Dechra Pharmaceuticals
Annual Report 2003

Plain-text annual report

Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 About Dechra Contents 01. Highlights 02. Chairman’s Statement 04. Chief Executive’s Review 04. National Veterinary Services 07. Dales Pharmaceuticals 08. NationWide Laboratories Cambridge Specialist Laboratory Services 10. Financial Review 12. Board of Directors 06. Arnolds Veterinary Products 13. Financial Statements Our Business An emerging pharmaceutical business, focused on the veterinary market Our Strategic focus The continuing development of our veterinary pharmaceutical portfolio Increasing own branded pharmaceutical penetration into international markets Increasing revenues from our existing businesses focusing on high margin products and services National Veterinary Services UK market leader in the supply of pharmaceuticals and added value services to the veterinary profession Arnolds Veterinary Products Veterinary sales and marketing specialists, and market leaders in the supply of licensed branded pharmaceuticals, instruments and equipment to the veterinary profession worldwide NationWide Laboratories/ Cambridge Specialist Laboratory Services NWL is a multi-disciplined independent commercial veterinary laboratory CSLS is the UK’s leading veterinary endocrine specialist Dales Pharmaceuticals Licensed manufacturer of human and veterinary pharmaceuticals for Arnolds and third party customers Highlights > > > > > Further progress in product licensing and development — key to future growth North American product development and marketing rights secured for Vetoryl Arnolds — fastest growing of the Top 20 veterinary pharmaceutical companies Laboratory businesses — strong earnings enhancing performance NVS — significantly improved H2 operating margin, market share remains above 42% Pre-exceptional items and goodwill amortisation £179.3m £6.75m 9.39p 4.12p Post-exceptional items and goodwill amortisation £179.3m £5.7m 7.52p 4.12p Turnover Profit before tax Earnings per share Total dividend per share Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 01 Chairman’s Statement “Key to future strategic growth is the development of new licensed products that can be marketed and sold both in the UK and internationally . . .” Michael Redmond, Chairman INTRODUCTION The Group made an encouraging start to the financial year being reported, producing a good first quarter performance with National Veterinary Services reporting sales up 11% in that period. We were then affected by a decline in market growth and the second quarter results were flat on the previous year. As previously reported, this shortfall in sales, together with increased overheads due to the expansion programme of the central warehouse facility at Stoke, a trebling of insurance premiums and an aggressive pricing environment, impacted on net margins during the first half. As the veterinary market continued to remain flat during the first two months of the second half, key initiatives were introduced to enhance operating margins which resulted in an improved second half performance compared to the first half. Our added-value services provided through National Veterinary Services continued to perform well. Our overall market share remains in excess of 42%. Sales of our own branded pharmaceuticals through Arnolds have grown significantly during the year, principally through the success of recent introductions to Arnolds’ licensed veterinary product portfolio, including our own developed products, Vetoryl® and Felimazole®. We have also continued to expand sales of core pharmaceuticals through our major European distributors. Our laboratory businesses, NationWide Laboratories and Cambridge Specialist Laboratory Services, produced a strong earnings enhancing performance with results being at their best ever. Customer orders, benefiting from synergies created through the Group structure, were increased by 25%. Our manufacturing operation, Dales Pharmaceuticals, saw turnover increase by £2.7million, reflecting the integration of Anglian Pharma. A number of initiatives and challenging new performance targets were introduced at this facility in January this year and although progress has been made, the full benefits of these actions in efficiency and productivity will not be realised until the current financial year ending 30 June 2004. COMPETITION COMMISSION INQUIRY The Competition Commission findings from its inquiry into the supply of prescription only medicines in the UK were reported in April of this year. The Commission provisionally concluded in the statement of issues released on 16 April 2002 that a scale monopoly exists in favour of National Veterinary Services, our principal trading subsidiary. In our statement issued on 20 September 2002, we stated that this was “a purely technical finding and did not imply that the situation operates or might be expected to operate against the public’s interest”. I am pleased to report that the Competition Commission’s findings issued on 11 April 2003 confirm this statement. The remedies from the Report are unlikely to have any material impact on the performance of Dechra. We continue to believe that Dechra is in a strong position to service and support the requirements of our existing and new customers when change is implemented. PRODUCT DEVELOPMENT AND LICENSING Key to the future strategic growth of the Group’s business is the development of new licensed products within its veterinary drug 02 portfolio that can be marketed and sold both in the UK and internationally. The lead time for development, regulatory approval through to marketing and distribution of veterinary drugs can take up to five years. As we widen our exposure to this part of our business, our product development expenditure will increase accordingly. During the year ended June 2003, we have made significant investments in product licensing and marketing authorisations. In particular, the Group made an initial payment of £784,000 as part of its exclusive rights to the intellectual property in Trilostane, the active compound in the Group’s proprietary drug Vetoryl, in respect of animal health applications in the USA and Canada. FINANCIAL HIGHLIGHTS Group turnover increased 5.4% from £170.2 million to £179.3 million, whilst operating margin (pre-goodwill amortisation and exceptional items) reduced from 5.15% to 4.55%. Pre-tax profit (pre-goodwill amortisation and exceptional items) was £6.75 million against £7.60 million in 2002. Adjusted earnings per share (pre-goodwill amortisation and exceptional items) was 9.39 pence (2002: 10.59 pence). Net debt at the end of the period remained broadly in line with last year at £15 million. DIVIDEND The Board is recommending a maintained final dividend of 2.75 pence per share (2002: 2.75 pence per share). This, together with the interim dividend of 1.37 pence per share, gives a total for the year of 4.12 pence per share. The total dividend is covered 2.3 times by profit after taxation before exceptional items and goodwill amortisation. If approved at the Annual General Meeting on 23 October 2003, the final dividend will be paid on 26 November 2003 to shareholders on the Register as at 31 October 2003. PEOPLE control, tax and treasury enhance and strengthen the scope of the Board in delivering continuous improvement across the Group. At the same time, in order to service our customers and drive our strategy forward, we made a number of additional senior operating management appointments across the Group and these are covered under the Chief Executive’s Review. Following the AGM in October, Mike Annice will step down from the Main Board in order to allow him to concentrate on the ongoing development of Dales. On behalf of the Board and shareholders, I would like to welcome all new staff who joined the Group during the last year whilst also thanking all our people across the Group’s subsidiaries for all the hard work and dedication that they have demonstrated throughout the year. PROSPECTS We believe that the Group has made operational improvements and progress in delivering our strategy despite the challenges the business faced both commercially and economically in the year ended 30 June 2003. Following our actions to improve operational efficiencies around the Group, together with the further development and growth of our own licensed and branded pharmaceuticals portfolio both in the UK and internationally, we remain cautiously optimistic that the Group will continue to see an improved trading performance in the year ending 30 June 2004. In May, we welcomed Neil Warner to the Main Board as a Non- Executive Director. Neil is Finance Director at Chloride Group PLC, a position he has held since 1997. His technical skills in financial Michael Redmond Chairman 2 September 2003 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 03 Chief Executive’s Review “. . . all our businesses are now stronger in management and infrastructure to deliver and support future growth opportunities.” Ian Page, Chief Executive Throughout the year, our business and the veterinary market in which we trade have faced significant economic and commercial challenges. Although the Group results are lower than we originally envisaged at the start of the financial year, I believe that all our businesses are now stronger in management and infrastructure to deliver and support future growth opportunities. Furthermore, significant advancements in delivering our key strategic objectives have been made which we believe will deliver strong medium and long term growth. DISTRIBUTION AND SERVICES The year has seen a number of significant developments at NVS. We have developed a stronger management team with the appointment of a new divisional Finance Director, Dan Shipman, Sales and Marketing Director, Sheryl Greentree, and Buying Director, Colin Higham. The skills of the new team have been instrumental in implementing the changes that will deliver future growth. Vetcom® Windows, our in-house developed practice management software system, continues to provide operational benefits to customers and has now been installed in almost 100 veterinary practices. The advanced practice management facilities will assist veterinary practices throughout the UK in developing good business National Veterinary Services (“NVS”) is the UK’s leading veterinary practices and allow them to drive their businesses forward. Within wholesaler and a supplier of added value services to veterinary practices. NVS had a solid start to the year; however, in the second quarter sales declined. External market data also showed a downturn in the overall market during this period. The shortfall in budgeted sales at NVS combined with the other factors detailed in the Chairman’s statement, coupled with a general lack of confidence within veterinary practices created by the Competition Commission Report, impacted on our performance. Initiatives implemented in the the year we also developed Vetcom “Handyscan”, a barcode-based ordering system which was launched in June 2003. The system enables veterinary practices to improve their stock control through barcode technology and allows them to place orders directly with NVS or to download data into the Vetcom practice management system. NVS are continuing to develop leading veterinary information technology solutions for veterinary practices. second half to respond to these challenges have subsequently In July 2003 we introduced the NVS own branded “Valu” range of resulted in an improvement in gross margins, efficiency and cost quality products at economic prices, initially focusing on controls which is reflected in a much better second half disposables such as surgical gloves, bandages, swabs and syringes. performance. These products will assist veterinary practices to reduce their daily 04 “The skills of the new team have been instrumental in implementing the changes that will deliver future growth.” costs of essential items whilst at the same time will provide NVS enhanced our Customer Services, introducing extended office with a competitive edge over other wholesalers, which will allow us opening hours and installing new customer call centre technology. to deliver improved margins to both ourselves and our veterinary customers. NVS is in the process of implementing an extension to our semi- automated picking system which will include an automatic weight The warehouse expansion and site development, which doubled checking system. This will deliver operating efficiencies and capacity, is now complete. The improved facilities will lead to improved order accuracy. greater efficiency and improved quality systems as we move forward. To support our high levels of service to customers we have Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 05 “ . . . 51% of all veterinary practices are now using Vetoryl on a regular basis.” SALES AND MARKETING Arnolds Veterinary Products (“Arnolds”), the Group’s veterinary sales and marketing business based in Shrewsbury, is a market leader in a number of specialist pharmaceutical sectors and also supplies a wide range of instruments and consumable products. Arnolds’ growth in pharmaceuticals at 32.2% was the highest growth seen by Key structural changes have been implemented throughout the year. In October 2002, UK Sales and Marketing was divided into two business units, one with specific focus on the sale of capital equipment and consumables, the other, being the larger team, focusing on the sale of pharmaceuticals. This has been a significant factor in driving forward exceptional growth. any of the top twenty veterinary pharmaceutical suppliers within the Towards the end of the year we merged our Export and UK UK. This was predominantly driven by our new products; however, administration operations into one cohesive unit. This has resulted further good growth was also achieved on our mature market in better customer service through faster response times and leading products such as Equipalazone®, Intubeaze® and Intra- improved communications. Operational efficiencies are now also epicaine®. Two of our most recently licensed products, Vetoryl and being realised from these initiatives. Felimazole, are making an increasingly significant contribution. We have also strengthened the technical team with the appointment Vetoryl achieved sales in excess of £1 million during the year and of a second veterinary adviser and have added further resource into achieved a high market penetration, with 51% of all veterinary practices now using Vetoryl on a regular basis. High levels of brand recognition have been gained through an ongoing education process as we continue to assist veterinarians in the diagnosis and treatment of dogs with Cushing’s disease. Felimazole has achieved the Regulatory and Licensing department. In a very competitive market we have achieved growth within a number of sectors of our instruments, disposables and agency products. Our agency agreements, namely Portex®, 3m® and Global significant growth during the second half since we announced that a Veterinary Products (formerly Cook Veterinary Products) have new licence has been granted for the product to be used for life-time continued to deliver good results. The overall performance from this stabilisation of feline hyperthyroidism. Sales by the end of the part of the business has been offset by a decrease in sales of financial year were approaching £0.5 million with sales in the fourth Braun® sutures, an agency agreement which has seen erosion in quarter in particular indicating an uplift in sales in the coming year. sales as a result of cheap imports. 06 “. . . the business has been successful in retaining all its key customers and has also gained new accounts during the course of the year.” MANUFACTURING Dales Pharmaceuticals (“Dales”), the Group’s manufacturing operation based in Skipton, North Yorkshire has experienced a demanding year. Following the acquisition of Anglian Pharma Plc in April 2002, its manufacturing operations were transferred to our site in Skipton, allowing an increased service offering in the manufacturing and production of liquids, ointments and solid dose pharmaceuticals. Following the commissioning of a new liquids products facility at Dales, the transfer was completed to schedule in January 2003. The enlarged business, which involved the manufacture of over 60 products and the associated licence variations, and which doubled the headcount at Skipton, has taken longer to integrate than originally anticipated. Although Dales has now made significant progress towards full integration, the benefits have not been realised within the year. Although the year has seen many challenges for Dales it is pleasing to note that this business has been successful in retaining all its key customers and has also gained new accounts during the course of the year. These include a new third party contract manufacturing account where commercial production started at the end of June 2003. This £0.5 million contract with a major pharmaceutical company involved several months of technical transfer work carried out in collaboration with the customer. Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 07 “The extension to the facilities allows the laboratory to process diagnostic samples more efficiently . . .” LABORATORY SERVICES The Group’s laboratory businesses are NationWide Laboratories Laboratories’. This change better reflects the true nature of the geographical area now served by the laboratory, across the UK. (“NWL”), a full service provider of clinical and diagnostic pathology During the year we secured new contracts for both businesses, services to the veterinary profession in the UK, and Cambridge Specialist Laboratory Services (“CSLS”), a provider of highly specialised diagnostic services with a principal focus on veterinary endocrinology and in high quality immunoassay measurement techniques. Both NWL and CSLS have made considerable progress in the year with turnover increasing 35% on the year immediately preceding acquisition. Operating margin also improved across both businesses, resulting in operating profit more than doubling. The past financial year has seen improvements across the laboratory businesses, with growth in customer orders, a considerable expansion of facilities, the strengthening of both the technical specialist and management teams together with the synergistic benefits from across the Group as a whole. partly reflecting the synergistic relationships that have developed with other Group companies. NWL has been able to widen its services to its clients by offering the collection of diagnostic specimens through the NVS distribution network whilst at the same time NWL benefited from sales leads from NVS territory managers. Additionally, NWL has assisted NVS in sourcing lower cost laboratory products for resale. NWL and CSLS have benefited from the appointment of Dr Peter Graham as Managing Director. Peter is one of the world’s leading veterinary endocrine specialists, and joined us from Michigan State University, where he ran the world’s largest dedicated veterinary diagnostic endocrinology laboratory. We have further developed and integrated the laboratory businesses NWL has updated and increased its testing repertoire, particularly in into the Group and have identified a number of new product and respect of veterinary endocrinology and has also enhanced its schedule of UKAS accredited test procedures. The extension to the facilities allows the laboratory to process diagnostic samples more efficiently and comfortably whilst providing capacity for significant growth of the business in the future. service opportunities which will enhance future growth. PRODUCT DEVELOPMENT AND LICENSING During the year we successfully secured a number of partnerships and licensing agreements. The ongoing product development In April 2003, we took the step of rebranding the trading style of the programme continues to deliver good opportunities for medium and business, from ‘North Western Laboratories’ to ‘NationWide long-term growth. 08 “Product development expenditure is directly related to recognised quantifiable projects that have a high probability of being delivered to market.” Within the UK the long-term usage licence for Felimazole has been The current Vetoryl licence submission is still being developed with a granted. Two further products have been submitted for licensing and are expected to deliver products for marketing within the next twelve months. Additional licences for new dosing regimes for both Felimazole and Vetoryl are also being prepared; these licences, once view to submitting the product for mutual recognition within Europe during the current financial year. Negotiations are at an advanced stage with a major pharma company as a potential marketing partner for the EU market. granted, will further increase market penetration of these key Product development expenditure is directly related to recognised products. In May 2003, the Group entered a joint venture partnership with LAB International® Inc. (“LAB”), a Canadian-based drug development company. The partnership will run for an initial period of five years and strengthens the Group strategy to further develop and accelerate our licensed branded veterinary pharmaceutical portfolio. quantifiable projects that have a high probability of being delivered to market. Several new projects are being investigated, including two potential cross-over products from human pharma and an equine laminitis research project being conducted in association with the Royal Veterinary College. SUMMARY Under the partnership, LAB provides research studies on selected Although we have experienced a difficult and demanding financial therapeutic agents whilst Dechra is responsible for the formulation and regulatory submission of these products. I am pleased to report that we have already started work on the development of two generic veterinary pharmaceuticals. year, we have continued to invest significantly in product development, which is key to delivering our medium and long-term growth strategy. With strengthened management teams across the Group, NVS now moving forward again and Arnolds and the laboratory businesses continuing to deliver strong results, the Group Of even greater significance is the sub-licence agreement concluded is well positioned to achieve sustained organic growth. in May 2003 with Bioenvision® Inc. to develop Vetoryl for future marketing in the USA and Canada. This veterinary drug, which as I have already indicated has been successfully developed and marketed in the UK by Arnolds, is highly effective in the treatment of Cushing’s disease, an endocrine disorder in dogs. Vetoryl’s introduction into the North American market, which is some ten times Ian Page Chief Executive larger than the UK, represents a substantial opportunity for Dechra. 2 September 2003 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 09 Financial Review “. . . sales of our own branded pharmaceuticals, our key strategic focus, increased by 32.2% compared to last year.” Simon Evans, Group Finance Director OPERATING RESULTS The Group achieved a profit before tax, exceptional items and goodwill amortisation of £6.75 million for the year, a decrease of 11.3% compared to last year calculated on the same basis. The results reflect a difficult year in which the Group has suffered the double impact of challenging market conditions combined with a number of cost increases. Group turnover increased by 5.4% (which included the full year effect of acquisitions made in 2002) compared to 8.3% on a like-for- like basis last year. This principally reflected slower sales growth at NVS. However, sales of our own branded pharmaceuticals, our key strategic focus, increased by 32.2% compared to last year. Gross margin improved from 12.1% to 12.8%. This was due to the relatively high gross margins of the acquired businesses and the benefit of the margin improvement initiatives undertaken at NVS during the second half of the financial year. Operating costs before exceptional items and goodwill amortisation increased by 26.0% above last year. This represented 8.3% of sales compared to 6.9% last year. The principal cost increases were: — insurance premiums increased from £219,000 to £573,000 — product development expenditure increased from £525,000 to £997,000 — acquisitions added £1.2 million to the cost base — expansion of the NVS facility added £250,000 to the cost base Excluding the above, the cost increase above last year was 6.7% which represented further investment in people and systems to strengthen our core businesses. Overall, Group operating margin (before exceptional items and goodwill amortisation) reduced slightly from 5.15% to 4.55%. NET INTEREST CHARGE The net interest charge increased to £1.4 million from £1.2 million, principally reflecting the additional borrowings to partly fund the acquisitions made in the latter part of the year ended 30 June 2002. Interest was covered 5.8 times by operating profit before goodwill amortisation and exceptional items. EXCEPTIONAL ITEM The exceptional item comprised the costs of integrating the operations of Dales and Anglian onto a single site at Skipton together with the costs of reorganising the Group’s trading operations into a single statutory entity. TAXATION The current year tax charge on profit before exceptional items and goodwill amortisation is 30.4%, slightly higher than the standard UK corporation tax rate of 30%. The difference is principally due to certain expenses that are not allowable for tax. There was a credit in respect of prior years of £91,000 and this reduced the overall tax charge on profit before exceptional items and goodwill amortisation to 29.1%. EARNINGS PER SHARE AND DIVIDEND Adjusted earnings per share (before exceptional items and goodwill amortisation) was 9.39p. The proposed final dividend is maintained at 2.75p per share making a total maintained dividend for the year of 4.12p. The total dividend is covered 2.3 times by adjusted profit after taxation (before exceptional items and goodwill amortisation). 10 SUMMARY OF RESULTS Turnover Operating profit Profit before tax Earnings per share Dividend per share 2003 Before exceptional items and goodwill amortisation 2003 After exceptional items and goodwill amortisation 2002 Before exceptional items and goodwill amortisation 2002 After exceptional items and goodwill amortisation £179.3m £8.2m £6.75m 9.39p 4.12p £179.3m £170.2m £170.2m £7.1m £5.7m 7.52p 4.12p £8.8m £7.6m 10.59p 4.12p £8.5m £7.3m 10.12p 4.12p CAPITAL EXPENDITURE Total capital expenditure for the year was £1.6 million. The main items included the addition of a liquids manufacturing suite at Dales to allow the transfer of production of the acquired Anglian business and an expansion of the NationWide Laboratories premises to enable future growth. In addition, the Group spent £784,000 including legal costs as the first stage payment for the acquisition of the rights to Vetoryl in the North American market. Further stage payments of $0.75 million and $3.0 million are due on the submission of a new animal drug application to the US Food and Drug Administration and the granting of a marketing authorisation respectively. During the year the Group entered into a sale and leaseback of its van and car fleet. This raised net proceeds of £0.5 million after settling outstanding hire purchase liabilities. CASH FLOW AND NET DEBT The Group achieved an increased operating cash flow to £6.5 million (2002: £6.4 million) despite the lower level of profits this year. This reflects the continued strong focus on cash management. The second half of the financial year saw a strong cash inflow which reduced net debt by £4.3 million compared to 31 December 2002. Net debt at 30 June 2003 was £15.0 million, broadly similar to the figure at 30 June 2002. BALANCE SHEET AND SHAREHOLDERS’ FUNDS Shareholders’ funds increased to £7.47 million during the year reflecting the retained profit. (2002: 45 days). Creditor days reduced from 66 to 58 due to a reduction in creditors inherited from the Anglian acquisition, together with a reduction in stock purchased under deferred payment terms. CAPITAL POLICY It is the policy of the Company to maintain an appropriate balance between equity financing and debt financing so as to reduce the weighted average cost of capital of the Company but without over- gearing. 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 19 to the financial statements. Working capital increased from £8.9 million to £11.1 million. Stock turn improved from 7.8 times to 9.0 times due to a reduction in stocks at NVS, whilst debtor days were broadly similar to last year at 46 days Simon Evans Group Finance Director 2 September 2003 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 11 Board of Directors EXECUTIVE DIRECTORS Ian Page CHIEF EXECUTIVE Aged 42, 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. Simon Evans BCom, ACA GROUP FINANCE DIRECTOR Aged 39, 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. Ed Torr EXECUTIVE DIRECTOR Aged 43, 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. Michael Annice BSc (Hons), MRPharmS EXECUTIVE DIRECTOR Aged 43, 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. Neil Warner BA, FCA, MCT NON-EXECUTIVE DIRECTOR Aged 50, Neil joined the Board in May 2003. He is Finance Director at Chloride Group PLC, a position he has held since 1997. Prior to this, he spent six years at Exel PLC (formerly Ocean Group PLC) where he held a number of senior posts in financial planning, treasury and control. Previous to this, he worked for Balfour Beatty PLC (formerly BICC Group plc), Alcoa and PricewaterhouseCoopers. Stephen Whitehouse FCCA COMPANY SECRETARY Aged 55, Stephen has been with the Group since 1989 and was part of the MBO team. He was 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. NON-EXECUTIVE DIRECTORS Michael Redmond NON-EXECUTIVE CHAIRMAN Aged 59, 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. He 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. Malcolm Diamond MBE SENIOR NON-EXECUTIVE DIRECTOR Aged 54, 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 and has continued 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. 12 Financial Statements contents 14. Corporate Governance 17. Directors’ Remuneration Report 23. Social, Ethical and Environmental Responsibilities 24. Directors’ Report 26. Statement of Directors’ Responsibilities 27. Independent Auditor’s Report 28. Consolidated Profit and Loss Account 29. Balance Sheets 30. Reconciliation of Movements in Shareholders’ Funds 31. Consolidated Cash Flow Statement 32. Notes to the Financial Statements 47. Financial History 48. Notes Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 13 Corporate Governance COMPLIANCE WITH THE COMBINED CODE The Directors note the issue of the revised Combined Code by the Financial Reporting Council on 23 July 2003 and will report on the Company’s compliance as and when required (not effective for current period). In the opinion of the Directors, the Company has complied throughout the period with Section 1 of the existing code with the exception of the following items (references in brackets are to provisions in the Combined Code): a) Composition of the Remuneration Committee. Until May 2003 the Remuneration Committee consisted of two Non-Executive Directors; after this date it has consisted of three Non-Executive Directors (B.2.2). b) Composition of the Audit Committee. Until May 2003 the Audit Committee consisted of two Non-Executive Directors (both of whom were independent); after this date it has consisted of three Non-Executive Directors (who are all independent) (D.3.1). This compliance was achieved following the appointment of N.W. Warner as Non-Executive Director in May 2003. BOARD OF DIRECTORS The details of the Board of Directors are shown on page 12 and in the Directors’ Report on page 24. There is a clear division of responsibilities between the Chairman and Chief Executive. The Board consists of an Independent Non-Executive Chairman, two other Independent Non-Executive Directors and four Executive Directors (including the Chief Executive). 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 that all the Non-Executive Directors are independent of Management and free of any business or other relationship which could materially interfere with the exercise of their independent judgement, and are not dependent on the Company for their 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 have previously 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 with at least one meeting per year. In addition, the Board has three standing committees — the Audit, Remuneration and Nomination committees, the details of which are shown on page 15. The Board has reserved to itself powers relating to matters which it considers significant to the Group’s business, operational and financial risks. These include the approval of corporate policies, plans and budgets, acquisitions and disposals of companies or businesses; major investment and financial decisions; appointments to the Board; and major management or organisational changes. 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 business, major items of strategic planning, investments and significant policy issues. The Board considers at least annually the strategic plans of the Group and individual businesses. Periodically, the Directors receive presentations from management concerning key areas of the Group’s operations. Full year and interim results are reviewed by the audit committee and the Board and approved prior to publication. Other price sensitive information may be published only with the approval of the Board of Directors. Each Director is entitled on request to receive information to enable him to make informed judgements and adequately discharge his duties. In addition, all Directors have access to the advice and services of the Company Secretary and senior managers generally, and may take independent professional advice at the Company’s expense in connection with their duties. The Company Secretary is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of the Company Secretary is a matter for the Board as a whole. All newly appointed Directors receive an induction programme to the Company including Corporate Governance training and background to the Company. All Directors are encouraged to keep up to date on all matters relevant to the Group and attend briefings and seminars as appropriate. 14 The following committees, all of which operate within written terms of reference, assist the Board. THE AUDIT COMMITTEE Members: N.W. Warner (Chairman), M. Redmond, and 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, the results of that audit, any control issues raised by them and management’s responses. 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. To review the use of Auditors on non-audit work. To review the requirement for an Internal Audit function. THE REMUNERATION COMMITTEE Members: M.M. Diamond (Chairman), M. Redmond and N.W. Warner. The Directors consider that the Company has fully complied with Schedule A of the Directors’ Remuneration Report Regulations 2002. The Remuneration Committee meets at least twice a year and sets the pay and benefits of the Executive Directors, approves their terms and conditions and bonus schemes, having regard to performance. A report on the remuneration of Directors appears on pages 17 to 22. The terms of reference of the Remuneration Committee include the following responsibilities: To make recommendations to the Board on executive remuneration packages. To determine targets for any performance related pay schemes. To determine the policy for and scope of any pension arrangements for Executive Directors. To approve contracts of employment with Executive Directors. To determine the terms of Executive Directors’ compensation packages. To ensure that shareholders should be invited to approve the policy set out in the Directors’ remuneration report at the Company’s AGM. THE NOMINATIONS COMMITTEE Members: M. Redmond (Chairman), M.M. Diamond, and N.W. Warner. The Nominations Committee normally meets 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 are responsible for the Company’s system of Internal Control, which aims to safeguard the Company’s assets, to ensure that proper accounting records are maintained to ensure compliance with statutory and regulatory requirements and the effectiveness of, and efficiency of operations including the assessment and management of risk. A system of internal control is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance particularly against material misstatement or loss. The Company has a well-established framework of internal financial and operational control for identifying, evaluating and managing the risks faced by the Company. 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 prepares and updates a six- Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 15 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Corporate Governance continued monthly thorough review of relevant risk areas and systems of internal control. The review is structured by business area and key risk strategy. The current review was prepared to 30 June 2003. The Company’s key systems of internal control include: Business Plans Business plans provide a framework from which annual budgets and forecasts are agreed with each business unit, 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. Actual performance during the year is monitored monthly against budget, forecast and previous year. Full year forecasts are updated at regular intervals during the year based on trended historical data and realistic forecasts. 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 determined by the individual businesses. Management Structure Executive management are responsible for the identification, evaluation and management of the significant risks applicable to their business areas. The risks are assessed on a periodic basis and may be associated with a variety of internal and external sources. The Company and its business units operate control procedures designed to ensure complete and accurate accounting of financial transactions, and to limit the loss of assets or fraud. Measures taken include physical controls, segregation of duties in key areas, and internal reviews and checks. Key functions such as tax, treasury, insurance, legal and personnel are controlled centrally. RISK CONTROL Responsibility for monitoring the Group’s system of internal control rests with the Board. It is assisted 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 audit committee reviews the requirement for an internal audit function annually. The Board has reviewed the effectiveness of the Group’s internal control systems from the period from 1 July 2002 to the date of approval of the financial statements by means of the updated progress report and internal controls action plan. The Board reviews 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 interim 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 generally available to the 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 prepared 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’s financial statements have been prepared on the basis that the Group is a going concern. 16 Directors’ Remuneration Report This report is presented in accordance with the relevant provisions of the Combined Code on Corporate Governance (the “Combined Code”) and the Directors’ Remuneration Report Regulations 2002 (the regulations). The regulations require the Company’s auditors to report on certain “auditable” information required to be included in the Directors’ Remuneration Report. The audited information has therefore been separately highlighted. The Board is responsible for the Group’s remuneration policy and setting non-executive fees, although the task of determining and monitoring the remuneration packages of Executive Directors has been delegated to the Remuneration Committee. REMUNERATION COMMITTEE The Remuneration Committee is responsible for ensuring that the remuneration packages provided to Executive Directors are appropriate to individual levels of experience, responsibility and performance, are consistent with the Company’s remuneration policy, and are in line with the principles of good corporate governance. The committee considers remuneration packages payable to executives at comparable companies when setting remuneration of Executive Directors and also considers pay structures around the Group. The Remuneration Committee comprises solely Non-Executive Directors: M.M. Diamond, M. Redmond and N.W. Warner. The committee usually meets twice a year and is chaired by M.M. Diamond. During the year the Group Chief Executive attended all of these meetings in order to assist on matters concerning remuneration of other senior executives within the Group. The Chief Executive was not present during the part of the meetings where his own remuneration was discussed. The committee appointed DLA during the year to provide it with external advice in establishing a new long-term incentive plan for Executive Directors and senior management (see below). The committee will, if considered appropriate, also seek independent external advice relating to the broader remuneration package but did not do so in the year ended 30 June 2003. REMUNERATION POLICY The Company’s policy on Directors’ remuneration for the forthcoming year is that its remuneration packages should be capable of attracting, rewarding and retaining Executive Directors whilst being arrived at responsibly and fairly, when compared with similar organisations. The remuneration packages of Executive Directors are structured to include a performance related element linked to corporate and individual objectives. Both the Executive Share Plan and the Executive Bonus Scheme are performance related. Bonuses are not pensionable. Remuneration for Non-Executive Directors is limited to salary only with no performance related element. The Company’s policy on the remuneration of all Directors is reviewed annually. Once remuneration has been approved by the Board, the Chairman, where considered appropriate, will consult the Company’s principal shareholders regarding remuneration issues. This remuneration policy is included in the Annual General Meeting agenda for shareholder approval. COMPONENTS OF THE REMUNERATION PACKAGE Basic Salary The basic salary of each Executive Director is determined taking into account the responsibilities and performance of the individual together with independently furnished information on rates for similar jobs in comparable industry sectors. Details of salaries, bonuses and benefits paid to Executive Directors are included in the table headed “Summary of Remuneration” shown on page 21. Non-Executive Directors have a service contract for an initial 12 month period which is thereafter terminated by either party giving 12 months’ notice. Participation in share option schemes, bonus schemes or entitlement to a pension is not allowed under the service contract. Benefits in kind Executive Directors receive other benefits, including the use of a fully expensed car, medical cover and life insurance, which overall provide a competitive package comparable to that provided by other comparable quoted companies. Pensions The scheme is a funded, contributory, Inland Revenue approved money-purchase occupational pension scheme and is contracted into the State Earnings Related Pension Scheme. Share Option Schemes The Company operates the Executive Share Plan, the Approved Share Option Scheme, the Unapproved Share Option Scheme together with a savings related share option scheme. The key features of the schemes are described on page 19. Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 17 Directors’ Remuneration Report continued Executive Incentive Plan In the forthcoming year the Company will operate, subject to shareholder approval, the Executive Incentive Plan, a new share based incentive plan. The following table illustrates eligibility under each of these schemes in the forthcoming year: I.D. Page S.D. Evans E.T.W. Torr M.D. Annice SAYE Scheme Executive Share Plan Approved Scheme Unapproved Scheme Executive Incentive Plan — — — — — — — — — — — — Executive Incentive Plan Under this new plan the Remuneration Committee will make awards to senior executives over a specified number of shares in the Company, with vesting to individuals being subject to the achievement of performance targets. The first target is based on Total Shareholder Return (TSR) over a specified measurement period expressed as an annual percentage return over that period. The TSR would be calculated and compared to the TSR’s of other companies in the FTSE Small Cap Index. If the Company is ranked in the top quartile of the list of TSR’s achieved by the companies in the FTSE Small Cap Index throughout the measurement period, all of the shares over which an award had been made would vest. If the TSR of the Company was ranked in the second quartile then a specified number of shares over which the award had been made would vest in the ownership of the relevant participant. The number of shares that vested for a participant would be determined by reference to a straight line graph which ensured that half of the shares over which the award had been made would vest on the achievement of a TSR that placed the Company at the bottom of the second quartile and ownership of all of the shares would vest on an achievement of a TSR that placed the Company at the top of the second quartile. If the TSR of the Company was ranked in the third or fourth quartile then none of the shares over which an award had been made would vest and the relevant participant would not be entitled to any of the shares. In addition to the TSR performance target, no award will vest unless in the opinion of the Remuneration Committee the underlying financial performance of the Company has been satisfactory over the measurement period. The maximum length of the measurement period for any award will be four years. If, however, after three years the TSR achieved by the Company over a three year period is sufficient to indicate a comparative performance that would rank the Company in the second quartile or above, the measurement period will be three years. It is intended that, for Executive Directors, the initial awards will represent 100% of basic salary with awards in subsequent years being capped at 50% of basic salary. 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 operational performance targets derived at the beginning of the financial year. The bonus is calculated on formulae which are determined each year by the Remuneration Committee. In the case of I.D. Page and S.D. Evans, the bonus target for 2003 was based solely on Group performance, whereas the bonus of E.T.W. Torr and M.D. Annice was based equally upon Group and Business Unit performance. In respect of the year ended 30 June 2003, a 5% bonus would be payable on achieving in excess of 95% of target, with 10% becoming payable on meeting target. Thereafter for each 1% achieved above target, a further 1% of salary is payable, capped at 30% of annual salary. No bonus payments are pensionable. Executive bonuses in the forthcoming year will be payable on the fulfilment of the prescribed conditions set out below. I.D. Page S.D. Evans E.T.W. Torr M.D. Annice Bonus Payable for achievement of target (% of Salary) Proportion Payable on Group/ Business Unit Performance Business Unit Group 30% 25% 25% 20% 100% 100% 100% 30% — — — 70% In addition, each further 1% achieved above 105% of target attracts a further bonus of 1% of salary capped at a maximum additional 10% of annual salary. 18 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) THE EXECUTIVE SHARE PLAN The Executive Share Plan was 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 was intended to motivate Executive Directors to increase significantly the market value of the Company for the benefit of the shareholders. In addition, it was expected that the plan would 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 administered by the trustees of the Dechra Pharmaceuticals PLC Employment 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. There are two performance criteria that are attached to awards made under the Executive Share Plan, both of which must 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). 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. No awards were made in the year to 30 June 2003. Outstanding awards made previously under the scheme are shown on page 21. These awards are share options with an aggregate exercise price of £1 and will vest to the relevant Director if the performance criteria detailed above are achieved within the required timescales. Other than in circumstances which the Remuneration Committee considers 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. APPROVED AND UNAPPROVED SCHEMES In accordance with the terms of both schemes, employees, unless participating in the Executive Share Plan, may receive options to buy Company Shares at market price of those shares at the date of grant. 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 this scheme. Unapproved Scheme The Remuneration Committee made awards on 11 April 2003 to 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 over a consecutive three year period (commencing no earlier than the beginning of the accounting period immediately preceding the grant of the option) being greater than the percentage increase in the Retail Prices Index for the same period by at least 12 per cent. SAVE AS YOU EARN (SAYE) SCHEME Under a savings related scheme, options may be offered to employees including Executive Directors, enabling them to subscribe for ordinary shares in the Company at the market price of those shares at the date of grant less a discount up to a maximum of 20%, subject to participation in a designated savings scheme. There are no specific performance criteria attaching to these options. The Company granted options under the Dechra Pharmaceuticals PLC SAYE scheme on 3 April 2003. The table on page 22 provides an analysis of outstanding SAYE Directors’ share options. Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 19 Directors’ Remuneration Report continued CONTRACTS OF SERVICE Each Executive Director has a service contract with the Company which contains details regarding remuneration, 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 6 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. Details of Directors’ service contracts and notice periods are set out below: Name M. Redmond I.D. Page S.D. Evans E.T.W. Torr M.D. Annice M.M. Diamond N.W. Warner Commencement 25 April 2001 23 August 2000 23 August 2000 23 August 2000 23 August 2000 23 August 2000 2 May 2003 Notice Period (Director) Notice Period (Company) 12 months 6 months 6 months 6 months 6 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months There are no expiry dates applicable to either Executive or Non-Executive Directors’ service contracts. The Company may in its absolute discretion at any time after written notice of termination has been given by either party lawfully terminate the service contract by paying to the Director an amount equal to his salary entitlement for the unexpired period of notice together with an amount representing the fair value of any other benefits to which the Director is contractually entitled for the unexpired period of notice (subject in either case to deduction at source of income tax and national insurance contributions). In the event that the service contract is terminated part way through any financial year the Director shall not be entitled to any bonus in respect of that financial year. Non-Executive Directors’ compensation entitlements are confined to 12 months’ remuneration entitlement. Individual Directors’ eligibility for the various elements of compensation are set out below: Name M. Redmond I.D. Page S.D. Evans E.T.W. Torr M.D. Annice M.M. Diamond N.W. Warner Salary 12 months 12 months 12 months 12 months 12 months 12 months 12 months Bonus Benefits n/a Nil Nil Nil Nil n/a n/a n/a 12 months 12 months 12 months 12 months n/a n/a Where applicable, payment of this compensation would be in full and final settlement of all claims other than in respect of share options and pension arrangements. In an appropriate case the Directors would have a regard to the departing Director’s duty to mitigate loss, except in the event of dismissal following a change of control of the Company. Other than as described above, there are no express provisions within the Directors’ service contracts for the payment of compensation or liquidated damages on termination of employment. No awards of compensation for loss of office or any other reason have been made to any person, whether a Director or a former Director, during the year. No compensation payments were made to Executive or Non-Executive Directors during the year. Directors’ Shareholdings The beneficial interests of the Directors in office at 30 June 2003 and their families in the share capital of Dechra Pharmaceuticals PLC at 30 June 2003 was as follows: Shareholdings M. Redmond I.D. Page S.D. Evans E.T.W. Torr M.D. Annice M.M. Diamond N.W. Warner 20 Ordinary Shares 2003 35,000 592,167 663,000 342,414 596,334 5,000 — Ordinary Shares 2002 10,000 592,167 663,000 342,414 596,334 5,000 — Total Shareholder Return The graph below shows the total shareholder return performance of the Company over the past three years compared with the total shareholder return over the same period for the FTSE Small Cap Total Return Index. The FTSE Small Cap Index is considered to be an appropriate index as the Company is a constituent of that index. Total Shareholder Return Indices DECHRA PHARMACEUTICALS PLC FTSE Small CAP 180 160 140 120 100 80 60 40 20 2000 2001 2002 2003 The information shown above relates to the three-year period since the Company’s flotation in September 2000. AUDITED INFORMATION The auditors are required to report on the information contained in the remainder of this report. Summary of Remuneration Executive Directors I.D. Page (Chief Executive) S.D. Evans E.T.W. Torr M.D. Annice G.B. Evans (resigned 5 November 2001)* Non-Executive Directors M. Redmond (Chairman) M.M. Diamond N.W. Warner (appointed 2 May 2003) P.J. Redfern (deceased 23 January 2002) * Includes £194,000 compensation for loss of office SHARE OPTIONS Awards made previously under the Executive Share Plan are as follows: I.D. Page S.D. Evans E.T.W. Torr M.D. Annice Salaries & Fees £’000 Bonuses £’000 Other Benefits £’000 Total 2003 £’000 Total 2002 £’000 145 100 92 85 — 40 22 3 — 487 — — 2 — — — — — — 2 15 10 15 12 — — — — — 52 160 110 109 97 — 40 22 3 — 541 141 116 106 85 251 20 20 — 14 753 Exercise Dates 2004–2010 2004–2012 2004–2010 2004–2012 As at 30 June 2002 and 30 June 2003 166,666 166,666 166,666 166,666 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 21 Directors’ Remuneration Report continued Executive Share Plan No options were exercised, lapsed or granted during the year. Share options have an aggregate exercise price of £1 and vest subject to achieving the performance criteria described above. Directors’ entitlements under savings related share option schemes are as follows: I.D. Page S.D. Evans E.T.W. Torr M.D. Annice Exercise Dates Exercise Price 2006 2008 2004 2004 2005 2006 2008 158p 39p 158p 158p 129p 158p 39p At 1 July 2002 Total 10,680 — 6,131 2,452 4,418 4,272 — 2003 Cancelled (10,680) — — — — (4,272) — 2003 Granted at 39p — 42,115 — — — — 14,538 At 30 June 2003 Total — 42,115 6,131 2,452 4,418 — 14,538 Directors’ interests in share options remains unchanged at 2 September 2003. The middle market price for the Company’s shares on 30 June 2003 was 87.50p and the range of prices during the year was 47.50p to 136.50p. PENSION ENTITLEMENT All Executive Directors were members of the Dechra Holdings Limited money purchase scheme throughout 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 paid as follows: Age 42 39 43 43 Contributions 2003 £000 Contributions 2002 £000 17 12 11 10 — 50 14 11 7 9 6 47 I.D. Page S.D. Evans E.T.W. Torr M.D. Annice G.B. Evans (resigned 5 November 2001) By order of the Board M.M. Diamond Chairman Remuneration Committee 2 September 2003 22 Social, Ethical and Environmental Responsibilities The Board has received adequate information and has not identified any risks that affect the Company’s short and long term value. ENVIRONMENTAL POLICY Dechra Pharmaceuticals PLC acknowledges the importance of good environmental controls. It is the Company’s policy to comply and exceed environmental legislation currently in place, adopt responsible environmental practices and is committed to minimising the impact of its operations on the environment. This is being achieved within our manufacturing unit by complying with and bettering effluent discharge standards into local water supplies which is monitored by Yorkshire Water Authority and standard operating procedures which ensure contaminated waste is disposed of only under strict controls. Exhaust air is fully filtered before discharge. The Group complies with the Waste Packaging Obligations Regulations and maintains a modern fleet of low CO2 emission diesel vehicles, which are subject to a leasing arrangement and are replaced every three years. Dechra will continue to review its environmental controls and encourage its own staff, suppliers and customers to achieve similar high standards. 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 maintenance, 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. A written Health and Safety policy manual is in use throughout the Group. Individual sites operate Health and Safety Committees, which meet regularly to consider Health and Safety issues and ensure risk assessments are carried out where necessary. Dechra’s commitment to Health and Safety will be achieved by adhering to the following policies: • We will meet and where necessary exceed the requirements of all legislation. • We will ensure the involvement and consultation of all employees to achieve the implementation of our policy by risk assessment, continuous improvement and the monitoring of resources. Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 23 Directors’ Report The Directors present their Annual Report and audited financial statements for the year ended 30 June 2003. PRINCIPAL ACTIVITY The Group manufactures and sells pharmaceuticals and also markets and sells veterinary equipment and related services including computer systems, predominantly to the UK veterinary market, but also to overseas markets. The Company acts as a holding company to all Group subsidiaries. SHARE CAPITAL Details of the changes in share capital are shown in note 21 to the financial statements. RESULTS AND DIVIDENDS The results for the year are set out on page 28. The Directors recommend the payment of a final dividend of 2.75p per share which, if approved by shareholders, will be paid on 26 November 2003 to shareholders registered at 31 October 2003. An Interim Dividend of 1.37p per share was paid on 9 April 2003 making a total dividend for the year of 4.12p (2002: 4.12p). The total dividend payment is £2,093,000 (2002: £2,069,000). A retained profit of £1,740,000 (2002: £2,989,000) is transferred to reserves. BUSINESS REVIEW AND FUTURE DEVELOPMENTS 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 Financial Review. DIRECTORS The Directors who served during the year were as follows: M. Redmond (Chairman) I.D. Page S.D. Evans E.T.W. Torr M.D. Annice M.M. Diamond N.W. Warner (appointed 2 May 2003) The interests of the Directors in the share capital of the Company are shown in the remuneration report on pages 17 to 22. In accordance with the articles of association, M.M. Diamond and S.D. Evans retire by rotation and, being eligible, offer themselves for re-election. N.W. Warner being a new appointee offers himself for election to the Board. Following the AGM in October, M.D. Annice will step down from the Board. This will mean the structure of the Board is fully compliant with the ‘New Combined Code’. 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. It is the Company’s policy to provide equal recruitment and other opportunities for all employees, regardless of sex, religion, race or disability. The Group gives full consideration to applications for employment from disabled people, where they adequately fulfil the requirements of the job. 24 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 operates a SAYE share option scheme in which all employees of the Group can participate. 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 2003 was £997,000 (2002: £525,000). 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 2003, the Group had an average of 68 days (2002: 77 days) purchases outstanding in creditors. The Company had an average of NIL days (2002: NIL days) purchases outstanding in creditors. SUBSTANTIAL SHAREHOLDINGS As at 27 August 2003, the Company is aware of the following material interests representing 3% or more of the issued share capital in the Company: No. of Shares % of Shares Held 5,755,000 4,989,864 2,536,800 2,180,000 2,056,600 1,550,000 11.29% 9.79% 4.98% 4.28% 4.03% 3.04% Threadneedle Asset Management Hermes Pension Management Platinum Fund Managers Montanaro Investment Management Insight Investment 3i Asset Management AUDITORS A resolution to reappoint KPMG Audit Plc as auditors is to be proposed at the forthcoming Annual General Meeting. By order of the Board S.P. Whitehouse Secretary Dechra House 2 September 2003 Jamage Industrial Estate Talke Pits Stoke-on-Trent ST7 1XW Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 25 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. 26 Independent Auditor’s Report to the Members of Dechra Pharmaceuticals PLC We have audited the financial statements on pages 28 to 46. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Directors are responsible for preparing the Annual Report and the Directors’ Remuneration Report. As described on page 26, 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 whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been 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 regarding Directors’ remuneration and transactions with the Group is not disclosed. We review whether the statement on pages 14 to 16 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 the unaudited part of the Directors’ Remuneration Report, 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 and the part of the Directors’ Remuneration Report to be audited. 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 and the part of the Directors’ Remuneration Report to be audited 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 and the part of the Directors’ Remuneration Report to be audited. 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 2003 and of the profit of the Group for the year then ended; and — the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor Birmingham 2 September 2003 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 27 Consolidated Profit and Loss Account For the year ended 30 June 2003 2003 2002 Before Exceptional Before Exceptional Exceptional Items and goodwill amortisation £’000 179,309 (156,319) 22,990 (7,252) (7,576) 8,162 (1,416) 6,746 (1,960) 4,786 Items and goodwill amortisation (note 3) £’000 Exceptional Items and goodwill amortisation £’000 Items and goodwill amortisation (note 3) £’000 Total £’000 – – – – (1,061) (1,061) – (1,061) 108 (953) 179,309 170,202 (156,319) (149,664) 20,538 (6,166) (5,599) 8,773 (1,170) 7,603 (2,308) 5,295 22,990 (7,252) (8,637) 7,101 (1,416) 5,685 (1,852) 3,833 (2,093) 1,740 – – – – (295) (295) – (295) 58 (237) Total £’000 170,202 (149,664) 20,538 (6,166) (5,894) 8,478 (1,170) 7,308 (2,250) 5,058 (2,069) 2,989 9.39p 9.36p (1.87p) (1.86p) 7.52p 7.50p 10.59p 10.56p (0.47p) (0.47p) 10.12p 10.09p TURNOVER Cost of sales GROSS PROFIT Distribution costs Administrative expenses Operating profit Net interest payable and similar charges Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Dividends Retained profit for the financial year Earnings per ordinary share Basic Diluted Note 2 5 6 9 10 11 11 A statement of movements on reserves is given in note 22 to the financial statements. All amounts relate to continuing operations. There were no recognised gains and losses other than shown above. 28 Balance Sheets As at 30 June 2003 FIXED ASSETS Intangible assets Tangible assets Investments CURRENT ASSETS Stocks Debtors CREDITORS: amounts falling due within one year NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS: amounts falling due after more than one year NET ASSETS CAPITAL AND RESERVES Called up share capital Shares to be issued Share premium account Merger reserve Profit and loss account TOTAL EQUITY SHAREHOLDERS’ FUNDS Note 12 13 14 15 16 17 17 21 22 22 22 22 Group Company 2003 £’000 5,730 5,572 – 2002 £’000 5,284 6,324 – 11,302 11,608 17,296 28,001 45,297 19,302 25,822 45,124 2003 £’000 – – 4,608 4,608 – 55,004 55,004 2002 £’000 – – 4,619 4,619 – 46,440 46,440 (42,420) (42,445) (20,373) (13,997) 2,877 14,179 (6,708) 7,471 510 – 26,783 1,720 2,679 14,287 (8,538) 5,749 504 750 26,783 994 (21,542) (23,282) 7,471 5,749 34,631 39,239 (6,639) 32,600 510 – 26,783 – 5,307 32,600 32,443 37,062 (8,200) 28,862 504 5 26,783 – 1,570 28,862 The financial statements were approved by the Board of Directors on 2 September 2003 and are signed on its behalf by: I.D. Page Director S.D. Evans Director Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 29 Reconciliation of Movements in Shareholders’ Funds For the year ended 30 June 2003 At 1 July 2002 Profit for the financial year Dividends New shares issued (Decrease)/increase in shares to be issued At 30 June 2003 Group Company 2002 £’000 1,010 5,058 (2,069) 1,000 750 5,749 2003 £’000 28,862 5,830 (2,093) 6 (5) 2002 £’000 28,579 2,341 (2,069) 6 5 32,600 28,862 2003 £’000 5,749 3,833 (2,093) 732 (750) 7,471 30 Consolidated Cash Flow Statement For the year ended 30 June 2003 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 Purchase of intangible fixed assets Sale of tangible fixed assets Net cash outflow for capital expenditure and financial investment ACQUISITIONS AND DISPOSALS Acquisitions of subsidiary undertakings Overdrafts of acquired businesses Purchase of business Net cash inflow/(outflow) for acquisitions and disposals EQUITY DIVIDENDS PAID CASH OUTFLOW BEFORE FINANCING FINANCING New bank loans Term loans repaid Capital element of finance lease payments Net cash outflow from financing Decrease in cash in the period (Bank overdraft)/cash at 30 June 2002 Bank overdraft at 30 June 2003 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 Other non-cash changes MOVEMENT IN NET DEBT IN THE PERIOD NET DEBT AT 1 JULY 2002 NET DEBT AT 30 JUNE 2003 Note 24 2003 £’000 6,542 62 (1,400) (46) (1,384) 2002 £’000 6,397 16 (1,103) (39) (1,126) (2,066) (2,155) (1,553) (784) 1,113 (1,224) 32 – – 32 (2,078) (178) – (2,842) (568) (3,410) (3,588) (2,110) (5,698) (3,588) – 2,842 568 (178) (75) – (7) (260) (14,728) (14,988) (2,845) – 141 (2,704) (3,214) (429) (180) (3,823) (1,927) (5,338) 3,000 (3,364) (401) (765) (6,103) 3,993 (2,110) (6,103) (3,000) 3,364 401 (5,338) (418) (500) (8) (6,264) (8,464) (14,728) 25 25 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 31 Notes to the Financial Statements For the year ended 30 June 2003 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. 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 for the year dealt with in the accounts of the Company was £5,830,000 (2002: £2,341,000). TURNOVER Turnover represents cash and credit sales excluding value added tax and net of discounts allowed. 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 10–331/3% 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 AND INTANGIBLE ASSETS 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. The cost of intangible assets acquired, which are capitalised only if separately identifiable, is amortised over estimated useful lives. 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. 32 1. ACCOUNTING POLICIES continued 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 19. 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”. 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. The origin of all turnover was in the UK. 3. EXCEPTIONAL ITEMS AND GOODWILL AMORTISATION Reorganisation and rationalisation costs Compensation for loss of office Total exceptional items Goodwill amortisation Total exceptional items and goodwill amortisation 2003 £’000 176,804 2,505 179,309 2002 £’000 167,907 2,295 170,202 2003 £’000 500 – 500 561 1,061 2002 £’000 – 194 194 101 295 The reorganisation and rationalisation costs relate to the integration of the Group’s manufacturing operations onto a single site at Skipton, together with the costs of reorganising the Group’s trading operations into a single statutory entity. The compensation for loss of office in 2002 relates to the termination of the contract of Gary Evans, the former Chief Executive, and associated legal fees. Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 33 Notes to the Financial Statements continued For the year ended 30 June 2003 4. ACQUISITIONS The financial statements for the year ended 30 June 2002 included provisional amounts for fair value adjustments and total consideration in respect of the acquisition of Anglian Pharma Plc and Anglian Pharma Manufacturing Limited. Total consideration was previously contingent on the finalisation of completion accounts. The completion accounts have now been finalised resulting in total consideration payable to the vendors being reduced by £50,000. The effect of this was a net reduction of £32,000 in total cash consideration and a further £18,000 reduction in shares to be issued. In addition, further fair value adjustments were made of £216,000 (net of £92,000 related tax credit) in respect of stock and £57,000 (net of £25,000 related tax credit) in respect of tangible fixed assets. Both fair value adjustments were made on the basis of better information becoming available regarding the state and condition of those assets at the time of acquisition. The impact on goodwill of all adjustments, including the reduction in consideration, is an increase of £223,000 (see note 12). No further fair value adjustments are considered necessary in relation to the acquisition of North Western Laboratories Limited which also took place last year. 5. NET INTEREST PAYABLE AND SIMILAR CHARGES Bank loans and overdrafts Amortisation of arrangement fees Other loans 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 6. 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 £27,000 for the Parent Company (2002: £9,000)) Other payments to the auditors for non-audit services 2003 £’000 1,316 97 19 46 1,478 (62) 1,416 2003 £’000 997 1,044 204 561 (100) 753 404 75 115 2002 £’000 1,070 74 3 39 1,186 (16) 1,170 2002 £’000 525 1,033 256 101 (43) 603 10 66 54 In addition to the non-audit fees shown above, a further £nil (2002: £66,000) has been capitalised in respect of payments made for non-audit services provided by the auditors. Analysis of total fees payable to the Group auditors: Audit services Further assurance services Tax compliance services Tax advisory services Other services 2003 £’000 75 17 33 25 40 190 2002 £’000 66 74 20 17 9 186 7. REMUNERATION OF DIRECTORS Details of the remuneration, shareholdings, share options and pension contributions of the Directors’ are included in the Directors’ Remuneration Report on pages 17 to 22. 34 8. EMPLOYEES The monthly average numbers of staff employed by the Group, which includes Directors, were: Manufacturing Distribution Administration The costs incurred in respect of these employees were: Wages and salaries Social security costs Other pension costs 9. 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 2003 Number 2002 Number 140 308 167 615 2003 £’000 8,748 755 281 9,784 2003 £’000 1,866 (63) 1,803 77 (28) 49 1,852 108 70 289 141 500 2002 £’000 6,475 530 191 7,196 2002 £’000 2,281 (35) 2,246 (24) 28 4 2,250 58 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 35 Notes to the Financial Statements continued For the year ended 30 June 2003 9. TAX ON PROFIT ON ORDINARY ACTIVITIES continued 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% (2002: 30%). The differences are explained below: Profit on ordinary activities before taxation Current tax charge at 30% (2002: 30%) EFFECTS OF Permanent timing differences: – goodwill amortisation – depreciation on assets not eligible for tax allowances – disallowable expenses Temporary timing differences: – capital allowances in excess of/(less than) depreciation – other short term timing differences Adjustments to tax charge in respect of previous periods Total current tax charge (see above) 10. DIVIDENDS Interim paid 1.37p per share (2002: 1.37p) Final proposed 2.75p per share (2002: 2.75p) 2003 £’000 5,685 1,705 168 18 52 238 14 (91) (77) (63) 2002 £’000 7,308 2,192 30 18 17 65 (20) 44 24 (35) 1,803 2,246 2003 £’000 691 1,402 2,093 2002 £’000 682 1,387 2,069 11. 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 36 2003 pence 7.52 0.77 8.29 1.10 9.39 7.50 0.76 8.26 1.10 9.36 2002 pence 10.12 0.27 10.39 0.20 10.59 10.09 0.27 10.36 0.20 10.56 11. 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 Earnings for adjusted and adjusted diluted earnings per share £’000 £’000 3,833 392 4,225 561 4,786 2003 No. 5,058 136 5,194 101 5,295 2002 No. Weighted average number of ordinary shares for basic and adjusted earnings per share Impact of share options Weighted average number of ordinary shares for diluted and adjusted diluted earnings per share 50,975,037 164,117 49,989,015 151,049 51,139,154 50,140,064 12. INTANGIBLE FIXED ASSETS Cost At 1 July 2002 Adjustments to fair values and consideration (see note 4) Additions At 30 June 2003 Amortisation At 1 July 2002 Charge for the year At 30 June 2003 Net book value At 30 June 2003 At 1 July 2002 Goodwill £’000 Patent rights £’000 5,385 223 – 5,608 101 561 662 4,946 5,284 – – 784 784 – – – 784 – Total £’000 5,385 223 784 6,392 101 561 662 5,730 5,284 Goodwill is being amortised over 10 years, being the Directors’ estimate of the useful life. During the year, the Group entered into an agreement with Bioenvision, a company based in the USA, to acquire the exclusive marketing and development rights of Trilostane for animal health applications in the USA and Canada. Trilostane is the active ingredient in the Group’s branded product Vetoryl. The first stage payment of £784,000 including legal costs was made in 2003 and has been capitalised as a patent right. Depending upon certain milestones being achieved, the Group is committed to making two further payments. The second stage payment of US$750,000 becomes payable on the submission of a new animal drug application to the US Food and Drug Administration (“FDA”) and the final payment of US$3,000,000 becomes payable on the FDA granting a marketing authorisation for Vetoryl. Once a marketing authorisation has been granted and the patent right can be applied commercially, the patent rights will begin to be amortised. Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 37 Notes to the Financial Statements continued For the year ended 30 June 2003 13. TANGIBLE FIXED ASSETS Group Cost At 1 July 2002 Additions Disposals Fair value adjustment (see note 4) At 30 June 2003 Depreciation At 1 July 2002 Disposals Charge for the year Fair value adjustment (see note 4) At 30 June 2003 Net book value at 30 June 2003 Net book value at 1 July 2002 Leased assets Net book value of assets held under finance leases: At 30 June 2003 At 1 July 2002 Contracted Capital Commitments (tangible fixed assets) Short Leasehold Land and Buildings £’000 Freehold Land £’000 Motor Vehicles £’000 Plant and Fixtures £’000 13 – – – 13 – – – – – 13 13 – – 2,171 438 (2) – 2,607 223 (2) 138 – 359 2,248 1,948 – – 2,322 364 (2,019) – 667 1,004 (993) 430 – 441 226 1,318 118 662 5,481 802 (389) (94) 5,800 2,436 (389) 680 (12) 2,715 3,085 3,045 122 178 2003 £’000 202 Total £’000 9,987 1,604 (2,410) (94) 9,087 3,663 (1,384) 1,248 (12) 3,515 5,572 6,324 240 840 2002 £’000 649 38 14. FIXED ASSET INVESTMENTS Company Cost and net book value At 1 July 2002 Acquisition of shares in subsidiary undertakings Adjustment to purchase consideration (see note 4) At 30 June 2003 A list of principal subsidiary undertakings is given in note 28. Shares in Subsidiary Undertakings £’000 4,619 20 (31) 4,608 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. 15. STOCKS Group Raw materials and consumables Work in progress Finished goods and goods for resale 16. DEBTORS Trade debtors Amounts owed by subsidiary undertakings Group relief receivable Deferred taxation Other debtors Prepayments and accrued income 2003 £’000 1,385 435 15,476 17,296 2002 £’000 1,619 72 17,611 19,302 Group Company 2003 £’000 26,765 – – 7 859 370 2002 £’000 24,550 – – 31 869 372 2003 £’000 – 53,541 1,371 – 31 61 2002 £’000 – 44,955 1,433 – 41 11 28,001 25,822 55,004 46,440 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 39 Notes to the Financial Statements continued For the year ended 30 June 2003 17. CREDITORS Bank loans and overdrafts Unsecured loan stock 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 Proposed dividend Bank loans Unsecured loan stock Hire purchase and finance leases Other creditors Falling Due within One Year Group Company 2003 £’000 7,652 500 128 2002 £’000 5,838 – 423 29,224 31,709 – 226 1,032 1,463 793 1,402 – 253 1,387 678 770 1,387 42,420 42,445 2003 £’000 18,333 500 – – 20 – – – 118 1,402 20,373 2002 £’000 10,334 – – – 2,018 – – – 258 1,387 13,997 Falling Due after more than One Year Group Company 2003 £’000 6,639 – 69 – 6,708 2002 £’000 7,700 500 267 71 8,538 2003 £’000 6,639 – – – 2002 £’000 7,700 500 – – 6,639 8,200 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. 40 18. BORROWINGS Borrowings due within one year Bank overdraft Bank loan Unsecured loan stock Borrowings 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 within one year Due between one and two years Unsecured loan stock due between one and two years Group Company 2003 £’000 5,698 1,954 500 8,152 1,954 4,886 6,840 (201) 6,639 128 69 197 – 2002 £’000 2,110 3,728 – 5,838 3,728 4,180 7,908 (208) 7,700 423 267 690 500 2003 £’000 16,379 1,954 500 18,833 1,954 4,886 6,840 (201) 6,639 – – – – Total borrowings 14,988 14,728 25,472 2002 £’000 6,606 3,728 – 10,334 3,728 4,180 7,908 (208) 7,700 – – – 500 18,534 The bank overdraft of £5.698 million and term loan of £8.794 million from Bank of Scotland are secured by a fixed and floating charge on the assets of the Group. Interest is charged on the overdraft at 1% over base and on the term loan at 1.25% over LIBOR. The loan is repayable in semi-annual instalments of £977,000. 19. 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 10 and 11. 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 The Group’s financial assets and liabilities are, with the exception of finance leases, 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 2003 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 £197,000 (2002: £690,000) with a weighted average fixed interest rate of 7.9% (2002: 8%) over a weighted average term of 18 months (2002: 15 months). Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 41 Notes to the Financial Statements continued For the year ended 30 June 2003 19. FINANCIAL INSTRUMENTS AND DERIVATIVES continued c) Foreign currency exposure profile There were no material foreign currency monetary assets or liabilities that would give rise to gains or losses in the profit and loss account. d) Maturity of borrowings Details are shown in notes 17 and 18. e) Maturity of facilities At 30 June 2003 the Group had an undrawn committed revolving credit facility of £5 million maturing in 2005. 20. DEFERRED TAX At 1 July 2002 (included in debtors) Transfer from profit and loss account Fair value adjustment (see note 4) At 30 June 2003 (included in debtors) The amounts provided for deferred taxation at 30% (2002: 30%) are as follows: Group Accelerated Capital allowances Short term timing differences Amounts included in debtors Group £’000 (31) 49 (25) (7) 2002 £’000 89 (120) (31) 2003 £’000 20 (27) (7) 42 21. CALLED UP SHARE CAPITAL Issued share capital At 1 July 2002 New shares issued At 30 June 2003 Authorised share capital At 30 June 2003 and 30 June 2002 Ordinary Shares of 1p each No. 50,442,244 532,793 50,975,037 75,000,000 £’000 504 6 510 750 On 17 May 2003, 532,793 new ordinary shares of 1p were issued to the vendors of Anglian Pharma Plc and Anglian Pharma Manufacturing Limited in satisfaction of the deferred consideration arising on last year’s acquisition of these companies (see note 4). SHARE OPTIONS Outstanding share options over ordinary shares of 1p at 30 June 2003 under the various Group Share Option Schemes are as follows: Exercise Price At 30 June Exercise Period per Share Pence 2002 Number Exercised Number Unapproved Share Option scheme 14 September 2000 22 April 2002 11 April 2003 2003 – 2010 2005 – 2012 2006 – 2013 SAYE scheme 26 April 2001 9 April 2002 3 April 2003 Total share options 2004 – 2006 2005 – 2007 2006 – 2008 120 153.5 58.5 158 129 39 524,000 399,000 – 923,000 178,124 150,614 – 328,738 1,251,738 – – – – – – – – – Granted Number – – 124,000 124,000 Lapsed Number (53,000) (22,000) (3,000) At 30 June 2003 Number 471,000 377,000 121,000 (78,000) 969,000 – – (101,648) (82,554) 76,476 68,060 1,034,938 — 1,034,938 1,034,938 (184,202) 1,179,474 1,158,938 (262,202) 2,148,474 Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 43 Notes to the Financial Statements continued For the year ended 30 June 2003 22. RESERVES Group At 1 July 2002 New shares issued Decrease in shares to be issued Retained profit for the year At 30 June 2003 Shares to be issued £’000 750 – (750) – – Share Premium Account £’000 26,783 – – – Merger Reserve £’000 994 726 – – Profit and Loss Account £’000 (23,282) – – 1,740 26,783 1,720 (21,542) Shares to be issued reduced on the issue of new ordinary shares relating to the acquisition of Anglian Pharma Plc and Anglian Pharma Manufacturing Limited (see notes 4 and 21). Company At 1 July 2002 Decrease in shares to be issued Retained profit for the year At 30 June 2003 23. GOODWILL 5 (5) – – 26,783 – – 26,783 – – – – 1,570 – 3,737 5,307 The cumulative amount of goodwill written off to reserves at 30 June 2003 was £30,184,000 (2002: £30,184,000). 24. RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOW Operating profit Depreciation Goodwill amortisation Profit on disposal of tangible fixed assets Decrease/(increase) in stocks Increase in debtors Decrease in creditors Net cash inflow from operating activities 44 2003 £’000 7,101 1,248 561 (100) 1,698 (2,197) (1,769) 6,542 2002 £’000 8,478 1,289 101 (43) (2,223) (601) (604) 6,397 25. ANALYSIS OF NET DEBT Borrowings due after one year Bank overdraft Other borrowings due within one year Finance leases Major non-cash transactions: At 1 July 2002 £’000 (8,200) (2,110) (3,728) (690) (14,728) Cash Inflow/ (Outflow) £’000 – (3,588) 2,842 568 (178) Other Non-Cash Changes £’000 1,561 — (1,568) (75) (82) At 30 June 2003 £’000 (6,639) (5,698) (2,454) (197) (14,988) 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 £75,000 (2002: £133,000) and finance leases with a total capital value of £nil (2002: £285,000) arising on the acquisitions of subsidiaries. 26. OTHER FINANCIAL COMMITMENTS At 30 June 2003 the Group has the following commitments payable within one year under operating leases expiring: Within one year Between one and two years Between two and five years In five years or more 2003 2002 Land and buildings £’000 Other assets £’000 Land and buildings £’000 Other assets £’000 53 – 66 655 774 104 111 418 – 633 – 9 51 756 816 – – – – – The Company had no commitments under operating leases in either the current or prior year. 27. PENSIONS The Group operates a defined contribution pension scheme for certain employees. The Group contributed between 4% and 12% of pensionable salaries which amounted to £281,000 (2002: £191,000) (see note 8). Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 45 Notes to the Financial Statements continued For the year ended 30 June 2003 28. SUBSIDIARY UNDERTAKINGS The principal subsidiary undertakings of the Company, all of which are wholly owned, are: Company Dechra Limited Country of Operation Country of Incorporation Principal Activity UK Great Britain Wholesaler, marketer and manufacturer of pharmaceuticals; Wholesaler and marketer of veterinary products, instruments and equipment; Provider of veterinary laboratory services National Veterinary Services Limited* UK Great Britain Wholesale of veterinary products Arnolds Veterinary Products Limited* UK and Export Great Britain Marketer of veterinary pharmaceuticals, Dales Pharmaceuticals Limited* Veneto Limited North Western Laboratories Limited* Cambridge Specialist Laboratory Services Limited† Anglian Pharma Manufacturing Limited‡ Anglian Pharma Limited* UK UK UK UK UK UK Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain instruments and equipment Manufacture of pharmaceuticals Holding Company Veterinary Laboratory Veterinary Laboratory Manufacture of pharmaceuticals Holding Company * 100% of ordinary share capital held by Veneto Limited. Voting preference shares held by Dechra Pharmaceuticals PLC Employee Benefit Trust. † 100% of ordinary share capital held by North Western Laboratories Limited. ‡ 100% of ordinary share capital held by Anglian Pharma Limited. 46 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 2003 £’000 2002 £’000 2001 £’000 2000 £’000 179,309 170,202 156,400 145,487 8,162 5,685 3,833 (2,093) 1,740 9.39 4.12 615 11,302 11,157 (14,988) 7,471 6,542 (1,384) (2,066) (1,224) 32 (2,078) (3,410) (3,588) 8,773 7,308 5,058 (2,069) 2,989 10.59 4.12 500 11,608 8,869 (14,728) 5,749 6,397 (1,126) (2,155) (2,704) (3,823) (1,927) (765) (6,103) 8,234 4,772 3,034 (1,867) 1,167 9.29 3.75 454 4,317 5,157 (8,464) 1,010 3,453 (7,712) (1,195) (1,771) (100) (622) 2,714 (5,233) 7,505 2,088 1,546 – 1,546 6.05 – 408 2,595 1,580 (31,994) (27,819) 12,036 (3,662) (252) (859) (260) – (2,473) 4,530 1999 £’000 130,762 6,033 417 205 – 205 1.61 – 367 2,514 5,823 (37,669) (29,332) 5,424 (3,348) 61 (183) (25) – (1,388) 541 The historical figures have been adjusted to reflect the adoption of FRS19 “Deferred Tax”. Dechra Pharmaceuticals PLC Annual Report and Accounts 2003 47 Notes 48 Advisers STOCKBROKER & FINANCIAL ADVISER Evolution Beeson Gregory 100 Wood Street London EC2V 7AN 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 REGISTRARS Computershare Services PLC PO Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH FINANCIAL PR Citigate Dewe Rogerson 9 The Apex 6 Embassy Drive Edgbaston Birmingham B15 1TP Printed by Jones & Palmer Limited, Birmingham. tel: (0121) 236 9007 DECHRA® PHARMACEUTICALS PLC 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 

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