D e c h r a ® P h a r m a c e u t i c a l s P L C A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 4 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 Evolving veterinary medicine Dechra® Pharmaceuticals PLC Annual Report and Accounts 2004 Moving forward in a new world Dechra® Pharmaceuticals Development in an evolving market Summary of Results 2004 Before exceptional items and goodwill amortisation 2003 Before exceptional items and goodwill amortisation 2004 After exceptional items and goodwill amortisation 2003 After exceptional items and goodwill amortisation Turnover £186.8m £179.3m +4% £186.8m £179.3m +4% Operating profit Profit before tax £9.2m £8.1m £8.2m +13% £6.7m +19% Earnings per share 11.28p 9.39p +20% Dividend per share 4.70p 4.12p +14% £8.5m £7.4m 9.97p 4.70p £7.1m +20% £5.7m +30% 7.52p +33% 4.12p +14% Contents 01 Welcome to Dechra 28 Statement of Directors’ Responsibilities 02 Chairman’s Statement 04 Chief Executive’s Review 10 Financial Review 12 Board of Directors 14 Corporate Governance 29 Independent Auditors’ Report to the Members of Dechra Pharmaceuticals PLC 30 Consolidated Profit and Loss Account 31 Balance Sheets 32 Reconciliation of Movements in Shareholders’ Funds 18 Directors’ Remuneration Report 33 Consolidated Cash Flow Statement 25 Social, Ethical and Environmental Responsibilities 26 Directors’ Report 34 Notes to the Financial Statements 48 Financial History 49 Advisers 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 Advisers Merchant Bank & Financial Advisers NM Rothschild & Sons Limited New Court St Swithins Lane London EC4P 4DU Stockbroker & Financial Advisers 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 LLP Victoria Square House Victoria Square Birmingham B2 4DL Designed and Printed by Jones & Palmer Limited, Birmingham. tel: (0121) 236 9007 Welcome to Dechra Our Business An emerging pharmaceutical business, focused on the veterinary market. Our Strategic focus The continued development of our veterinary pharmaceutical portfolio. Increasing our pharmaceutical penetration into international markets. Pharmaceuticals Marketing and development of licensed branded pharmaceuticals to the veterinary profession worldwide. UK market leading supplier of veterinary instruments and equipment Licensed manufacturer of human and veterinary pharamaceuticals for Arnolds and third party customers UK market leader in the supply of pharmaceuticals and added value services to the veterinary profession, including management information systems and consumer and internet services Multi-disciplined independent commercial veterinary laboratories providing diagnostic and clinical pathology services Services Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 (cid:2) (cid:2) Chairman’s Statement “We expect to see the positive results from our hard work and investments made over the last three years beginning to feed through to sales for the Group in the current financial year.” Introduction The Group’s progress in achieving its objectives of improving operational efficiencies, increasing margins, delivering new services and the development of its veterinary pharmaceutical portfolio is reflected in these results. During the year our distribution business improved operating margins and returned to sales growth following a flat start. Our manufacturing operation significantly improved productivity and profitability and our own pharmaceutical sales increased by 16%. Further details are set out under the Chief Executive’s Review. Our strategic focus on the development of our veterinary pharmaceutical products is progressing extremely well. We have a portfolio of new products and range extensions under in-house and through development both partnerships. These will provide us with new opportunities to extend our pharmaceutical range in the UK and on a global basis. Financial Highlights Group turnover increased 4% from £179.3 million to £186.8 million. Operating profit before exceptional items and goodwill amortisation increased by 13% to £9.2 million (2003: £8.2 million). Profit before tax, calculated on the same basis, improved by 19% to £8.1 million (2003: £6.7 million). Profit after exceptional items and goodwill amortisation was up 30% at £7.4 million (2003: £5.7 million). Adjusted earnings per share (pre-exceptional items and goodwill amortisation) was 11.28 pence (2003: 9.39 pence), a 20% increase over 2003. The figure after exceptional items and goodwill amortisation was 9.97 pence (2003: 7.52 pence), an improvement of 33%. Gross margin improved from 12.8% to 13.6% reflecting the continued ongoing improvements in product mix, productivity and operational efficiencies. Cash flow during the period was strong, with operating cash flow being 125% of operating profit. Net debt reduced by 33% to £10.1 million against £15.0 million at June 2003, which is a credit to the strong focus on cash management over the last three years. Interest cover (before exceptional items and goodwill amortisation) remains healthy at 8.2 times. Research and development spend in the period was slightly up on the previous year at £1.1 million reflecting investement in our veterinary pharmaceutical portfolio. We expect further increases during the current financial year as we plan for future growth. 02:03 Although capital expenditure in the period was relatively modest, we anticipate this to be higher in 2004/5 as we enhance our information technology platform within our distribution business and upgrade our injections facility at our UK manufacturing plant. Additionally, following submission later this year of our New Animal Drug Application to the United States Food and Drug Administration (“FDA”) in the USA for Vetoryl®, a second milestone payment will become due under the terms of our agreement with Bioenvision Inc. Dividend To reflect the solid improvement in the Group’s profitability and to underpin the Board’s confidence in the Group’s strategic development, the Directors are recommending a final dividend of 3.15 pence per share. This, together with the interim dividend paid of 1.55 pence per share, makes a total for the year of 4.70 pence per share, an increase of 14% on 2003. The total dividend is covered 2.4 times by profit after taxation but before exceptional items and goodwill amortisation. The final dividend, which is subject to shareholder approval at our Annual General Meeting to be held on Thursday 21 October 2004, will be paid on 24 November 2004 to shareholders on the Register as at 29 October 2004. Current Trading and Prospects The strong performance of the Group has continued into the first two months of this new financial year and results are in line with internal budgets. As I reported earlier, the development of our veterinary pharmaceutical portfolio is progressing extremely well. We are on schedule to launch at least two new products in the UK, and one in Europe during this new financial year and we have taken significant steps towards licensing Vetoryl® in the USA. In addition, our partnerships, alliances and collaboration agreements offer a number of opportunities to extend our portfolio. As shareholders are aware, the research and development of any specialist pharmaceutical product can take a number of years. However, we expect to see the positive results from our hard work and investments made over the last three years beginning to feed through to sales for the Group in the current financial year. We remain confident that we will be able to report further progress when we announce our Interim Results in March 2005. People On behalf of the Board and shareholders I would like to thank all the Group’s employees for their hard work, continued focus, and for working with the management the team productivity, profitability and efficiency of our business. improve to Michael Redmond Chairman 7 September 2004 I would also like to welcome all new staff who joined us during the year. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Chief Executive’s Review “A number of exciting new pharmaceutical development opportunities are being explored as we increase our focus on developing Dechra into a global veterinary pharmaceutical business.” Pharmaceuticals Product Development & Licensing The most important strategic growth opportunity for Dechra is the development of our veterinary pharmaceutical programme. All major products in the development pipeline are on target with a number of licence applications submitted and pending approval. A further strategy is to extend the market presence of our own pharmaceuticals into North America, Mainland Europe, Australasia and Japan. In December 2003, we completed a European marketing agreement with Janssen Animal Health. The initial five year partnership allows Janssen full marketing and distribution rights to Felimazole® and Vetoryl® in Mainland Europe with Dechra retaining all intellectual property and manufacturing rights. Janssen’s extensive knowledge of the European market will allow the launch to be quicker and more cost-effective than we could have achieved independently. The full EU licence for Felimazole®, gained through the mutual recognition procedure, has now been received, all European territories having approved the application. The product will be launched during Autumn 2004 in the key territories of France and Germany with all other countries being rolled out in 2005. We have successfully completed all remaining UK based trials for Vetoryl®. Dossier submission for EU approval is anticipated in this financial year. Additionally, the FDA has granted Vetoryl® an expedited review, which we believe is a very positive indication of the clinical need for the product within the USA. The North American market is ten times larger than the UK, and with the high level of awareness of Cushing’s Disease (for which Vetoryl® is the preferred treatment), the product’s introduction represents a significant growth opportunity for the Group. We are at an advanced stage in the appointment of a US national to head up our North American marketing drive. We have also identified partners to license, market and distribute both Vetoryl® and Felimazole® in Canada and Australia, with contracts currently being negotiated. 04:05 The Equine Laminitis project which we commenced with The Royal Veterinary College in 2002 has produced some encouraging early results. With these positive indications, we are now entering the next stage of development. Trials of a needle-free injection system via a partnership with The Medical House PLC are also currently being undertaken. Initial compliance has been successful. We have recently submitted dossiers for three new products and two range extensions for approval to the UK assessors, the Veterinary Medicines Directorate (“VMD”). The range extensions are a 30mg Vetoryl® capsule targeted specifically at small dogs, which is currently sold on a “specials” order basis, together with the introduction of a 2.5mg Felimazole® tablet for cats, which will offer increased flexibility and dosing options. We anticipate receiving marketing approval for the majority of these products in time for a UK launch in the current financial year. A number of other exciting new pharmaceutical development opportunities are being explored as we increase our focus on developing Dechra into a global veterinary pharmaceutical business. Sales & Marketing The focus by Arnolds on sales of licensed veterinary pharmaceutical products has been reflected in its results. 70% of turnover is now pharmaceutical, with the balance being instruments and consumables. Our key successes have been the continued market penetration of our lead products, Equipalazone®, Vetoryl® and Felimazole®, each of which now exceed sales of £1 million per annum. Equipalazone®, which has dominated the equine non-steroidal market for over ten years, grew sales by 11%. In the last twelve months, Vetoryl® sales increased by 39% and Felimazole® by 132%. Both products have achieved in excess of 80% market penetration of companion animal veterinary practices and we anticipate that the number of animals being prescribed the products will continue to grow. In response to the continuing growth of our own pharmaceuticals and imminent new product launches, we have decided to restructure the Arnolds business. The instruments, consumables and capital goods part of the business has been consolidated into one business unit, and the Pharmaceuticals business will become an independent business unit. The roles of the marketing ‘product team will change managers’ who will be responsible for marketing and managing a particular product on a global basis giving them increased responsibility and accountability. to The Arnolds website is being re-developed to provide easy access to the latest information and technical data on our key products. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Chief Executive’s Review continued “Our key successes have been the continued penetration of our lead products, Equipalazone®, Vetoryl® and Felimazole®, all of which now exceed sales of £1 million per annum.” Pharmaceuticals continued Manufacturing The restructuring of the management team at the beginning of the year and the focus on high value profitable business and operational improvements have resulted in the successful turnaround in Dales’ performance. Investment in state-of-the-art capsule production equipment provided significant improvements in yields, output and product quality which subsequently improved supply and, more importantly, customer service levels. In June 2004, we achieved our £1 million per month sales target and we anticipate ongoing run rates to be around this level during the current financial year. Dales will continue to provide the technical pharmaceutical input to the Group Regulatory function support of new marketing authorisation applications (product licences) and in the renewal process for existing licences. in 06:07 Hamilton, south of Glasgow, with a dedicated service team to focus on developing relationships with the veterinary practices across an important region that offers NVS substantial growth opportunities. Information Technology We continue to develop new services to offer the veterinary practitioner. Through our Alternative Analysis tool, we can study the spend of a particular practice and recommend mutually financially beneficial products. 340 practices benefited from this service last year. In partnership with our customers, NVS territory managers can also exploit the NVS Indices, which analyses key data to indicate the profitability of a practice by product category and identify areas of potential growth and improvement. Our other established products Vetcom® Windows, Handyscan and Vet2Pet® continue to perform well. Services Distribution Although market conditions were competitive, National Veterinary Services (“NVS”) produced an encouraging performance with a 17% increase in operating profits, whilst maintaining its 42% share of the veterinary market. Our recently introduced own branded ‘Valu’ range of disposable products, which offers quality at a highly competitive price, is running at annualised sales in excess of £400,000. We expect sales to increase over the coming twelve months as a result of our continued focus on these high margin products. The full implementation of the automatic order consolidation and weight checking system, completed in the third quarter, has improved overall efficiency by increasing customer order picking rates and removing the need for full manual checking. NVS has been the first to apply this technology in the veterinary sector and we expect to see the full benefits of this investment in this new financial year. During the next twelve months, NVS will upgrade its internal IT systems, which will provide state-of-the-art functionality delivering future operational and customer benefits. To better service and meet the needs of our customers in the South East, we have split our Swanley operation into two depots, one in Swanscombe and the other in Caxton Hill. In Scotland, we have opened a distribution centre in Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Chief Executive’s Review continued “NVS produced an encouraging performance with a 17% increase in operating profits, whilst maintaining its 42% share of the veterinary market.” Services continued Laboratories Our Laboratory Services business has benefited from Group strengths which have contributed to the excellent results achieved by NationWide Laboratories (“NWL”) and Cambridge Specialist Laboratory Services (“CSLS”). During the period, they grew their customer base and added 18 new clinical & diagnostic services to their range. implementation of The improved workflow systems has provided substantial operational efficiencies and enhanced our already high levels of customer service. During the current financial year, NWL will be targeting key territories where it has identified significant opportunities to expand its business, in particular with its specialist same day service. Roadshows Working with the veterinary profession, we have, over the course of the year, carried out a number of conferences, forums and symposiums. This has enabled us to market Group services, educate veterinarians on our specialist veterinary pharmaceutical portfolio and contribute to the continued professional development of our veterinary clients. We have also been involved in debates on the future of the sector, identifying the best way forward to assist practices to develop to their full potential. 08:09 People Dechra currently employs 647 people. During the year we further strengthened operational management across the Group. This has had a beneficial effect in particular at Dales, our manufacturing facility, where the experience and skills brought into the business with the appointments of a new Finance Director, Quality Director and Manufacturing Manager have contributed to its much improved performance. In July 2004, we appointed a new Finance Director at Arnolds. Stephen Whitehouse, who previously held the position, will concentrate on his role as Group Company Secretary. The Group recognises the importance of staff development. Each business is responsible for coordinating an appropriate career development programme which includes internal and external training courses suitable to meet individual staff requirements. Summary Following a very challenging period last year, the results achieved this year are a tribute to the hard work and dedication of everybody in the Group. We will continue to work together to exploit our market leading position within our businesses whilst taking advantage of the opportunities to develop our veterinary drug portfolio both in the UK and internationally. Ian Page Chief Executive 7 September 2004 Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Financial Review “I am pleased that the results of our efforts are seen in record profits this year together with a substantial reduction in net debt.” Introduction The focus over the last year, from a financial perspective, has been to lift operating margins in all of our businesses and achieve an improvement in working capital management and cash flow. I am pleased that the results of our efforts are seen in record profits this year together with a substantial reduction in net debt. Operating Results The Group achieved a profit before tax, exceptional items and goodwill amortisation of £8.1 million, an increase of 19.5% compared to last year calculated on the same basis. The results after exceptional items and goodwill amortisation are summarised on the inside front cover. Group turnover improved by 4.2% although, after a flat first half of the year, it was encouraging to see sales in the second half increase by 8.6%. This reflects the continued success of our branded pharmaceutical product portfolio and significantly better productivity at our manufacturing operation. improved market conditions, Gross margin is up from 12.8% to 13.6% reflecting ongoing improvements in operational efficiency and productivity at all of our businesses. Operating costs include a charge of £215,000 in respect of the Executive Incentive Plan in accordance with UITF17 (revised) although there is no cash flow impact on the Group. Product development spend increased from £1.0 million in 2003 to £1.1 million. Overall, Group operating margin improved from 4.55% to 4.92%. Net Interest Charge The improved cash flow performance this year resulted in a 20.6% reduction in the interest charge from £1.4 million to £1.1 million, despite interest rates rising during the period. Interest was covered 8.2 times (2003: 5.8 times) by operating profit before exceptional items and goodwill amortisation. Taxation The current year tax charge on profit before exceptional items and goodwill amortisation is 30.5%, the slightly higher than standard rate being due to expenditure not deductible for tax purposes. There is also a net prior year credit of £150,000 which has brought the overall rate for the year down to 28.6%. Earnings Per Share and Dividend Adjusted earnings per share (before exceptional items and goodwill amortisation) was 11.28p (2003: 9.39p), an increase of 20.1%. The proposed final dividend is 3.15p, making a total for the year of 4.70p, a 14% uplift over last year. The total dividend is covered 2.4 times by profit after taxation but before exceptional items and goodwill amortisation. Capital Expenditure Following significant investments over the last two years, capital expenditure during the year was relatively low at £666,000. The major new investment in the period was in an automatic weight checking system at our distribution business. Capital expenditure is likely to increase over the coming financial year, with planned investments in a new IT system at our distribution business and an upgrade of the injections department at our manufacturing facility. The second milestone payment of US$750,000 in respect of the acquisition of the rights to Vetoryl® in North America (announced on 23 May 2003) is likely to become due in the coming financial year 10:11 following submission of our New Animal Drug Application to the FDA. A further update on the potential impact of IFRS will be given in the next Annual Report. Cash Flow and Net Debt The Group achieved an operating cash flow of £10.6 million, a 61.7% increase on last year’s figure of £6.5 million. This reflects continued improvements over the last three years. Operating cash flow represented 125% of operating profit compared to 92% last year. Net debt showed a very healthy 32.5% reduction from £15.0 million to £10.1 million. Balance Sheet and Shareholders’ Funds Shareholders’ funds increased to £10.2 million during the year reflecting the retained profit. Working capital decreased from £11.1 million to £10.0 million. Stock turn improved from 9.0 times to 11.5 times. Trade debtor days improved from 45 days to 44 days although debtors increased in absolute terms due to high sales levels in June. Trade creditor days were 53 (2003: 58 days). Gearing at 30 June 2004 was 50% (measured as net debt divided by total assets before net debt). However, if goodwill previously written off to reserves of £30.2 million is added back, gearing falls to 20%. Total Shareholder Return The graph on page 23 shows the total shareholder return measured against the Small Cap index from the period since flotation in September 2000. It is pleasing to note that, apart from a brief period last year, the Group has consistently outperformed the index. International Financial Reporting Standards (“IFRS”) The Group will be required to report for the first time under IFRS for the year ending 30 June 2006. Work has already been progressing to identify the changes that will be required. The principal areas where there may be a significant impact on the reported results of the Group are: Share options The fair value of share options issued will be required to be charged to the profit and loss account over the relevant measurement period. Research and development expenditure Certain development expenditure is required to be capitalised. Current Group policy is to write off such expenditure as incurred. Capital Policy It is the Company’s policy 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 the Group Finance Director. 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. Foreign exchange exposure is hedged naturally as far as possible by matching receipts and payments in the relevant foreign currency. To this end, the Group maintains Euro and US Dollar accounts. Unmatched foreign currency exposure is hedged at the discretion of the Group Finance Director. The foreign currency exposure relating to future outstanding milestone payments in respect of the acquisition of the rights to Vetoryl® in North America of US$750,000 and US$3 million the marketing (which becomes due once authorisation is granted by the FDA) has, as far as possible, been hedged by foreign currency swap options (see note 18). No borrowings are denominated in foreign currencies. Liquidity Management The Group’s cash position is monitored on a daily basis by the Group Finance Director. 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 18 to the financial statements. Simon Evans Group Finance Director 7 September 2004 Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Board of Directors 01 03 02 Executive Directors 01 Ian Page Chief Executive Aged 43, 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 veterinary arena. 02 Simon Evans, B.Com, ACA Group Finance Director Aged 40, Simon qualified as a Chartered Accountant in 1988 and spent seven years at KPMG. He joined NVS in 1992 and, was appointed Group Finance Director in 1997 following the MBO. 03 Ed Torr Development Director Aged 44, 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, but relinquished this role in 2004 to focus on his Main Board responsibilities; specifically the strategic development of the Group’s licensed veterinary pharmaceutical portfolio in key international territories. Prior to joining the Group, he worked within the animal healthcare sector for a number of companies including ICI, Wellcome and Alfa Laval Agri. 12:13 04 05 06 07 06 Neil Warner, B.A, FCA, MCT Non-Executive Director Aged 51, 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. He has also held senior positions in Balfour Beatty PLC (formerly BICC Group plc), Alcoa and PricewaterhouseCoopers. 07 Stephen Whitehouse, FCCA Company Secretary Aged 56, 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 04 Michael Redmond Non-Executive Chairman Aged 60, 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 Divison. 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. 05 Malcolm Diamond, MBE Senior Non-Executive Director Aged 55, Malcolm joined the Board in August 2000 prior to the Group’s flotation in September of the same year. Previously Malcolm was Chief Executive of Trifast plc, a position he held for 18 years. He was the principal driver of Trifast’s strategic direction change from a UK-based business to a global entity. Currently, he is advising a number of private businesses on their strategic planning, management development programmes and marketing initiatives. Other Non-Executive Directorships include Armida Ltd, Centurion Electronics plc and Unicorn Asset is also Management’s AIM2VCT Fund. Malcolm Executive Chairman at CWO Ltd. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Corporate Governance Revised Combined Code The revised Combined Code was issued by the Financial Reporting Council on 23 July 2003 and will become effective for the Company in respect of the year ending 30 June 2005 and subsequently. The rest of this report is therefore based on the existing Combined Code. During the year, the Board has undertaken a review of the requirements of the revised Combined Code and intends to comply in all respects except where it requires that the Chairman should not be a member of the Audit Committee. The Board considers that the Chairman has valuable knowledge and experience to offer the Audit Committee. He is considered to be completely independent of executive management. For this reason, the Chairman will continue to sit on the Audit Committee. The Audit Committee also comprises two other independent Directors (see page 15). Compliance with the Combined Code In the opinion of the Directors, the Company has complied throughout the period with Section 1 of the existing code. Board of Directors The details of the Board of Directors are shown on pages 12 and 13 and in the Directors’ Report on page 26. 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 three 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 as a Non-Executive Director. In addition, no Non-Executive Director has previously been a senior manager of the Company, and has not participated in the Company’s incentive bonus scheme or pension scheme. The Board considers M.M. Diamond to be the Senior Independent Director. Conduct of Board Meetings The Board normally has eleven Board Meetings per annum 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 Nominations committees, the details of which are shown on pages 15 and 16. 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, Development 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. The attendance at Board meetings by all members was a minimum of 96%. 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. 14:15 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. The Board has developed a process of reviewing its effectiveness, led by the Chairman, which is based on a combination of written reviews by individual Directors, discussion with the Chairman and review by the Board as a whole. This process has been undertaken during the year. 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. Board Committees The Board has three standing committees — the Audit, Remuneration and Nominations Committees. The Board has reviewed membership of these committees and has confirmed its view that it is appropriate that all the non-executives should participate as members of these committees, so that they are fully involved in monitoring the governance issues affecting the Company, including executive remuneration, succession planning and risk management. There is therefore no provision for fixed periods of membership of the committees, as recommended by the 2003 FRC Code. The Board also considers that the Chairman should continue his membership of the Audit, Remuneration and Nominations Committees in that he has a wide experience and knowledge gained through his directorships with other companies. The Audit Committee Members: N.W. Warner (Chairman), M. Redmond, and M.M. Diamond. The Audit Committee met twice during the year with 100% attendance. The terms of reference of the Audit Committee include the following responsibilities: To monitor the integrity of the financial statements of the Company, reviewing the annual and interim reports in detail to ensure they present a balanced assessment of the Company’s position and prospects which is understandable to shareholders and potential investors. To review the effectiveness of the Company’s internal controls and risk management systems as described on pages 16 and 17 and, in conjunction with the auditors, consider the accounting policies adopted by the Company. To review the Company’s whistle-blowing arrangements. To oversee the relationship with the external auditors. The Committee makes recommendations to the Board on the appointment of the external auditors, approves their remuneration, monitors their independence and objectivity, and monitors the effectiveness of the audit process and sets the policy for non-audit work. To make recommendations to the Board on 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. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Corporate Governance continued The Remuneration Committee met twice during the year, with 100% attendance. It sets the pay and benefits of the Executive Directors, and approves their terms and conditions and bonus schemes, having regard to performance. A report on the remuneration of Directors appears on pages 18 to 24. 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 Annual General Meeting. 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, ensure that proper accounting records are maintained, ensure compliance with statutory and regulatory requirements and ensure the effectiveness 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 quarterly 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 2004. 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 16:17 (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) 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 due to 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 2003 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 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 are disclosed at the Meeting. At the Annual General Meeting there is an opportunity, following the formal business, for informal communications between investors and Directors. 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. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 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 did not seek any external advice during the year but will do so in future if considered appropriate and has done in the past, most recently in respect of the Executive Incentive Plan discussed below. 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 Incentive 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 18:19 salaries, bonuses and benefits paid to Executive Directors are included in the table headed “Summary of Remuneration” shown on page 23. 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. This provides an overall package that is competitive with similar 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 Approved Share Option Scheme, the Unapproved Share Option Scheme together with a savings related share option scheme. Executive Directors are entitled to participate in the Company savings related share option (“SAYE”) scheme and the Executive Incentive Plan discussed below. However, Executive Directors are not entitled to participate in either the Approved Share Option Scheme or the Unapproved Share Option Scheme. The table on page 24 provides an analysis of outstanding SAYE Directors’ Share Options. Executive Incentive Plan Following its approval by shareholders at the Annual General Meeting on 23 October 2003, the Company operates the Executive Incentive Plan for Executive Directors and other key employees. The Executive Incentive Plan aims to provide a clear link between the remuneration of Executive Directors and the creation of value for shareholders by rewarding Executive Directors for the Company’s performance in terms of Total Shareholder Return (TSR). Under this plan the Remuneration Committee makes awards to senior executives of shares in the Company, with vesting to individuals being subject to the achievement of performance targets. The first target is based on TSR over a three year measurement period (commencing at the beginning of the financial year in which the awards are made) expressed as an annual percentage return over that period. The TSR is calculated and compared to the TSR’s of all other companies in the FTSE Small Cap Index for the entire measurement period. 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 over the measurement period, all of the shares over which an award had been made will vest. If the TSR of the Company is ranked in the second quartile then the number of shares which will vest is determined by reference to a straight-line graph which ensures that 30% of the shares over which the award has been made will vest on the achievement of a TSR that places the Company at the bottom of the second quartile and all of the shares will vest on an achievement of a TSR that places the Company at the top of the second quartile. If the TSR of the Company is ranked in the third or fourth quartile then none of the shares over which an award had been made will vest and the relevant participant will 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. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Directors’ Remuneration Report continued Initial awards under the Plan were made during the year and these are shown on page 24. The measurement period for these awards commenced on 1 July 2003 and will end on 30 June 2006. Future awards will be capped at a maximum of 50% of basic salary in any one year, with the measurement period commencing at the start of the financial year in which they are made. Executive Share Plan All awards previously made under the Executive Share Plan have now lapsed. It is not intended that any further awards will be made under this scheme since the Executive Incentive Plan is now in place and is considered to provide a better means of incentivising Executive Directors to increase shareholder value. 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, S.D. Evans and E.T.W. Torr, the bonus target for 2004 was based solely on Group profit performance. Executive bonuses for the year ended 30 June 2004 and for the forthcoming year are payable on the achievement of Group performance targets as set out below. I.D. Page S.D. Evans E.T.W. Torr Bonus payable for achievement of profit target (% of Salary) 30% 25% 25% 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. I.D. Page was also granted a discretionary bonus of 2.5% of basic salary for the year ended 30 June 2004. 20:21 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: Notice Period Name M. Redmond I.D. Page S.D. Evans E.T.W. Torr M.M. Diamond N.W. Warner Notice Period Commencement (Director) (Company) 25 April 2001 23 August 2000 23 August 2000 23 August 2000 23 August 2000 2 May 2003 12 months 6 months 6 months 6 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 a deduction at source of income tax and national insurance contributions). In the event that the service contract is terminated partway 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. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Directors’ Remuneration Report continued 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.M. Diamond N.W. Warner Salary 12 months 12 months 12 months 12 months 12 months 12 months Bonus Benefits n/a Nil Nil Nil n/a n/a n/a 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 2004 and their families in the share capital of Dechra Pharmaceuticals PLC at 30 June 2004 was as follows: Shareholdings M. Redmond I.D. Page S.D. Evans E.T.W. Torr M.M. Diamond N.W. Warner Ordinary Shares 2004 35,000 592,167 663,000 342,414 5,000 2,206 Ordinary Shares 2003 35,000 592,167 663,000 342,414 5,000 – On 1 July 2004, S.D. Evans acquired a further 6,131 ordinary shares following the exercise of his option under the SAYE Scheme. Total Shareholder Return The graph on the following page shows the total shareholder return performance of the Company over the past four 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. 22:23 Total Shareholder Return Indices DECHRA PHARMACEUTICALS (£) FTSE Small CAP – TOT RETURN IND (£) 180 160 140 120 100 80 60 40 20 2001 2002 2003 2004 The information shown above relates to the four-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 (resigned 23 October 2003) Non-Executive Directors M. Redmond (Chairman) M.M. Diamond N.W. Warner Salaries & Fees £’000 Bonuses £’000 Other Benefits £’000 Total 2004 £’000 Total 2003 £’000 149 102 95 27 40 22 20 455 48 26 24 – – – – 98 18 8 15 4 – – – 45 215 136 134 31 40 22 20 598 160 110 109 97 40 22 3 541 Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Directors’ Remuneration Report continued Executive Incentive Plan Awards made under the Executive Incentive Plan are as follows: I.D. Page S.D. Evans E.T.W. Torr SAYE Scheme Directors’ entitlements under the SAYE Scheme are as follows: I.D. Page S.D. Evans E.T.W. Torr Exercise Dates 2004 Number of shares 2003 Number of shares At 30 June 2006–2007 2006–2007 2006–2007 120,000 80,000 80,000 – – – At 1 July 2003 and 30 June 2004 Number of shares 42,115 6,131 2,452 4,418 Exercise Price 39p 158p 158p 129p Exercise Dates July 2008 July 2004 July 2004 July 2005 On 1 July 2004, S.D. Evans exercised his entitlement under the SAYE Scheme and acquired 6,131 ordinary shares at a price of 158p per share. The market price at the time was 154p. The middle market price for the Company’s shares on 30 June 2004 was 1491/2p and the range of prices during the year was 871/2p to 150p. 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 43 40 44 44 Contributions 2004 £000 Contributions 2003 £000 18 12 11 3 44 17 12 11 10 50 I.D. Page S.D. Evans E.T.W. Torr M.D. Annice (resigned 23 October 2003) By order of the Board M.M. Diamond Chairman Remuneration Committee 7 September 2004 24:25 Social, Ethical and Environmental Responsibilities The Board recognises the need to review and manage risks to the short and long term value of the Company arising from social, ethical and environmental matters. The Board has received adequate information to review these risks and has not identified any risks to the business that affect its future value. Environmental Policy Dechra Pharmaceuticals PLC acknowledges the importance of good environmental controls. It is the Company’s policy to comply with and exceed environmental legislation currently in place, adopt responsible environmental practices and be 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. During the year, the Group carried out a full audit of all its properties for asbestos. All necessary action has been taken to comply with new laws governing the control of asbestos. 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. Each division has a Health and Safety Committee comprising representatives from both management and employees. Employee representatives are elected by a ballot of the whole workforce. The Committees meet on a regular basis to carry out a rolling review of risk assessments as well as investigating any concerns raised by individual employees. Each site has at least one person continuously trained in Heath and Safety legislation. A full Health and Safety Report is presented at Divisional Board Meetings on a quarterly basis. Executive Directors are present at these meetings. These reports are summarised for the Main Board also on a quarterly basis. The Finance Director is the nominated Executive Director responsible for Health and Safety policy. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Directors’ Report The Directors present their Annual Report and audited financial statements for the year ended 30 June 2004. 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 20 to the financial statements. Results and Dividends The results for the year are set out on page 30. The Directors recommend the payment of a final dividend of 3.15p per share which, if approved by shareholders, will be paid on 24 November 2004 to shareholders registered at 29 October 2004. An Interim Dividend of 1.55p per share was paid on 7 April 2004, making a total dividend for the year of 4.70p (2003: 4.12p). The total dividend payment is £2,396,000 (2003: £2,093,000). A retained profit of £2,685,000 (2003: £1,740,000) 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 (resigned 23 October 2003) M.M. Diamond N.W. Warner The interests of the Directors in the share capital of the Company are shown in the remuneration report on pages 18 to 24. In accordance with the articles of association, M. Redmond and E.T.W. Torr retire by rotation and, being eligible, offer themselves for re-election. Political and Charitable Contributions The Group made no political or charitable contributions during the year. Employees It is the Group’s policy to encourage employee involvement as the Directors consider that this is essential for the successful running of the business. The Group keeps employees informed of performance, developments and progress by way of regular team briefing sessions and notices. 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. 26:27 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 2004 was £1,124,000 (2003: £997,000). 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 2004, the Group had an average of 75 days (2003: 68 days) purchases outstanding in creditors. The Company had an average of Nil days (2003: Nil days) purchases outstanding in creditors. Substantial Shareholdings As at 13 August 2004, the Company is aware of the following material interests representing 3% or more of the issued share capital in the Company. Insight Investment Hermes Pension Management Threadneedle Asset Management Platinum Fund Managers Montanaro Investment Management 3i Asset Management Legal & General Investment Management No. of Shares 4,932,548 4,575,132 3,632,404 2,536,800 1,950,000 1,790,000 1,661,008 % of Shares Held 9.67 8.97 7.12 4.97 3.82 3.51 3.26 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 7 September 2004 Dechra House Jamage Industrial Estate Talke Pits Stoke-on-Trent ST7 1XW Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 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; (cid:3) 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. 28:29 (cid:3) (cid:3) (cid:3) Independent Auditors’ Report to the Members of Dechra Pharmaceuticals PLC We have audited the financial statements on pages 30 to 47. 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 28, 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 17 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 2004 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 7 September 2004 Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Consolidated Profit and Loss Account For the year ended 30 June 2004 Before exceptional items and goodwill amortisation £’000 2004 Exceptional items and goodwill amortisation (note 3) £’000 Note Before exceptional items and goodwill amortisation £’000 2003 Exceptional items and goodwill amortisation (note 3) £’000 Total £’000 Total £’000 2 186,843 (161,422) 25,421 (7,588) (8,649) 9,184 – – – – (691) (691) 186,843 179,309 (161,422) (156,319) 25,421 (7,588) (9,340) 8,493 22,990 (7,252) (7,576) 8,162 – – 179,309 (156,319) – – (1,061) (1,061) 22,990 (7,252) (8,637) 7,101 4 5 8 9 (1,124) – (1,124) (1,416) – (1,416) 8,060 (691) 7,369 6,746 (1,061) 5,685 (2,309) 21 (2,288) (1,960) 108 (1,852) 5,751 (670) 5,081 4,786 (953) 3,833 (2,396) 2,685 (2,093) 1,740 10 10 11.28p 11.12p (1.31p) (1.29p) 9.97p 9.83p 9.39p 9.36p (1.87p) (1.86p) 7.52p 7.50p 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 A statement of movements on reserves is given in note 21 to the financial statements. All amounts relate to continuing operations. There were no recognised gains and losses other than shown above. 30:31 Balance Sheets As at 30 June 2004 Fixed assets Intangible assets Tangible assets Investments Current assets Stocks Debtors Note 11 12 13 14 15 Group Company 2004 £’000 5,174 5,224 – 2003 £’000 5,730 5,572 – 10,398 11,302 16,979 32,889 49,868 17,296 28,001 45,297 2004 £’000 – – 4,608 4,608 – 48,718 48,718 2003 £’000 – – 4,608 4,608 – 55,004 55,004 Creditors: amounts falling due within one year 16 (45,172) (42,420) (15,912) (20,373) Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Merger reserve Profit and loss account Total equity shareholders’ funds 4,696 2,877 15,094 14,179 32,806 37,414 34,631 39,239 (4,763) (6,708) (4,759) (6,639) (174) – – – 10,157 7,471 32,655 32,600 510 26,784 1,720 (18,857) 510 26,783 1,720 (21,542) 10,157 7,471 510 26,784 – 5,361 32,655 510 26,783 – 5,307 32,600 16 19 20 21 21 21 The financial statements were approved by the Board of Directors on 7 September 2004 and are signed on its behalf by: I.D. Page Director S.D. Evans Director Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Reconciliation of Movements in Shareholders’ Funds For the year ended 30 June 2004 At 1 July 2003 Profit for the financial year Dividends New shares issued Decrease in shares to be issued At 30 June 2004 Group 2004 £’000 7,471 5,081 (2,396) 1 – 2003 £’000 5,749 3,833 (2,093) 732 (750) Company 2004 £’000 2003 £’000 32,600 28,862 2,450 (2,396) 1 – 5,830 (2,093) 6 (5) 10,157 7,471 32,655 32,600 32:33 Consolidated Cash Flow Statement For the year ended 30 June 2004 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 Equity dividends paid Cash inflow/(outflow) before financing Financing Shares issued Term loans repaid Loan stock repaid Capital element of finance lease payments Net cash outflow from financing Increase/(decrease) in cash in the period Bank overdraft at 30 June 2003 Bank overdraft at 30 June 2004 Reconciliation of Net Cash Flow to Movement in Net Debt Increase/(decrease) in cash during the period Debt repayments Repayment of finance leases Change in net debt resulting from cash flows New finance leases Other non-cash changes Movement in net debt in the period Net debt at 1 July 2003 Net debt at 30 June 2004 Note 23 2004 £’000 10,576 584 (1,580) (16) (1,012) 2003 £’000 6,542 62 (1,400) (46) (1,384) (1,864) (2,066) (569) (5) 28 (546) (1,553) (784) 1,113 (1,224) – 32 (2,192) (2,078) 4,962 (178) 1 (1,954) (500) (135) (2,588) 2,374 (5,698) (3,324) 2,374 2,454 135 4,963 (11) (74) – (2,842) – (568) (3,410) (3,588) (2,110) (5,698) (3,588) 2,842 568 (178) (75) (7) 24 24 4,878 (14,988) (260) (14,728) (10,110) (14,988) Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Notes to the Financial Statements 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 £2,450,000 (2003: £5,830,000). Turnover Turnover represents cash and credit sales excluding value added tax and net of discounts allowed and is recognised to the extent that all obligations relating to that turnover have been fulfilled in accordance with FRS5 Application Note G. 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. 34:35 Leased Assets Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. Rental payments are apportioned between the finance element, which is charged to the profit and loss account, and the capital element, which reduces the outstanding lease obligations. Operating lease rentals are charged to the profit and loss account on a straight line basis over the lease term. Stocks Stocks are valued at the lower of cost and net realisable value. The cost of work in progress and finished goods includes an appropriate proportion of attributable overheads. Research and Development Research and development expenditure is written off as it is incurred. Derivative Financial Instruments Short term debtors and creditors that meet the definitions of a financial asset or liability respectively have been excluded from the numerical disclosures as permitted by FRS13 “Derivatives and Other Financial Instruments Disclosures”, as detailed in note 18. Arrangement Fees Arrangement fees incurred on the raising of loans are written off over the expected life of the relevant loan. Employee Share Schemes Apart from SAYE options, where shares or share options are granted to employees at below market value, the difference between the issue price and the market price is charged to the profit and loss account over the performance period in accordance with UITF17 (revised). Due regard is made to the likelihood of the performance criteria being achieved over the performance period with the charge to the profit and loss account being adjusted accordingly. 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 2004 £’000 184,411 2,432 186,843 2003 £’000 176,804 2,505 179,309 The Directors consider that all turnover is derived from a single class of business. The origin of all turnover was in the UK. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Notes to the Financial Statements continued 3. Exceptional Items and Goodwill Amortisation Exceptional Items — reorganisation and rationalisation costs Goodwill amortisation Total exceptional items and goodwill amortisation 2004 £’000 130 561 691 2003 £’000 500 561 1,061 The reorganisation and rationalisation costs relate to the integration of the Group’s manufacturing operations onto a single site at Skipton, together with other costs of reorganising the Group’s trading operations. 4. 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 5. 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 Loss/(profit) on disposal of tangible fixed assets Operating lease rentals: land and buildings plant and machinery Audit fees (including £38,000 for the Parent Company (2003: £27,000)) Other payments to the auditors for non-audit services Analysis of total fees payable to the Group auditors: Audit services Further assurance services Tax compliance services Tax advisory services Other services 2004 £’000 1,599 88 5 16 1,708 (584) 1,124 2004 £’000 1,124 872 116 561 4 748 795 80 216 2004 £’000 80 11 61 126 18 296 2003 £’000 1,316 97 19 46 1,478 (62) 1,416 2003 £’000 997 1,044 204 561 (100) 753 404 75 115 2003 £’000 75 17 33 25 40 190 36:37 6. 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 18 to 24. 7. 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 8. Tax on Profit on Ordinary Activities Tax charge for the year a) 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 2004 Number 2003 Number 154 318 171 643 2004 £’000 9,576 852 287 10,715 2004 £’000 2,454 (347) 2,107 (16) 197 181 2,288 21 140 308 167 615 2003 £’000 8,748 755 281 9,784 2003 £’000 1,866 (63) 1,803 77 (28) 49 1,852 108 Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Notes to the Financial Statements continued 8. Factors affecting the tax charge for the current period Tax on Profit on Ordinary Activities continued b) The current tax charge is lower than (2003: higher than) the standard rate of corporation tax in the UK of 30% (2003: 30%). The differences are explained below: Profit on ordinary activities before taxation Current tax charge at 30% (2003: 30%) Effects of Permanent differences: – goodwill amortisation – depreciation on assets not eligible for tax allowances – disallowable expenses 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 9. Dividends Interim paid 1.55p per share (2003: 1.37p) Final proposed 3.15p per share (2003: 2.75p) 2004 £’000 7,369 2,211 168 22 37 227 (65) 81 16 (347) 2,107 2004 £’000 790 1,606 2,396 2003 £’000 5,685 1,705 168 18 52 238 14 (91) (77) (63) 1,803 2003 £’000 691 1,402 2,093 10. 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 items 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 38:39 2004 pence 9.97 0.21 10.18 1.10 11.28 9.83 0.21 10.04 1.08 11.12 2003 pence 7.52 0.77 8.29 1.10 9.39 7.50 0.76 8.26 1.10 9.36 10. 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 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 11. Intangible Fixed Assets Cost At 1 July 2003 Additions At 30 June 2004 Amortisation At 1 July 2003 Charge for the year At 30 June 2004 Net book value At 30 June 2004 At 1 July 2003 2004 £’000 5,081 109 5,190 561 5,751 2004 No. 2003 £’000 3,833 392 4,225 561 4,786 2003 No. 50,975,214 725,830 50,975,037 164,117 51,701,044 51,139,154 Goodwill Patent rights £’000 £’000 5,608 – 5,608 662 561 1,223 4,385 4,946 784 5 789 – – – 789 784 Total £’000 6,392 5 6,397 662 561 1,223 5,174 5,730 Goodwill is being amortised over 10 years, being the Directors’ estimate of the useful economic life. During the year ended 30 June 2003, 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. The additions in the year ended 30 June 2004 represent legal costs. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Notes to the Financial Statements continued 12. Tangible Fixed Assets Group Cost At 1 July 2003 Additions Disposals At 30 June 2004 Depreciation At 1 July 2003 Charge for the year Disposals At 30 June 2004 Net book value at 30 June 2004 Net book value at 1 July 2003 Leased assets Net book value of assets held under finance leases: At 30 June 2004 At 1 July 2003 Short Leasehold Land and Buildings £’000 Freehold Land £’000 Motor Vehicles £’000 Plant and Fixtures £’000 13 – – 13 – – – – 13 13 – – Total £’000 9,087 666 (557) 9,196 3,515 988 (531) 3,972 2,607 23 (3) 2,627 359 155 (3) 511 667 2 (73) 596 441 147 (47) 541 5,800 641 (481) 5,960 2,715 686 (481) 2,920 2,116 55 3,040 5,224 2,248 226 3,085 5,572 – – 32 118 149 122 2004 £’000 63 181 240 2003 £’000 202 Shares in Subsidiary Undertakings £’000 4,608 Contracted Capital Commitments (tangible fixed assets) 13. Fixed Asset Investments Company Cost and net book value At 1 July 2003 and 30 June 2004 A list of principal subsidiary undertakings is given in note 27. 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. 40:41 14. Stocks Group Raw materials and consumables Work in progress Finished goods and goods for resale 15. Debtors Trade debtors Amounts owed by subsidiary undertakings Group relief receivable Deferred taxation Other debtors Prepayments and accrued income 16. 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 2004 £’000 1,271 539 15,169 16,979 2003 £’000 1,385 435 15,476 17,296 Group Company 2003 £’000 26,765 – – 7 859 370 28,001 2004 £’000 – 46,639 1,816 82 35 146 48,718 2003 £’000 – 53,541 1,371 – 31 61 55,004 Falling Due within One Year Group Company 2003 £’000 7,652 500 128 29,224 – 226 1,032 1,463 793 1,402 42,420 2004 £’000 13,805 – – – 10 – – – 491 1,606 15,912 2003 £’000 18,333 500 – – 20 – – – 118 1,402 20,373 2004 £’000 31,337 – – – 890 662 32,889 2004 £’000 5,278 – 69 33,205 – 246 1,275 1,666 1,827 1,606 45,172 Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Notes to the Financial Statements continued 16. Creditors continued Bank loans Hire purchase and finance leases 17. 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 Falling Due after more than One Year Company Group 2003 £’000 6,639 69 6,708 2004 £’000 4,759 – 4,759 2003 £’000 6,639 – 6,639 Group Company 2003 £’000 5,698 1,954 500 8,152 1,954 4,886 6,840 (201) 6,639 128 69 197 2004 £’000 11,851 1,954 – 13,805 1,954 2,932 4,886 (127) 4,759 – – – 2003 £’000 16,379 1,954 500 18,833 1,954 4,886 6,840 (201) 6,639 – – – 2004 £’000 4,759 4 4,763 2004 £’000 3,324 1,954 – 5,278 1,954 2,932 4,886 (127) 4,759 69 4 73 Total borrowings 10,110 14,988 18,564 25,472 The bank overdraft of £3.324 million and term loan of £6.840 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. The Company guarantees the borrowings of other Group companies, which at 30 June 2004 amounted to £nil (2003: £nil). 42:43 18. 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) b) c) d) e) Fair value of financial assets and liabilities The Group’s financial assets and liabilities are, with the exception of finance leases and the foreign currency swap option (described below), 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. During the year the Group entered into two foreign currency swap options for a total of $3.75 million to exchange sterling for US dollars at any time before 31 December 2004 and 31 December 2005 respectively. Their fair value at 30 June 2004 was not materially different to their book value, being £nil (2003: £nil). Interest rate risk profile of financial liabilities as at 30 June 2004 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 £73,000 (2003: £197,000) with a weighted average fixed interest rate of 7.8% (2003: 7.9%) over a weighted average term of 10 months (2003: 18 months). 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. Maturity of borrowings Details are shown in notes 16 and 17. Maturity of facilities At 30 June 2004 the Group had an undrawn committed revolving credit facility of £5 million maturing in between two to five years. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Notes to the Financial Statements continued 19. Provisions for Liabilities and Charges Deferred Tax At 1 July 2003 (included in debtors) Transfer from profit and loss account At 30 June 2004 At 1 July 2003 Transfer to profit and loss account At 30 June 2004 (included in debtors) The amounts provided for deferred taxation at 30% (2003: 30%) are as follows: Group £’000 (7) 181 174 Company £’000 – (82) (82) Group Accelerated capital allowances Short term timing differences Total 20. Called up Share Capital Issued share capital At 1 July 2003 New shares issued At 30 June 2004 Authorised share capital At 30 June 2004 and 30 June 2003 2004 £’000 296 (122) 174 Group Company 2003 £’000 20 (27) (7) 2004 £’000 – (82) (82) 2003 £’000 – – – Ordinary Shares of 1p each £’000 510 – 510 No. 50,975,037 2,820 50,977,857 750 75,000,000 During the year, 2,820 new ordinary shares of 1p were issued following the exercise of options under the SAYE scheme. Share Options Outstanding share options over ordinary shares of 1p at 30 June 2004 under the various Group Share Option Schemes are as follows: Exercise Price per Share Pence Exercise Period Unapproved Share Option scheme 14 Sept 2000 2003–2010 22 April 2002 2005–2012 11 April 2003 2006–2013 Approved Share Option scheme 2 April 2004 2007–2014 SAYE scheme 26 April 2001 2004–2006 2005–2007 9 April 2002 2006–2008 3 April 2003 Total share options 120 153.5 58.5 134.5 158 129 39 At 30 June 2003 Number 471,000 377,000 121,000 969,000 – – 76,476 68,060 1,034,938 1,179,474 2,148,474 Exercised Number Granted Number Lapsed Number At 30 June 2004 Number 433,000 352,500 105,000 890,500 143,000 143,000 (38,000) (24,500) (16,000) (78,500) (4,000) (4,000) (3,179) (8,673) (46,839) (58,691) (141,191) 73,297 59,387 985,279 1,117,963 2,151,463 – – – – – – – – (2,820) (2,820) (2,820) – – – – 147,000 147,000 – – – – 147,000 The performance target to be achieved under the Unapproved and Approved Share Option Schemes is growth in 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) of at least 12% above inflation. 44:45 21. Reserves Group At 1 July 2003 New shares issued Retained profit for the financial year At 30 June 2004 Company At 1 July 2003 New shares issued Retained profit for the financial year At 30 June 2004 Share Premium Account £’000 26,783 1 – 26,784 26,783 1 – 26,784 Merger Reserve £’000 1,720 – – 1,720 Profit and Loss Account £’000 (21,542) – 2,685 (18,857) – – – – 5,307 – 54 5,361 22. Goodwill The cumulative amount of goodwill written off to reserves at 30 June 2004 was £30,184,000 (2003: £30,184,000). 23. Reconciliation of Operating Profit to Operating Cash Flow Operating profit Depreciation Goodwill amortisation Loss/(profit) on disposal of tangible fixed assets Decrease in stocks Increase in debtors Increase/(decrease) in creditors Net cash inflow from operating activities 2004 £’000 8,493 988 561 4 317 (4,901) 5,114 10,576 2003 £’000 7,101 1,248 561 (100) 1,698 (2,197) (1,769) 6,542 Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 Notes to the Financial Statements continued 24. Analysis of Net Debt Borrowings due after one year Bank overdraft Other borrowings due within one year Finance leases 25. Other Financial Commitments 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 At 1 July 2003 £’000 (6,639) (5,698) (2,454) (197) (14,988) Cash flow £’000 – 2,374 2,454 135 4,963 Other Non-Cash Changes £’000 1,880 – (1,954) (11) At 30 June 2004 £’000 (4,759) (3,324) (1,954) (73) (85) (10,110) 2004 2003 Land and buildings £’000 Other assets £’000 Land and buildings £’000 Other assets £’000 25 38 25 708 796 65 399 268 1 733 53 – 66 655 774 104 111 418 – 633 The Company had no commitments under operating leases in either the current or prior year. 26. 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 £287,000 (2003: £281,000) (see note 7). 46:47 27. 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 UK Great Britain Dechra Investments Limited National Veterinary Services Limited* Arnolds Veterinary Products Limited* 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 UK UK UK Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Principal Activity Wholesaler, marketer and manufacturer of pharmaceuticals; Wholesaler and marketer of veterinary products, instruments and equipment; Provider of veterinary laboratory services Holding Company Non-trading Non-trading Non-trading Holding Company Non-trading Non-trading Non-trading 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 Dechra Investments Limited. † 100% of ordinary share capital held by North Western Laboratories Limited. ‡ 100% of ordinary share capital held by Anglian Pharma Limited. Dechra® Pharmaceuticals PLC A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 4 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 Provisions for liabilities and charges 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 2004 £’000 2003 £’000 2002 £’000 2001 £’000 2000 £’000 186,843 179,309 170,202 156,400 145,487 9,184 8,162 8,773 8,234 7,505 7,369 5,081 (2,396) 2,685 11.28 4.70 643 5,685 3,833 (2,093) 1,740 9.39 4.12 615 7,308 5,058 (2,069) 2,989 10.59 4.12 500 10,398 10,043 (174) (10,110) 10,157 11,302 11,157 – (14,988) 7,471 11,608 8,869 – (14,728) 5,749 10,576 (1,012) (1,864) (546) – (2,192) (2,588) 2,374 6,542 (1,384) (2,066) (1,224) 32 (2,078) (3,410) (3,588) 6,397 (1,126) (2,155) (2,704) (3,823) (1,927) (765) (6,103) 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) 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 The historical figures have been adjusted to reflect the adoption of FRS19 “Deferred Tax”. 48:49 Moving forward in a new world Dechra® Pharmaceuticals Development in an evolving market Summary of Results 2004 Before exceptional items and goodwill amortisation 2003 Before exceptional items and goodwill amortisation 2004 After exceptional items and goodwill amortisation 2003 After exceptional items and goodwill amortisation Turnover £186.8m £179.3m +4% £186.8m £179.3m +4% Operating profit Profit before tax £9.2m £8.1m £8.2m +13% £6.7m +19% Earnings per share 11.28p 9.39p +20% Dividend per share 4.70p 4.12p +14% £8.5m £7.4m 9.97p 4.70p £7.1m +20% £5.7m +30% 7.52p +33% 4.12p +14% Contents 01 Welcome to Dechra 28 Statement of Directors’ Responsibilities 02 Chairman’s Statement 04 Chief Executive’s Review 10 Financial Review 12 Board of Directors 14 Corporate Governance 29 Independent Auditors’ Report to the Members of Dechra Pharmaceuticals PLC 30 Consolidated Profit and Loss Account 31 Balance Sheets 32 Reconciliation of Movements in Shareholders’ Funds 18 Directors’ Remuneration Report 33 Consolidated Cash Flow Statement 25 Social, Ethical and Environmental Responsibilities 26 Directors’ Report 34 Notes to the Financial Statements 48 Financial History 49 Advisers 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 Advisers Merchant Bank & Financial Advisers NM Rothschild & Sons Limited New Court St Swithins Lane London EC4P 4DU Stockbroker & Financial Advisers 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 LLP Victoria Square House Victoria Square Birmingham B2 4DL Designed and Printed by Jones & Palmer Limited, Birmingham. tel: (0121) 236 9007 D e c h r a ® P h a r m a c e u t i c a l s P L C A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 4 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 Evolving veterinary medicine Dechra® Pharmaceuticals PLC Annual Report and Accounts 2004