatives. He was, until its takeover in March 2002, a Non-Executive Director of Sytner Group plc and was formerly a Member of both the CBI Smaller Quoted Companies Working Committee (SQC) and the National Manufacturing Council. 07. STEPHEN WHITEHOUSE FCCA COMPANY SECRETARY Aged 54, Stephen has been with the Group since 1989 and was part of the MBO team. He is Finance Director at Arnolds and was appointed Company Secretary at flotation in 2000. Prior to this, he worked for twelve years at GKN Sankey and ten years at British Oxygen. 5 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CHIEF EXECUTIVE’S REVIEW “Product opportunities remain key to the Group’s strategy as they offer significantly higher margin returns across the Group.” Ian Page, Chief Executive INTRODUCTION In my first year as Chief Executive, I am delighted to report that Dechra has made significant developments in taking forward and delivering our strategy for growth. THE COMPETITION COMMISSION INQUIRY The Competition Commission’s Review relating to the supply and dispensing of Prescription-Only Veterinary Medicines ('POMs') continues. On April 16, following an initial consultation period, an interim ‘issues’ statement was released by the Commission which appeared on the Regulatory News Service. A ‘Proposed Remedies’ paper is anticipated to be released shortly which is expected to be followed up by a further Consultation period, with the resultant findings being published in early 2003. The Company continues to co-operate fully with the inquiry and we will update shareholders when any new relevant information is available. STRATEGY DEVELOPMENT Returning to our strategy, I would like to outline the progress achieved during the year. • The development of our veterinary pharmaceutical portfolio Arnolds has successfully licensed and marketed two new veterinary prescription- only medicines - Vetoryl® and Felimazole®, both of which are projected to make a significant contribution to revenues during the new financial year. Product opportunities remain key to the Group’s strategy as they offer significantly higher margin returns across the Group. Whilst our current pipeline will deliver satisfactory returns in the short and medium term, we are now accelerating its development to drive longer-term growth prospects. We are continuing to identify niche opportunities and additionally are developing high-value branded generics. We also have alliances with UK and international pharmaceutical companies to develop products for the veterinary markets worldwide. • Increased Export Opportunities Sales of our licensed pharmaceuticals will be significantly increased by licensing products in overseas markets. Mainland Europe offers short to medium-term opportunities and we currently have a number of licensing dossiers under preparation for submission through the ‘mutual recognition’ system. Dales, our manufacturing division, has started the procedure to gain Federal Drug Administration (“FDA”) approval as we recognise the marketing opportunities for niche products in North America. Whilst there will be no short-term revenue benefits, this is an important step to achieve our long-term growth potential. • Exploitation of Contract Manufacturing The acquisition of Anglian Pharma Plc (“Anglian”) has more than doubled our contract manufacturing revenues and substantially enhanced our management capabilities with the retention of senior Anglian personnel in all areas of the business. The rationalisation of Anglian is proceeding to plan with the transfer of business to Dales’ site at Skipton expected to be completed by the end of January 2003. 6 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 > Build on the strengths and capabilities recently brought to the Group through Anglian, NWL and CSLS > Develop export markets through joint ventures in the EU and North America > Continue to add value and enhance the service offerings to the veterinary profession The 30% organic sales growth achieved this year provides a good base from which to develop this business further in particular through Anglian’s sales team who already have a proven track record in securing new contracts and developing long-term relationships. • Further Penetration of Existing Markets Our principal trading subsidiary, National Veterinary Services (“NVS”), again out- performed market growth in the year being reported by approximately three percentage points. NVS has launched Vetcom windows® our in-house developed practice management software which not only generates regular rental income but considerably improves veterinary practices marketing and business management capabilities. The NVS Central operation in Stoke-on-Trent, Staffordshire, has been considerably expanded by the acquisition of a lease for an adjacent warehouse. The site has been refurbished and provides an additional 6,000 pallet spaces to support growth across the Group. The new facility will further improve operational efficiencies at NVS as well as providing increased security and improved staff facilities. More significantly, the acquisition of North Western Laboratories (“NWL”) and Cambridge Specialist Laboratory Services (“CSLS”) has enabled us to extend our service offering to the veterinary profession. NWL and CSLS are well regarded within the industry for their high quality service levels and clinical research methodologies. NWL, based in Poulton-le-Flyde, is a multi- disciplined veterinary laboratory with UKAS accreditation and provides diagnostic and clinical pathology services to veterinary surgeons throughout the UK. Around 80% of its work is focussed around the companion animal sector. NWL’s services are being promoted by NVS’s sales team and we are already beginning to see new business as a result. In addition we have launched a national ‘sample’ collection service utilising the NVS network. This new service offered to our customers gives us a competitive edge in this exciting and developing market. CSLS, based in Sawston, South Cambridgeshire is the UK’s leading specialist veterinary endocrine laboratory. For a number of years, Arnolds has utilised the skills of CSLS in its product development programme - in particular they played a key role in the newly launched licensed products Vetoryl® and Felimazole®. Summary Despite the negative influence of factors outside of our control, our strong and capable team have delivered a good result and a number of significant achievements, as I have just outlined. We welcome the additional skills and expertise our recent acquisitions have brought to the Group and, with the continued support of the Board, management and staff, I look forward to the future with enthusiasm and confidence. Ian Page Chief Executive 3 September 2002 7 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NATIONAL VETERINARY SERVICES NVS, our principal trading subsidiary, is the UK's leading veterinary wholesaler. Our central warehouse which carries over 12,000 product lines, pharmaceuticals instruments, consumables and related products, provides a comprehensive service to over 1,800 veterinary practices. Traditionally, NVS has focussed on the small animal market which has provided solid growth over recent years. However, we have strengthened our large animal offering through new software, products and marketing promotions. The large animal market began to recover towards the end of 2001 and showed strong growth in the early months of this calendar year albeit from a lower base following the foot and mouth crisis the previous year. In the year being reported, NVS accounted for 94% of Group turnover of which, 80% relate to pharmaceuticals and 20% to related products. Sales increased by 8% which was three points above market sector growth. IMPROVED SERVICES THAT BENEFIT THE CUSTOMER NVS will remain the leading veterinary wholesaler by continuing to improve the services we offer our customers. VETCOM Vetcom, our in-house developed practice management software continues to provide operational benefits to both NVS and its customers. The software was first introduced in 1990 and has provided a solid foundation for the business. Today, over 80% of orders received daily by NVS are processed electronically via the VetCom system - the balance being handled by our Customer Care team. In April 2002, following several years of development and extensive tests in trial practices, we launched a Windows based full practice management system. VETCOM TEAM VETCOM WINDOWS® PROVIDES THE VETERINARY PROFESSION WITH A COMPUTER SYSTEM THAT FULFILS ALL THE REQUIREMENTS TO MANAGE THEIR BUSINESSES EFFECTIVELY AND PROFITABLY. SIMON LAHEY VETCOM MANAGER, AND HIS TEAM AIM TO PROVIDE THE BEST SERVICE POSSIBLE TO THE VETERINARY PRACTICES, FROM INSTALLING THE SYSTEM TO FREE INDUCTION TRAINING; FREE HELP DESK SUPPORT; FREE SOFTWARE DEVELOPMENT AND PROGRAM ENHANCEMENTS AND NEXT DAY ENGINEERING SUPPORT. 8 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 “NVS continues to focus on its core wholesaling business as we consolidate on our market share, which remains above 40% in a highly competitive market.” Martin Roach, Managing Director This comprehensive management tool not only allows the veterinary practice to improve its own marketing initiatives to its own client base, it enables veterinary practices to do everything from scheduling appointments to holding client records, invoicing, stock control, ordering and accounting. In June 2002, Vetcom Tracker was launched; this software has been developed for the large animal veterinary practice and has enabled them to meet Government Safety Regulations to track prescribed veterinary pharmaceuticals from ordering through to administration in animals destined for human food production. Revenues are generated from these products by monthly rental; we will increase market penetration as more practices utilise the software. VET2PET www.vet2pet.co.uk This on-line secure veterinary pet superstore, available to the consumer, lists over 1,500 high quality premium products. In addition to the electronic service, NVS has supplied over 1,000 pet accessories catalogues to veterinary practices enabling their customers to browse in the waiting room. Products can be ordered on-line or via the surgery and delivered the next day directly to customers homes or to their veterinary practice. This offering greatly extends the choice for pet owners and benefits the practice as it can add value to its service by being able to supply, on demand, product without the need to stock. As a result, we have seen a significant increase in sales from this activity which although from a low base is encouraging for the future. Our Pet Care Insurance, operated by Pinnacle, continues to sell well. We anticipate that by the end of 2002, around 10,000 policies will have been underwritten, up from 4,000 in 2001 and although this service is not considered a significant revenue provider, it underpins our strategy of improving the services we offer. 9 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NATIONAL VETERINARY SERVICES CONTINUED LABORATORY AND CLINICAL SERVICES Following the acquisition of NWL and CSLS we have extended our service offering to include clinical and pathology services which are being marketed by our customer care and sales teams. CUSTOMER CARE Customer service remains fundamental to our business. We must ensure that we can deliver product in full and on time. I am pleased to report that we have maintained our 98% service levels. We continue to examine ways to further improve our customer care service. Currently, we are in the process of upgrading our telephone system thus further improving the way in which we handle enquiries. NVS INDICES As part of our objectives of improving management information to veterinary practices, we introduced NVS Indices. This highly successful product provides information to the veterinary practices on their purchase levels and compares their business with others in their territory as well as nationally. This helps them manage their costs, identify growth areas and improve their buying and stock control functions. Meeting and exceeding our customers' expectations is crucial. During the year, we increased the level of staffing in this area. Training is also key and we have run a number of courses to enable staff to acquire the experience and product knowledge which enables them to provide professional advice to our customers. OPERATIONAL IMPROVEMENTS The automated picking system introduced in 2001 at our Central warehouse operation in Stoke has continued to provide substantial cost savings and improved productivity. However, with the increase in volumes already achieved, and to support future growth, we recently acquired a lease for additional warehousing capacity on an adjacent site which has more than doubled capacity. The extended facility, allows us to bring all our stock onto one site which significantly improves our stock control and efficiency. 10 10 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 “Customer service remains fundamental to our business. I am pleased to report that we have maintained our 98% service levels.” Martin Roach, Managing Director In addition to improving our central operation, we opened a depot in Wallingford, Berkshire and added new van routes to satisfy increased volume and better meet practices requests for specific delivery times. Our depot in Swanley, Kent, is near capacity. Therefore, during this new financial year, we will be establishing depots north and south of the Thames which will satisfy increased business in the South-East whilst providing our veterinary practices in this region with an improved service. STRATEGY FOR GROWTH 2002 has seen NVS produce a creditable performance. To ensure we remain in a leading position our strategy for growth will be based on:- • Identifying new areas for development whilst maintaining our focus on our core business • Further improving operational efficiencies and productivity • Continuing to provide the highest levels of service • Maintaining and developing close relationships with our customers to ensure we are meeting their needs • Continue to enhance our IT capabilities both internally and for our customers • Identifying new sources of products which will provide benefits to both the veterinary profession and their customers • Further improving purchasing in order to retain our competitiveness and increase margins www.vetwholesaler.co.uk Martin Roach Managing Director National Veterinary Services Limited 3 September 2002 11 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 ARNOLDS VETERINARY PRODUCTS LICENSING & REGULATORY KEITH COLLIS AND THE REGULATORY TEAM SUPPORTED BY DR FRANCESCA HOLLAND PHD, MRCVS FORM PART OF THE TEAM RESPONSIBLE FOR REGULATION AND LICENSING OF THE PHARMACEUTICAL DEVELOPMENT PROGRAMME. THEY ALSO PROVIDE TECHNICAL SUPPORT TO OUR CUSTOMERS AND OUR SALES & MARKETING TEAM. THE TEAM HAS SUCCESSFULLY LICENSED HYPERCARD®, VETORYL® AND FELIMAZOLE®. OUR GROWING PORTFOLIO OF DEVELOPMENT PROJECTS IN THE COMPANION ANIMAL SECTOR WILL PROVIDE THE TEAM WITH FUTURE OPPORTUNITIES. Our focus on new products, key suppliers and strategic alliances has seen positive contributions in all sectors of Arnolds’ business. Oxyglobin® and Vetoryl® which were developed and introduced to the market in 2001/2002 have performed ahead of expectations whilst other key pharmaceutical brands such as Equipalazone®, Soloxine®, Intubeaze®, Willcain®, Intra Epicaine® and Peridale® have increased sales over the period. Our key distributorships of 3M®, B.Braun and Sims-Portex® have also achieved growth in a mature market. We are also successfully continuing to develop our export markets through EU product licensing and by existing and new international alliances all of which will ensure good future growth overseas. ADDING VALUE TO OUR CUSTOMERS As part of our Continuous Development Programme, Arnolds has introduced a series of educational seminars targeted at our customers - the veterinary surgeons. In the first series of seminars, entitled “Advances in Small Animal Medicines”, lectures were delivered to 600 delegates by independent speakers renowned for their expertise in fields related to Arnolds product sectors. Post seminar research showed an 80% positive approval rating in the subjects covered which included:- • Advances in Canine Endocrinology • Anaemia: The Investigation and Treatment • Advances in Feline Endocrinology and Cardiology Throughout these seminars, Arnolds reinforces its product range and enforces our position as a key player in the veterinary pharmaceutical market. PRODUCT DEVELOPMENT Arnolds’ strategy is to develop and market niche pharmaceutical products focussed on the companion animal sector. Our pipeline in product development remains centred around:- • Cardiology • Endocrinology/Hormonal • Respiratory • Oncology 12 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 “We are successfully continuing to develop our export markets through EU product licensing and by existing and new international alliances all of which will ensure good future growth.” Ed Torr, Managing Director The success of recent introductions to our licensed product portfolio, including Vetoryl® and Felimazole®, provide exciting opportunities for the future. Already, preparation is underway to license them in other countries, initially in Europe. We are constantly investigating opportunities to supplement our own-brand product range with associated products through third party alliances. In the final quarter of the year, our strength in the instruments and consumables market was further enhanced through a distribution agreement with Cook Veterinary Products which gives us exclusive rights to market their veterinary products in the UK. OPERATIONS As we have continued to experience growth we have had to adapt to the ever-changing needs of the business and its customers. The warehouse operation has been reorganised, increased technical support has been introduced and our front line sales and marketing teams have been provided with a more sophisticated database which has further focussed their activities. Within Arnolds we employ some 50 people, and it is a credit to each and every one of them that through their commitment and effort, we have delivered a strong performance. A LOOK TO THE FUTURE The veterinary industry in the UK faces an exciting future. Arnolds is in a strong position to capitalise on this challenging market-place, and the opportunities that we have created for the future:- • New innovative products • A strong development pipeline • The people and the structure to deliver, and • A strong brand with a companion animal focus Ed Torr Managing Director Arnolds Veterinary Products Limited 3 September 2002 www.arnolds.co.uk 13 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 DALES PHARMACEUTICALS MANAGEMENT TEAM STRENGTHENED THE TEAM HAS BEEN SIGNIFICANTLY STRENGTHENED FOLLOWING THE ACQUISITION OF ANGLIAN. SIMON DARVILLE, STEVE DEWAR, STEPHEN WILLIAMS AND GARETH DAVIES BRING TO THE BUSINESS ADDITIONAL TECHNICAL EXPERTISE AND EXPERIENCE WHICH STRENGTHENS THE SALES & MARKETING, PRODUCTION, PACKING AND TECHNICAL SUPPORT FUNCTIONS - ALL ESSENTIAL FOR THE FUTURE GROWTH AND DEVELOPMENT OF DALES. Dales Pharmaceuticals, the Group’s manufacturing arm located in Skipton, North Yorkshire, is a fully licensed M.C.A. (Medicines Control Agency) approved plant. It produces veterinary pharmaceuticals on behalf of the Group’s subsidiary, Arnolds, and human pharmaceuticals for third parties on a contract manufacturing basis. The development, which we believe to be the most modern and best of its kind in the UK, has exceeded customer expectations. It operates under a Building Management System which monitors and controls the environment, thus providing protection for both products and staff who work within the manufacturing and packing departments. OPERATIONS During the year, we have had to adapt to change and create opportunities to meet our strategic objectives. We have been successful in developing existing customer relationships whilst, at the same time, converting enquiries into sales from new customers both in the UK and overseas. BUILDING FOR THE FUTURE The manufacturing facilities have undergone extensive re-development at a cost of £2.8 million. The 57,000 sq. ft unit, which has trebled capacity, has taken more than twelve months to complete and was officially opened in May. The building was named the Peter Redfern Building in memory of our late Chairman. Solid dose production capacity has been significantly increased to one billion tablets/capsules per annum, with packing capacity similarly increased via fully automated packing lines. In addition to solid dose production, key capabilities include production and packing of liquid products such as injections, oral suspensions, syrups and semi-solid products such as gels, pastes, creams and ointments. STRENGTHENING THE OFFERING The scope of products and services we can now offer both new and existing customers has been expanded through the acquisition of Anglian, which was previously renowned as a niche manufacturer of liquids, ointments and solid dose pharmaceuticals. 14 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 “Through the strengthened operating resource at Dales, created by the capital investment and the Anglian merger, we are in a stronger position to exploit the opportunities that exist in the human healthcare market.” Mike Annice, Managing Director These complement the existing Dales range of speciality solid dose tablets, capsules and powders and provides opportunities for the enlarged sales team to “cross sell” the additional capabilities arising from the expanded product offering. Through the strengthened operating resource at Dales, created by the capital investment and the Anglian merger, we are in a stronger position to exploit the opportunities that exist in the human healthcare market. This, together with our close working relationship with Arnolds on the development and manufacture of its current and future licensed veterinary product portfolio, provides a solid foundation upon which to further build our business. Mike Annice Managing Director Dales Pharmaceuticals Limited 3 September 2002 www.dalespharma.com FOCUSSING ON EFFICIENCY AND SERVICE Currently, we are in the process of transferring the manufacturing and packaging activities of Anglian to Skipton. This will create a single operation, with added management resource, who can meet on-going and future requirements for both existing and new customers. It will also have long-term benefits for the business with increased operational and productivity efficiency, and an improved service to our customers. MOVING FORWARD Over the last three years, the pharmaceutical contract manufacturing market is estimated to have grown from £600 million to £800 million, as leading pharma businesses look to out-source production of certain product lines to achieve improved returns and efficiencies on their major products. 15 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NORTH WESTERN LABORATORIES / CAMBRIDGE SPECIALIST LABORATORY SERVICES THE PATHOLOGY TEAM THE TEAM IS HEADED BY JANE MILLER, BVET MED MRCVS FRCPATH. IN ADDITION TO HER EXTENSIVE KNOWLEDGE OF CLINICAL PATHOLOGY, JANE HAS A PARTICULAR INTEREST IN HISTOPATHOLOGY, CYTOLOGY AND PATHOLOGY. OTHER MEMBERS OF THE TEAM INCLUDE; DR GERALDINE HALE BVM&S PHD CERT PM MRCVS, WHO HAS AN INTEREST IN INTERNAL MEDICINE, MICROBIOLOGY AND EXTENSIVE EXPERIENCE OF CURRENT VETERINARY THERAPY; SUE BECK BVMS MRCVS, WHO SPECIALISES IN DERMATOLOGY AND FELINE AND RABBIT MEDICINE AND DR TED ORMEROD BVMS, PHD, MRCVS, THE PRINCIPAL VETERINARY HISTOPATHOLOGIST. WE ALSO RETAIN THE SERVICES OF ROMAIN PIZZI BVSC, MSC, MRCVS, A SPECIALIST IN AVIAN AND EXOTIC SPECIES. NORTH WESTERN LABORATORIES COMPETITIVE ADVANTAGE NWL provides clinical and diagnostic pathology services to the veterinary profession within the UK and increasingly in Europe. NWL is the only commercial laboratory in this sector of the market with UKAS accreditation to ISO 17025, providing a significant advantage over the competition in a number of markets. This internationally recognised standard, monitors all of the requirements that testing laboratories have to meet if they wish to demonstrate that they operate a quality system, are technically competent, and able to generate technically valid results. UKAS accreditation has already given us a competitive advantage in securing a number of substantial new contracts in the last 2 years. ADDING VALUE TO CLIENT SERVICE NWL provides its veterinary clients with a highly complementary range of services, general veterinary practitioners continue to provide the largest proportion of the laboratory’s income. With the changes taking place in the market, NWL is well placed to provide an integrated laboratory solution to the growing number of corporate and large group veterinary practices whilst continuing to provide the smaller practice clients with a highly personalised service. Considerable emphasis is placed on the development of client services. The Sameday courier collection service is to be enhanced. In addition, a Nextday service through the NVS logistics system is to be introduced. Web based sample tracking, reporting and information services are under development which will add value to the business and improve our competitive advantage. DIVERSIFICATION Microbiological and analytical services to the food industry continue to develop and, although this sector is highly competitive, we are currently undergoing a significant investment which will create additional capacity allowing us to exploit this and other new markets. Similarly, we anticipate our services to the pharmaceutical industry to expand as further value of UKAS accreditation is realised. EXPANSION OF FACILITIES Major expansion of the laboratory facilities is underway. This will not only provide increased laboratory space, but will also accommodate the planned expansion of the pathology team. 16 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 “One of the unique strengths of the laboratory has been the research and development of a wide range of specialist assays, in particular, radio-immunoassay, a highly specialist analytical technique not commonly available from competing laboratories.” Alistair Parker/Tom Williams, Joint Managing Directors www.nwlabs.co.uk www.cslabs.co.uk CAMBRIDGE SPECIALIST LABORATORY SERVICES SPECIALIST EXPERTISE The team at CSLS, headed by Helen Evans, enjoys an enviable international reputation for expertise in the highly specialised field of veterinary endocrinology. Helen was instrumental in starting the first specialist veterinary endocrinology laboratory in the 1980’s. Following the break up of the original enterprise, Helen took the opportunity with a number of colleagues to establish CSLS. Since then, the laboratory has gone from strength to strength through the provision of a range of both routine and highly specialised hormone assays for the veterinary practitioner. RESEARCH AND DEVELOPMENT One of the unique strengths of the laboratory has been the research and development of a wide range of specialist assays, in particular, radio-immunoassay, a highly specialist analytical technique not commonly available from competing laboratories. This, together with the expertise of Helen and her team are recognised worldwide by veterinary endocrinologists. Providing assay services for UK and overseas universities and research organisations gives an increasing source of revenue. The laboratory works closely with individual specialists to develop assay methods and undertakes the testing to an extremely high standard of competence and reliability. MAJOR ASSET CSLS is a major asset, providing research, testing and trial facilities for the Group particularly Arnolds Veterinary Products, as they develop a growing portfolio of veterinary endocrinology pharmaceuticals and other specialist products. Alistair Parker/Tom Williams Joint Managing Directors North Western Laboratories/ Cambridge Specialist Laboratory Services 3 September 2002 17 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 FINANCIAL REVIEW “During the year, significant investment of nearly £7.0 million was made both in our existing businesses and acquisitions.” Simon Evans, Group Finance Director OPERATING RESULTS The Group profit and loss account is shown on page 33 and discloses a profit before tax, exceptional item and goodwill amortisation of £7.6 million, an increase of 29.9% on last year calculated on the same basis. A significant contributor to this increase was a lower interest charge, reflecting both lower base rates this year and the full year effect of reduced gearing following our listing on the London Stock Exchange in September 2000. Group turnover increased by 8.8% (8.3% excluding acquisitions) compared to 7.5% last year. This reflects a slow recovery in the market following the foot and mouth outbreak last year, the benefit of new product introductions at Arnolds and a 30.0% increase in third party contract manufacturing turnover at Dales. Gross margin showed a slight decline during the year from 12.3% to 12.1%, reflecting an increased competitive environment faced particularly by NVS together with fewer opportunities for strategic stock purchases. Dales was also impacted by the costs of the expansion. However, I am pleased to say that the increase in operating costs was restricted to 5.4% (before exceptional items and goodwill amortisation and excluding acquisitions) compared to the increase in turnover of 8.3%. This was achieved despite increased expenditure on new product development. Overall, Group operating margin (before exceptional items and goodwill amortisation) reduced slightly to 5.15% from 5.26%. During the year, the Group made its first two acquisitions since flotation. These were both made towards the end of our financial year and their impact on the results for this year was therefore negligible. We expect both acquisitions to be earnings enhancing in the year ending 30 June 2003. The operations of Anglian Pharma Manufacturing Ltd are in the process of being integrated into Dales. Rationalisation costs associated with the integration will be shown as an exceptional operating item in the year ending 30 June 2003. NET INTEREST CHARGE The net interest charge of £1.2 million was covered 7.5 times by operating profit before goodwill and exceptional item. This compares to 3.5 times for the same period last year. EXCEPTIONAL ITEM The exceptional item represents compensation for loss of office paid to Gary Evans the former Chief Executive together with associated legal fees. This represented his contractual entitlement. TAXATION The tax charge of 30.8% is slightly higher than the standard UK corporation tax rate of 30.0%. The difference is principally due to certain expenses that are not allowable for tax, such as goodwill amortisation. EARNINGS PER SHARE AND DIVIDEND Adjusted earnings per share (before exceptional items and goodwill amortisation) was 10.59p (2001: 9.29p; 2001 pro-forma 9.66p), an increase of 14.0% (pro-forma: 9.6%). 18 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 TURNOVER (£m) OPERATING PROFIT (£m) EARNINGS PER SHARE (p) £170 £156 £145 £130 £8.8 £8.2 £7.5 £6.0 10.59 9.29 6.05 1.61 99 00 01 02 99 00 01 02 99 00 01 02 > Turnover up 9% > Operating Profit up 7% > Earnings per Share up 14% > Dividends up 10% Pro-forma earnings in 2001 were calculated before exceptional items and before a pro-forma interest adjustment which reflected the effect on interest payable and similar charges on bank and other loans (and the related tax effect) of replacing the funding in place prior to the Group’s flotation on the London Stock Exchange on 22 September 2000 with that in place from 22 September 2000 onwards as if this financing had been in place since 1 July 2000. The proposed final dividend is 2.75p per share (2001: 2.5p) making a total of 4.12p for the year (2001: 3.75p). Dividends were covered 2.4 times by profit after taxation. CAPITAL EXPENDITURE Total fixed asset additions (excluding acquisitions) were £2.8 million of which £2.0 million related to the Dales expansion. The depreciation charge for the year was £1.3 million compared to £1.2 million last year, the increase reflecting the continued investment in the Group. BALANCE SHEET AND SHAREHOLDERS’ FUNDS Shareholders’ funds increased to £5.75 million during the year, reflecting the retained profit for the year of £3.0 million and the issue of £1.0 million of ordinary shares to partly fund the acquisition of North Western Laboratories Limited and Anglian Pharma Plc. In addition, £0.75 million of shares are still to be issued in respect of the Anglian Pharma Plc acquisition. Working capital increased from £5.4 million to £9.1 million, of which £0.5 million related to new acquisitions. The remainder of the increase principally reflected an investment in stocks at NVS to further improve service levels. PRIOR YEAR ADJUSTMENT The Group has adopted FRS 19 “Deferred Tax” for the first time. This has resulted in a net deferred tax asset not previously provided being included in the balance sheet. All comparative figures have been amended accordingly. CASH FLOW AND NET DEBT During the year, significant investment of nearly £7.0 million was made both in our existing businesses and acquisitions. This caused net debt to rise from £8.7 million to £14.9 million. Interest cover, however, remains healthy. CAPITAL POLICY It is the policy of the Company to maintain a prudent balance between equity financing and debt financing. Whilst the cost of debt is normally lower than the cost of equity, it is at the expense of financial flexibility. The Company will therefore only use debt financing to the extent that minimum internal interest cover targets are not breached. TREASURY POLICY Overall treasury policy is set by the Board and monitored by myself. The Company does not speculate on short term interest rate or exchange rate movements. All of the Group’s borrowings (with the exception of hire purchase contracts) are currently at floating rates. No borrowings are denominated in foreign currencies and the Group has no significant foreign exchange exposure. LIQUIDITY MANAGEMENT The Group’s cash position is monitored on a daily basis by myself. The Group has available overdraft and revolving credit facilities from the Bank of Scotland for its day to day working capital requirements. Further information on Financial Instruments is shown in note 20 to the financial statements. Simon Evans Group Finance Director 3 September 2002 19 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 FINANCIAL CONTENTS 21. Corporate Governance 24. Board Remuneration Report 28. Health & Safety Policy / Environmental Policy 29. Directors’ Report 31. Statement of Directors’ Responsibilities 32. 33. Consolidated Profit and Loss Account 34. Balance Sheets Independent Auditors’ Report 35. Reconciliation of Movements in Shareholders’ Funds 35. Consolidated Statement of Total Recognised Gains and Losses 36. Consolidated Cash Flow Statement 38. Notes to the Financial Statements 54. Financial History 55. Notes 20 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CORPORATE GOVERNANCE Combined Code The Financial Services Authority (FSA) listing rules contain the Combined Code – ‘Principals of Good Governance and Code of Best Practice.’ In the opinion of the Directors, the Group has complied throughout the period with Section 1 of the Code of Best Practice with the exception of the following items (references in brackets are to provisions in the Combined Code): a) Composition of the Remuneration Committee. From January 2002 the Remuneration Committee consisted of two Non-Executive Directors. Prior to this it consisted of three Non-Executive Directors (B.2.2). b) Composition of the Audit Committee. From January 2002 the Audit Committee consisted of two Non-Executive Directors (all of whom are independent). Prior to this there were three Non-Executive Directors (D.3.1). Board of Directors The details of the Board of Directors are shown on page 5 and in the Directors’ Report on page 29. There is a clear division of responsibilities between the Chairman and Chief Executive. The Board consists of an independent Non-Executive Chairman, four Executive Directors (including the Chief Executive) and one other independent Non-Executive Director. At least two members of the Board are required to retire from office by rotation at the Annual General Meeting subject to all Directors having submitted themselves for re-election every three years. The Board considers an independent Director to be one who has no relationship with any party who may undermine independence and is not dependent on the Company for his or her primary source of income or paid by the Company in any capacity other than a Non-Executive Director. In addition, an independent director will not previously have been a senior manager of the Company, and will not have participated in the Company’s incentive bonus schemes or pension schemes. The Board considers M.M. Diamond to be the senior independent Director. Conduct of Board Meetings The Board normally has twelve regular monthly Board meetings including two meetings where the full year and half year results are dealt with. Strategy meetings are convened as required. A schedule of matters reserved for the Board is maintained comprising key events and decisions. At all Board meetings an agenda is established reflecting the Directors’ responsibilities. This comprises reports from the Chief Executive, Finance Director and Operating Company Directors, reports on the performance of the businesses, major items of strategic planning and investments and significant policy issues. The Board considers at least annually the strategic plans of the Group and individual businesses. From time to time the Directors receive presentations from management about key areas of the Group’s operations. Full year and interim results are reviewed by the audit committee and approved prior to publication. Other price sensitive information may be published only with the approval of the full Board. The Directors regularly receive financial and other information on the Group’s activities and performance and those of the individual businesses. Each Director is entitled on request to receive information to enable him to make informed judgements and adequately discharge his duties and has access to the advice and services of the Company Secretary on all matters of Board procedure. The Directors’ terms of appointment also allow them, at the Company’s expense, to take independent professional advice in connection with their duties. Although no formal training programme exists, all Directors are encouraged to keep up to date on matters relevant to the Group and attend briefings and seminars as appropriate. The Board is assisted by the following committees, all of which operate within written terms of reference. 21 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CORPORATE GOVERNANCE CONTINUED The Audit Committee Members: M. Redmond (Chairman), M.M. Diamond. The Audit Committee generally meets twice a year. The terms of reference of the Audit Committee include the following responsibilities: • To review and advise the Board on the interim and annual financial statements • To review with the external auditors the nature and scope of their audit and the results of that audit, any control issues raised by them and management’s response • To make recommendations as to the appointment and remuneration of the external auditors and any question of their resignation or removal •To review and oversee the Company’s approach to internal control and risk management The Remuneration Committee Members: M.M. Diamond (Chairman), M. Redmond. The Remuneration Committee meets at least once per year and sets the pay and benefits of the Executive Directors and approves their terms and conditions and bonus schemes having regard to performance. A report on the remuneration of Directors appears on pages 24 to 27. The Nominations Committee Members: M. Redmond (Chairman), M.M. Diamond. The Nominations Committee will normally meet once per year and oversees the plans for management succession, recommends appointments and reappointments to the Board and considers the structure and composition of the Board generally. Internal Control The Directors have overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, not absolute, assurance against material misstatement or loss. The members of the Board have responsibility for monitoring the conduct and operations of individual businesses within the Group. This includes the review and approval of business strategies and plans and the setting of key business performance targets. The executive management responsible for each business are accountable for the conduct and performance of their business within the agreed strategies. In complying with the internal control requirements of the Combined Code, the Directors have taken guidance from the Institute of Chartered Accountants in England and Wales publication “Internal Control: Guidance for Directors on the Combined Code” (“the Turnbull Guidance”). As a result, the Board has prepared and updated a thorough review of relevant risk areas and systems of internal control. The review is structured by business area and key risk category. The Company’s key systems of internal control include: Business Plans Business plans provide a framework from which annual budgets are agreed with each business, including financial and strategic targets against which business performance is monitored. The plans are reviewed by executive management and then by the Board for ultimate approval. Monthly actual results are compared to the approved plans. Investment Approval The Group has clear requirements for the approval and control of expenditure. Strategic investment decisions involving both capital and revenue expenditure are subject to formal detailed appraisal and review according to approval levels set by the Board. Operating expenditure is controlled within each business with approval levels for such expenditure being determined by the individual business. Management Structure Executive management are responsible for the identification, evaluation and management of the significant risks applicable to their areas of the business. The risks are assessed on a periodic basis and may be associated with a variety of internal or external sources. 22 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CORPORATE GOVERNANCE CONTINUED Risk Control Responsibility for monitoring the Group’s system of internal control rests with the Board. It is assisted in this respect by the Audit Committee which reviews the interim and annual reports provided to shareholders, the audit process and the systems of internal control and risk management, the latter by way of consideration of the Board’s updated progress report and action plan regarding internal controls. Whilst the Board recognises this does not constitute an internal audit function, it believes that due to the size of the Group this review provides sufficient comfort as to the controls in place. The Board has reviewed the effectiveness of the Group’s internal control systems for the period from 1 July 2001 to the date of approval of the financial statements by means of consideration of the updated progress report and internal controls action plan. The Board will review the operation and effectiveness of its control assessment on a regular basis. Investor Relations A rolling programme of meetings between institutional shareholders and Executive Directors is held throughout the year, in addition to the annual and half year results presentations and the Annual General Meeting to foster mutual understanding of objectives. Such meetings are conducted so as to ensure protection of share price sensitive information that has not already been made available generally to Company’s shareholders. Similar guidelines also apply to communications between the Company and parties such as financial analysts, brokers, and the press. The Company also organises site visits on a periodic basis. All members of the Board usually attend the Annual General Meeting. The Chairmen of the Audit Committee, Remuneration Committee and Nominations Committee will normally be available to answer shareholders’ questions at that meeting. Notice of the Meeting, together with a letter from the Chairman and the Annual Report and financial statements, are posted to shareholders not fewer than 23 days prior to the date of the Annual General Meeting. The package sent to shareholders includes a summary of the business to be covered at the Annual General Meeting, where a separate resolution is proposed for each substantive matter. Where a vote is taken on a show of hands, the level of proxies received for and against the resolution and any abstentions will be disclosed at the meeting. Going Concern After consideration of budgets and other financial information, the Directors are satisfied that the Group is in a sound financial position with adequate resources to continue in operation for the foreseeable future. For this reason, the Group financial statements have been prepared on the basis that the Group is a going concern. 23 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 BOARD REMUNERATION REPORT This report has been prepared in compliance with schedule B of the Combined Code annexed to the listing rules of the Financial Services Authority. Remuneration Policies In determining remuneration policies, the Board has followed the provisions set out in Schedule A of the Combined Code. Responsibilities of the Remuneration Committee and its membership are set out in the corporate governance statement on pages 21 to 23. Remuneration packages for Executive Directors are structured to include a performance related element linked to corporate and individual objectives, specifically the Executive Share Plan and the Executive Bonus Scheme. Remuneration policy reflects the fact that pay levels must be positioned at competitive levels in order to attract and retain Executive Directors of a high calibre. At the same time it is recognised that levels of remuneration must be arrived at responsibly and fairly. It is the policy of the Company to align the interests of shareholders and executives as closely as possible. Schemes encouraging executive share ownership are an important part of the policy and executive share options are detailed below. Salaries and Fees Salaries of Executive Directors reflect the scope and depth of their responsibilities and are reviewed annually by the Remuneration Committee. The Board sets the level of remuneration of the Non-Executive Directors by reference to practice in comparable companies. Executive Bonus Scheme This scheme rewards Executive Directors for achieving operating efficiencies and profitable growth in the relevant year by reference to challenging but achievable targets derived at the beginning of the financial year and relate to Group and business unit performance. During 2001/02, the performance criterion was operating profit before interest and tax. A bonus of 5% of base salary was payable for performance at 95% of target rising to a maximum of 30% of salary for performance 20% above target. The bonuses of the Chief Executive and Group Finance Director are dependant on Group results. The bonuses of the other Executive Directors are dependent on the relevant subsidiary company performance. Other Benefits Executive Directors receive other benefits, including a company car, private healthcare, sick pay and holidays which overall provide a reasonably competitive package comparable with that provided by other quoted companies. Analysis of individual Directors’ emoluments P.J. Redfern (deceased 23 January 2002) G.B. Evans (resigned 5 November 2001) S.D. Evans I.D. Page E.T.W. Torr M.D. Annice M.M. Diamond M. Redmond (appointed 25 April 2001) S.P. Whitehouse (resigned 22 August 2000) C.D. Higham (resigned 22 August 2000) *to date of resignation Salaries and fees £’000 Bonuses £’000 Other benefits £’000 Total 2002 £’000 Total 2001 £’000 14 48 94 118 88 72 20 20 9 12 9 4 9 13 11 9 9 474 34 51 14 57 116 141 106 85 20 20 – – 559 25 151 99 108 96 77 17 3 11* 9* 596 G.B Evans who resigned on the 5th November 2001 received compensation for loss of office amounting to £194,000 (including £7,000 of legal expenses) which was in accordance with his service contract. 24 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 BOARD REMUNERATION REPORT CONTINUED The Executive Share Plan The Executive Share Plan has been adopted by the Company in addition to three share option schemes (the Approved Scheme, the Unapproved Scheme and the SAYE Scheme – all detailed below). As a consequence of the imposition of very demanding performance targets, the Executive Share Plan is intended to motivate Executive Directors to increase significantly the market value of the Company for the benefit of the shareholders. In addition, it is expected that the plan will play a major part in retaining the services of the Directors and Executives who have demonstrated, over recent years, their drive and commitment to the Company and its shareholders. The Executive Share Plan is administrated by the trustee of the Dechra Pharmaceuticals PLC Employee Benefit Trust under the authority of the Remuneration Committee. Any Executive Director who is participating in the Executive Share Plan will not be granted options under the Approved Share Option Scheme or the Unapproved Share Option Scheme. Other than in circumstances which the Remuneration Committee consider exceptional, any further awards can only be made in the 42 day period following the announcement of the interim or final results of the Company. Two performance criteria attached to awards made under the Executive Share Plan, both of which must normally be satisfied before any shares can vest. Firstly, the share price of the Company in the six months following the third anniversary of the award must be at least 220% of the Initial Award Value for at least 90 days (the Initial Award Value being 120p for the awards made on 14 September 2000 or an amount equal to the three day average closing mid market value of an ordinary share on the date that any further awards are made). Adjustments to the share price target would be made following a change in the capital structure of the Company. Secondly, the earnings per ordinary share of the Company must exceed inflation by a compound 15% per annum in the three financial years following an award. The trustee of the Dechra Pharmaceuticals Employee Benefit Trust made the additional following awards under the Executive Share Plan on 13 March 2002. These awards are share options with an exercise price of £1 in aggregate, which will vest to the Directors shown below if the performance criteria detailed above are achieved within the relevant timescales. The option exercise date in respect of half of the actual number over which the performance option can be exercised will be the fourth anniversary of the commencement of the measurement period and in respect of the balance of the actual number over which the performance option can be exercised will be the fifth anniversary of the commencement of the measurement period. Director S.D. Evans I.D. Page E.T.W. Torr M.D. Annice Exercise Dates As at 30 June 2001 2004 – 2012 2004 – 2010 2004 – 2010 2004 – 2012 145,833 166,666 166,666 104,166 Granted 20,833 – – 62,500 As at 30 June 2002 166,666 166,666 166,666 166,666 Share Option Schemes Two other schemes, the Approved Share Option Scheme and the Unapproved Share Option Scheme, are in operation within the Group. In accordance with the terms of both schemes, employees (excluding Executive Directors) may receive options to buy Company shares at current market value. Options can be exercised, subject to certain criteria relating to the performance of earnings per share, between three and ten years after grant. Approved Scheme No awards were made under the Approved Scheme during the period. Unapproved Scheme The Remuneration Committee made awards on 22 April 2002 to specific key employees within the Group. No Executive Directors received awards under this scheme. The performance target to be achieved under the Unapproved Share Option Scheme has been set by the Remuneration Committee in accordance with the scheme rules, and is based on the growth in the earnings per share of the Group. It requires that the percentage growth in the Group’s earnings per share over a consecutive three-year period (commencing no earlier than the beginning of the accounting period immediately preceding the grant of the option) is greater than the percentage increase in the Retail Prices Index for the same period by 12 per cent. 25 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 BOARD REMUNERATION REPORT CONTINUED SAYE The Company granted options under the Dechra Pharmaceuticals PLC SAYE scheme on 9 April 2002. No share options lapsed or were exercised during the period. An analysis of the number of outstanding Directors’ share options, is as follows: SAYE Scheme S.D. Evans I.D. Page E.T.W. Torr – – M.D. Annice Exercise Dates 2004 2006 2004 2005 2006 2001 Granted at 158p 6,131 10,680 2,452 – 4,272 2002 Granted at 129p – – – 4,418 – 2002 Total 6,131 10,680 2,452 4,418 4,272 The market price of the Company’s shares on 30 June 2002 was 123p and the range of prices during the year was 181.50p – 123p. Directors interests in share options at 3 September 2002 remain unchanged. Directors’ Shareholdings The beneficial interests of the Directors in office at 30 June 2002 and their families in the share capital of Dechra Pharmaceuticals PLC at 30 June 2002 are shown below. Shareholdings S.D. Evans I.D. Page E.T.W. Torr M.D. Annice M.M. Diamond M. Redmond There were no changes to the Directors’ interests shown above between 30 June 2002 and the date of this report. Ordinary Shares 2001 638,000 592,167 342,414 596,334 – – Ordinary Shares 2002 663,000 592,167 342,414 596,334 5,000 10,000 26 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 BOARD REMUNERATION REPORT CONTINUED Pension Entitlement All Executive Directors were members of the Dechra Pharmaceuticals PLC money purchase pension scheme during the year. Contributions made by Dechra Pharmaceuticals PLC on behalf of the Executive Directors during the year are based on a percentage of pensionable salary and were as follows: G.B. Evans (resigned 5 November 2001) S.D. Evans I.D. Page E.T.W. Torr M.D. Annice Non-Executive Directors are not members of the pension scheme. Contributions during the year £’000 6 11 14 7 9 Contracts of Service Each Executive Director has a service contract with the Company which contains details regarding remuneration, holiday and sick pay entitlements, restrictions and disciplinary matters. Executive Directors are appointed on contracts terminable by the Company on not more than 12 months notice and by the Director on six months notice. Non-Executive Directors are appointed for an initial term of one year, continuing thereafter until terminated by either party giving not less than 12 months notice. 27 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 HEALTH AND SAFETY POLICY Dechra Pharmaceuticals PLC attaches great importance to the Health and Safety of its employees and the public. The management are responsible and committed to the implementation, monitoring and promoting of a policy of Health and Safety at work, to ensure the care and well being of its employees and on-site visitors. This is being achieved by adherence to the following policies: – • • • • • • We will meet and where necessary exceed the requirements of all relevant legislation. Where there is no appropriate legislation, Dechra will implement its own high standards. Ensure the involvement and consultation of all employees to achieve commitment to the implementation of our policy by means of risk assessment, continuous improvement and the monitoring of resources. Work with our suppliers to encourage their involvement in achieving our aims. Promote the awareness of Health and Safety to all employees through supervision, information and training and therefore ensure the individuals active involvement in their own, and others well being. Allocate duties for Health and Safety issues and provide practical working procedures to reduce the potential of risks identified. To regularly review the Health and Safety policy to ensure full compliance with new legislation. ENVIRONMENTAL POLICY Dechra Pharmaceuticals PLC is committed to minimising the impact of its operations on the environment by means of a programme of continuous improvement and the reduction of pollution. This will be achieved by the adherence to the following policies: – • • • • • • • We shall meet and, where possible exceed the requirements of all relevant legislation. Where there is no appropriate legislation, Dechra will consider and implement its own high standards. Where practicable, reduce consumption of materials in all aspects of its operations and re-use and/or dispose of waste when possible and promote recycling and the use of recycled products. We shall review and consider energy efficiency on existing and replacement equipment including the vehicle fleet. We will encourage employee involvement on environmental awareness through training programmes and company practices for Dechra personnel. Work with our suppliers and customers to encourage their involvement in achieving our aims. We shall set and review objectives and targets to improve our environmental performance. We will monitor and review our progress periodically. 28 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 DIRECTORS’ REPORT The Directors present their annual report and the audited financial statements for the year ended 30 June 2002. Principal Activity The Group manufactures and sells pharmaceuticals and also markets and sells veterinary equipment and related goods and services, predominantly to the UK veterinary market, but also to overseas markets. Acquisitions During the year, the Company made two acquisitions, details of which are described in the Chief Executive’s Review and in note 5 to the financial statements. Share Capital Details of the changes in share capital are shown in note 22 to the financial statements. Results and Dividends The results for the year are set out on page 33. The Directors recommend the payment of a final dividend of 2.75p per share which, if approved by shareholders, will be paid on 27 November 2002 to shareholders registered at 1 November 2002. An interim dividend of 1.37p per share was paid on 8 April 2002 making a total dividend for the year of 4.12p (2001: 3.75p). The total dividend payment is £2,069,000 (2001: £1,867,000). A retained profit of £2,989,000 (2001: £1,167,000) is transferred to reserves. Business Review A review of the Group’s activities during the year and likely future developments are dealt with in the Chairman’s statement, Chief Executive’s review and Operational Review. Directors The Directors who served during the year were as follows: P.J. Redfern (Chairman) (deceased 23 January 2002) M. Redmond (Chairman since 5 July 2002) G.B. Evans (resigned 5 November 2001) S.D. Evans I.D. Page E.T.W. Torr M.D. Annice M.M. Diamond (acting Chairman from 24 January 2002 to 4 July 2002) The interests of the Directors in the share capital of the Company are shown in the remuneration report on pages 24 to 27. In accordance with the Company’s articles of association, I.D. Page and M.D. Annice retire by rotation and being eligible, offer themselves for re-election. Political and Charitable Contributions The Group made no political or charitable contributions during the year. Employees It is the Group’s policy to encourage employee involvement as the Directors consider that this is essential for the successful running of the business. The Group keeps employees informed of performance, developments and progress by way of regular team briefing sessions and notices. The Group gives full consideration to applications for employment from disabled people, where they adequately fulfil the requirements of the job. Where existing employees become disabled, it is the Group’s policy whenever practicable to provide continuing employment under the Company’s terms and conditions and to provide training and career development whenever appropriate. The Group has set up a SAYE Share Option Scheme so that all employees of the Group can participate in its success. 29 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 DIRECTORS’ REPORT CONTINUED Research and Development The Group has a structured research and development programme with the aim of identifying and bringing to market new pharmaceutical products. The expenditure on this activity for the year ended 30 June 2002 was £525,000 (2001: £427,000). Suppliers The Company does not adhere to any Code of Practice regarding the payment of suppliers but seeks to agree the terms of payment with suppliers prior to placing business and it is the Company’s policy to settle liabilities by the due date. At 30 June 2002, the Group had an average of 77 days (2001: 83 days) purchases outstanding in creditors. The Company had an average of NIL (2001: NIL days) days purchases outstanding in creditors. Substantial Shareholders As at 22 August 2002, the Company is aware of the following material interests (other than Directors) representing 3% or more of the issued share capital in the Company: Threadneedle Asset Management Scottish Widows Investment Partnership Hermes Pensions Management Montanaro Investment Management Morley Fund Management HG Capital Private Equity Friends Ivory & Sime (London) Edinburgh Fund Managers Insight Investments Legal & General Investment Management Universities Superannuation Scheme No of shares 5,440,000 3,999,557 2,760,752 2,680,000 1,958,904 1,895,311 1,824,683 1,750,600 1,725,000 1,694,087 1,540,912 % of Shares Held 10.78 7.93 5.47 5.31 3.88 3.76 3.62 3.47 3.42 3.33 3.05 Auditors A resolution to re-appoint KPMG Audit Plc as auditors is to be proposed at the forthcoming Annual General Meeting. By order of the Board S.P. Whitehouse Secretary 3 September 2002 Dechra House Jamage Industrial Estate Talke Pits Stoke-on-Trent ST7 1XW 30 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 STATEMENT OF DIRECTORS’ RESPONSIBILITIES Company law requires the Directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss for that period. In preparing the 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 accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company or Group will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. 31 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF DECHRA PHARMACEUTICALS PLC We have audited the financial statements on pages 33 to 53. Respective responsibilities of Directors and Auditors The Directors are responsible for preparing the Annual Report. As described on page 31, this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if 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 or the Listing Rules regarding Directors’ remuneration and transactions with the Group is not disclosed. We review whether the statement on pages 21 to 23 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with the Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. 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 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 financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 30 June 2002 and of the profit of the Group for the year then ended and have been properly in accordance with the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor Birmingham 3 September 2002 32 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE 2002 Note Turnover – continuing operations – acquisitions Cost of sales Gross profit Distribution costs Administrative expenses – before goodwill amortisation – goodwill amortisation Total administrative expenses Operating profit – continuing operations – acquisitions Total operating profit Net interest payable and similar charges 2 2 2 3 3 3 3 3 3 3 6 Profit on ordinary activities before taxation Tax on profit on ordinary activities 7 10 Profit on ordinary activities after taxation Dividends Retained profit for the financial year Earnings per ordinary share Basic Diluted 11 12 12 2002 Before Exceptional Item £’000 Exceptional Item (note 4) £’000 Note Total £’000 Re-stated* Before Exceptional Item £’000 2001 Exceptional Item (note 4) £’000 169,346 856 170,202 (149,664) 20,538 (6,166) – – – – – – 169,346 856 156,400 – 170,202 (149,664) 156,400 (137,208) 20,538 (6,166) 19,192 (5,882) – – – – – – Re-stated* Total £’000 156,400 – 156,400 (137,208) 19,192 (5,882) (5,599) (194) (5,793) (5,076) (1,080) (6,156) (101) – (101) – – – (5,700) (194) (5,894) (5,076) (1,080) (6,156) 8,689 (17) 8,672 (1,170) 7,502 (2,308) 5,194 (194) – (194) 8,495 (17) 8,478 8,234 – 8,234 (1,080) – (1,080) 7,154 – 7,154 – (1,170) (2,382) – (2,382) (194) 58 (136) 7,308 (2,250) 5,058 (2,069) 2,989 5,852 (1,738) (1,080) – 4,772 (1,738) 4,114 (1,080) 3,034 (1,867) 1,167 10.39p 10.36p (0.27p) (0.27p) 10.12p 10.09p 9.29p 9.26p (2.44p) (2.43p) 6.85p 6.83p A statement of movements on reserves is given in note 23 to the financial statements. All amounts relate to continuing operations. *re-stated on adoption of FRS 19, see note 21. 33 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 BALANCE SHEETS AS AT 30 JUNE 2002 Fixed assets Intangible assets Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand Note 13 14 15 16 17 Company 2002 £’000 – – 4,619 4,619 2001 £’000 – – 894 894 Group 2002 £’000 2001 re-stated* £’000 – 4,317 – 4,317 5,284 6,324 – 11,608 19,302 25,822 – 16,460 24,237 3,993 – 46,440 – – 45,188 – Creditors: amounts falling due within one year 18 (42,445) (38,950) (13,997) (8,719) 45,124 44,690 46,440 45,188 Net current assets 2,679 5,740 32,443 36,469 Total assets less current liabilities 14,287 10,057 37,062 37,363 Creditors: amounts falling due after more than one year 18 (8,538) (9,047) (8,200) (8,784) Capital and reserves Called up share capital Shares to be issued Share premium account Merger reserve Profit and loss account 5,749 1,010 28,862 28,579 22 23 23 23 23 504 750 26,783 994 (23,282) 498 – 26,783 – (26,271) 504 5 26,783 – 1,570 498 – 26,783 – 1,298 Total equity shareholders’ funds 5,749 1.010 28,862 28,579 The financial statements were approved by the Board of Directors on 3 September 2002 and are signed on its behalf by: I. Page Director S.D. Evans Director *re-stated on adoption of FRS 19, see note 21. 34 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS FOR THE YEAR ENDED 30 JUNE 2002 At 1 July 2001 (re-stated- see below) Profit after tax for the financial year Dividends New shares issued Shares to be issued Costs of share issue At 30 June 2002 Group 2001 re-stated* £’000 2002 £’000 2002 £’000 1,010 (27,819) 28,579 5,058 (2,069) 1,000 750 – 3,034 (1,867) 28,002 – (340) 2,341 (2,069) 6 5 – Company 2001 £’000 875 1,909 (1,867) 28,002 – (340) 5,749 1,010 28,862 28,579 The Group’s reserves at 1 July 2001 were originally £901,000 before adding a prior year adjustment of £109,000. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 30 JUNE 2002 Profit for the financial year being total gains and losses relating to the year Prior year adjustment (see note 21) Total gains and losses since the last annual report *re-stated on adoption of FRS 19, see note 21. 2001 re-stated* £’000 3,034 2002 £’000 5,058 109 5,167 35 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2002 Net cash inflow from operating activities Returns on investment and servicing of finance Interest received Interest paid Interest element of finance lease rentals Net cash outflow for returns on investment and servicing of finance Taxation Corporation tax paid Capital expenditure Purchase of tangible fixed assets Sale of tangible fixed assets Net cash outflow for capital expenditure and financial investment Acquisitions and disposals Acquisitions of subsidiary undertakings Borrowings of acquired businesses Purchase of business Net cash outflow for acquisitions and disposals Equity dividends paid Cash outflow before financing Financing Shares issued less expenses New bank loans Term loans repaid Capital element of finance lease payments Net cash (outflow)/inflow from financing Decrease in cash in the period Cash at 30 June 2001 (Bank overdraft)/cash at 30 June 2002 Note 25 5 5 2002 £’000 6,397 16 (1,103) (39) 2001 £’000 3,453 4 (7,673) (43) (1,126) (7,712) (2,155) (1,195) (2,845) 141 (1,882) 111 (2,704) (1,771) (3,214) (429) (180) (3,823) (1,927) – – (100) (100) (622) (5,338) (7,947) – 3,000 (3,364) (401) 27,662 15,000 (39,462) (486) (765) 2,714 (6,103) (5,233) 3,993 (2,110) 9,226 3,993 36 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 CONSOLIDATED CASH FLOW STATEMENT CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 Reconciliation of Net Cash Flow to Movement in Net Debt Decrease in cash during the period Cash inflow from new loans Debt repayments Repayment of finance leases Change in net debt resulting from cash flows New finance leases Loan stock issued Movement in net debt in the period Net debt at 1 July 2001 Net debt at 30 June 2002 Note 26 26 2002 £’000 (6,103) (3,000) 3,364 401 (5,338) (418) (500) (6,256) (8,680) 2001 £’000 (5,233) (15,000) 39,462 486 19,715 (860) – 18,855 (27,535) (14,936) (8,680) 37 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2002 1. Accounting Policies The following accounting policies have been applied in dealing with items which are considered material in relation to the Group and parent Company’s financial statements. During the year, Financial Reporting Standard 19 ‘Deferred Tax’ became effective for this year’s financial statements. For the effects of FRS 19, see note 21. Basis of Preparation The financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards. Consolidation Principles The consolidated financial statements incorporate those of Dechra Pharmaceuticals PLC and its subsidiary undertakings made up to 30 June. The acquisition method of accounting has been adopted and the results of subsidiary undertakings acquired are included from the date of acquisition. In accordance with Section 230(4) of the Companies Act 1985, no separate profit and loss account is presented for the Company. The profit after taxation dealt with in the accounts of the Company was £2,341,000 (2001: £1,909,000). Turnover Turnover represents cash and credit sales excluding value added tax. Tangible Fixed Assets and Depreciation Depreciation is calculated so as to write off the cost less estimated residual value of tangible fixed assets over their estimated useful lives. The principal rates used are as follows: Short leasehold property Fixtures, fittings and equipment Motor vehicles Period of the lease on a straight line basis 10-33 1/3% on a straight line basis 25% on a straight line basis Investments Investments held as fixed assets are stated at cost less any impairment losses. Where the consideration for the acquisition of a subsidiary undertaking includes shares in the Company to which the provisions of section 131 of the Companies Act 1985 apply, cost represents the nominal value of the shares issued together with the fair value of any additional consideration given and costs. In the Group balance sheet the excess of the fair value of the shares issued as consideration over their nominal value is credited to a merger reserve. Goodwill Goodwill relating to the acquisition of companies and businesses up to 30 June 1998 was written off immediately against reserves. On a subsequent disposal or termination of a previously acquired business, the profit or loss on disposal or termination is calculated after charging the amount of any related goodwill not written off through the profit and loss account, including any previously taken direct to reserves. Purchased goodwill arising subsequent to 30 June 1998 is capitalised and amortised to nil over its estimated useful economic life. Leased Assets Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. Rental payments are apportioned between the finance element, which is charged to the profit and loss account and the capital element which reduces the outstanding lease obligations. Operating lease rentals are charged to the profit and loss account on a straight line basis over the lease term. Stocks Stocks are valued at the lower of cost and net realisable value. The cost of work in progress and finished goods includes an appropriate proportion of attributable overheads. Research and Development Research and development expenditure is written off as it is incurred. Derivative Financial Instruments Short term debtors and creditors that meet the definitions of a financial asset or liability respectively have been excluded from the numerical disclosures as permitted by FRS 13; Derivatives and Other Financial Instruments Disclosures as detailed in note 20. 38 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 1. Accounting Policies continued Arrangement Fees Arrangement fees incurred on the raising of loans are written off over the expected life of the relevant loan. Taxation The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which the timing differences reverse and is provided in respect of all timing differences which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS19, “Deferred Tax”. FRS 19 has been adopted for the first time in these financial statements and comparative figures have been re-stated accordingly (See note 21). Pensions The Group operates a defined contribution pension scheme. The amount charged to the profit and loss account represents contributions payable to the scheme in the accounting period. The assets of the Scheme are held separately from those of the Group in an independently administered fund. 2. Analysis of Turnover by Geographical Region Destination UK Rest of the world The Directors consider that all turnover is derived from a single class of business. 3. Cost of Sales and Operating Expenses Analysis Turnover Cost of sales Gross profit Distribution costs Administrative expenses - before exceptional items and goodwill amortisation – exceptional items – goodwill amortisation Total administrative expenses Operating profit The origin of all turnover was in the UK. 2002 £’000 167,907 2,295 2001 £’000 154,705 1,695 170,202 156,400 Continuing Operations 2002 Acquisitions £’000 £’000 Total £’000 2001 Total £’000 169,346 (149,102) 20,244 (6,107) 856 (562) 170,202 (149,664) 156,400 (137,208) 294 (59) 20,538 (6,166) 19,192 (5,882) (5,448) (194) – (151) – (101) (5,599) (194) (101) (5,076) (1,080) – (5,642) (252) (5,894) (6,156) 8,495 (17) 8,478 7,154 39 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 4. Exceptional Items Flotation costs Compensation for loss of office 2002 £’000 – 194 194 2001 £’000 1,080 – 1,080 The compensation for loss of office relates to the termination of the contract of Gary Evans, the former Chief Executive and associated legal fees. 5. Acquisitions North Western Laboratories Limited and Cambridge Specialist Laboratory Services Limited were acquired on 8 April 2002 and, excluding goodwill amortisation, contributed £73,000 to the Group’s operating profit, £72,000 to profit before tax, (£177,000) to operating cash flows, (£1,000) to returns on investment and servicing of finance, (£16,000) to financing and utilised £3,000 for investment activities. Under the terms of the acquistion agreement, consideration was paid on completion made up of £1,500,000 in cash, the issue of £500,000 of loan notes and £750,000 of ordinary shares of 1p at a fair value consideration of 160p per share. Anglian Pharma Plc and Anglian Pharma Manufacturing Limited were acquired on 17 May 2002 and, before goodwill amortisation, contributed £11,000 to the Group’s operating profit, £5,000 to profit before taxation, (£118,000) to the Group’s operating cash flows, (£6,000) to returns on investment and servicing of finance, (£6,000) to financing and utilised £37,000 for investing activities. In accordance with the acquistion agreement, initial consideration was paid on completion made up of £1,500,000 in cash and the issue of £250,000 of ordinary shares of 1p at a fair value consideration of 137.2p per share. Further consideration of £750,000 of ordinary shares of 1p is payable on 17 May 2003. If the consolidated net assets of Anglian Pharma Plc at 17 May 2002 are determined to be less than £150,000 then the deferred consideration will be reduced by an equivalent amount. The best estimate at 30 June 2002 of the deferred consideration that will be payable is £750,000 and this has been credited to shares to be issued in anticipation of the settlement of the purchase consideration in ordinary shares. Appropriate adjustments to goodwill and shares to be issued will be made as and when the final consideration is agreed and settled. The fair values arising on these acquisitions were: Intangible fixed assets Tangible fixed assets Stock Debtors Bank loans and overdrafts Finance leases and hire purchase Other creditors Provisions for liabilities and charges Cash consideration (including acquisition expenses of £214,000) Non-cash consideration: Shares issued Loan notes issued Shares to be issued (estimated) Total estimated consideration Goodwill (see note 13) 2002 Fair Value Provisions £’000 (14) (25) (68) (44) – – – (48) Book Value £’000 14 664 687 1,106 (429) (285) (1,453) (26) 278 (199) Fair Value £’000 – 639 619 1,062 (429) (285) (1,453) (74) 79 3,214 1,000 500 750 5,464 5,385 40 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 5. Acquisitions continued The fair value adjustments above principally relate to the revaluation of assets to their estimated market value. Total consideration and fair value adjustments have been determined provisionally subject to the availability of more detailed market value information relating to specific assets and liabilities. There were no acquisitions in 2001. 6. Net Interest Payable and Similar Charges Bank loans and overdrafts Amortisation of arrangement fees Other loans Other interest Finance charges payable on finance leases and hire purchase contracts Total interest payable Bank deposit and other interest receivable Net interest payable and similar charges 7. Profit on Ordinary Activities Before Taxation is stated after charging/(crediting): Research and development Depreciation of owned assets Depreciation of assets held under finance leases Amortisation of goodwill Profit on disposal of tangible fixed assets Operating lease rentals: land and buildings plant and machinery Audit fees (including £9,000 for the Parent Company (2001: £9,000)) Other payments to the auditors for non-audit services (2001: including £203,000 relating to the flotation) 2002 £’000 1,070 74 3 – 39 1,186 (16) 1,170 2002 £’000 525 1,033 256 101 (43) 603 10 66 54 2001 £’000 1,704 37 595 7 43 2,386 (4) 2,382 2001 £’000 427 1,010 175 – (78) 455 61 40 293 In addition to the non-audit fees shown above, a further £66,000 (2001:£nil) has been capitalised in respect of payments made for non-audit services provided by the auditors. 8. Remuneration of Directors Details of the remuneration, share holdings, share options and pension contributions of the Directors are included in the Board Remuneration Report on pages 24 to 27. 9. Employees The monthly average number of staff employed by the Group, which includes Directors, were: Manufacturing Distribution Administration 2002 Number 2001 Number 70 289 141 500 59 274 121 454 41 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 9. Employees continued The costs incurred in respect of these employees were: Wages and salaries Social security costs Other pension costs 10. Tax on Profit on Ordinary Activities a) Tax charge for the year Current taxation UK Corporation tax charge Adjustments in respect of prior periods Total current tax charge for the year Deferred taxation Origination and reversal of timing differences Adjustments in respect of prior periods Total deferred tax charge for the year Tax on profit on ordinary activities Tax credit included above attributable to exceptional operating items 2002 £’000 6,475 530 191 7,196 2001 £’000 5,874 476 157 6,507 2002 £’000 2001 re-stated* £’000 2,281 (35) 2,246 (24) 28 4 1,537 (67) 1,470 263 5 268 2,250 1,738 58 – b) Factors affecting the tax charge for the current period The current tax charge is higher than the standard rate of corporation tax in the UK of 30% (2001: 30%). The differences are explained below: Profit on ordinary activities before taxation Current tax charge at 30% (2001: 30%) *re-stated on adoption of FRS 19, see note 21. 2002 £’000 7,308 2,192 2001 £’000 4,772 1,432 42 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 10. Tax on Profit on Ordinary Activities continued Effects of Permanent timing differences: – goodwill amortisation – depreciation on assets not eligible for tax allowances – disallowable flotation related expenses – other Temporary timing differences: – excess of capital allowances over depreciation – other short term timing differences – adjustments to tax charge in respect of previous periods 2002 £’000 2001 £’000 30 18 – 17 65 (20) 44 (35) (11) – 15 335 18 368 (22) (241) (67) (330) Total current tax charge (see above) 2,246 1,470 11. Dividends Interim paid 1.37p per share (2001: 1.25p) Final proposed 2.75p per share (2001: 2.5p) 2002 £’000 682 1,387 2,069 2001 £’000 622 1,245 1,867 12. Earnings per Share Earnings per ordinary share have been calculated by dividing the profit on ordinary activities after taxation for each financial year by the weighted average number of ordinary shares in issue during the year. Basic earnings per share after exceptional items and goodwill amortisation Effect of exceptional items Basic earnings per share before exceptional item Effect of goodwill amortisation Adjusted earnings per share Diluted earnings per share Effect of exceptional items Diluted earnings per share before exceptional items Effect of goodwill amortisation Adjusted diluted earnings per share *re-stated on adoption of FRS 19, see note 21. 43 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 2002 pence 10.12 0.27 10.39 0.20 10.59 10.09 0.27 10.36 0.20 10.56 2001 re-stated* pence 6.85 2.44 9.29 – 9.29 6.83 2.43 9.26 – 9.26 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 12. Earnings per Share continued The calculation of basic and diluted earnings per share is based upon: Earnings for basic and diluted earnings per share calculations Exceptional items Earnings for basic and diluted earnings per share calculations before exceptional items Goodwill amortisation £’000 £’000 5,058 136 5,194 101 3,034 1,080 4,114 – Earnings for adjusted and adjusted diluted earnings per share 5,295 4,114 Weighted average number of ordinary shares for basic and adjusted earnings per share Impact of share options 2002 No. 2001 No. 49,989,015 151,049 44,274,767 132,093 Weighted average number of ordinary shares for diluted and adjusted diluted earnings per share 50,140,064 44,406,860 13. Intangible Fixed Assets – Goodwill Cost At 1 July 2001 Additions At 30 June 2002 Amortisation At 1 July 2001 Charge for the year At 30 June 2002 Net book value At 30 June 2002 At 1 July 2001 Goodwill is being amortised over 10 years, being the Directors’ estimate of the useful life. Group £’000 – 5,385 5,385 – 101 101 5,284 – 44 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 14. Tangible Fixed Assets Group Cost At 1 July 2001 Additions – existing operations – acquisitions Disposals At 30 June 2002 Depreciation At 1 July 2001 Disposals Charge for the year At 30 June 2002 Net book value at 30 June 2002 Net book value at 30 June 2001 Leased assets Net book value of assets held under finance leases: At 30 June 2002 At 1 July 2001 Contracted Capital Commitments Short Leasehold Land and Buildings £’000 Freehold Land £’000 Motor Vehicles £’000 Plant and Fixtures £’000 Total £’000 7,100 2,755 639 (507) 2,469 266 39 (452) 3,795 1,153 588 (55) 2,322 5,481 9,987 13 – – – 13 – – – – 13 13 – – 823 1,336 12 – 2,171 133 – 90 223 1,948 690 774 (409) 639 1,004 1,318 1,695 – – 662 826 1,876 – 560 2,436 3,045 1,919 178 – 2002 £’000 649 2,783 (409) 1,289 3,663 6,324 4,317 840 826 2001 £’000 1,075 45 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 15. Fixed Asset Investments Company Cost and net book value At 1 July 2001 Additions At 30 June 2002 Shares in Subsidiary Undertakings £’000 894 3,725 4,619 A list of principal subsidiary undertakings is given in note 29. Where subsidiaries are acquired for shares, or a combination of shares and cash, statutory merger relief has been applied and accordingly cost includes the nominal value of shares issued. 16. Stocks Group Raw materials and consumables Work in progress Finished goods and goods for resale 17. Debtors Trade debtors Amounts owed by subsidiary undertakings Group relief receivable Deferred taxation Other debtors Prepayments and accrued income *re-stated on adoption of FRS 19, see note 21. 2002 £’000 1,619 72 17,611 2001 £’000 723 37 15,700 19,302 16,460 Group re-stated* 2001 £’000 23,187 – – 109 732 209 2002 £’000 24,550 – – 31 869 372 Company 2002 £’000 – 44,955 1,433 – 41 11 2001 £’000 – 43,830 1,274 – 23 61 25,822 24,237 46,440 45,188 46 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 18. Creditors Bank loans and overdrafts Hire purchase and finance leases Trade creditors Amounts due to subsidiary undertakings Other creditors Corporation tax Other taxation and social security Accruals and deferred income Deferred consideration Proposed dividend Bank loans Unsecured loan stock Hire purchase and finance leases Other creditors Falling Due within One Year Group 2001 £’000 3,000 410 31,131 – 67 1,263 1,192 462 180 1,245 2002 £’000 10,334 – – 2,018 – – – 258 – 1,387 2002 £’000 5,838 423 31,709 – 253 1,387 678 770 – 1,387 42,445 38,950 13,997 Company 2001 £’000 4,436 – – 2,971 – – – 67 – 1,245 8,719 Falling Due after more than One Year 2002 £’000 7,700 500 267 71 8,538 Group 2001 £’000 8,784 – 263 – 9,047 2002 £’000 7,700 500 – – 8,200 Company 2001 £’000 8,784 – – – 8,784 47 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 19. Borrowings Bank loans due after more than one year Aggregate bank loan instalments repayable between one and two years between two and five years Arrangement fees netted off Obligations under finance leases due after more than one year Due between one and two years Unsecured loan stock due after more than one year Due between one and two years Total 2002 £’000 3,728 4,180 7,908 (208) 7,700 267 500 8,467 Group 2001 £’000 3,000 6,000 9,000 (216) 8,784 263 – 9,047 2002 £’000 Company 2001 £’000 3,728 4,180 7,908 (208) 7,700 – 500 8,200 3,000 6,000 9,000 (216) 8,784 – – 8,784 The term loans from Bank of Scotland of £9 million, £1.288 million and £1.35 million are secured by a fixed and floating charge on the assets of the Group. Interest is charged at 1.25% over LIBOR. The loans are repayable in semi-annual instalments of £1.5 million, £214,000 and £150,000 respectively. The unsecured loan stock is payable on the earlier of 8 April 2004 or North Western Laboratories Limited and Cambridge Specialist Laboratory Services Limited achieving annual pre-tax profits of at least £400,000. Interest is charged at 1% below base rate. 48 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 20. Financial Instruments and Derivatives An explanation of the Group’s treasury policies and controls is set out in the Finance Director’s Review on pages 18 to 19. As permitted by Financial Reporting Standard 13, short term debtors and creditors meeting the definition of a short term asset or liability are excluded from these disclosures. a) Fair value of financial assets and liabilities Most financial assets and liabilities are at floating rates of interest and therefore their fair value and book value are equal. Finance leases are at various fixed rates of interest, however the difference between book value and fair value is not material. b) Interest rate risk profile as at 30 June 2002 i) Financial liabilities Financial liabilities principally comprise the Group’s borrowings of bank loans and overdrafts from the Bank of Scotland. These are secured by fixed and floating charges on the assets of the Group. All interest is payable at floating rates of 1 – 1.25% above LIBOR. The Group also has finance lease commitments of £690,000 (2001: £673,000) with a weighted average fixed interest rate of 8% (2001: 9%) over a weighted average term of 15 months (2001: 20 months). ii) Financial assets The Group had cash in hand of £NIL (2001: £3,993,000). Interest receivable is at floating rate. c) Foreign currency exposure profile There were no material foreign currency monetary assets or liabilities that may give rise to gains or losses in the profit and loss account. d) Maturity of borrowings Details are shown in notes 18 and 19. e) Maturity of facilities At 30 June 2002 the Group had an undrawn committed revolving credit facility of £5 million maturing in 2005. 21. Provisions for Liabilities and Charges At 1 July 2001 as previously reported Prior year adjustment At 1 July 2001 as re-stated (included in debtors) Transfer from profit and loss account Acquisitions Deferred taxation transferred to debtors At 30 June 2002 The amounts provided for deferred taxation under the liability method at 30% (2001: 30%), are as follows: Group Capital allowances Short term timing differences Amounts included in debtors *re-stated on adoption of FRS 19, see note 21. 49 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 Deferred Tax Group £’000 – (109) (109) 4 74 31 – 2002 £’000 2001 re-stated* £’000 89 (120) (31) 3 (112) (109) NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 21. Provisions for Liabilities and Charges continued Prior year adjustment As a result of the Group’s adoption of FRS 19 “Deferred Tax’, full provision is now made for deferred taxation on all timing differences which have arisen but have not reversed at the balance sheet date, except as follows: i) deferred tax is not recognised on the difference between fair values and book values on non-monetary assets arising on acquisition except where there is a binding agreement to sell the asset and the gain or loss expected to arise has been recognised ii) deferred tax assets are recognised only to the extent that it is more likely than not that they will be recovered. The effect of the prior year adjustment was to reduce consolidated profit after tax by £30,000 (2001: £2,000) and increase net assets by £31,000 (2001: £109,000). There was no effect on the Company. 22. Called up share Capital Issued share capital At 1 July 2001 New shares issued At 30 June 2002 Authorised share capital At 30 June 2002 and June 2001 Ordinary Shares of 1p each No. 49,791,278 650,966 50,442,244 75,000,000 £’000 498 6 504 750 Since 1 July 2001 there have been the following changes in the issued and fully paid share capital of the Company: On 8 April 2002, 468,750 new ordinary shares of 1p were issued at 160p to the shareholders of North Western Laboratories Limited and Cambridge Specialist Laboratory Services Limited in part consideration for the acquisition of these companies. On 17 May 2002, 182,216 new ordinary shares of 1p were issued at 137.2p to the shareholders of Anglian Pharma Plc and Anglian Pharma Manufacturing Limited in part consideration for the acquisition of these companies. Further shares will be issued to the vendors as set out in note 5. Share Options Outstanding share options over ordinary shares of 1p at 30 June 2002 under the various Group Share Option Schemes are as follows: Exercise Period Exercise Price per Share Pence Unapproved Share Option scheme 14 September 2000 22 April 2002 2003 – 2010 2005 – 2012 120 153.5 SAYE scheme 26 April 2001 9 April 2002 Total share options 2004 – 2006 2005 – 2007 158 129 At 30 June 2001 Number 544,000 – 544,000 201,247 – 201,247 745,247 Exercised Granted Lapsed Number Number Number At 30 June 2002 number – – – – – – – – 399,000 (20,000) – 524,000 399,000 399,000 (20,000) 923,000 – 150,614 (23,123) – 178,124 150,614 150,614 (23,123) 328,738 549,614 (43,123) 1,251,738 50 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 23. Reserves Group At 1 July 2001 as previously reported Prior year adjustment (see note 21) At 1 July 2001 (as re-stated) New shares issued (see note 5) Shares to be issued (see note 5) Retained profit for the year At 30 June 2002 Company At 1 July 2001 Shares to be issued Retained profit for the year At 30 June 2002 24. Goodwill Shares to be issued Share Premium Account Merger Reserve £’000 £’000 £’000 – – – – 750 – 750 – 5 – 5 26,783 – 26,783 – – – 26,783 26,783 – – 26,783 – – – 994 – – 994 – – – – Profit and Loss Account re-stated* £’000 (26,380) 109 (26,271) – – 2,989 (23,282) 1,298 – 272 1,570 The cumulative amount of goodwill written off to reserves at 30 June 2002 was £30,184,000 (2001: £30,184,000). 25. Reconciliation of Operating Profit to Operating Cash Flow Operating profit Depreciation Goodwill amortisation Profit on disposal of tangible fixed assets Increase in stocks Increase in debtors Decrease in creditors Net cash inflow from operating activities *re-stated on adoption of FRS 19, see note 21. 2002 £’000 8,478 1,289 101 (43) (2,223) (601) (604) 2001 £’000 7,154 1,185 – (78) (253) (1,972) (2,583) 6,397 3,453 51 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 26. Analysis of Net Debt Cash at bank and in hand Debt due after one year Debt due within one year Finance leases At 1 July 2001 £’000 3,993 (9,000) (3,000) (673) Cash Inflow/ (Outflow) £’000 Other Non-Cash Changes £’000 (3,993) (1,908) 162 401 – 2,500 (3,000) (418) At 30 June 2002 £’000 – (8,408) (5,838) (690) (8,680) (5,338) (918) (14,936) Major non-cash transactions: During the year the Group entered into finance lease arrangements in respect of assets with a total capital value at the inception of the leases of £133,000 (2001: £860,000) and finance leases with a total capital value of £285,000 (2001: £nil) arising on the acquisitions of subsidiaries (see note 5). On 8 April 2002, the Group issued £500,000 of unsecured loan stock to the shareholders of North Western Laboratories Limited and Cambridge Specialist Laboratory Services Limited in part consideration for the acquisition of these companies (see note 5). 27. Other Financial Commitments At 30 June 2002 the Group has the following commitments payable within one year under operating leases expiring: Between one and two years Between two and five years In five years or more 2002 Land and Buildings £’000 2001 Land and Buildings £’000 9 51 756 816 – 44 489 533 28. Pensions The Group operates a defined contribution pension scheme for certain employees. The Group contributed between 8% and 12% of pensionable salaries which amounted to £191,000 (2001: £157,000). See note 9. 52 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 30 JUNE 2002 29. Subsidiary Undertakings The principal subsidiary undertakings of the Company, all of which are wholly owned, are: Company Country of Operation Country of Incorporation Principal Activity National Veterinary Services Limited* UK Arnolds Veterinary Products Limited* UK and Export Dales Pharmaceuticals Limited* Veneto Limited North Western Laboratories Limited † Cambridge Specialist Laboratory Services Limited Anglian Pharma Manufacturing Ltd †† Anglian Pharma Plc *100% of ordinary share capital held by Veneto Limited. † 100% of ordinary share capital held by North Western Laboratories Limited. †† 100% of ordinary share capital held by Anglian Pharma Plc. UK UK UK UK UK UK England England England England England England England Wholesale of veterinary products Marketer of veterinary pharmaceuticals, instruments and equipment Manufacture of pharmaceuticals Holding Company Veterinary Laboratory Veterinary Laboratory Manufacture of pharmaceuticals England Holding Company 53 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 FINANCIAL HISTORY Profit and loss account Turnover Operating profit before exceptional items and goodwill Profit on ordinary activities before taxation Profit after taxation Dividends Retained profit Earnings per share – adjusted (pence) Dividend per share (pence) Average number of employees Balance sheet Fixed assets Working capital Net debt Shareholders’ funds Cash flow Cash flow from operating activities Net interest paid Tax paid Capital expenditure Acquisitions Equity dividends paid Financing Changes in cash in period 2002 £’000 2001 £’000 2000 £’000 1999 £’000 1998 £’000 170,202 8,773 7,308 5,058 (2,069) 2,989 10.59 4.12 500 11,608 9,077 (14,936) 5,749 6,397 (1,126) (2,155) (2,704) (3,823) (1,927) (765) (6,103) 156,400 8,234 4,772 3,034 (1,867) 1,167 9.29 3.75 454 4,317 5,373 (8,680) 1,010 3,453 (7,712) (1,195) (1,771) (100) (622) 2,714 (5,233) 145,487 7,505 2,088 1,546 – 1,546 6.05 – 408 130,762 6,033 417 205 – 205 1.61 – 367 2,595 1,580 (31,994) (27,819) 2,514 5,823 (37,669) (29,332) 12,036 (3,662) (252) (859) (260) – (2,473) 4,530 5,424 (3,348) 61 (183) (25) – (1,388) 541 122,874 5,502 77 9 – 9 0.03 – 343 2,529 5,022 (37,088) (29,537) 6,408 (4,072) (1,300) (130) (36,672) – 39,921 4,155 The historical figures have been adjusted to reflect the adoption of FRS19 “Deferred Tax” (see note 21) 54 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES 55 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 NOTES 56 DECHRA PHARMACEUTICALS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2002 

Continue reading text version or see original annual report in PDF format above