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2023 ReportECO ANIMAL HEALTH GROUP PLC 20th July 2012 ECO Animal Health Group plc (AIM: EAH) Results for the year ended 31 March 2012 HIGHLIGHTS First Aivlosin® marketing authorisation for US received after year end, further approvals expected 31.8 per cent increase in profit after tax to £2.6 million (2011: £2.0 million) 41.6 per cent uplift in diluted earnings per share to 4.19 pence (2011: 2.96 pence) Rise to £6.5 million (2011: £6.4 million) in profit attributable to shareholders before interest, tax, depreciation, amortisation, share based payments, impairment, foreign exchange and minorities. 25 per cent increase in dividend to 3.75 pence per share (2011: 3.0 pence) Net cash of £9.5 million at year end Continuing strong Aivlosin® sales in key markets New subsidiary formed in Mexico Peter Lawrence, Executive Chairman of ECO Animal Health Group plc, commented: “ECO Animal Health Group has delivered another strong set of results for the year ended 31 March 2012 and the current year has started well. We are confident that the long awaited marketing authorisations in the US and Canada will have a major positive effect on the development of ECO, although it will be some months before the product launches gain momentum. We do not expect a noticeable impact on our financial performance until next year. ECO is very well placed to further broaden its product ranges and its global reach will ensure that it capitalises on opportunities as they arise in all the Company’s major markets. The Company is set for an exciting future and looks forward to maximising value for shareholders” ECO ANIMAL HEALTH GROUP PLC DIRECTORS AND ADVISORS Directors Peter Lawrence Marc Loomes Kevin Stockdale Brett Clemo Julia Trouse David Danson Julia Henderson Chairman Chief Executive Finance Director Executive Director Executive Director Non Executive Director Non Executive Director Secretary Julia Trouse Company Number 01818170 Registered office Registered auditors Registrars Bankers Nominated Adviser and Broker 78 Coombe Road New Malden Surrey KT3 4QS Reeves & Co LLP Third Floor 24 Chiswell Street London EC1Y 4YX Share Registrars Limited Suite E, First Floor 9 Lion and Lamb Yard Farnham Surrey GU9 7LL NatWest plc Mitcham Branch 282 London Road Mitcham Surrey CR4 2ZP Cenkos Securities plc 6, 7, 8 Tokenhouse Yard London EC2R 7AS ECO ANIMAL HEALTH GROUP PLC CONTENTS Chairman’s statement Directors’ report Independent auditors’ report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Company statement of changes in equity Statements of financial position Statements of cash flows Page 1 - 3 4 - 9 10 - 11 12 13 14 15 16 17 Notes to the financial statements 18 - 62 ECO ANIMAL HEALTH GROUP PLC CHAIRMANS STATEMENT FOR THE YEAR ENDED 31 MARCH 2012 I am pleased to report that ECO Animal Health Group has delivered another sound set of results for the year ended 31 March 2012. In the Interim Report issued in December 2011, I advised that the second half had started well with a significant increase in sales; I am pleased to report that this performance was maintained for the balance of the year. The results for the year have been achieved in a marketplace under considerable pressure from the ongoing global the overall economic difficulties and consumption of meat protein continues to grow and the animal health industry along with it. is particularly encouraging that it The most important event affecting the future performance of the Group occurred after the year end when, in July 2012, the Center for Veterinary Medicine (CVM) of the US Food and Drug Administration (FDA) granted ECO a marketing authorisation in the United States for Aivlosin® 625 mg/g water soluble granules for swine. This long awaited decision follows an enormous amount of product development and regulatory work by our staff for the US authorities and represents the culmination of a huge investment by the Group over the past decade. The significance of this initial approval cannot be over stated as it allows ECO to enter a market that is one third of the global market for its products, which until now was closed to the Group. FINANCIAL Group turnover increased by close to 5 per cent to £28.3 million (2011: £27.1 million) while in US dollar terms the increase was 7 per cent. The US dollar exchange rate against other major currencies has a significant influence on ECO’s performance as a large portion of the Group’s sales and purchases are in US dollars and the value of that currency influences the translation of our results into sterling. As a global business, it is inevitable that we are impacted by currency movements and we take steps, where appropriate, to hedge that risk. In the year under review, the US dollar weakened against sterling and the Group hedged its exposure about half way through the period, albeit at some initial expense, but this has subsequently proved to have been the correct course of action. Profit after tax for the year increased by 31.8 per cent to over £2.6 million (2011: £2.0 million) and profit before interest and non cash charges of tax, depreciation and amortisation, share based payments, impairment, foreign exchange and minorities rose to £6.5 million (2011: £6.4 million). I believe that this measure is a truer reflection of the state of the business than profit before tax, because we are required to amortise or depreciate drug registration costs, rather than to assess them by the increase in their fair value. The depreciation figure alone in our financial statements leads to an understatement of the actual value of our marketing authorisations worldwide and therefore of the total return to shareholders. Further, the figure for share based payments (which we are required to recognise in the income statement as a measure of the non cash remuneration received by our employees in return for their efforts during the year) has a significant impact on our reported profit. The method of calculating the amount charged to the income statement is an inexact science and will vary from award to award, as market conditions change. This is because the value of any award can be based on a variety of complex assumptions, variables and models, which inevitably, are subject to review and will change as further data becomes available over time. Diluted earnings per share advanced 41.6 per cent reaching 4.19 pence (2011: 2.96 pence) The Group continues to benefit from enhanced tax allowances associated with the costs of developing its drugs. As a result of this and the favourable resolution of tax enquiries relating to previous years, the Group continues to accumulate tax losses, which have served to reduce the necessary level of deferred tax provision when compared to prior years. As a result, the Group does not expect to have a liability in respect of UK Corporation Tax for some years. Cash generated from operations during the year exceeded £6 million and the Group was able to deliver net cash balance at the year end of £9.5 million, a slight increase on the previous year. 1 ECO ANIMAL HEALTH GROUP PLC CHAIRMANS STATEMENT FOR THE YEAR ENDED 31 MARCH 2012 The Board is pleased to declare a dividend of 3.75 pence per share (2011: 3.00 pence) which is an increase of 25 per cent and reflects our continued confidence in the business and the anticipated further profit contribution from its product portfolio. This will be paid on 5 October 2012 to shareholders on the register on 31 August 2012. Once again, we are offering shareholders a scrip alternative to the cash dividend and remain grateful to the many shareholders who support us in this way and help to conserve cash within the Company. OPERATIONS Overall ECO sales were ahead by nearly 5 per cent in the year to 31 March 2012 and the increase in the second half of the year, over the equivalent period in 2011, was in excess of 11 per cent. This accelerating trend is encouraging and was achieved in tough global markets, where pricing pressures intensified during the year, reflecting the generally difficult environment. ECO responded rapidly to the changing market dynamics by introducing pricing strategies to retain and, where possible grow, market shares. We were particularly pleased to see a rise of 23 per cent in our turnover in Latin America, which delivered an increase in earnings of over 40 per cent from this important and fast growing region. The growth was driven principally by advances in Aivlosin® sales to Argentina and Venezuela, underpinned by continuing substantial sales in Brazil. ECO set up a new subsidiary in Mexico which should generate increased sales of Aivlosin® and other ECO products to the large and growing Mexican and Central American markets. Further growth was driven by strong sales of Aivlosin® in China, India and Malaysia. Sales from our Chinese subsidiary, Zhejiang ECO Biok Animal Health Products Limited, also continued to grow, rising a further 7 per cent during the year. As this important business is currently focused on pigs, the next significant strategic step is to broaden its product offering by entering the poultry sector in China for which the company already holds a number of marketing authorisations.. Aivlosin®’s excellent product performance in India, Malaysia and Turkey and its growing reputation, is leading to increased penetration in these rapidly developing markets for poultry. Pheasant chicks The difficulties within the Eurozone, coupled with the decline in the value of the Euro against sterling and the US dollar, meant that the sterling value of turnover and earnings arising from within that area dropped back slightly. Substantial investment and progress has since been made that will support future Aivlosin® growth, including an adjustment in strategy with increased focus on key markets, employment of additional sales support staff, the appointment of a new distributor in France and obtaining an important new approval for Aivlosin® Water Soluble Granules for use in poultry in Turkey. The European markets remain important to ECO, although their potential is not as significant as those territories with faster growing animal production where in general our presence is strong. We were also particularly encouraged by the growth in UK sales of over 30 per cent, reflecting the continued success of our direct- to- market strategy with Aivlosin®. 2 ECO ANIMAL HEALTH GROUP PLC CHAIRMANS STATEMENT FOR THE YEAR ENDED 31 MARCH 2012 Although the initial signs of recovery in Japan were promising, following the natural disasters of March 2011, it is now apparent that the full impact of these cataclysmic events is taking longer to overcome than previously thought. Many farmers were put out of business either through flooding, nuclear contamination or logistical problems and the cumulative effect has caused our business there to suffer for much of the year. Confidence in the economy and particularly in local agriculture was badly damaged, but following a series of initiatives undertaken by our Ecopharma subsidiary, its sales have been showing signs of a firm recovery since the year end. Aivlosin®– North America The last few months have been transformational in ECO’s development of Aivlosin®. North America is an extremely important market for this product and access is dependent on obtaining the necessary regulatory approvals, which is a very lengthy, costly and exacting process. In November 2011 the Veterinary Drugs Directorate (VDD) of Health Canada granted a marketing authorisation for Aivlosin® 625 mg/g water soluble granules for pigs for the treatment of ileitis, an enteric (gut) disease in pigs. The Health Canada approval was the first in North America for Aivlosin®. Initial sales in Canada, which started in March 2012, have been very encouraging and the feedback from veterinarians is positive. In July 2012, after years of trials and preparatory work by ECO’s product development and regulatory specialists in the UK and North America, the US Food and Drug Administration (FDA) also granted ECO a marketing authorisation in the United States for Aivlosin® 625 mg/g water soluble granules for pigs for the treatment of ileitis. The FDA’s approval is ECO’s first in the United States and marks a very important step in the Group’s continuing development of Aivlosin® as a global veterinary product. ECO established a joint venture sales and marketing company, Pharmgate Animal Health LLC, in the US in 2010 to prepare for the launch of Aivlosin®. These approvals will, in due course, be followed by further authorisations for other formulations and indications. PEOPLE We now employ over 150 people in our 14 offices around the world and we are, as always, grateful to our hard dedicated, working team of highly qualified specialists who are making our Group a leading force in the global animal health markets. OUTLOOK We are confident that the long awaited marketing authorisations in the US and Canada will have a major positive effect on the development of ECO, although it will be some months before the product launches gain momentum. We do not expect a noticeable impact on our financial performance until next year. ECO is very well placed to further broaden its product ranges and its global spread will ensure that it capitalises on opportunities as they arise in all the Group’s major markets. The Group is set for an exciting future and looks forward to maximising value for shareholders. Peter Lawrence Executive Chairman 19 July 2012 3 ECO ANIMAL HEALTH GROUP PLC DIRECTORS' REPORT FOR THE YEAR ENDED 31 MARCH 2012 The directors present their report and financial statements for the year ended 31 March 2012. Directors The following directors have held office since 1 April 2011: Peter Lawrence Marc Loomes Kevin Stockdale Brett Clemo Julia Trouse David Danson Julia Henderson Principal activities Chairman Chief Executive Finance Director Executive Director Executive Director Non Executive Director Non Executive Director The principal activities of the Group in the year under review were those of manufacturers and suppliers of animal health products. Results and dividends The consolidated income statement for the year is set out on page 12. The profit for the year after tax was £2,626,926 (2011: £1,993,803). The directors have declared a dividend of 3.75p per share (2011: 3.00p). Substantial shareholdings At 2 May 2012, the Company had been notified of the following holdings of 3 per cent or more of its issued share capital. P A Lawrence and family Schroder Investment Management Limited Prudential plc Axa Investment Managers SA Artemis Appleby Trust (Jersey) Limited Hargreave Hale & Co Ordinary shares 11,208,536 10,849,114 7,845,158 3,979,022 3,621,983 2,603,290 2,350,000 Per cent 20.34 19.68 14.23 7.22 6.57 4.72 4.26 4 ECO ANIMAL HEALTH GROUP PLC DIRECTORS' REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2012 Group research and development activities The Group is continually researching into and developing new products and markets. Details of expenditure incurred and written off during the year are shown in the notes to the financial statements. Following the recent approval of our first marketing authorisation for Aivlosin® in the USA, the Group remains committed to obtaining further authorisations of its Aivlosin® products in the USA and Canada and also other key territories such as Korea and Russia. Submissions have been made to the relevant authorities and approvals are expected in the future, although the exact timing remains outside the Group’s control. Review of the business and future developments A full review of the year, together with an indication of future developments, is given in the Chairman's statement on pages 1 to 3. Principal risks and uncertainties The directors present below their review of the principal risks and uncertainties facing the business. If any of the following risks materialise, the Group's business, financial condition, prospects and share price could be materially and adversely affected. The directors consider the following risks along with specific financial risks such as credit and currency risks, which are more fully outlined in note 32 to the financial statements, are the most significant, but not necessarily the only ones associated with the Group and its businesses. Competition The Group operates in competitive global markets and there are no assurances that the Group's competitiveness will improve or that it will win any additional market share from any of its competitors or maintain existing market shares. The Group reviews its pricing and takes action to control its cost base to ensure that it remains as competitive as possible and protect its margins. Failure to do this may result in materially lower margins and loss of market share. Dependence on key customers and suppliers The Group is dependent on a number of customers and distributors in each of the territories into which it sells. The loss of one or more of its key customers could result in lower than expected sales and have a significant impact on the scale of its operations. The Group seeks to minimise reliance on key territories and individual customers and distributors. The Group is also dependent on a small number of suppliers for some of its raw materials and maintains business interruption insurance in respect of each of these. In the longer term the Group is working towards a situation where it has dual sourcing on all key supplies. Timing of product registrations The Group uses only reputable subcontractors and experts as well as employing highly qualified staff to ensure that applications for registrations are of the highest possible quality when submitted. Nevertheless, the Group is subject to occasional delays for example due to backlogs at the licensing authorities, which are completely outside of its control. These delays can result in the Company falling short of its short term financial objectives but do not significantly affect its prospects over the longer term. 5 ECO ANIMAL HEALTH GROUP PLC DIRECTORS' REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2012 Going concern The directors believe that the Group is well placed to manage its business risks successfully despite the uncertain economic outlook. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current and expected banking facilities. After making enquiries, the directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. Market value of freehold land and buildings The Group's freehold land and buildings situated at 78 Coombe Road, New Malden, were independently valued by an appropriately qualified person in April 2010. The market value of the property at that date was £650,000. The property at Western Road was acquired at open market value of £156,550 during the year and has not been subsequently revalued. Key performance indicators The key performance indicators ("KPIs") for the Group are those that communicate the financial performance and strength of the Group as a whole to shareholders. A summary of the KPIs is as follows: Financial Revenue Gross profit Gross margin % Earnings due to shareholders before interest, tax depreciation, amortisation, share-based payments, foreign exchange differences and minorities. 2012 £ 2011 £ 28,322,177 10,817,951 38.20 27,078,262 10,712,925 39.56 6,519,723 6,370,109 Cash balances, net of borrowings 9,509,732 9,418,341 Non-financial Health and safety – major accidents reported to the board in the year There are no other major non-financial KPIs. Nil Nil 6 ECO ANIMAL HEALTH GROUP PLC DIRECTORS' REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2012 Directors’ interests Under the Group’s executive share option scheme the following directors have the right to acquire Ordinary shares. M D Loomes J Trouse K Stockdale B Clemo D Danson J Henderson 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Directors’ emoluments 27,640 at £1.085 100,000 at £1.47 150,000 at £1.50 50,000 at £1.61 583,750 at £1.085 100,000 at £0.85 100,000 at £1.47 150,000 at £1.50 7,640 at £1.085 70,000 at £1.47 75,000 at £1.50 20,000 at £1.61 206,100 at £1.085 50,000 at £0.85 70,000 at £1.47 75,000 at £1.50 20,000 at £1.61 27,640 at £1.085 70,000 at £1.47 75,000 at £1.50 20,000 at £1.61 50,000 at £1.085 50,000 at £0.85 70,000 at £1.47 75,000 at £1.50 20,000 at £1.61 27,640 at £1.085 40,000 at £1.47 75,000 at £1.50 35,000 at £1.35 50,000 at £1.61 60,000 at £1.085 50,000 at £0.85 40,000 at £1.47 75,000 at £1.50 35,000 at £1.35 50,000 at £1.61 30,000 at £0.85 30,000 at £0.85 35,000 at £1.35 35,000 at £1.35 The directors who served in the year received the following; emoluments, pension contributions, share-based payments and benefits in kind. P A Lawrence M D Loomes J Trouse K Stockdale B Clemo D Danson J Henderson 2012 £ 1,131 304,766 118,075 126,769 176,482 15,447 23,658 ---------------- 766,328 ---------------- 2011 £ 1,154 266,565 126,522 115,670 162,112 15,903 22,532 ---------------- 710,459 ---------------- Directors' insurance The Company maintains directors' and officers' liability insurance for the benefit of its directors which remained in place at 31 March 2012 and throughout the preceding year. 7 ECO ANIMAL HEALTH GROUP PLC DIRECTORS' REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2012 Financial instruments The Group's accounting policies for financial instruments and strategy for management of those financial instruments are given in notes 2 and 32 to the financial statements respectively. Employees Applications for employment by disabled persons are given full and fair consideration. When existing employees become disabled every effort is made to provide continuing employment wherever possible. Donations Charitable donations- Charities Aid Foundation 2012 £ 3,500 ======= 2011 £ 3,620 ======= Creditor payment policy The Group agrees terms and conditions for its business transactions with its suppliers and payments are made on these terms, subject to the terms and conditions being met by the suppliers. The Parent Company has no supplies of goods. Trade payables for the Parent and its UK subsidiary at the year end amounted to 108 days (2011: 114 days) of average supplies for the year. Internal financial control The board of directors is responsible for the Group's system of internal financial control. Internal control systems are designed to meet the particular needs of the companies concerned and the risks to which they are exposed. This provides reasonable, but not absolute, assurance against material misstatement or loss. Strict financial and other controls are exercised by the Group over its subsidiary companies by day to day supervision of the businesses by the directors. Corporate governance The Company’s shares are traded on the Alternative Investment Market of the London Stock Exchange and the Company is therefore not required to report on compliance with the Combined Code. The directors support the Combined Code and have complied with all the recommendations which they feel are relevant to a business the size of ECO Animal Health Group plc. Stockbrokers Cenkos Securities plc are the Company's nominated advisor and stockbrokers. The closing share price on 31 March 2012 was 207p per share (2011: 216p). During the year the average share price was 214.5p (2011:187p). Auditors The auditors Reeves and Co LLP will be proposed for reappointment in accordance with the provisions of section 489 of the Companies Act 2006. 8 ECO ANIMAL HEALTH GROUP PLC DIRECTORS' REPORT (CONTINUED) FOR THE YEAR ENDED 31 MARCH 2012 Statement of directors' responsibilities The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Statement of disclosure to auditors So far as each of the directors are aware; (a) there is no relevant audit information of which the Company's auditors are unaware, and they have taken all the steps that they ought to have taken as directors in order to make (b) themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information. On behalf of the board .............................. Peter Lawrence Director 19 July 2012 9 ECO ANIMAL HEALTH GROUP PLC INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF ECO ANIMAL HEALTH GROUP PLC We have audited the financial statements (the “financial statements”) of ECO Animal Health Group plc for the year ended 31 March 2012 which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated and company statements of financial position, the Consolidated and company statements of changes in equity, the Consolidated and company statements of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 9, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall position of the financial statements. Opinion on financial statements In our opinion: the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 March 2012 and of the Group’s profit and Group’s and Parent Company’s cash flows for the year then ended; the Group’s financial statements have been properly prepared in accordance with IFRSs adopted by the European Union; the Parent Company’s financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 10 ECO ANIMAL HEALTH GROUP PLC INDEPENDENT AUDITORS’ REPORT (Continued) TO THE SHAREHOLDERS OF ECO ANIMAL HEALTH GROUP PLC Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not yet been received from branches not visited by us; or the Parent Company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all of the information and explanations we require for our audit. James O’Brien FCA Senior Statutory Auditor For and on behalf of; Reeves and Co LLP Statutory Auditors Chartered Accountants London Date: 19 July 2012 The maintenance and integrity of the Group’s website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. 11 ECO ANIMAL HEALTH GROUP PLC CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2012 Revenue Cost of sales Gross profit Other income Administrative expenses Profit from operating activities Finance income Finance costs Net finance income/(expense) Profit before income tax Income tax credit/(charge) Profit for the year Profit attributable to: Owners of the parent company Minority interest Profit for the year Basic and diluted earnings per share (pence) Post tax earnings per share Diluted earnings per share (pence) Notes 2,3 4 5 6 6 8 24 7 2012 £ 28,322,177 (17,504,226) 10,817,951 760,062 (9,373,175) 2011 £ 27,078,262 (16,365,337) 10,712,925 178,961 (8,422,529) 2,204,838 2,469,357 130,931 (15,427) 115,504 2,320,342 306,584 2,626,926 2,217,627 409,299 2,626,926 2012 4.24 4.19 73,116 (250,857) (177,741) 2,291,616 (297,813) 1,993,803 1,590,781 403,022 1,993,803 2011 3.07 2.96 The consolidated income statement has been prepared on the basis that all operations are continuing operations. 12 ECO ANIMAL HEALTH GROUP PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2012 Notes 2012 £ 2011 £ Profit for the year 2,626,926 1,993,803 Other comprehensive income: Foreign currency translation differences Defined benefit plan actuarial (losses)/gains Revaluation of investments Transfer on disposal of investment Revaluation of freehold property Deferred tax on revaluations Other comprehensive income for the year 21 200,872 (151,000) (2,828) (58,766) - 14,782 3,060 203,229 14,000 61,594 - 52,000 (87,373) 243,450 Total comprehensive income for the year 2,629,986 2,237,253 Attributable to: Owners of the parent company Minority interest 24 2,140,405 489,581 2,629,986 1,754,161 483,092 2,237,253 All items listed in other comprehensive income have gone through reserves and are shown in the consolidated statement of changes in equity. The notes on pages 18 to 62 form part of these financial statements. 13 ECO ANIMAL HEALTH GROUP PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2012 CONSOLIDATED Attributable to the owners of the Parent Share Share Treasury Revaluation Other Retained Total Minority Capital premium Reserve Reserve Reserves Earnings Interest Total Equity Balance as at 31 March 2010 2,580,637 45,487,897 Account £ £ Profit for the year Other comprehensive income: Foreign currency differences Actuarial losses on pension scheme assets Revaluation of investment Revaluation of freehold property Deferred taxation Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners - - - - - - - - - - - - - - Issue of shares in the year 29,121 781,203 - - - - - - 29,121 781,203 2,609,758 46,269,100 - - - - - - - - - - - - - - Share-based payments Transfers on expiry of options Dividends relating to 2010 Transactions with owners Balance as at 31 March 2011 Profit for the year Other comprehensive income: Foreign currency differences Actuarial losses on pension scheme assets Revaluation of investment Transfer on disposal of investment Deferred taxation Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners Issue of shares in the year 146,202 4,587,817 Share-based payments Transfers on expiry of options Dividends relating to 2011 Cancellation of share premium account Treasury reserve arising from issue of jointly owned shares Transactions with owners Balance as at 31 March 2012 - - - (13,250,000) - - - - - 146,202 (8,662,183) (5,217,580) - (5,217,580) £ - - - - - - - - - - - - - - - - - - - - - - - - - - £ £ £ £ £ £ 519,319 1,141,591 4,569,844 54,299,288 1,400,296 55,699,584 1,590,781 1,590,781 403,022 1,993,803 123,159 123,159 80,070 203,229 14,000 - - - 14,000 61,594 52,000 (87,373) - - - - 14,000 61,594 52,000 (87,373) 1,727,940 1,754,161 483,092 2,237,253 - - 810,324 303,504 - - - 810,324 303,504 - (114,865) 114,865 - - (1,190,888) (1,190,888) (92,801) (1,283,689) 188,639 (1,076,023) (77,060) (92,801) (169,861) 545,540 1,330,230 5,221,761 55,976,389 1,790,587 57,766,976 2,217,627 2,217,627 409,299 2,626,926 120,590 120,590 80,282 200,872 (151,000) (151,000) - - (2,828) (58,766) 14,782 - - - - (151,000) (2,828) (58,766) 14,782 2,187,217 2,140,405 489,581 2,629,986 - - - - - - - - 303,504 - - - - - - - - 290,890 - - - 61,594 52,000 (87,373) 26,221 - - - - - - - - (2,828) (58,766) 14,782 (46,812) - - - - - - - - - 4,734,019 290,890 - - - 4,734,019 290,890 - (96,989) 96,989 - - (1,567,595) (1,567,595) (388,581) (1,956,176) 3,250,000 10,000,000 - - - - - (5,217,580) - (5,217,580) 3,443,901 8,529,394 (1,760,266) (388,581) (2,148,847) 2,755,960 37,606,917 (5,217,580) 498,728 4,774,131 15,938,372 56,356,528 1,891,587 58,248,115 14 ECO ANIMAL HEALTH GROUP PLC STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2012 COMPANY Attributable to the owners of the Parent Share Capital Share Treasury Revaluation Other Retained Total premium Reserve Reserve Reserves Earnings Balance as at 31 March 2010 2,580,637 45,487,897 Account £ £ Profit for the year Other comprehensive income: Actuarial losses on pension scheme assets Revaluation of investment Revaluation of freehold property Deferred taxation Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners - - - - - - - - - - - - Issue of shares in the year 29,121 781,203 Share-based payments Transfer to retained earnings re expired options Dividends relating to 2010 Transactions with owners - - - - - - 29,121 781,203 Balance as at 31 March 2011 2,609,758 46,269,100 Profit for the year Other comprehensive income: Actuarial losses on pension scheme assets Revaluation of investment Transfer on disposal of investment Deferred taxation Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners - - - - - - - - - - - - - - Issue of shares in the year 146,202 4,587,817 Share-based payments Transfers on expiry of options Dividends relating to 2011 Cancellation of share premium account Treasury reserve arising from issue of jointly owned shares - - - - - - - - (13,250,000) £ - - - - - - - - - - - - - - - - - - - - - - - - - £ £ £ £ 250,457 1,141,591 4,902,393 54,362,975 - - 61,594 52,000 (87,372) 26,222 - - - - - - - - - - - - 303,504 1,353,391 1,353,391 14,000 14,000 - - - 61,594 52,000 (87,372) 1,367,391 1,393,613 - - 810,324 303,504 (114,865) 114,865 - - (1,190,888) (1,190,888) 188,639 (1,076,023) (77,060) 276,679 1,330,230 5,193,761 55,679,528 - - - (2,828) (58,766) 14,782 (46,812) - - - - - - - - - - - - - - - 290,890 (96,989) 739,303 739,303 - - (151,000) (151,000) - - - (2,828) (58,766) 14,782 588,303 541,491 - - 4,734,019 290,890 96,989 - (1,567,595) (1,567,595) 3,250,000 10,000,000 - - - (5,217,580) 3,443,901 8,529,394 (1,760,266) Transactions with owners 146,202 (8,662,183) (5,217,580) - (5,217,580) Balance as at 31 March 2012 2,755,960 37,606,917 (5,217,580) 229,867 4,774,131 14,311,458 54,460,753 15 ECO ANIMAL HEALTH GROUP PLC STATEMENTS OF FINANCIAL POSITION (CO. NUMBER: 01818170) AS AT 31 MARCH 2012 Group 2012 £ 2011 £ Company 2012 £ 2011 £ Notes Non-current assets Intangible assets Property, plant and equipment Investment property Investments Current assets Inventories Trade and other receivables Income tax recoverable Other taxes and social security Cash and cash equivalents Total current assets Liabilities Trade and other payables Short -term borrowings Income tax Other taxes and social security Dividends Current liabilities Net current assets Total assets less current liabilities Non current liabilities Deferred tax 11 12 13 14 15 16 18 19 20 39,109,147 38,636,816 1,277,586 - - - 655,611 662,599 - 154,773 350,888 20,082,240 20,393,834 1,268,063 154,773 8,738 40,540,721 40,265,290 20,899,612 21,049,445 4,417,317 10,755,390 15,921 292,182 14,002,422 - - 4,803,929 9,642,817 28,912,983 28,625,161 213,622 3,588 6,243,597 - 229,630 9,793,239 355,667 94,712 9,471,537 29,483,232 24,368,662 38,935,852 35,085,968 (6,705,991) (4,492,690) (58,084) (157,572) (31,122) (5,795,322) (53,196) (77,529) (76,699) (32,369) (734,166) (4,492,690) - (44,143) (31,122) (226,588) (53,196) - (54,628) (32,369) (11,445,459) (6,035,115) (5,302,121) (366,781) 18,037,773 18,333,547 33,633,731 34,719,187 58,578,494 58,598,837 54,533,343 55,768,632 17 (330,379) (831,861) (72,590) (89,104) TOTAL ASSETS LESS TOTAL LIABILTIES 58,248,115 57,766,976 54,460,753 55,679,528 EQUITY Issued share capital Share premium account Treasury reserve Revaluation reserve Other reserves Retained earnings Minority interests TOTAL EQUITY 23 25 26 24 2,755,960 2,609,758 2,755,960 2,609,758 37,606,917 46,269,100 37,606,917 46,269,100 - (5,217,580) 276,679 498,728 1,330,230 4,774,131 5,193,761 15,938,372 (5,217,580) - 229,867 545,540 4,774,131 1,330,230 5,221,761 14,311,458 56,356,528 55,976,389 54,460,753 55,679,528 - 1,891,587 1,790,587 - 58,248,115 57,766,976 54,460,753 55,679,528 Approved by the Board and authorised for issue on 19 July 2012 Peter Lawrence Director The notes on pages 18 to 62 form part of these financial statements. 16 ECO ANIMAL HEALTH GROUP PLC STATEMENT OF CASHFLOWS FOR THE YEAR ENDED 31 MARCH 2012 Cashflows from operating activities Profit before income tax Adjustment for: Net finance costs/(income) Depreciation Amortisation of intangible assets Pension payments Pension operating costs Share based payments Profit on disposal of investment Operating cash flows before movements in working capital Change in inventories Change in receivables Change in payables Cash generated from operations Finance costs Income tax Net cash from operating activities Cash flows from investing activities Disposal of investment Acquisition of property, plant and equipment Acquisition of investment property Purchase of drug registrations Finance income Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Dividends paid Purchase of own shares Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Foreign exchange movements Balance at 1 April 2011 Balance at 31 March 2012 Notes 12 & 13 11 21 21 22 Group 2012 £ Group 2011 £ Company 2012 £ Company 2011 £ 2,320,342 2,291,616 732,074 1,352,597 (115,504) 98,219 3,593,365 (64,000) 3,000 290,890 (28,210) 6,098,102 386,612 (1,396,043) 991,542 6,080,213 (90,356) 140,185 6,130,042 177,741 88,543 3,239,948 (59,000) 2,000 303,504 - 6,044,352 893,380 (421,077) 2,158,550 8,675,205 (54,169) (155,860) 8,465,176 (398,154) 21,932 - (64,000) 3,000 290,890 (58,766) 526,976 - (599,864) 497,093 424,205 (89,831) 219,119 553,493 (406,817) 20,859 - (59,000) 2,000 303,504 - 1,213,143 - 772,301 146,407 2,131,851 (52,866) (742) 2,078,243 12 13 11 308,766 (140,457) (156,550) (4,063,647) 126,931 (3,924,957) - (151,257) - (4,269,988) 73,116 (4,348,129) 308,766 (27,143) (156,550) - 483,985 609,058 - (3,766) - - 459,683 455,917 4,390,913 (1,614,317) (5,217,580) (2,440,984) 305,995 (776,145) - (470,150) 4,390,913 (1,225,736) (5,217,580) (2,052,403) 305,995 (683,344) - (377,349) (235,899) 327,290 9,418,341 9,509,732 3,646,897 (131,405) 5,902,849 9,418,341 (889,852) - 6,190,401 5,300,549 2,156,811 - 4,033,590 6,190,401 18 17 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2012 General information 1. Eco Animal Health Group plc (“the company”) and its subsidiaries (together “the group”) manufacture and supply animal health products globally. The Company is traded on the AIM market of the London Stock Exchange and is incorporated and domiciled in the UK. The address of its registered office is 78 Coombe Road, New Malden, Surrey, KT3 4QS. 2. Summary of significant accounting policies Basis of preparation 2.1 The group has presented its annual report and accounts in accordance with International Financial reporting Standards (IFRS), as adopted by the European Union, IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of financial statements, in conformity with IFRS as adopted by the European Union, requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The principal accounting policies of the group are set out below and have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements. Adoption of new and revised standards 2.2 At the date of authorisation of these financial statements, the following standards and interpretations to existing standards are mandatory for the first time for the accounting period ended 31 March 2012. IFRIC 19 (issued 2009) IFRS 1 (amended 2010) IFRS 3 IFRIC 14 (amended 2009) IAS 24 (revised 2009) IAS 34 IFRIC 13 "Extinguishing Financial Liabilities with Equity Instruments" "Limited Exemption from Comparative IFRS Disclosures for first time Adoptors" "Measurement of non-controlling interests" "Prepayments of a Minimum Funding Requirement" "Related Party Disclosures" "Significant events and transactions" "Fair value of award credit" Effective from 01 July 2010 01 July 2010 01 July 2010 01 January 2011 01 January 2011 01 January 2011 01 January 2011 18 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 2.3 Adoption of new and revised standards (continued) The adaption of these standards and interpretations has not had a significant impact on the Group. At the date of the authorisation of these financial statements, the following standards and interpretations were in issue but not yet effective. Effective from IFRS 1 (amended 2010) IFRS 7 (amended 2010) IAS12 (amended 2012) IFRS 9 (issued 2009) IFRS 10 (issued 2011) IFRS 11 (issued 2011) IFRS 12 (issued 2011) IFRS 13 (issued 2011) IAS 1 (issued 2011) IAS 19 "Severe Hyperinflation and Removal of Fixed Dates for First-time Adoptors" 01 July 2011 Financial Instruments: Disclosures" 01 July 2011 "Deferred Tax: Recovery of Underlying Assets" "Financial Instruments" "Consolidated Financial Statements" "Joint arrangements" "Disclosure of Interests in Other Entities" "Fair Value Measurement" "Presentation of other items of Comprehensive Income" "Employee Benefits (Revised)" 01 January 2012 01 January 2013 01 January 2013 01 January 2013 01 January 2013 01 January 2013 01 July 2012 01 January 2013 A review of the impact of these standards, amendments and interpretations continues. At this stage the directors do not believe that they will give rise to any significant financial impact. The Group did not adopt any new or amended standards early during the year and does not plan to early adopt any of the standards issued but not yet effective. Basis of consolidation 2.4 The consolidated financial statements comprise the accounts of the Company and its subsidiaries drawn up to 31 March 2012. An entity is classed as a subsidiary of the Company when as a result of contractual arrangements the Company has the power to govern its financial and operating policies so as to obtain benefits from its activities. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured, as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value the difference is recognised directly in the income statement. Accounting policies have been changed where material to ensure consistency with the policies adopted by the Group. Although the subsidiaries in Brazil and China have December year ends, the Group uses management accounts to the end of March to prepare the Group accounts. Subsidiaries are wholly consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. 19 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Segment reporting 2.5 Operating segments are reported in a manner consistent with the internal reporting to the chief operating decision-maker. The chief operating decision-maker who is responsible for allocating resources and assessing performance of the operating segments has been identified as the Board. 2.6 (a) Foreign currency translation Functional and presentational currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in Pounds Sterling, which is the Company’s functional and the Group’s presentational currency. (b) Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translated into Pounds Sterling at the rates of exchange ruling at the date of the financial statements. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Foreign exchange gains and losses that relate to borrowing and cash and cash equivalents are presented in the income statement within finance income or finance costs. (c) Group companies The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows; assets and liabilities for each balance sheet presented are translated at the closing exchange rate at the date of the balance sheet; income and expenses for each income statement are translated at average exchange rates unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case the income and expenses are translated at the rate on the dates of the transaction; and all resulting exchange differences are recognised as a separate component of equity. When a foreign operation is partially disposed or sold, exchange differences that were recognised in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing exchange rate. 2.7 Financial instruments Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. 20 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows from the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group has the following non-derivative financial assets: Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables and cash and cash equivalents. Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Non-derivative financial liabilities All financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Group has the following non-derivative financial liabilities: bank overdrafts and trade and other payables. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. Goodwill 2.8 Goodwill arising on the acquisition of an entity represents the excess of the costs of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is not subject to amortisation but is tested for impairment. Negative goodwill arising on an acquisition is recognised directly in the income statement. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss recognised in the income statement on disposal. Goodwill arising before the date of transition to IFRS, on 1 April 2004, has been retained at the previous UK GAAP amounts, subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. 21 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Other intangible assets 2.9 Drug registrations, patents and licences The Group recognises internally generated or externally acquired intangible assets at cost and subsequently recognises them at cost less accumulated amortisation and impairment losses. Intangible assets acquired as part of a business combination are recognised at fair value. Expenditure on drug registrations and licences is recognised as an internally generated or externally acquired intangible asset only if all the following conditions are met: an asset is created that can be identified it is probable that the asset created will generate future economic benefits: and the development cost of the asset can be measured reliably. All drug registrations and licences are amortised on a straight-line basis over their useful economic life of 10 years. Distribution rights Distribution rights are recognised at cost and amortised on a straight line basis over their estimated useful economic life of 20 years. They are reviewed for impairment when any indication of potential impairment exists. Property, plant and equipment and depreciation 2.10 Plant and equipment are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset over its expected useful life, as follows; Plant and machinery 20% on cost Fixtures, fittings and equipment 20% on cost 25% on cost Motor Vehicles Freehold land and buildings are stated at valuation less depreciation. The property is professionally valued by a qualified surveyor at least once every three years. Surpluses and deficits arising from the periodic valuations are taken to the revaluation reserve in the statement of financial position and are recognised in the statement of comprehensive income for the year. Depreciation is provided at a rate calculated to write off the valuation less estimated residual value over the remaining useful life of the building at a rate of 2 per cent per annum. Land is not depreciated. Impairment of non-financial assets 2.11 The carrying amounts of the Group’s assets are reviewed at each year end, to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated in order to determine the impairment loss if any. The recoverable amount is the higher of its fair value and its value in use. For intangible assets with an indefinite useful life, an impairment test is performed at each year end. In assessing value in use, the expected future cash flows from the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised in the income statement whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years. 22 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Investment property 2.12 Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost on initial recognition and subsequently at its cost less any accumulated impairment and depreciation. 2.13 The Group leases certain property, plant and equipment. Leasing Assets obtained under finance leases, where the Group has substantially all the risks and rewards of ownership are capitalised as property, plant and equipment and depreciated over the shorter of the lease term and their useful lives. Obligations under such agreements are included in borrowings net of the financial charge allocated to future periods. The financial element of the rental payment is charged to the income statement so as to produce constant periodic rates of charge on the net obligations outstanding in each period. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Inventories 2.14 Inventories are valued at the lower of cost and net realisable value. Cost is determined using the first- in, first-out method. The cost of finished goods comprises raw materials, direct labour and other direct costs. Net realisable value is the estimated selling price in the ordinary course of business. Trade receivables 2.15 Trade receivables are measured at initial recognition at fair value and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowance for estimated, irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Investments 2.16 Non-current asset investments are stated at fair value, including transaction costs, less impairment. They are recognised or derecognised on the date when the contract for acquisition or disposal requires the delivery of that investment. Investments in subsidiaries are stated at cost less impairment in the Parent Company’s statement of financial position. An impairment is recognised in profit or loss when there is objective evidence that the asset is impaired and is measured on the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate adjusted for a risk premium. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised costs would have been had the impairment not been recognised. Investments classified as available-for-sale are stated at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity, determined using the weighted average cost method, is included in the net profit or loss for the period. 23 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Interest in joint ventures 2.17 A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control; that is, when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control. The Group reports its interests in jointly controlled entities using proportionate consolidation. The group’s share of the assets, liabilities, income, expenses and cash flows of jointly controlled entities are combined with the equivalent items in the results on a line-by-line basis. 2.18 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held on call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. Financial liabilities and equity 2.19 Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. 2.20 Bank borrowings and loans Interest-bearing bank loans and overdrafts are recorded as the proceeds received, net of direct issue costs (which equate to fair value). Finance charges including premiums payable on settlement or redemption and direct issue costs are accounted for on an accruals basis in profit or loss using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade payables 2.21 Trade payables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method. Provisions 2.22 Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle the obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation outstanding at the year end and are discounted to present value where the effect is material. 2.23 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group’s activities. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue on despatch of the goods (which the directors believe transfers substantially all the risks and rewards of ownership to the buyer). No goods are despatched on a sale or return basis. Distributors trade on their own account and not as agents. The Group also receives interest, royalty income and management charges in respect of accounting services supplied to certain ex-subsidiaries. The amounts are small and are recognised on an accruals basis. Pensions 2.24 Defined Contribution Scheme The pension costs charged against operating profits represent the amount of the contributions payable to the schemes in respect of the accounting period. 24 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Defined Benefit Scheme The regular cost of providing retirement pensions and related benefits is charged to the income statement over the employees’ service lives on the basis of a constant percentage of earnings. Any difference between the charge to the income statement and the contributions paid to the scheme are disclosed as an asset or liability in the statement of financial position in accordance with IAS 19. Actuarial gains or losses are taken directly to equity in the statement of comprehensive income. Share-based payments 2.25 The Group has applied the requirements of IFRS2 Share-based payments. In accordance with the transitional provisions, IFRS2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 January 2005. The Group issues equity-settled share-based payments to certain employees in exchange for services from those employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant of such equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions (with a corresponding movement in equity). The Group’s Employee Benefit Trust (“the Trust”) was set up on 6 October 2011 to administer the Group’s Joint Share Ownership Plan (JSOP). The trust was funded by loans from the Group, with its assets comprising shares in the Company. The Group recognised the assets and liabilities of the Trust in its own accounts and the carrying value of the Company’s shares held by the Trust were recorded as a deduction in total equity until such a time as the shares vest unconditionally to employees. Fair value, for both options and jointly owned shares is measured by use of the Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behaviour considerations. Further details of the inputs to the Black-Scholes model can be found in note 22 to the accounts. Taxation 2.26 Tax expense for the period comprises current and deferred tax. Current tax, including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the year end. Tax expenses are recognised in the income statement or statement of comprehensive income according to the treatment of the transactions which give rise to them. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amount in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted, or substantially enacted, by the date of the statement of financial position and are expected to apply when the related deferred tax asset is realised or deferred tax liability is settled. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. 25 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Equity 2.27 Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Amounts arising on the restructuring of equity and reserves to protect creditor interests are credited to the capital redemption reserve. The Treasury reserve arises when the Company issues equity share capital under its Joint Share Ownership Plan, which is held in trust by ECO Animal Health Group plc Employee Benefit Trust. The interests of this trust are consolidated into the Group’s financial statements and the relevant amount treated as a reduction in equity. The expenses of the trust are included in the consolidated income statement. 2.28 Dividend distribution Final dividend distributions to the Company’s shareholders are recognised as liabilities in the financial statements in the period in which they are approved by the Company’s shareholders. Interim dividends are recognised when they are paid. 2.29 Critical accounting estimates and judgements The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are: (a) Estimated impairment value of intangible assets The Group tests annually whether intangible assets with indefinite life have suffered any impairment. Other intangible assets are reviewed for impairment when an indication of potential impairment exists. Impairment provisions are recorded as applicable based on directors’ estimates of recoverable values. Details of the impairment reviews performed can be found in note 11 of the financial statements. (b) Income taxes The Group is subject to income taxes predominantly in the United Kingdom but also in other jurisdictions. Significant estimates are required in determining the provision for income taxes. There are some transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises assets and liabilities based on estimates of the final agreed position. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. (c) Pension scheme The Group maintains one defined benefit pension scheme which has been accounted for according to the provisions of IAS19. Although the assumptions were determined by a qualified actuary, any change in those assumptions may materially impact the financial position and results of the Group. Details of the assumptions used can be found in note 21 of the financial statements. (d) Share-based payments The charge to the Income Statement in respect of share-based payments has been externally calculated using management’s best estimates of the amount of options expected to vest and various other inputs to the Black-Scholes model, as disclosed in note 22. Any variation in those assumptions may have a material impact on the Group’s future results and financial position. 26 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Segment information 3. Management has determined the operating segments based on the reports reviewed by the Board that are used to make strategic decisions. The Board considers the business from a geographical perspective. Geographically, management considers the performance in the UK and Europe, China, Japan and the Indian subcontinent, Latin America and the rest of the world. The segment information provided to the Board for the year ended 31 March 2012 is as follows; Management considers Earnings before Interest, Tax, Depreciation and Amortisation (“EBITDA”), adjusted for share-based payments. China, Japan and the Indian subcontinent £ U.K. £ Europe £ Latin America £ Rest of the world £ Total £ Year ended 31 March 2012 Total segmental revenue Inter-segment revenue Revenue from external customers Sale of goods Royalties 760,235 4,201,343 - - 11,546,943 (2,421,888) 11,791,871 4,644,930 32,945,322 (4,623,145) (2,196,659) (4,598) 760,235 4,201,343 760,235 4,201,343 - 760,235 4,201,343 - 9,125,055 9,125,055 - 9,125,055 9,595,212 4,640,332 28,322,177 9,595,212 4,325,068 28,006,913 315,264 315,264 9,595,212 4,640,332 28,322,177 - Adjusted EBITDA Total assets (846,287) 1,103,737 15,285,976 9,464,789 1,934,133 20,078,286 2,636,392 1,359,337 6,187,312 16,556,570 8,638,332 70,023,953 Year ended 31 March 2011 Total segmental revenue Inter-segment revenue Revenue from external customers Sale of goods Royalties 567,921 4,344,378 - - 12,198,318 (2,218,332) 10,095,787 4,433,739 31,640,143 (4,561,881) (2,343,549) - 567,921 4,344,378 567,921 4,344,378 - 567,921 4,344,378 - 9,979,986 9,979,986 - 9,979,986 7,752,238 4,433,739 27,078,262 7,752,238 4,091,730 26,736,253 342,009 342,009 7,752,238 4,433,739 27,078,262 - Adjusted EBITDA Total assets (935,268) 1,416,463 11,843,501 9,446,879 2,481,290 20,182,417 1,849,331 1,289,536 6,101,352 14,721,730 8,439,425 64,633,952 27 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Segment information (continued) 3. Goodwill and other intangible assets are initially allocated to the geographical segments on the basis of the proportion of sales achieved by each segment. A reconciliation of adjusted EBITDA to profit before tax is provided as follows: Adjusted EBITDA for reportable segments Depreciation Amortisation Share-based payment charges Finance income/(expense) Profit before tax 2012 £ 6,187,312 (98,219) (3,593,365) (290,890) 115,504 2,320,342 2011 £ 6,101,352 (88,543) (3,239,948) (303,504) (177,741) 2,291,616 Other income 4. This includes an amount of £550,000 received in compensation for a claim against a former adviser relating to tax losses not claimed within the statutory time limit. 28 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 5. Result from operating activities Result from operating activities is stated after charging: Cost of inventories recognised as an expense Employee benefits expenses Amortisation of intangible assets Depreciation Loss on foreign exchange transactions Research and development Operating lease rentals Fees payable to the Company's auditor for the audit of the parent Company and Group annual accounts Fees payable for audit of the Company's subsidiaries pursuant to legislation Earnings due to shareholders before interest, tax, depreciation, amortisation, share-based payments and foreign exchange differences. Profit from operating activities Depreciation Amortisation Share-based payments Foreign exchange differences Minorities 2012 £ 2011 £ 17,504,226 16,365,337 2,879,736 3,239,948 88,543 268,757 29,245 146,221 2,967,640 3,593,365 98,219 332,411 37,561 178,625 18,000 18,000 27,000 27,000 2012 £ 2011 £ 2,204,838 98,219 3,593,365 290,890 2,469,357 88,543 3,239,948 303,504 6,187,312 332,411 6,101,352 268,757 6,519,723 (409,299) 6,370,109 (403,022) 6,110,424 5,967,087 29 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 6. Finance cost/income Finance costs Interest paid Foreign exchange differences on bank loans and overdrafts Finance income On short term bank deposits Net finance income/(expense) 2012 £ 2011 £ (90,356) 74,929 (54,169) (196,688) 130,931 115,504 73,116 (177,741) Earnings per share 7. The calculation of basic earnings per share is based on the post tax profit for the year divided by the weighted average number of shares in issue during the year. 2012 2011 Earnings Weighted average number of shares Per share amount Earnings Weighted average number of shares Per share amount £'000 000 (pence) £'000 000 (pence) Earrnings attributable to ordinary shareholders on continuing operations after tax Dilutive effect of share options Fully diluted earnings per share 2,218 52,333 4.24 1,590 51,873 3.07 - 553 (0.05) - 1,860 (0.11) 2,218 52,886 4.19 1,590 53,733 2.96 Dilutive earnings per share takes into account the dilutive effect of share options. For the purposes of calculating earnings per share, shares held by the Employee Benefit Trust as part of the Joint Share Ownership Plan are excluded from the calculation of the weighted average number of shares. The weighted average number of shares held by the Trust during the year was 1,233,950. 30 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 8. Taxation Current tax year Foreign corporation tax on profits for the year Adjustment for prior years Current tax Deferred tax Origination and reversal of temporary differences Income tax(credit)/charge Factors affecting the tax charge for the year Profit on ordinary activities before taxation Profit on ordinary activities before taxation multiplied by the applicable rate of UK corporation tax of 26% (2011: 28%) Effects of: Non deductible expenses Non chargeable credits Enhanced allowance on research and development expenditure Lower tax rate for Chinese subsidiary Unused tax losses carried forward Other tax adjustments Income tax charge Applicable tax rate per UK legislation Effects of: Non deductible expenses Non chargeable credits Enhanced allowance on research and development expenditure Lower tax rate for Chinese subsidiary Unused tax losses carried forward Other tax adjustments Effective tax rate 31 2012 £ 2011 £ 189,527 (9,411) 180,116 189,248 (14,205) 175,043 (486,700) 122,770 (306,584) 297,813 2,320,342 2,291,616 2012 £ 2011 £ 603,289 641,652 148,535 (453,659) 73,425 (113,993) (742,797) (116,428) 263,899 (9,423) (306,584) (153,062) (153,561) - 3,352 297,813 2012 % 26.00 6.40 (19.55) (32.01) (5.02) 11.37 (0.40) (13.21) 2011 % 28.00 3.20 (4.97) (6.68) (6.70) - 0.15 13.00 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 9. Profit for the financial year Parent Company's profit for the financial year 739,303 1,353,391 10. Dividends 2012 £ 2011 £ Dividend for the period ended 31 March 2010 of 2.3p per ordinary share Dividend for the period ended 31 March 2011 of 3.0p per ordinary share 2012 £ 2011 £ - 1,190,888 1,567,595 - 1,567,595 1,190,888 The Board is declaring a dividend of 3.75 pence per share in respect of the year ended 31 March 2012. A scrip dividend alternative will be offered. 32 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 11. Intangible fixed assets Group Goodwill Distribution rights Total Drug registrations, patents and licence costs Cost At 1 April 2010 Additions Foreign exchange movements At 1 April 2011 Additions At 31 March 2012 £ 17,930,495 - - 17,930,495 - 17,930,495 £ 1,034,860 - - 1,034,860 - 1,034,860 £ 4,269,988 63,209 £ 31,127,251 50,092,606 4,269,988 63,209 35,460,448 54,425,803 4,063,647 39,524,095 58,489,450 4,063,647 Amortisation At 1 April 2010 Charge for the year At 1 April 2011 Charge for the year Foreign exchange movements At 31 March 2012 Net Book Value At 31 March 2012 - - - - - - 315,726 55,318 12,233,313 12,549,039 3,239,948 3,184,630 371,044 51,743 - 422,787 15,417,943 15,788,987 3,593,365 (2,049) 18,957,516 19,380,303 3,541,622 (2,049) 17,930,495 612,073 20,566,579 39,109,147 At 31 March 2011 17,930,495 663,816 20,042,505 38,636,816 At 1 April 2010 17,930,495 719,134 18,893,938 37,543,567 The amortisation charge is included within administrative expenses on the income statement. Distribution rights are amortised over their estimated useful life of 20 years and reviewed for impairment when any indication of potential impairment exists. The remaining amortisation period at the date of the financial statements was 11 years. The carrying value of goodwill is attributable to the following cash generating units: Entity Eco Animal Health Limited (remaining 50%) Zhejiang Eco Biok Animal Health Products Limited 1 April 2007 ECOpharma Inc. (remaining 80%) Date of acquisition 1 October 2004 24 December 2009 £ 17,358,621 94,257 477,617 ------------------------------------------------- 17,930,495 =================== Goodwill acquired in a business combination is allocated at acquisition to the cash generating units (CGU’s) that are expected to benefit from the business combination. 33 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 11. Intangible fixed assets (Continued) The recoverable amounts of the CGU’s are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and the estimated remaining useful life of the asset which is maintained at 30 years through ongoing investment in the cash generating unit. The Group prepares cash flow forecasts derived from the most recent financial budgets and projections that are approved by management for the year ahead and then extrapolates them assuming a 3% annual growth rate which is well below the current performance of the existing business. The directors believe that the long term growth rate assumed does not exceed the average long term growth rate for the relevant markets. The exception to this rule is ECOpharma Inc. In this case the directors believe that a 5 percent growth rate in sales and margin for the second to fifth years, followed by a 3 per cent growth rate thereafter is appropriate. Management estimates discount rates using the pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGU’s. In the current year management estimated the applicable rate to be 11%. Despite general economic conditions, management considers that there is adequate headroom when comparing the net present value of the cash flows to the carrying value of goodwill to conclude that no impairment is necessary this year. On current assumptions the excess of recoverable amount over carrying value is over £35 million. Management believes that the most significant assumption in the calculation of value in use is the estimated growth rate. However, even if the growth rate were to be zero, the recoverable amount would still be over £16 million more than the carrying value and no impairment would be necessary. This assumes an earnings multiple of 10 on the current budgeted results in estimating fair value which has been derived from historical data. Drug registrations and licences are amortised over their estimated useful lives of 10 years, which is the directors’ estimate of the time it would take to develop a new product allowing for the Group’s patent protection and the exclusivity period which comes with certain registrations. Given the economic climate the directors have conducted an impairment review in the current year by preparing cash flow projections for the year ahead and extrapolating the results for the remaining life of the registrations assuming zero growth and an 11% discount rate to establish value in use. On the current assumptions the excess of the recoverable amount over carrying value is more than £18 million. The calculations have also shown that on current budget figures a 5 year life is more than enough to justify the current carrying value of these registrations. Moreover, fair value calculated as 10 times the current cash generated by the registrations gives an even higher result, so management has again concluded that no impairment is necessary. 34 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 12. Property, plant and equipment Group Cost or valuation At 1 April 2010 Additions Foreign exchange movements At 1 April 2011 Additions Foreign exchange movements Land and Buildings (freehold) Plant and machinery Fixtures, fittings and equipment Motor Vehicles Total £ 650,000 - - 650,000 - - £ 762,411 93,456 280,133 1,136,000 6,117 43,660 £ 535,296 15,590 - 550,886 74,749 - 42,211 - £ £ - 1,947,707 151,257 280,133 42,211 2,379,097 140,457 59,591 43,660 - At 31 March 2012 650,000 1,185,777 625,635 101,802 2,563,214 Depreciation At 1 April 2010 Charge for the year Foreign exchange movements Revaluation adjustment At 1 April 2011 Charge for the year Foreign exchange movements At 31 March 2012 Net Book Value At 31 March 2012 52,000 9,400 - (52,000) 9,400 9,400 - 18,800 359,139 29,058 203,463 - 591,660 33,433 97,190 722,283 448,434 42,125 (151) - 490,408 37,597 8 528,013 - 7,960 2,083 - 859,573 88,543 205,395 (52,000) 10,043 1,101,511 96,442 16,012 97,198 - 26,055 1,295,151 631,200 463,494 97,622 75,747 1,268,063 At 31 March 2011 640,600 544,340 60,478 32,168 1,277,586 At 1 April 2010 598,000 403,272 86,862 - 1,088,134 The freehold property at 78 Coombe Road, New Malden was valued on 28 April 2010 by Mr R Sworn of Kelion Sworn Chartered Surveyors and Valuers, London, W1. The fair value in use of the freehold property was determined at £650,000 by means of applying a 7.5% discount rate to the annual rental value of the property as determined by local market conditions. The property will continue to be valued on a regular basis The value of non depreciable land included within Land and Buildings is £180,000. 35 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 12. Property, plant and equipment (continued) The value of the freehold property would have been recorded at £328,743 (2011: £340,049) on a historical cost basis giving rise to the current revaluation surplus of £229,867.This balance is not distributable to shareholders. Depreciation has been included in the administrative expenses line on the income statement. Company Cost or valuation At 1 April 2010 Additions At 31 March 2011 Additions Land and Buildings (freehold) £ 650,000 - 650,000 - Fixtures, fittings and equipment £ 139,751 3,766 143,517 677 Motor Vehicles Total £ - - - 26,466 £ 789,751 3,766 793,517 27,143 At 31 March 2012 650,000 144,194 26,466 820,660 Depreciation At 1 April 2010 Charge for the year Revaluation adjustment At 1 April 2011 Charge for the year At 31 March 2012 Net Book Value At 31 March 2012 52,000 9,400 (52,000) 9,400 9,400 18,800 117,047 11,459 - 128,506 9,084 137,590 - - - - 1,671 1,671 169,047 20,859 (52,000) 137,906 20,155 158,061 631,200 6,604 24,795 662,599 At 31 March 2011 640,600 15,011 At 1 April 2010 598,000 22,704 - - 655,611 620,704 The freehold property at 78 Coombe Road, New Malden was valued on 28 April 2010 by Mr R Sworn of Kelion Sworn Chartered Surveyors and Valuers, London, W1. The fair value in use of the freehold property was determined at £650,000 by means of applying a 7.5% discount rate to the annual rental value of the property as determined by local market conditions. The property will continue to be valued on a regular basis. 36 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 12. The value of non depreciable land included within Land and Buildings is £180,000. Property, plant and equipment (continued) The value of the freehold property would have been recorded at £328,743 (2011: £340,049) on a historical cost basis giving rise to the current revaluation surplus of £229,867.This balance is not distributable to shareholders. Depreciation has been included in the administrative expenses line on the income statement. 13. Investment property Group and Company Cost Additions At 31 March 2012 Depreciation Charge for the year At 31 March 2012 Net Book Value At 31 March 2012 At 31 March 2011 Land and Buildings (freehold) Total £ £ 156,550 156,550 156,550 156,550 1,777 1,777 1,777 1,777 154,773 154,773 - - The investment property was purchased at open market value during the year. Depreciation has been included in the administrative expenses line on the income statement. 37 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 Fixed asset investment 14. Group Cost or fair value At 1 April 2010 Revaluation in the year At 31 March 2011 Revaluation in the year Disposals At 31 March 2012 Net Book Value At 31 March 2012 At 31 March 2011 At 1 April 2010 Available for sale quoted assets at fair value £ 250,000 61,594 311,594 (2,828) (308,766) - - Unlisted investments Total £ 39,294 - 39,294 (30,556) - £ 289,294 61,594 350,888 (33,384) (308,766) 8,738 8,738 8,738 8,738 311,594 39,294 350,888 250,000 39,294 289,294 The available for sale asset (the holding in Anpario plc (formerly Kiotech International plc)) was sold during the year. 38 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 14. Fixed asset investments (continued) Company Available for sale quoted assets at fair value Investments in subsidiary undertakings at cost Total Cost or fair value At 1 April 2010 Revaluation in the year At 31 March 2011 Revaluation in the year Disposals At 31 March 2012 Impairment At 1 April 2010, 2011 and 2012 Net Book Value At 31 March 2012 At 31 March 2011 At 1 April 2010 £ 250,000 61,594 311,594 (2,828) (308,766) - - - - £ £ 21,273,502 21,523,502 61,594 21,273,502 21,585,096 (2,828) (308,766) 21,273,502 21,273,502 - - 1,191,262 1,191,262 20,082,240 20,082,240 311,594 20,082,240 20,393,834 250,000 20,082,240 20,332,240 The available for sale asset (the holding in Anpario plc (formerly Kiotech International plc)) was sold during the year. 39 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 14. Fixed asset investments (continued) The Company holds more than 20% of the share capital of the following companies: Company Subsidiary undertakings held by Company Zhejiang ECO Biok Animal Health Products Limited Petlove Limited Eco Animal Health Limited Country of registration or incorporation Class Shares held % P. R. China Great Britain Great Britain Ordinary Ordinary Ordinary 3 91 100 Subsidiary undertakings held by Group ECO Animal Health Southern Africa (Pty) Limited South Africa Zhejiang ECO Biok Animal Health Products Limited P. R. China Ordinary 100 Ordinary 48 Shanghai ECO Biok Veterinary Drug Sale Company Ltd. (via Zhejiang ECO Biok Animal Products Ltd.) ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda. ECOpharma Inc. ECO Animal Health USA Corp. Interpet LLC ECO Animal Health de Mexico ECO Argentina S.A. P. R. China Ordinary 48 Brazil Japan U.S.A. U.S.A. Mexico Argentina Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 The principal activity of these undertakings for the last relevant financial year was as follows: ECO Animal Health Limited ECO Animal Health Southern Africa (Pty) Limited Petlove Limited Zhejiang ECO Biok Animal Health Products Limited Shanghai ECO Biok Veterinary Drug Sale Company Ltd. ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda ECOpharma Inc. ECO Animal Health USA Corp. Interpet LLC ECO Animal Health de Mexico ECO Argentina S.A. Principal activity Distribution of animal drugs Non-trading Non-trading Manufacture of animal drugs Distribution of animal drugs Distribution of animal drugs Distribution of animal drugs Non-trading Non-trading Distribution of animal drugs Non-trading 40 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 14. Fixed asset investments (continued) The aggregate amount of capital and reserves and the results of these undertakings for the last relevant financial year were: Profit/loss for the year Equity Profit/loss for the year Equity 2012 2012 2011 2011 £ £ £ £ ECO Animal Health Limited 3,345,471 2,068,100 1,277,371 1,237,171 Zhejiang ECO Biok Animal Health Products Ltd 3,855,323 835,305 3,649,202 822,493 ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda (129,901) (197,683) 41,893 (45,195) ECOpharma Inc 671,451 (98,253) 758,461 224,171 ECO Animal Health de Mexico 9,233 9,093 - - The equity and results of Shanghai ECO Biok Veterinary Drug Sale Company Ltd are included within those disclosed for Zhejiang ECO Biok Animal Health Products Limited. During the year ECO Animal Health (Europe) Limited was taken out of the group structure and dissolved. All of the subsidiaries listed above were included in the consolidation for the year. Zhejiang ECO Animal Health Products Limited and ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda both have 31 December year ends. The Group receives management accounts for the three months to 31 March for these subsidiaries for use in preparing the consolidated financial statements. ECOpharma Inc has changed its year end to March with effect from 31 March 2012. ECO Argentina S.A. which holds neither assets nor liabilities and which has not traded since its formation has been excluded from consolidation. The Group also holds (by means of its ownership of ECO Animal Health USA Corp.), a 50% joint venture interest in Pharmgate LLC, which is resident in U.S.A. Pharmgate LLC will distribute the group’s products in the U.S.A. once marketing authorisations are granted. The Group has also entered into a new 50% joint venture, Pharmgate Animal Health Canada Inc, to distribute its newly licensed products into Canada. 41 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 14. Fixed asset investments (continued) The following amounts included in the group’s financial statements are related to its interest in these joint ventures. Pharmgate LLC 2012 £ 31,803 (9,851) - - (100,153) 2011 £ 20,439 (4,751) - - 100,153 Pharmgate Animal Health Canada Inc 2012 £ 16,377 (14,705) 5,644 4,599 - 2011 £ - - - - - Current assets Current liabilities Sales Margins Expenses 15. Inventories Group 2012 £ 2011 £ Raw materials and consumables Finished goods and goods for resale At 31 March 2012 2,279,354 2,137,963 4,417,317 2,935,528 1,868,401 4,803,929 Company 2012 2011 £ - - - £ - - - The cost of inventories recognised as an expense and included in cost of sales in the period amounted to £17,504,226 (2011: £16,635,337). 16. Trade and other receivables Trade receivables Amounts owed by group undertakings Other receivables Prepayments and accrued income Non current Current Group 2012 £ 2011 £ Company 2012 £ 2011 £ 9,616,990 - 768,301 370,099 10,755,390 100,225 10,655,165 10,755,390 9,015,511 - 391,384 235,922 9,642,817 - 28,418,185 226,630 268,168 28,912,983 - 28,184,995 281,542 158,624 28,625,161 128,224 9,514,593 9,642,817 28,373,610 539,373 28,912,983 28,313,219 311,942 28,625,161 42 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 16. Trade and other receivables (continued) As at 31 March 2012, trade receivables of £2,102,528 (2011: £1,324,362) due to the Group and £nil (2011: £nil) due to the Company were past due but not impaired. These relate to long standing distributors with whom we have agreed settlement terms and with whom there is no history of default. The ageing analysis of these trade receivables is as follows: Up to 3 months past due 3 to 6 months past due Over 6 months past due 2012 £ 1,731,377 286,649 84,502 2,102,528 Group Company 2011 £ 2012 £ 2011 £ 1,238,808 33,021 52,533 1,324,362 - - - - - - - - As at 31 March 2012, trade receivables of £32,379 were impaired and provided for. The impaired receivables mainly relate to historic debt for which recovery is still being sought. The Group mitigates its exposure to credit risk by extensive use of commercial credit reference agencies, close management of its customers’ trading against terms offered and use of retention of title clauses wherever possible. The ageing analysis of the impaired balances is as follows: Current Up to 3 months past due 3 to 6 months past due Over 6 months past due Group 2012 £ - - - 32,379 32,379 2011 £ 1,379 27,622 26,478 68,869 124,348 Company 2012 £ - - - - - 2011 £ - - - - - 43 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 16. Trade and other receivables (continued) Movement on the Group provision for impairment of trade receivables is as follows: Group Balance at 1 April Recovered in the year Written off in the year Balance at 31 March Group 2012 £ 124,348 (75,605) (16,364) 32,379 The directors are pleased to note that the active management of the Latin American accounts provided for in 2009 as a result of the economic conditions at that time, has resulted in a positive outcome in almost all cases and that the remaining general provision in respect of this region could be released during the year. The carrying amounts of trade and other receivables are denominated in the following currencies: Pounds Sterling Euros U S Dollars Chinese RMB Brazilian Real Japanese Yen Other currencies Group 2012 £ 776,993 2,857,514 5,513,412 411,957 357,576 492,684 345,254 10,755,390 2011 £ 633,540 2,806,327 4,070,628 544,793 606,322 757,984 223,223 9,642,817 Company 2012 £ 28,780,350 - 132,633 - - - - 28,912,983 2011 £ 28,478,774 - 146,387 - - - - 28,625,161 The carrying amounts of trade and other receivables are not significantly different to their fair values. 44 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 17. Deferred tax Group Deferred tax assets and liabilities are attributable to the following: Drug registration expenditure Freehold property Plant and equipment Investments Tax losses carried forward Liabilities 2012 £ 2011 £ Net 2012 £ 2011 £ (2,139,050) (72,590) (12,094) - 1,893,355 (2,281,894) (72,590) (2,050) (14,782) 1,539,455 (2,139,050) (72,590) (12,094) - 1,893,355 (2,281,894) (72,590) (2,050) (14,782) 1,539,455 Amount (payable) after more than one year (330,379) (831,861) (330,379) (831,861) The movement on the deferred tax account can be summarised as follows: Drug registration expenditure £ Freehold property £ Property, plant and equipment £ Investments £ Total £ At 31 March 2011 (742,439) (72,590) (2,050) (14,782) (831,861) Credit/(charge) for the year through income statement Movement through the year through revaluation reserve 496,744 - - - (10,044) - 486,700 - 14,782 14,782 At 31 March 2012 (245,695) (72,590) (12,094) - (330,379) The tax losses carried forward are not expected to expire under current legislation. Any future dividend received from the Chinese subsidiary Zhejiang ECO Biok Animal Health Products Limited will be subject to a 10 per cent withholding tax. The deferred tax liability in respect of this has not been recognised. 45 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 17. Deferred tax (continued) Company At 31 March 2011 Credit for the year through income statement Movement through the year through revaluation reserve Freehold property £ (72,590) - - Property, plant and equipment £ Investments £ Total £ (1,732) 1,732 - (14,782) - 14,782 (89,104) 1,732 14,782 At 31 March 2012 (72,590) - - (72,590) A credit of £1,732 (2011: credit of £1,536) was recognised in the Company’s income statement for the year. A credit of £14,782 (2011: charge of £87,372) was recognised in the Company’s Revaluation Reserve. 18. Cash and cash equivalents Cash and cash equivalents comprise cash and short term deposits held by the Group. The carrying amount of these assets are not significantly different to their fair value. Note Group 2012 £ 2011 £ Company 2012 £ 2011 £ Cash and cash equivalents Overdrafts Net funds per cash flow 20 14,002,422 9,471,537 (53,196) (4,492,690) 9,509,732 9,418,341 (4,492,690) 9,793,239 6,243,597 (53,196) 5,300,549 6,190,401 46 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 19. Trade and other payables Group 2012 £ 2011 £ Company 2012 £ 2011 £ 5,410,817 4,904,967 514,654 375,701 6,705,991 5,795,322 887,400 407,774 124,057 565,651 44,458 734,166 135,904 69,025 21,659 226,588 Trade payables Other payables Accruals and deferred income 20. Borrowings Included within payables on the statement of financial position are the following amounts at fair value secured by a debenture on the assets of the group: Group 2012 £ 2011 £ Company 2012 £ 2011 £ Short term borrowings 4,492,690 53,196 4,492,690 53,196 Currency analysis of short term borrowings U S Dollars Euros Group 2012 £ 2011 £ Company 2012 £ 2011 £ 4,072,226 420,464 - 53,196 4,072,226 420,464 - 53,196 4,492,690 53,196 4,492,690 53,196 The Group has no net overdraft facilities in place at the year end, although it has the facility to overdraw in specific currencies within a positive total cash balance. The interest rate for all currency overdrafts is 2.75 per cent over the relevant currency base rate. 47 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 21. Pension and other post-retirement benefit commitments Defined Contribution pension Scheme The Group operates defined contribution pension schemes for the benefit of certain directors and senior employees. The assets of the schemes are held separately from the Group and independently administered by insurance companies. The pension cost charge represents contributions payable to the funds in the year and amounted to £316,853 (2011: £201,994). Defined Benefit Pension Scheme The Group operates a defined benefit scheme in the UK for ex-employees only. A full actuarial valuation was carried out at 6 April 2009 and updated 31 March 2012 by a qualified independent actuary. The major assumptions used by the actuary were: Discount rate Rate of increase in pension payment Inflation assumption with a maximum of 5% p.a. 31 March 2012 4.6% 2.9% 2.9% 1 April 2011 5.5% 3.4% 3.4% Mortality rates Pre retirement mortality is based on the mortality table known as AMCOO for males and AFCOO for females and 70% of the mortality indicated by this table has been taken, as in the previous year. Post retirement mortality is based on the mortality table known as PCMAOO for males and PCFAOO for females. Allowance has been made for the improvement in mortality experienced recently and expected in the future by using 100% for males and 70% for females of the “Medium Cohort” improvement table, subject to a minimum improvement rate of 1.4% p.a. for males and 1.1% p.a. for females. To allow for the expected additional cost of purchasing annuities on retirement, only 60% of the mortality indicated by these projections has been taken into the calculations. Expectation of life at retirement age of 65 is 25.2 (2011: 25.1) years for males and 29.1 (2011: 29.0) years for females. For members retiring in 20 years time, the expectation of life at age 65 would be 28.1 (2011: 28.0) years for males and 31.3 (2011: 31.2) years for females. 48 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 21. Pension and other post-retirement benefit commitments (continued) Results Assets at start of year Defined benefit obligation at start of year Net asset at 1 April Current service cost, including risk benefits Expected return on assets Interest cost (Loss)/gain on asset return Experience (loss)/gain (Loss)/gain on changes in assumptions Statement of other comprehensive income Employer contributions gross Expenses paid by trustees Net asset at 31 March 2012 Actual assets at end of year Actual defined benefit obligation at end of year 2012 £ 2,684,000 (2,596,000) £ 2011 £ 2,592,000 (2,575,000) (3,000) 150,000 (139,000) (26,000) (5,000) (120,000) 64,000 (7,000) £ 17,000 (2,000) 88,000 (3,000) (2,000) 144,000 (138,000) 11,000 6,000 10,000 1,000 3,000 (151,000) 14,000 59,000 (6,000) 57,000 2,000 2,959,000 2,957,000 53,000 88,000 2,684,000 2,596,000 The pension fund assets are all held within a policy managed by an insurance company. 49 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 21. Pension and other post-retirement benefit commitments (continued) Reconciliation of changes in the asset value during the year Fair value of assets at 1 April Expected return on assets (Loss)/gain on asset return Employer contributions (gross) Death in service insurance premiums paid Expenses paid by trustees Increase/(decrease) in secured pensioners value due to scheme experience £ 2012 £ 2,684,000 150,000 (26,000) 64,000 (3,000) (7,000) £ 2011 £ 2,592,000 144,000 10,000 59,000 (2,000) (6,000) 97,000 (113,000) Fair value of assets at 31 March 2012 2,959,000 2,684,000 Reconciliation of changes in the liability value during the year Defined benefit obligation at 1 April Interest cost Experience loss/(gain) on liabilities Loss/(gain) on changes in assumptions Increase/(decrease) in secured pensioners value due to scheme experience Defined benefit obligation at 31 March 2012 2,596,000 139,000 5,000 120,000 2,575,000 138,000 (1,000) (3,000) 97,000 (113,000) 2,957,000 2,596,000 The expected contribution to be paid by the employer during the next accounting year is £59,000. This includes a provision of £3,000 for death in service risk premium, (2011: £5,000). Year ended 31 March 2012 2011 2010 2009 2008 Present value of defined benefit obligation Fair value of plan assets Surplus/(deficit) in plan Experience (loss)/gains on plan liabilities 2,959,000 2,596,000 2,575,000 2,227,000 2,325,000 2,957,000 2,684,000 2,592,000 2,224,000 2,368,000 43,000 (3,000) 17,000 88,000 2,000 (5,000) 1,000 9,000 3,000 8,000 50 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 22. Share-based payments The measurement requirements of IFRS2 have been implemented in respect of share options that were granted after 7 November 2002. The expense recognised for share based payments made during the year is shown in the following table: 2012 £ 2011 £ Total expense arising from equity settled share-based transactions 290,890 303,504 The share based payment plans are described below: Movements in issued share options and jointly owned shares during the year The following table illustrates the number and weighted average exercise prices (WAEP) of and movements in, share options and jointly owned shares during the period: Options 2012 Jointly owned shares Options 2011 2012 2012 WAEP £ - 1.23 1.87 2,603,290 2012 WAEP £ - 3,307,390 985,000 2.00 2011 WAEP £ 1.14 1.48 - - - 1.03 1.39 2,603,290 - 1.11 - - (30,000) (255,000) 2.00 4,007,390 - 1,905,390 1.39 1.09 1.23 1.12 Outstanding at 1 April Granted during the period Expired/cancelled during the period Exercised during the period Outstanding at 31 March Exercisable at 31 March 4,007,390 456,500 - (1,206,040) 3,257,850 1,129,350 The maximum aggregate number of shares over which options may currently be granted cannot exceed 10 per cent of the nominal share capital of the Company on the grant date. The options outstanding at 31 March 2012 had a weighted average share price of £1.39 and a weighted average contractual life of 5.2 years. Eco Animal Health Group plc Executive Share Option Scheme In accordance with the Executive Share Option Scheme, approved and unapproved share options are granted to full time directors and employees who devote at least 25 hours per week to the performance of duties or employment with the Company. Details of options granted to directors can be found in the Directors Report and notes 29 (Directors Emoluments) and 31 (Related Party Transactions). The exercise price of the options is equal to the market price of the shares at the date of grant. The options vest three years from the date of grant and if the option holder ceases to be a director or employee of the Company due to injury, disability, redundancy or retirement on reaching pensionable age or any other age at which they are bound to retire at in accordance with the terms of their contract of employment, the option may be exercised within a period of six months after the option holders so ceasing, although the Board may, at its discretion, extend this period by up to 36 months after the date of cessation. 51 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 22. Share-based payments (continued) If the option holder ceases employment for any other reason, the option may not be exercised unless the Board permits. The approved and unapproved options will be forfeited where they remain unexercised at the end of their respective contractual lives of ten and seven years. An analysis of the expiry dates of the outstanding options is given below: Date of grant Unapproved Approved (pence) Expiry date Exercise price 06 August 2003 25 October 2005 20 February 2006 10 August 2006 03 March 2008 03 March 2008 18 September 2008 18 September 2008 30 April 2009 30 April 2009 06 August 2009 06 August 2009 24 December 2009 24 December 2009 12 April 2010 20 May 2010 20 May 2010 13 September 2010 11 October 2011 11 October 2011 10,000 443,970 115,000 481,450 103,000 10,650 375,000 389,900 90,000 302,400 2,321,370 10,000 11,880 12,600 490,900 35,000 55,550 22,000 29,350 115,100 154,100 936,480 202.50 06 August 2013 340.00 25 October 2012 252.50 20 February 2016 238.00 10 August 2016 108.50 03 March 2018 108.50 03 March 2015 85.00 18 September 2018 85.00 18 September 2015 147.00 30 April 2019 147.00 30 April 2016 135.00 06 August 2019 135.00 06 August 2016 155.00 24 December 2019 155.00 24 December 2016 150.00 12 April 2017 140.00 20 May 2020 140.00 20 May 2017 161.00 13 September 2017 186.50 11 October 2021 186.50 11 October 2018 ECO Animal Health Group plc Joint Share Ownership Plan In accordance with the newly established Joint Share Ownership Plan (JSOP), jointly owned shares may be awarded to directors and employees of the company. The shares are awarded at the market price on the day of the award and are held jointly by the employee concerned and the ECO Animal Health Group plc Employee Benefit Trust. After a three year vesting period, the shares may be sold at the option of the employee. The proceeds of sale are split between the trust and the employee so that the Trust receives the original market value of the shares sold plus a 5.9% per annum carry charge, with the employee receiving any excess over this amount. Because these are actual issued shares in the company rather than options there is no expiry date associated with jointly owned shares. However, they will normally be forfeit if the employee ceases to be an employee of the company for any reason other than death, injury, redundancy, retirement on or after normal retirement age or disposal by the Group of the employing business entity. The market price of the shares at 31 March 2012 was 207.5p with a range in the year of 185p to 245p. 52 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 22. Share-based payments (continued) Inputs to the Valuation Model (for options and jointly owned shares) The fair value of share options granted prior to 31 March 2007 were estimated at the time of grant using trinomial pricing model, taking into account all the terms and conditions upon which the options were granted. For options issued after 1 April 2007, the directors took the decision that a Black- Scholes model would be more appropriate. The following table lists the inputs to the Black-Scholes model which applies to both options and jointly owned shares. 2012 2011 2010 2009 2008 Vesting period (years) Option expiry (years) Dividends expected on the shares Risk free rate Volatility of share price Weighted average fair value of options 3 3 3 3 3 7-10 yrs 7-10 yrs 7-10 yrs 7-10 yrs 7-10 yrs 5.00% 5.00% 4.66% 2.40% 25% 40% 18.7p 32.6p 4.50% 2.00% 45% 37.78p 1.00% 2.00% 27% 41.0p 4.50% 4.19% 30% 16.8p The risk free rate has been based on the yield from UK Government treasury coupons. The volatility of the share price was estimated based on standard deviation calculations on the historic share price. Under the terms of the Group’s Joint Share Ownership Plan (JSOP) on 6 October 2011, the Group issued a part interest in 1,819,290 Ordinary shares of 5p each to the Executive Directors at a price of 194p per share as an effective modification to existing benefits under the Group’s Unapproved Share Option Scheme. As part of this transaction the Directors exercised 1,039,290 of vested options and agreed that a further 780,000 of unvested options would be effectively capped at the 6 October 2011 market price of 194p by means of a partial waiver of these options. The jointly owned shares and the capped options are therefore treated as one instrument when looking at the overall limit on outstanding share options and jointly owned shares. On 21 October 2011, the Group issued a part interest in a further 784,000 Ordinary shares of 5p each to the Executive Directors and certain other senior employees below board level as an alternative to unapproved options. These shares were issued at a price of 214p per share and have a vesting period of three years. The fair value of the part interest in the jointly owned shares was calculated using a Black-Scholes model with the same assumptions as those used for the options issued during the year. The weighted average fair value of each jointly owned share issued during the year was 26.15 pence. 53 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 23. Share capital Authorised 68,100,000 Ordinary shares of 5p each 10,790 Deferred ordinary shares of 10p each 32,334 Convertible preference shares of £1 each 2012 £ 2011 £ 3,405,000 3,405,000 1,079 32,334 3,438,413 3,438,413 1,079 32,334 Allotted, called up and fully paid 55,119,201 ( 2011: 52,195,172) Ordinary shares of 5p each 2,755,960 2,609,758 During the year a further 173,989 shares were issued at a premium of £334,406 as a result of the take up of the scrip dividend option and 1,206,040 more shares were issued at a premium of £1,182,451 as a result of the exercise of options by employees. In addition, 1,544,000 shares were issued as a result of the Group’s new share ownership scheme at a premium of £3,070,960. During the year the Company obtained a court order authorising the cancellation of £10,000,000 of the total share premium. This amount was transferred to the credit of the Company’s retained earnings in accordance with the resolution approved by the shareholders at the Annual General Meeting on 2 September 2011. At the same time an amount of £3,250,000 was transferred from the Share Premium Account to a non-distributable Special Reserve for the protection of creditors. This transfer will be reversed when all creditors outstanding as at the date of the court order have been paid or alternatively, when a further £3,250,000 has been credited to the Share Premium Account as a result of the issue of equity. 24. Minority interests 2012 £ 2012 £ 2011 £ 2011 £ Balance at 1 April Share of subsidiary's profit for the year Share of foreign exchange gain on net investment 1,790,587 1,400,296 409,299 80,282 403,022 80,070 Share of dividend paid by subsidiary Balance at 31 March 489,581 (388,581) 1,891,587 483,092 (92,801) 1,790,587 54 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 25. Treasury share reserve Balance at 1 April Arising in the year Balance at 31 March 2012 £ 2011 £ - 5,217,580 5,217,580 - - - Treasury share reserve includes £5,217,580 (2011: £nil), being the cost of 2,603,290 shares in the Company held by the Group’s JSOP. 26. Other reserves Capital redemption reserve £ 105,829 - - 105,829 - - Reserve for share- Special based reserve payment Total £ £ £ - 1,035,762 1,141,591 303,504 - (114,865) - - 1,224,401 1,330,230 290,890 - (96,989) - 303,504 (114,865) 290,890 (96,989) - 3,250,000 - 3,250,000 105,829 3,250,000 1,418,302 4,774,131 Group and Company At 1 April 2010 Share-based payments Transfer to retained earnings on expiry of options At 31 March 2011 Share-based payments Transfer to retained earnings on expiry of options Transfer on reduction of share premium for protection of creditors At 31 March 2012 55 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 26. Other reserves (continued). Included in the Group’s retained earnings are the following exchange movements which have been taken directly to reserves on consolidation of the subsidiaries listed below: At 1 April 2011 £ Movement in the year £ At 31 March 2012 £ 325,638 83,555 409,193 2,281 49,254 38 2,245 (629) 25,891 11,243 (131) 84 (52) 120,590 28,172 60,497 (93) 2,329 (681) In respect of: Zhejiang Eco Biok Animal Health Products Limited Eco Animal Health do Brasil Comercio de Produtos Veterinarios Ltda ECOpharma Inc. ECO Animal Health Southern Africa (pty) Ltd Interpet LLC Pharmgate LLC Foreign currency differences attributable to owner credited directly to reserves. 27. Financial commitments At 31 March 2012 the Group had minimum commitments under non-cancellable operating leases as follows: Expiry date: Within one year Between two and five years In over five years 28. Capital commitments Land and Buildings 2011 £ 2012 £ Motor vehicles 2011 £ 2012 £ 10,377 536,971 2,197,631 2,744,979 - 713,846 2,293,625 3,007,471 4,988 62,136 - 67,124 3,168 67,244 - 70,412 The group had no authorised capital commitments as at 31 March 2012 (2011: Nil). 56 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 29. Directors’ emoluments Emoluments for qualifying services Company pension contributions to money purchase schemes Share-based payments Benefits in kind 2012 £ 2011 £ 386,008 439,520 183,024 94,074 174,979 157,288 19,577 766,328 710,459 22,317 During the year the directors exercised 1,059,290 (2011: nil) share options realising a gain of £968,243 (2011: £nil). The number of directors for whom retirement benefits are accruing under money purchase pension schemes amounted to 3 (2011: 3). No directors accrued benefits under defined benefit schemes for this or the previous year. The highest paid director received £304,766 (2011: £266,565) including share-based payments and £120,854 (2011: £79,220) of pension contributions. 30. Employees Number of employees The average number of employees (including directors) during the year was: 2012 Number 2011 Number 7 49 34 55 145 7 47 39 51 144 2012 £ 2011 £ 3,628,585 3,512,002 303,504 277,724 203,994 4,569,165 4,297,224 290,890 329,837 319,853 Directors Production and development Administration Sales Employment costs (including amounts capitalised) Wages and salaries Share-based payments Social security costs Other pension costs 57 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 31. Related party transactions At the year end ECO Animal Health Group plc owed P A Lawrence, a director of ECO Animal health Group plc and members of his family a balance amounting to £512,337 (2011: £62,886). During the year, the Group provided management services to Anpario plc (formerly Kiotech International plc), a company in which P A Lawrence is a Director and holds share options. Fees of £26,000 (2011: £26,000) were charged. During the year, the Group provided the services of two employees to C-Corp Limited, a company in which P A Lawrence is a Director and shareholder. Fees of £48,970 (2011: £44,279) were charged. During the year ECO Animal Health Limited made sales on an at arm’s length basis to the following other companies. The sales and year end balances are given in the table below. Since all of these companies are wholly owned by the Group, these transactions and balances have all been eliminated on consolidation. Subsidiary companies Sales £ Year end receivables 2012 £ Sales £ Year end receivables 2011 £ Zhejiang Eco Biok Animal Health Products Limited Eco Animal Health do Brasil Comercio de Produtos Veterinarios Ltda. Ecopharma Inc. ECO Animal Health de Mexico ECO Animal Health USA Corp. 1,854,311 558,361 1,119,737 541,705 2,196,659 567,577 - - 1,250,962 344,499 175,411 22,633 2,343,549 1,098,594 - - 1,371,550 337,958 - - Interest and management charges from Parent to the other Group companies During the year the Company made management charges on an arm’s length basis to ECO Animal Health Limited amounting to £195,598 (2011: £187,222) and charged interest of £397,298 (2011: £304,705) to the Company. Both of these charges were made through the inter-company account and were eliminated on consolidation. ECO Animal Health Limited also made management charges on an arm’s length basis to ECOpharma Inc. amounting to £32,316 (2011: £85,828). The whole transaction was eliminated on consolidation. ECO Animal Health Limited also paid £109,011 (2011: £100,153) of management charges to ECO Animal Health USA Corp. which were that company’s share of the expenses incurred by Pharmgate LLC prior to commencement of sales in the USA. This transaction was eliminated on consolidation. During the year ECO Animal Health Limited paid no dividend (2011: £1,500,000) to ECO Animal Health Group plc. During the year Zhejiang ECO Biok Animal Health Products Limited paid dividends of £31,085 (2011: £7,425) to ECO Animal Health Group plc and £373,356 (2011: £89,164) to ECO Animal Health Limited. Both amounts were eliminated on consolidation. 58 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 31. Related party transactions (continued) During the year P Lawrence and his family received dividends in the form of cash and shares to the value of £333,185 (2011: £252,934), and the other directors and their families received dividends in the form of cash and shares to the value of £895 (2011: £662). During the year the Company acquired at open market value a freehold property from C-Corp Limited of which P A Lawrence is a Director and Shareholder, for a total cost of £156,550 including 1% stamp duty. Joint Ventures During the year ECO Animal Health Limited made sales on an arm’s length basis of £4,515 to ECO Animal Health Canada LLC. This balance remained outstanding at the year end. Key management compensation The group regards the directors as its key management. Salaries and short term benefits Retirement benefits Share-based payments 32. Financial instruments 2012 £ 2011 £ 461,639 507,343 183,024 94,074 174,979 157,288 819,642 758,705 The Group uses financial instruments comprising borrowings, cash and liquid resources and various items, such as trade receivables, trade payables etc. that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. The directors are responsible for the overall risk management. The main risks arising from the Group’s use of financial instruments are interest rate risk, capital and liquidity risk, credit risk and foreign currency risks and they are summarised below. The policies have remained unchanged throughout the year. Interest rate risk The Group finances its operations through a mixture of retained earnings and bank borrowings. At the year end the interest rate exposure of the Group arose on currency overdraft facilities of £4,492,690 (2011: £53,196), details of which are shown in the note below on capital and liquidity risk. IFRS7 requires the disclosure of a sensitivity analysis that details the effects on the Group’s profit or loss and other equity of reasonably possible fluctuations in market rates. This sensitivity analysis has been determined based on exposure at the year end date. If interest rates had been 1 per cent higher or lower and all other variables were held constant the Group’s profit would have decreased/increased by a maximum of £44,926. 59 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 32. Financial instruments (Continued) Capital and liquidity risk The Group manages its capital to ensure continuity as a going concern whilst maximising returns through the optimisation of debt and equity. As part of this, the Board considers the cost and risk associated with each class of capital. The capital structure of the Group consists of debt which includes the borrowings disclosed in note 20, cash and cash equivalents in note 18 and equity attributable to equity holders of the parent comprising issued capital, reserves and retained earnings as disclosed in the Group’s statement of changes in equity. Liquidity risk is managed by maintaining adequate reserves and banking facilities with continuous monitoring of the latest developments by management. At 31 March 2012 the Group was contractually obliged to make repayments as detailed below: WITHIN ONE YEAR OR ON DEMAND Bank overdrafts Trade payables Credit risk 2012 £ 2011 £ 53,196 4,492,690 5,410,817 4,904,967 9,903,507 4,958,163 Credit risk is that of financial loss as a result of default by a counterparty on its contractual obligations. The Group’s exposure to credit risk arises principally in relation to trade receivables from customers and on short term bank deposits. Customers’ creditworthiness is wherever possible checked against independent rating databases and filing authorities or otherwise assessed on the basis of trade knowledge and experience. Exposure and customer credit limits are continually monitored both on specific debts and overall. The credit risk in relation to short term bank deposits and derivatives is limited because the counterparties are banks with good credit ratings. Currency risk The Group operates in overseas markets particularly through its subsidiaries in China, Brazil and Japan and is subject to currency exposure on transactions undertaken during the year. The Group does some hedging of receivables when the Board feels it is appropriate to do so and foreign exchange differences on retranslation of foreign monetary items are taken to the income statement. 60 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 32. Financial instruments (Continued) The table below shows the extent to which the Group companies have monetary assets and liabilities in currencies other than in Sterling: Foreign currency of Group operations 2012 US Dollar Euros Rand Chinese RMB Japanese Yen Brazilian Real Other Sterling equivalent (000's) (1,930) 2,141 266 2,790 438 794 192 2011 Sterling equivalent (000's) 4,508 2,410 204 2,867 165 835 52 At 31 March 2012 the Group was mainly exposed to the U S Dollar, the Euro, the Chinese RMB and the Brazilian Real. The following table details the effect of a 10 per cent movement in the exchange rate of these currencies against sterling when applied to outstanding monetary items denominated in foreign currency as at 31 March 2012. A positive number indicates the decrease in profit which would arise from a 10 per cent weakening of the foreign currency concerned. U S Dollar Euro Chinese RMB Brazilian Real 2012 £'000 (175) 195 254 72 2011 £'000 410 219 261 76 61 ECO ANIMAL HEALTH GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEAR ENDED 31 MARCH 2012 32. Financial instruments (Continued) Analysis of financial instruments by category Group 2012 Investments Trade and other receivables (excluding prepayments) Cash and cash equivalents 2011 Investments Trade and other receivables (excluding prepayments) Cash and cash equivalents Company 2012 Trade and other receivables (excluding prepayments) Cash and cash equivalents 2011 Investments Trade and other receivables (excluding prepayments) Cash and cash equivalents Loans and receivables £ Available for sale £ 8,738 10,385,291 14,002,422 - - - Total £ 8,738 10,385,291 14,002,422 Loans and receivables £ Available for sale £ Total £ 43,461 311,594 355,055 9,406,895 9,594,403 - - 9,406,895 9,594,403 Loans and receivables £ Available for sale £ Total £ 28,644,815 9,793,239 - - 28,644,815 9,793,239 Loans and receivables £ Available for sale £ Total £ - 311,594 311,594 28,466,537 6,243,597 - - 28,466,537 6,243,597 All financial liabilities in the Group’s and Company’s statements of financial position are classified as held at amortised cost for both the current and previous year. 62 ECO ANIMAL HEALTH GROUP PLC NOTICE OF MEETING Animal Health Group plc Notice is hereby given that the Annual General Meeting of ECO Animal Health Group plc will be held at 78 Coombe Road, New Malden, Surrey KT3 4QS at 10 am on 27th September 2012 for the following purposes: 1. To receive and adopt the report of the directors and the Group Financial Statements for the 12 months ended on 31 March 2012, together with the report of the auditors; 2. To re-elect Mr Peter Lawrence, the Director retiring by rotation who, being eligible, offers himself for re-election: 3. To appoint the auditors, Reeves & Co LLP and to authorise the directors to determine their remuneration; To consider and if thought fit, to pass the following Resolutions as Special Resolutions: 4. That in substitution for the authority granted to the directors pursuant to a special resolution passed at the Annual General Meeting of the Company held on 2nd September 2011, the directors be generally and unconditionally authorised for the purposes of Section 551 of the Companies Act 2006 (“the Act”) to exercise all the powers of the Company to allot shares up to an aggregate of £649,040 provided that this authority shall expire on 27th September 2013, or, if sooner, at the Company’s next Annual General Meeting, save that the Company may, before such expiry, make an offer or agreement which would or might require relevant securities to be allocated after such expiry notwithstanding that the authority conferred by this resolution has expired. All authorities previously conferred under Section 80 of the Companies Act 1985 are revoked, but such revocation shall not have retrospective effect. 5. That the Company be and is hereby generally and unconditionally authorised for the purposes of Section 701 of the Companies Act 2006 to make market purchases (within the meaning of Section 701 of the Companies Act 2006) of Ordinary Shares of 5 pence each in the capital of the Company provided that : (a) the maximum number of Ordinary Shares which may be purchased is 551,192 (representing one per cent of the Company’s issued ordinary share capital as at the date of this notice); (b) the minimum price (exclusive of expenses) which may be paid for each ordinary share is 10 pence; (c) the maximum price (exclusive of expenses) which may be paid for each Ordinary Share is an amount equal to 105 per cent of the average of the middle market quotations of an ordinary share in the Company taken from the Daily Official List of 63 ECO ANIMAL HEALTH GROUP PLC the London Stock Exchange plc for the five business days immediately preceding the day on which the share is contracted to be purchased; (d) this authority shall expire at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution or on 27th September 2013, whichever is earlier, (unless previously renewed, varied, or revoked by the Company in general meeting); and (e) the Company may, before such expiry, enter into one or more contracts to purchase Ordinary Shares under which such purchases may be completed or executed wholly or partly after the expiry of this authority, and may make a purchase of Ordinary Shares in pursuance of any such contract or contracts. 6. That pursuant to the passing of the resolution numbered 4 above, and in substitution for the authority granted to the directors pursuant to a special resolution passed at the Annual General Meeting of the Company held on 2nd September 2011, the directors be empowered pursuant to Section 551 of the Companies Act 2006 to allot equity securities (as defined in Section 560 of the Companies Act 2006) and sell treasury shares for cash pursuant to the authority given pursuant to Resolution 4 above as if Section 561 of the Companies Act 2006 did not apply to any such allotment or sale provided that the authority conferred by Resolution 4 above and by this Resolution 6 shall expire on 27th September 2013 or, if sooner, at the Company’s next Annual General Meeting (save that the Company may, before the expiry of such authority, make offers or arrangements requiring relevant securities to be allotted or sold prior to such expiry and the directors may allot relevant securities or sell treasury shares in pursuance of such offers or arrangements as if the authority conferred had not expired) and provided that the disapplication of Section 561 of the Act effected by this Resolution 6 is limited to the allotment of equity securities and the sale of treasury shares up to an aggregate nominal value of £275,596 being ten per cent of the current issued share capital of the Company. By Order of the Board Julia Trouse - Secretary New Malden 19 July 2012 64 ECO ANIMAL HEALTH GROUP PLC Animal Health Group plc FORM OF PROXY FOR USE AT THE ANNUAL GENERAL MEETING I/We.......................................……………………………….of.................................................................... (Please complete in BLOCK CAPITALS) being (a) Member(s) of the above named Company, owning HEREBY APPOINT shares; ................................................………………………………of.................................................................... failing whom the Chairman of the Meeting as my/our proxy to vote for me/us on my/our behalf on any resolution proposed at the Annual General Meeting of the Company to be held on 27th September 2012 and in particular to vote on the resolutions to be proposed thereat in the manner indicated below FOR AGAINST VOTE WITHELD RESOLUTIONS 1. To receive the directors’ report and financial statements for the 12 months ended 31 March 2012. 2. To re-elect Mr Peter Lawrence, the Director retiring by rotation who, being eligible, offers himself for re-election. 3.To appoint the auditors Reeves+Co LLP and to authorise the directors to determine their remuneration. 4. To allow the Board to allot unissued shares up to an aggregate nominal value of £649,040. 5. To authorise the Company to make market purchases up to 551,192 of its shares. 6. To allow the Board to issue equity securities for cash up to a nominal value of £275,596. (Please indicate with an “X” in the appropriate space how you wish your vote to be cast. If no specific direction as to voting is given then proxy will vote or abstain at his discretion.) Date: ........................................... Signature: .............................................................. NOTES: 1. If you wish to appoint a proxy other than the Chairman of the meeting, please insert the name and address of your proxy (who need not be a member of the Company). 3. 2. This form of proxy must be lodged at the Company’s Registered Office at 78 Coombe Road, New Malden, Surrey KT3 4QS not less than 48 hours before the time appointed for the holding of the meeting. In the case of a corporation, this form of proxy must be executed under seal or under the hand of a duly authorised officer of the corporation. In the case of joint holders, the vote of the senior who tends a vote whether in person or by proxy shall be accepted to the exclusion of votes of the other joint holders and or this purpose seniority will be determined by the order in which the names stand in the Register of Members in respect of the joint holdings. 4. 5. Any alterations to this form of proxy should be initialled. 65
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