Instem plc Annual Report 2010

Plain-text annual report

Instem Life Science Systems plc Annual Report 2010 Instem (AIM:INS.L) is a leading supplier of IT solutions to the early development healthcare market. Instem’s solutions accelerate drug and chemical development by increasing productivity, automating processes and enhancing practices that lead to safer and more effective drugs. Instem has over 130 customers in North America, Europe, China, India and Japan, including sixteen of the top twenty pharmaceutical and biotech companies such as GlaxoSmithKline and AstraZeneca. It is estimated that approximately half of the world’s pre-clinical drug safety data has been collected over the last 20 years via Instem software. ® The Provantis solution incorporates a comprehensive suite of modules required for managing and recording Early Development Safety Assessment (EDSA) studies, from receipt of the compound through to the automated assembly of statistical analyses and final reports. The software allows scientific staff to collect, analyse and share data across the organisation and externally. Installed on-site or using SaaS, Provantis streamlines traditional paper or spreadsheet-based workflow with intuitive functionality enforcing best practice, reducing the potential for errors and providing documented validation at every step. Centrus TM Launched in September of 2010, the Centrus suite provides a single, secure environment to access, harmonise and use early drug development information from a variety of sources, including current data acquisition systems, legacy systems, warehouses, partner and contract research applications, to meet the rapidly-expanding needs of life science organisations for data- driven decision making. By having the ability to access various sources and formats of data, Centrus adds value to existing systems; collating and standardising information and distributing the results to sponsors, regulators and partners. The suite provides powerful pre-built applications as well as the ability to utilise a range of sophisticated business intelligence and analysis tools. The acquisition of BioWisdom greatly enhances the Centrus product suite capabilities and adds another compelling dimension to the Instem offering. Our clients include these fine organisations... Contents HIGHLIGHTS CHAIRMAN’S STATEMENT OPERATIONAL REVIEW FINANCIAL REVIEW BOARD OF DIRECTORS DIRECTORS’ REPORT CORPORATE GOVERNANCE REPORT DIRECTORS’ REMUNERATION REPORT DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF INSTEM LIFE SCIENCE SYSTEMS PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION COMPANY STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CASH FLOWS COMPANY STATEMENT OF CASH FLOWS CONSOLIDATED AND COMPANY STATEMENT OF CHANGES IN EQUITY ACCOUNTING POLICIES NOTES TO THE FINANCIAL STATEMENTS COMPANY STATEMENT OF COMPREHENSIVE INCOME DIRECTORS AND ADVISERS 3 5 7 13 17 19 22 26 28 29 30 31 32 33 34 35 36 42 78 81 Instem Life Science Systems plc Annual Report, 2010 1 s t h g i l h g h i 2 Instem Life Science Systems plc Annual Report, 2010 Highlights Financial Highlights Operational Highlights • Revenues steady at £10.00m (2009: £9.99m) • Successfully admitted to AIM in October 2010 to facilitate the growth strategy • Won the majority of new business placed in the Early Development Safety Assessment (EDSA) market. Notable new customers included: • US National Institute of Environmental Health Sciences (NIEHS) • • Shin Nippon Biomedical Laboratories USA Shanghai Institute of Materia Medica • Customer retention rate remained at over 95% • Launched new product suite, Centrus™, extending addressable market • Completed investment in a new Chinese operation • Acquisition of BioWisdom Ltd, completed post year end on 3 March 2011, augmenting the Centrus suite • Recurring revenues accounted for 67% of total revenues (2009: 64%) • Operating proﬁ t before amortisation and non-recurring costs increased by 2.0% to £2.23m (2009: £2.19m) • Closing cash balance as at 31 December 2010 of £3.26m We have established a proﬁ table, cash- generative leading business in the niche market of early drug safety assessment. With ﬁ scal and regulatory pressures driving the need for our solutions, we believe we now have a strong platform from which to achieve accelerated growth through the entry into complementary markets and geographies. Since our Admission to AIM in October 2010 we have made progress with both our organic and acquisitive growth strategies, acquiring BioWisdom in March 2011. We look forward to the future with conﬁ dence and will build on the successful execution of our strategy so far by continuing to drive growth through both internal investment and complementary acquisitions. Phil Reason, Chief Executive Instem Life Science Systems plc Annual Report, 2010 3 growth “We now have a strong platform from which to achieve growth through entry into complementary markets and regions, as fiscal and regulatory pressures continue to drive the need for Instem’s solutions, and customers pursue consolidation of the fragmented EDA supplier base.” 4 Instem Life Science Systems plc Annual Report, 2010 t n e m e t a t s Chairman’s Statement 2010 proved to be a successful year for Instem in what has clearly been a challenging economic climate for many of our customers, prospects and competitors. The progress we have achieved over recent years enabled us to consider taking the Company public, and in October we successfully raised £9.15m, before issue costs, from new investors and were admitted to trading on AIM, the London Stock Exchange’s international market for smaller, growing companies. The transformation into a public Company has served to strengthen our position within the Early Development Safety Assessment (EDSA) market, and will enable us to execute our strategy of advancing into the broader Early Development Applications (EDA) market. Revenues held steady at £10.00m, while operating proﬁ t before amortisation and non-recurring costs increased 2% to £2.23m. This ﬁ nancial performance was achieved through a focus on the delivery of operational targets, whilst investing in a number of initiatives aimed at the continued long term development of Instem. In particular these included the launch of our new product suite, Centrus, and the completion of our investment in a new operation in China. We were delighted to welcome many new customers during the year, including a division of the US Government and SNBL, one of the largest Contract Research Organisations in the US. We believe that we were successful in winning the majority of new business placed in the EDSA market in the period, pointing to the strength of our product offering and customer support. Our successful admission to AIM has enabled us to embark upon our M&A programme, which is planned to augment our organic growth. We were delighted to be able to announce, post period end, the acquisition of BioWisdom Limited, which will supplement and strengthen our Centrus product range. We now have a strong platform from which to achieve growth through entry into complementary markets and regions, as ﬁ scal and regulatory pressures continue to drive the need for Instem’s solutions, and customers pursue consolidation of the fragmented EDA supplier base. I would like to thank Instem’s dedicated staff for their tremendous contribution in 2010 and look forward to sharing with them the anticipation and excitement we feel for 2011 and beyond. David Gare Chairman Instem Life Science Systems plc Annual Report, 2010 5 development “We have made significant headway in the development of the business. As planned, we have expanded our customer base, grown our market share, entered new geographies and launched new products to support future growth.” i w e v e r 6 Instem Life Science Systems plc Annual Report, 2010 Operational Review In these results, our ﬁ rst since our successful IPO last year, we are pleased to report that we have made signiﬁ cant headway in the development of the business. As planned, we have expanded our customer base, grown our market share, entered new geographies and launched new products to support future growth. Instem continues to win the majority of new business in the EDSA market; winning, we believe, at least two-thirds of that placed. Customer Wins We have achieved some signiﬁ cant new customer wins during the year. These included an order for 500 users of Provantis from SNBL USA, one of the leading Contract Research Organisations (CROs) in the United States, replacing a competitor’s system. SNBL USA is a wholly-owned subsidiary of Shin Nippon Biomedical Laboratories Ltd, one of the largest CROs in Japan, which has approximately 2,000 team members worldwide. Provantis was also selected by the US Government to assist in its National Toxicology Program in August 2010. This Software-as-a-Service (SaaS) order from the US National Institute of Environmental Health Sciences (NIEHS) will see Instem’s software used in studies to be carried out at contract laboratories at various sites throughout the United States. It is a prestigious contract win for Instem, to be completely funded by the US federal government at a value of over £420,000 for an initial two year period. We were also pleased to record several successes in our new markets of China and Japan: • • The Shanghai Institute of Materia Medica (SIMM) purchased a subscription to Provantis in October 2010, becoming the ﬁ rst SaaS client in our newly established Shanghai data centre. SIMM, part of the Chinese Academy of Sciences, is highly ranked in China for its drug discovery and development activities with more than 70 drugs having been developed since its establishment. In conjunction with our Japanese distributor we carried out a comprehensive implementation project during 2010 for Mitsubishi Chemical Medience Corporation (MCM), one of Japan’s largest CROs, who purchased Provantis in December 2009 following an extensive competitive evaluation. The implementation was for a wide range of Provantis modules for over 200 users across two sites, one in Kashima and one in Kumamoto, ultimately replacing two separate competitor systems. Such a contract with a large and established CRO acts as a great Instem Life Science Systems plc Annual Report, 2010 7 OPERATIONAL REVIEW endorsement for Provantis in both Japan and the wider Asia-Paciﬁ c region. • In June 2010, we secured business from the pharmaceutical organisation Shionogi & Co Limited as a new client. Recurring Revenues It is a feature of the regulated market in which we operate that our customers require continuous support of their systems. Consequently the Group has maintained support contracts with all of its ongoing customers, and the customer retention rate remains high at over 95%. The level of renewals strongly underpins revenue expectations in 2011. The Group has an average client relationship term exceeding 10 years and with customer numbers increasing each year, the level of these recurring revenues is expected to continue to provide an important contribution to our year-on-year performance. The introduction of the SaaS delivery alternative in 2006 has also increased recurring revenues, adding to the visibility of future business. Market Developments The worldwide drug development industry accounts for over US$65 billion of annual expenditure and had been growing at 9.1% a year as pharmaceutical companies (a) raced to combat a surge in patent expiration on a number of key drugs over the next two to three years, and (b) sought to cope with increasingly complex regulatory requirements. There is mounting pressure to achieve higher levels of productivity and efﬁ ciency along all stages of the drug and chemical development process. 2010 has seen a varied response by pharmaceutical companies, with some reducing and others increasing R&D expenditure in the face of these looming revenue challenges. Most, though, continue to see increased out-sourcing of EDSA studies as the preferred strategic option. According to studies and management estimates, the life science industry’s expenditure on IT solutions is estimated to have reached US$17 billion by the end of 2010 and the EDA market is currently worth approximately US$500 million per annum. Instem’s core EDSA subsector is worth approximately US$60 million, giving Instem a market share of approximately 25 per cent. Expanding Addressable Market Through the launch of Centrus in October 2010 we have expanded our presence into the adjacent Data Document Management & Reporting market. The Centrus suite of products is an extension of the development work previously carried out for Provantis and whilst the two product suites can be seamlessly integrated, Centrus can also stand alone, integrating with competitor and complementary EDA systems. The successful launch has therefore considerably expanded our potential market. We believe a key driver for the update of Centrus is the emergence of SEND (Standard for the Exchange of Non-clinical Data). SEND is a US FDA-sponsored initiative seeking to harmonise the presentation of vast amounts of data generated during early development, facilitating the retrieval and utilisation of that data both before and after regulatory submission. Centrus has the ability to add value to existing systems, and aids in the integration and sharing of current and historic data between sponsors and partners in a standardised form. SEND completed its formal public review in February 2011. We expect the standard to progress to formal conclusion in the second half of 2011, followed by an indication by regulators that it is their preferred vehicle for electronic regulatory submissions. In anticipation, several pharmaceutical companies are now requesting that SEND data sets are created for current studies, resulting in new orders for Instem’s submit™ SEND solution. Expanding Geographical Reach We believe that it is strategically important to have a presence in all major markets where early development facilities are located. Traditionally this has been in North America, Europe and Japan. However, increasingly these facilities are being located in emerging economies such as the People’s Republic of China (PRC). 8 Instem Life Science Systems plc Annual Report, 2010 OPERATIONAL REVIEW China The preclinical development market is growing most rapidly in emerging markets and in particular, in China. Instem is expanding into such markets and during 2010 a localised version of Provantis was developed and a Wholly Foreign Owned Enterprise (WFOE) established in Shanghai. Instem now has a complete full-service local Chinese offering. Instem has recruited local staff; four people in client facing roles providing local sales, sales support, service implementations and customer support. In a relatively short amount of time, this ofﬁ ce has had initial success with the securing of the ﬁ rst fully domestic Chinese client, the Shanghai Institute of Materia Medica (SIMM), adding to a number of existing Instem clients in China secured as a consequence of their strong US relationships. improving our hosting capabilities and switching providers to DataPipe, whose data centre in Summit, New Jersey is much closer to Instem’s US headquarters in Pennsylvania. DataPipe also offers us a single global provider through its operations in Shanghai. This is increasingly important to Instem due to our growth in the Asia-Paciﬁ c region. The Shanghai-based data centre meets the highest standards for reliability, security and redundancy and is managed by experienced staff 365 days a year. This purpose built data centre features state-of-the-art network, power and environmental infrastructure and is ISO 9001 and SunTone™ certiﬁ ed. Technology Partners In 2011 the Group will look to leverage the investment made throughout 2010, cement our presence in the region and add to the local client roster. We continue to partner with leading technology providers to offer augmented capabilities within our product families. Japan Increasingly, Japanese preclinical organisations are performing FDA regulated studies and they are now demanding solutions that meet the required international regulatory standards. In 2006 Instem established a distributor relationship with CTCLS to capitalise on this market. CTCLS is one of Japan’s leading providers of integrated R&D support systems for the life sciences sector and they support Instem solutions through their full service ofﬁ ces in Tokyo and Osaka. During 2010 this relationship proved very successful with the implementation of the major MCM order from late 2009 and the winning of Shionogi & Co Limited. Software as a Service (SaaS) All our solutions and services are available via a traditional on-site licensing/support route or via the hosted SaaS model. We believe the SaaS model to be particularly pertinent to the smaller laboratories market, where we have historically had limited presence. In the year we saw the number of users choosing the SaaS subscription model rather than the perpetual licensing model increase considerably. This included 100 users from the NIEHS contract alone. In the year we strengthened our internal infrastructure so as to bolster our SaaS delivery systems by We have worked closely with SAS® in the year, the leader in business and clinical data analytics software, to more cost effectively license our clients for the SAS® technology embedded within Provantis. This streamlines the deployment of Provantis and reduces the total cost of ownership for Instem clients. Instem continues to build on this relationship, which has had a highly successful ﬁ rst year, exceeding revenue targets under the SAS® alliance agreement. The partnership also provides access to SAS®’s marketing and technical capabilities worldwide, supporting the Company’s international growth plans. Asta Development Limited’s Teamplan enterprise project portfolio and resource management solution is also integrated within the Provantis suite as part of our Toxicology Resource Planning module, TRP™. TRP had a strong 2010 with record sales and closed the year with a strong prospect pipeline. Product Development Provantis® Instem continues to invest in Provantis, our market- leading EDSA product suite, to further consolidate our position as the vendor of choice for solutions that support the identiﬁ cation and development of safer drugs. Instem Life Science Systems plc Annual Report, 2010 9 ACQUISITIONS “An important aspect of the AIM flotation was our desire to supplement our organic growth with acquisitions of complementary businesses. Such acquisitions would consolidate the Group’s market position, complement our existing products, provide access to adjacent markets and increase efficiencies in the vertical supply chain. An early realisation of this objective was the acquisition, post period-end, of Cambridge-based BioWisdom.” 10 Instem Life Science Systems plc Annual Report, 2010 i w e v e r Potential acquisition targets include direct competitors, related EDA providers in the areas of workﬂ ow/study management, data acquisition and analysis, modeling/ predictive technologies and administrative solutions. In order to ensure that we are best placed to execute this strategy we have allocated dedicated resources to this activity. An early realisation of this objective was the acquisition, post period-end, of Cambridge-based BioWisdom Limited for an initial enterprise value of £0.90 million and a maximum total enterprise value of £1.50 million. BioWisdom is a leading provider of software solutions for extracting intelligence from R&D related healthcare data. The acquisition broadens and strengthens the Centrus product suite as well as providing opportunities for both organisations to cross sell solutions into complementary client bases. News of the acquisition has been very well received in the market and early integration of the businesses is progressing well. OPERATIONAL REVIEW This year saw advances across the product suite to improve the effectiveness and efﬁ ciency of our customers’ operations. Of particular note was the delivery of our Chinese product that enables indigenous Chinese product safety organisations to leverage the advantages that have been available in other geographies for a considerable period. As the only international EDSA vendor with a local Chinese ofﬁ ce, we have been able to leverage the experience and knowledge of our local personnel to ensure that our translations are accurate and appropriate to support the Chinese user community. We were gratiﬁ ed to see this investment vindicated by the early adoption of the product by local customers. In other areas of the suite we have advanced our sophisticated reporting capabilities by further extending the range and complexity of analyses that the system can handle. This means that customers have more power to shape the required analyses as they adopt new technologies in the search for new drugs. Centrus™ The Centrus submit™ product has been further developed to address the requirements of the developing CDISC SEND standard for regulatory submissions to the US FDA. With the approaching publication of the ﬁ nal version of this standard, we believe the product is well-positioned for an anticipated increase in interest from the non-clinical development community. Since the acquisition of BioWisdom, we have started to incorporate the relevant elements of its product set into the Centrus product suite. Early indications are that Omniviz®, for example, provides an excellent platform for the visualisation of SEND data sets and that other elements of the product set will play a signiﬁ cant role in adding value to our customers as they move into an increasingly electronic submissions and data interchange environment. Acquisition Strategy Pharmaceutical companies are acutely focused on productivity and are now looking to consolidate the number of suppliers they use. An important aspect of the AIM ﬂ otation was our desire to supplement our organic growth with acquisitions of complementary businesses. Such acquisitions would consolidate the Group’s market position, complement our existing products, provide access to adjacent markets and increase efﬁ ciencies in the vertical supply chain. Instem Life Science Systems plc Annual Report, 2010 11 EXPANSION “The business continued to expand in our developing markets with revenue from outside North America and Europe increasing to 6% of revenues (2009: 3%) with significant wins in Japan and China.” i w e v e r 12 Instem Life Science Systems plc Annual Report, 2010 Financial Review Revenue Operating Costs The ﬁ nancial results demonstrate a year of solid performance. Total revenues were steady at £10.00m (2009: £9.99m) The business continued to expand in our developing markets with revenue from outside North America and Europe increasing to 6% of revenues (2009: 3%) with signiﬁ cant wins in Japan and China. In Instem’s more traditional markets 58% of revenues were derived in North America (2009: 61%), 36% in Europe (2009: 36%). Instem’s business model consists of licence fees, annual support fees, SaaS subscription fees and professional services fees. Our sales mix has gradually changed in recent years. In 2009 approximately 64% of revenue was of a recurring nature, principally from annual renewal fees and hosting fees via SaaS and a small proportion of professional fees. This has increased yet further in 2010, to 67%, enhancing our level of visibility over future revenue and allowing us to invest conﬁ dently in future business initiatives. The renewal of the annual support contracts was strong in 2010 with customer renewal rates in excess of 95%; this includes a signiﬁ cant multi-year deal with one of our major customers, reﬂ ecting their commitment to Instem and its existing and future products. As a software solutions business, the majority of our costs are employee related and typically represent approximately two thirds of total operating costs. In 2010 employee related costs were £5.19m of total costs of £7.77m. In 2009 these were £5.22m and £7.80m respectively. There was an increase in our average employee number to 103 in 2010 (2009: 90), reﬂ ecting our investment in Centrus and the opening of our Shanghai ofﬁ ce. We ended 2010 with 110 employees. Consequently we would expect an increase in our overall costs in 2011 as we continue to invest in these areas. Profit from Operations In 2010, proﬁ t from operations before amortisation and non-recurring costs was £2.23m (2009: £2.19m) an increase of 2%. During 2010 our proﬁ t from operations was impacted by start up costs, including management time, of £0.24m associated with the establishment of our operation in China. Excluding these costs would result in an adjusted EBITA, before ﬂ oat costs, of £2.43m, an 11.5% increase over 2009. £0.04m of the costs associated with the establishment of our operation in China are included in the non-recurring costs of £0.39m. Instem Life Science Systems plc Annual Report, 2010 13 i w e v e r 14 Instem Life Science Systems plc Annual Report, 2010 Outlook 2010 has been a year of substantial strategic development for Instem. The achievement of the successful AIM IPO in October provides the platform to implement our ambitions for the future growth of the business. We have successfully executed on the strategy outlined at the time of our IPO last year and will continue to drive growth through internal investment and complementary acquisitions. Importantly, we have maintained our leading position in our niche EDSA market, expanded our addressable market through the launch of a new product suite, Centrus, and grown our impressive blue-chip customer base. With plans to launch additional products, enhance customer relationships and increase product penetration with existing clients, we look forward to the future with conﬁ dence. Phil Reason Chief Executive FINANCIAL REVIEW After taking these non-recurring costs into account, Group proﬁ t from operations was £1.81m (2009: £2.14m). The business continues to generate more than 58% of its revenue in US dollars and therefore we continue to closely monitor the exchange rate. In 2010 we have not seen a signiﬁ cant impact through exchange rate movements with the average exchange rate in the year of $1.5474 (2009: $1.5647). Pension Scheme There was an increase in the deﬁ ned beneﬁ ts pension scheme liability as calculated under IAS 19 to £1.48m (2009: £1.08m). Cash Flow During the year the Group generated £0.72m (2009: £3.8m) from its operations. In addition, the Company raised £3.44m of new money, net of expenses and repayment of loan notes through the issue of new shares at the IPO. In January 2010 the Group repaid the outstanding loan note of £2.55m to Alchemy Partners. As a result, the Group had net cash reserves of £3.26m as at 31 December 2010, compared with £2.72m at 31 December 2009. The board has not recommended the payment of a dividend. Admission to AIM Instem was admitted to AIM on 13 October 2010, following the raising of £9.15m (prior to expenses) through a placing by Brewin Dolphin of 5,228,376 new Ordinary Shares at the placing price of 175p per share. The funds raised have been utilised to repay loan notes of £4.89m to existing shareholders and the balance will be used to facilitate future strategic acquisitions. Share Capital and Reserves The total issued share capital amounted to £1.17m (2009: Nil) representing 11,714,286 shares of 10p nominal value and the share premium account has increased to £7.81m (2009: Nil) as a result of the issue of the shares during the year. Instem Life Science Systems plc Annual Report, 2010 15 d r a o b 16 Instem Life Science Systems plc Annual Report, 2010 BOARD OF DIRECTORS David Gare aged 67 – Non-executive Chairman David was a founder member of the Company’s former parent, Instem Limited and led the resulting businesses through most of their history. David successfully achieved a succession of strategic developments for Instem Limited, including its sale to Kratos Inc. in 1976, its MBO in 1983, its ﬂ otation on the USM in 1984, its ﬂ otation on the Ofﬁ cial List in 1996, its public to private and demerger in 1998 and the buyout of Instem LSS Limited from Alchemy Partners in 2002. Throughout David has concentrated on value creation through achievement of a strong market position. Phil Reason aged 49 – Chief Executive Ofﬁ cer Phil is an experienced chief executive who has developed a number of IT businesses in the life sciences and nuclear industries, both organically and through acquisition. Phil joined the former parent Company, Instem Limited, in 1982 and was appointed Managing Director of the Life Sciences division in 1995 and Chief Executive Ofﬁ cer of Instem LSS Limited on the demerger from Instem Limited. Given the importance of the North American market to Instem’s organic and acquisitive growth, Phil relocated from the UK to the US in 2003 and established a new headquarters in the Philadelphia area. Phil previously ran Instem Limited’s Nuclear and Laboratory Information Management Systems integration businesses. Jim McLauchlan aged 54 – Chief Financial Ofﬁ cer Jim is a qualiﬁ ed Chartered Accountant with wide experience in leading accounting, information technology and other businesses. He has an MBA from Bradford University. He joined Instem LSS Limited in 2003 and has executive responsibility for Finance & Administration, Human Resources and IT. Jim brings considerable experience to the role and has been instrumental in enhancing systems and practices across the business. His prior positions include four years with Touche Ross in Canada and six years with IT outsourcing business Digica, where he was part of a VC-backed management buyout team. Mike McGoun aged 63 – Non-executive Director Mike has a wealth of management experience within the IT industry. He spent 10 years at IBM prior to co-founding a successful ComputerLand franchise in 1984. In 1994 Mike moved to SkillsGroup plc as a main board director, with responsibility for corporate development and later as a non-executive director. Mike is the founder of and was appointed non-executive Chairman of Tikit Group plc in 2001. Mike has been Chairman of Peakdale Molecular plc, a chemistry research organisation, since 2002. David Sherwin aged 54 – Non-executive Director David is a qualiﬁ ed Management Accountant and holds an MBA from Staffordshire University. He joined Instem Limited as a trainee accountant in 1973 and was appointed Chief Financial Ofﬁ cer in 1979. He has worked closely with David Gare on all of the subsequent transactions involving Instem Limited and Instem LSS Limited including participating in the management buyout of Instem Limited in 1983, the ﬂ otation on the USM in 1984, the ﬂ otation on the Ofﬁ cial List in 1996 and the demerger of the business in 1998. Instem Life Science Systems plc Annual Report, 2010 17 s t r o p e r 18 Instem Life Science Systems plc Annual Report, 2010 DIRECTORS’ REPORT DIRECTORS’ REPORT The directors submit their report and the Group and Company ﬁ nancial statements on Instem Life Science Systems plc for the 52 week period ended 31 December 2010. Principal Activities The principal activity of the Group is the provision of world-class information solutions for Life Sciences research and development. The principal activity of the Company is that of a holding Company. Review of the Business 3. New product orders In 2010 the value of orders from new products developed and new markets entered during the preceding three years amounted to £0.90m (2009: £0.96m). Future Developments The directors consider that the continued investment in product and market development will allow the business to grow organically in its core markets. Investment in business growth initiatives will also allow the business to move into new product and market areas. The combination of organic growth along with strategic acquisitions will support the expected growth as outlined in the Chairman’s statement and the Operational Review. A full review of the business is given on pages 5 to 17. Risks and Uncertainties The Company was incorporated on 5 February 2010. On 1 October 2010 the Company acquired the entire issued share capital of Instem LSS Group Limited. The acquisition of Instem LSS Group Limited does not qualify as a business combination under IFRS 3 ‘Business Combinations’ as Instem Life Science Systems plc does not meet the deﬁ nition of a business within that standard. As a consequence the transaction is being treated as a pooling of interests to reﬂ ect the substance of the transaction as described more fully in the accounting policies. On 13 October 2010 the Company was admitted to the Alternative Investment Market (“AIM”) raising funds before expenses of £9.15m. The funds raised have been utilised to repay loan notes of £4.89m to existing shareholders and the balance will be used to facilitate future strategic acquisitions. In measuring the successful development of the business, the directors focus on three important performance indicators which strongly underwrite the future performance of the Group: 1. Total number of customers In 2010 the Group had a total of 77 customers (2009: 66 customers) for continuing products. 2. Recurring revenue The Group generates a substantial proportion of revenue from fees in respect of annual support and routine upgrade services. The value of these recurring fees in 2010 was £6.7m (2009: £6.4m). The directors consider that the global pharmaceutical market is likely to continue to provide growth opportunities for the business. The combination of the high level of annual support renewals and low levels of customer attrition provides revenue visibility to underpin the Company strategy on product and market development. The Group seeks to mitigate exposure to all forms of risk through a combination of regular performance review and a comprehensive insurance programme. The global nature of the market means that the Group is exposed to currency risk as a consequence of the signiﬁ cant proportion of its revenue being recognised in US Dollars. The Group continually assesses the most appropriate approach to managing its currency exposure in line with the overall goal of achieving predictable earnings growth. Research and Development Activities The Group continues its development programme of software for the global pharmaceutical market including the research and development of new products and enhancement to existing products. The directors consider the investment in research and development to be fundamental to the success of the business in the future. In 2010 development expenditure was £1.65m (2009:£1.66m) before capitalised expenditure of £0.36m (2009:£0.07m). Instem Life Science Systems plc Annual Report, 2010 19 DIRECTORS’ REPORT Dividends Political and Charitable Contributions The directors do not recommend the payment of a dividend. Directors The Group made charitable contributions in the year of £819 (2009: £900), matching contributions made by employees to a Give As You Earn scheme. No political donations were made in 2010 or 2009. The following directors have held ofﬁ ce since 5 February 2010: Policy on Payment of Suppliers It is the Company’s policy to make payments to suppliers in accordance with the agreed terms and conditions of supply, provided that the supplier has performed in accordance with the terms of supply. Trade payables at 31 December 2010 represented 36 days purchases (2009: 39 days). Financial Instruments The Group’s objectives and policies on ﬁ nancial instruments are set out in note 18 to the ﬁ nancial statements. Indemnity of Officers and Directors Under the Company’s Articles of Association and subject to the provisions of the Companies Act, the Company may and has indemniﬁ ed all directors or other ofﬁ cers against liability incurred in the execution or discharge of their duties or the exercise of their powers, including but not limited to any liability for the costs of any legal proceedings. The Company has purchased and maintains appropriate insurance cover against legal action brought against directors or ofﬁ cers. Annual General Meeting The Annual General Meeting of the Company will be held on 31st May 2011 at the ofﬁ ces of Brewin Dolphin, Manchester. The resolutions to be proposed at the Annual General Meeting, together with explanatory notes appear in a separate notice of Annual General Meeting which is sent to all shareholders. The proxy card for registered shareholders is distributed along with the notice. D Gare (appointed 15 September 2010) M F McGoun (appointed 15 September 2010) D M Sherwin (appointed 15 September 2010) P J Reason (appointed 15 September 2010) J McLauchlan (appointed 15 September 2010) M S Thorne (appointed 5 February 2010, resigned 15 September 2010) M P Harris (appointed 5 February 2010, resigned 15 September 2010) Details of the directors’ service contracts and their respective notice terms are detailed in the Remuneration Committee report on page 26. Directors and Their Interests The interests of the directors, who held ofﬁ ce at 31st December 2010 and up to the date of this report, were as follows: No. of Shares 2010 2009 David Gare 2,278,427 David Sherwin 1,580,066 Phil Reason 665,287 Jim McLauchlan 144,936 Mike McGoun 14,286 - - - - - Directors’ interests in share options are detailed in the Remuneration Committee report on page 26. Employee Involvement The general policy of the Company is to welcome employee involvement as far as it is reasonably practicable. Employees are kept informed of progress by regular Company meetings and monthly management reports. 20 Instem Life Science Systems plc Annual Report, 2010 DIRECTORS’ REPORT Statement as to Disclosure of Information to Auditors The directors who were in ofﬁ ce on the date of approval of these ﬁ nancial statements have conﬁ rmed, as far as they are aware, that there is no relevant audit information of which the auditors are unaware. Each of the directors has conﬁ rmed that they have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditors. Auditors Baker Tilly UK Audit LLP, Chartered Accountants, were appointed auditors by the Company. Pursuant to section 487 of the Companies Act 2006, a resolution to appoint Baker Tilly UK Audit LLP as auditors will be put to the members at the forthcoming AGM. On behalf of the board Jim McLauchlan Director Diamond Way Stone Business Park Stone Staffordshire ST15 0SD 27 April 2011 Instem Life Science Systems plc Annual Report, 2010 21 CORPORATE GOVERNANCE REPORT CORPORATE GOVERNANCE REPORT The board fully supports the underlying principles of corporate governance contained in the Corporate Governance Code, notwithstanding that, as its securities are not listed on the Ofﬁ cial List, it is not required to comply with such recommendations. It has sought to comply with the provisions of the Corporate Governance Code, insofar as is practicable and appropriate for a public Company of its size and nature, taking account of the QCA guidelines for smaller quoted companies. The board recognises its overall responsibility for the Company’s systems of internal control and for monitoring their effectiveness. The main features of the Company’s corporate governance procedures, which do not constitute full compliance with the Corporate Governance Code, are as follows: Attendance at Board and Committee Meetings Attendances of directors at board and committee meetings convened in the period since ﬂ otation, along with the number of meetings they were invited to attend are set out below: No of meetings in the period Board meetings Audit Committee Remuneration Committee Nomination Committee Executive directors Phil Reason Jim McLauchlan Non Executive directors David Gare David Sherwin Mike McGoun 3/3 3/3 3/3 3/3 3/3 1/1 1/1 1/1 1/1 1/1 - - 1/1 1/1 1/1 - - - - - the board has one independent non-executive director who takes an active role in board matters; Audit Committee a. b. the Company has an Audit Committee, a Remuneration Committee and a Nomination Committee, each of which consists of the non-executive directors, and meets regularly with executive directors in attendance by invitation. The Audit Committee has unrestricted access to the Group’s auditors and ensures that auditor independence has not been compromised; The Audit Committee comprises Mike McGoun (Chairman), David Gare and David Sherwin, all of whom are non-executive directors of the Company. The board is satisﬁ ed that the Audit Committee has all the recent and relevant ﬁ nancial experience required to fulﬁ l the role. Appointments to the Audit Committee are made by the board in consultation with the Nomination Committee and the chairman of the Audit Committee. The Audit Committee meets at least three times a year and any other time as required by either the chairman of the Audit Committee or the Chief Financial Ofﬁ cer of the Company or the external auditors of the Company. In addition, the Audit Committee shall meet with the external auditors of the Company (without any of the executives attending) at least once a year. The Audit Committee: a. monitors the ﬁ nancial reporting and internal ﬁ nancial control principles of the Company; b. maintains appropriate relationships with external auditors including considering the appointment and remuneration of external auditors and reviews and monitors the external auditor’s independence and objectivity and the effectiveness of the audit process; c. all business activity is organised within a deﬁ ned structure with formal lines of responsibility and delegation of authority, including a schedule of “matters referred to the board”; and d. regular monitoring of key performance indicators and ﬁ nancial results together with comparison of these against expectations. 22 Instem Life Science Systems plc Annual Report, 2010 CORPORATE GOVERNANCE REPORT reviews all ﬁ nancial results of the Company and ﬁ nancial statements, including all announcements in respect thereof before submission of the relevant documents to the board; Remuneration Committee meets at least once a year and any other time as required by either the chairman of the Remuneration Committee or the Chief Financial Ofﬁ cer of the Company. c. d. reviews and discusses (where necessary) any issues and recommendations of the external auditors including reviewing the external auditors’ management letter and management’s response; e. considers all major ﬁ ndings of internal operational audit reviews and management’s response to ensure co-ordination between internal and external auditors; f. reviews the board’s statement on internal reporting systems and keep the effectiveness of such systems under review; and g. considers all other relevant ﬁ ndings and audit programmes of the Company. The Audit Committee is authorised to: a. investigate any activity within its terms of reference; b. seek any information it requires from any employee of the Company; and c. obtain, at the Company’s expense, outside legal or other independent professional advice and to secure the attendance of such persons to meetings as it considers necessary and appropriate. Remuneration Committee The Remuneration Committee comprises Mike McGoun (Chairman), David Gare and David Sherwin, all of whom are non-executive directors of the Company. The members of the Remuneration Committee are appointed by the board on recommendation from the Nomination Committee. The Chief Executive Ofﬁ cer of the Company is normally invited to meetings of the Remuneration Committee to discuss the performance of other executive directors but is not involved in any of the decisions. The Remuneration Committee invites any person it thinks appropriate to join the members of the Remuneration Committee at its meetings. The The Remuneration Committee: a. ensures that the executive directors are fairly rewarded for their individual contributions to the overall performance of the Company but also to ensure that the Company avoids paying more than is necessary for this purpose; b. considers the remuneration packages of the executive directors and any recommendations made by the Chief Executive Ofﬁ cer for changes to their remuneration packages including in respect of bonuses (including associated performance criteria), other beneﬁ ts, pension arrangements and other terms of their service contracts and any other matters relating to the remuneration of or terms of employment applicable to the executive directors that may be referred to the Remuneration Committee by the board; c. oversees and reviews all aspects of the Company’s share option schemes including the selection of eligible directors and other employees and the terms of any options granted; d. demonstrates to the Company’s shareholders that the remuneration of the executive directors is set by an independent committee of the board; and e. considers and makes recommendations to the board about the public disclosure of information about the executive directors’ remuneration packages and structures in addition to those required by law or by the London Stock Exchange. The chairman of the Remuneration Committee reports formally to the board on its proceedings after each meeting on all matters within its duties and responsibilities. The Remuneration Committee produces an annual report which is included in the Company’s annual report and accounts. Instem Life Science Systems plc Annual Report, 2010 23 CORPORATE GOVERNANCE REPORT The Remuneration Committee is authorised to: c. a. investigate any activity within its terms of reference; b. seek any information it requires from any employee of the Company; c. assess the remuneration paid by other UK listed companies of a similar size in any comparable industry sector and to assess whether changes to the executive directors’ remuneration is appropriate for the purpose of making their remuneration competitive or otherwise comparable with the remuneration paid by such companies; and d. obtain, at the Company’s expense, outside legal or other independent professional advice, including independent remuneration consultants, when the Remuneration Committee reasonably believes it is necessary to do so and to secure the attendance of such persons to meetings as it considers necessary and appropriate. Nomination Committee The Nomination Committee comprises David Gare (Chairman), Mike McGoun and David Sherwin, all of whom are non-executive directors of the Company. Appointments to the Nomination Committee are made by the board, in consultation with the chairman of the Nomination Committee. The Nomination Committee may invite any person it thinks appropriate to join the members of the Nomination Committee at its meetings. The Nomination Committee meets at least once per year. The Nomination Committee: a. regularly reviews the structure, size and composition (including skills knowledge and experience) required of the board compared to its current position and makes recommendations to the board with regard to any changes; b. gives full consideration to succession planning for directors and other senior executives in the course of its work, taking into account the challenges and opportunities facing the Company, and what skills and expertise are needed on the board in the future; 24 Instem Life Science Systems plc Annual Report, 2010 is responsible for identifying and nominating for the approval of the board, candidates to ﬁ ll board vacancies as and when they arise; d. evaluates the balance of skills, knowledge and experience on the board before an appointment is made and, in light of this evaluation, prepares a description of the role and capabilities required for a particular appointment. The chairman of the Nomination Committee reports formally to the board on its proceedings after each meeting on all matters within its duties and responsibilities. The Nomination Committee also makes recommendations to the board concerning: a. formulating plans for succession for both executive and non-executive directors and in particular the key roles of Chairman of the board and Chief Executive Ofﬁ cer; b. membership of the Audit and Remuneration Committees, in consultation with the chairmen of those committees; c. d. the re-appointment of any non-executive director at the conclusion of their speciﬁ ed term of ofﬁ ce having given due regard to their performance and ability to continue to contribute to the board in the light of the knowledge, skills and experience required; the re-election by shareholders of any director under the “retirement by rotation” provisions in the Company’s articles of association having due regard to their performance and ability to continue to contribute to the board in the light of the knowledge, skills, and experience required; e. matters relating to the continuation in ofﬁ ce of any director at any time including the suspension or termination of service of an executive director as an employee of the Company subject to the provisions of the law and his/her service contract; and f. the appointment of any director to executive or other ofﬁ ce other than to the positions of Chairman of the board and Chief Executive Ofﬁ cer, the recommendation for which would be considered at a meeting of the full board. CORPORATE GOVERNANCE REPORT The Nomination Committee is authorised to: a. investigate any activity within its terms of reference; b. seek any information it requires from any employee; c. obtain outside legal or other independent professional advice at the Company’s expense when the Nomination Committee reasonably believes it is necessary to do so; and d. instruct external professional advisers to attend any meeting at the Company’s expense if the Nomination Committee considers this reasonably necessary or appropriate. Internal Controls The directors are responsible for establishing and maintaining the Group’s system of internal control and reviewing its effectiveness. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatement or loss. The board and senior executives meet to review both the risks facing the business and the controls established to minimise those risks and their effectiveness in operation on an ongoing basis. The aim of these reviews is to provide reasonable assurance that material risks and problems are identiﬁ ed and appropriate action taken at an early stage. Going Concern The directors have prepared and reviewed ﬁ nancial forecasts. After due consideration of these forecasts and current cash resources, the directors consider that the Company and the Group have adequate ﬁ nancial resources to continue in operational existence for the foreseeable future (being a period of at least twelve months from the date of this report), and for this reason the ﬁ nancial statements have been prepared on a going concern basis. On behalf of the board Jim McLauchlan Company Secretary Instem Life Science Systems plc Annual Report, 2010 25 DIRECTORS’ REMUNERATION REPORT DIRECTORS’ REMUNERATION REPORT Instem Life Science Systems plc is not required to comply with Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 relating to directors’ remuneration reports or the Listing Rules, as a company on AIM. The disclosures contained within this report are, therefore, made on a voluntary basis and in keeping with the board’s commitment to best practice. Remuneration Committee The Remuneration Committee (‘the Committee’) is composed entirely of non-executive directors. The committee was formed upon the public listing of the Company 13th October 2010. The Chairman of the Committee is Mike McGoun. The terms of reference for the committee are to determine the Company’s policy on Executive remuneration and to consider and approve the remuneration packages for directors and key executives of the Company, subject to ratiﬁ cation by the board. During the period 13th October to 31st December 2010, the Committee met once. Full details of the elements of each director’s remuneration are set out on page 27. Details of share-based payments to directors are shown in note 6 to the ﬁ nancial statements. Policy on Executive Director Remuneration The Company’s current and ongoing policy aims to ensure that executive directors are rewarded fairly for their individual contributions to the Company’s overall performance and is designed to attract, retain and motivate executives of the right calibre. The Committee is responsible for recommendations on all elements of Executive remuneration including, in particular, basic salary, annual bonus, share options and any other incentive awards. In implementing the remuneration policy, the Committee has regard to factors speciﬁ c to the Company, such as salary and other beneﬁ t arrangements within the Company and the achievement of the Company’s strategic objectives. The Committee determines the Company’s Policy on Executive remuneration with reference to comparable companies of similar market capitalisation, location and business sector. Basic Salary The basic salaries of Executive directors are reviewed annually having regard to individual performance and position within the Company and are intended to be competitive but fair using information provided from both internal and external sources. Performance Related Annual Bonus Executive directors are eligible for a performance related bonus based on Company performance, in particular, the achievement of proﬁ t and cash targets. The performance related annual bonus forms a signiﬁ cant part of the level of remuneration considered appropriate by the Committee. In addition to the formal bonus scheme, the Committee has the discretion to recommend the payment of ad hoc awards to reﬂ ect exceptional performance. Pensions Contributions are made to the Executive directors’ personal pension schemes up to a maximum of 16.5% of basic salary. Benefits Beneﬁ ts comprise private healthcare and critical illness cover. No director receives additional remuneration or beneﬁ ts in relation to being a director of the board of the Company or any subsidiary of the Company. Service Contracts The executive directors have service contracts with a maximum notice period of 12 months. The board determines the Company’s policy on non-executive directors’ remuneration. David Gare, David Sherwin and Mike McGoun each have a 3 year contract starting October 2010 with a notice period of 3 months during or after expiry of the ﬁ xed term. 26 Instem Life Science Systems plc Annual Report, 2010 DIRECTORS’ REMUNERATION REPORT The actual emoluments paid to directors in the year ended December 31st 2010 are as follows: Salary (inc bonus) Benefits Pension 2010 Total 2009 Total Executives P. Reason J. McLauchlan Non-executives D. Gare D.M. Sherwin M. McGoun Total 158 72 240 128 5 603 4 11 5 2 - 22 24 16 - - - 40 186 99 245 130 5 665 212 119 53 52 - 436 Directors’ and Employees’ Share Options No of meetings in year Exercise price(£) Issue date Held at 31/12/09 Granted During Year Exercised during Year Lapsed during Year Held at 31/12/2010 Phil Reason Ordinary shares Jim McLauchlan Ordinary shares Employees Ordinary shares Total 1.75 13/10/2010 1.75 13/10/2010 1.75 13/10/2010 - - - 187,428 93,714 304,569 585,711 - - - - - - - - 187,428 93,714 304,569 585,711 Further detail of the terms of the option agreements is given in note 6. Approved by the board and signed on its behalf by: Mike McGoun Independent non-executive director Instem Life Science Systems plc Annual Report, 2010 27 DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS The directors are responsible for keeping adequate accounting records that are sufﬁ cient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the ﬁ nancial position of the Group and the Company and enable them to ensure that the ﬁ nancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company 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 corporate and ﬁ nancial information included on the Instem Life Science Systems plc website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁ nancial statements may differ from legislation in other jurisdictions. DIRECTORS’ RESPONSIBILITIES IN THE PREPARATION OF FINANCIAL STATEMENTS The directors are responsible for preparing the Directors’ Report and the ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and Company ﬁ nancial statements for each ﬁ nancial year. The directors are required by the AIM Rules of the London Stock Exchange to prepare Group ﬁ nancial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and have elected under Company law to prepare the Company ﬁ nancial statements in accordance with IFRS as adopted by the EU. The ﬁ nancial statements are required by law and IFRS adopted by the EU to present fairly the ﬁ nancial position of the Group and the Company and the ﬁ nancial performance of the Group. The Companies Act 2006 provides in relation to such ﬁ nancial statements that references in the relevant part of that Act to ﬁ nancial statements giving a true and fair view are references to their achieving a fair presentation. Under Company law the directors must not approve the ﬁ nancial statements unless they are satisﬁ ed that they give a true and fair view of the state of affairs of the Group and the Company and of the proﬁ t or loss of the Group for that period. In preparing the Group and Company ﬁ nancial statements, the directors are required to: a. select suitable accounting policies and then apply them consistently; b. make judgements and accounting estimates that are reasonable and prudent; c. state whether they have been prepared in accordance with IFRSs adopted by the EU; d. prepare the ﬁ nancial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. 28 Instem Life Science Systems plc Annual Report, 2010 INDEPENDENT AUDITORS’ REPORT INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF INSTEM LIFE SCIENCE SYSTEMS PLC We have audited the Group and parent Company ﬁ nancial statements (“the ﬁ nancial statements”) on pages 30 to 77. The ﬁ nancial 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 ﬁ nancial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Opinion on financial statements In our opinion: • the ﬁ nancial statements give a true and fair view of the state of the Group’s and the parent’s affairs as at 31 December 2010 and of the Group’s proﬁ t for the period then ended; the Group ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union the parent ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the Companies Act 2006; and the ﬁ nancial statements have been prepared in accordance with the requirements of the Companies Act 2006. • • • Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the ﬁ nancial year for which the ﬁ nancial statements are prepared is consistent with the ﬁ nancial statements. Respective responsibilities of directors and auditor Matters on which we are required to report by exception As more fully explained in the Directors’ Responsibilities Statement set out on page 28, the directors are responsible for the preparation of the ﬁ nancial statements and for being satisﬁ ed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁ nancial 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 (APB’s) Ethical Standards for Auditors. 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 been received from branches not visited by us; or the parent Company ﬁ nancial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration speciﬁ ed by law are not made; or • • Scope of the audit of the financial statements • we have not received all the information and explanations we require for our audit. A description of the scope of an audit of ﬁ nancial statements is provided on the APB’s website at www. frc.org.uk/apb/scope/private.cfm. Geoff Wightwick FCA (Senior Statutory Auditor) For and on behalf of BAKER TILLY UK AUDIT LLP, Statutory Auditor Chartered Accountants 3 Hardman Street Manchester M3 3HF 27 April 2011 Instem Life Science Systems plc Annual Report, 2010 29 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the 52 week period ended 31 December 2010 52 week period ended 53 week period ended Note 31 December 2010 31 December 2009 REVENUE Operating expenses PROFIT FROM OPERATIONS BEFORE AMORTISATION AND EXCEPTIONAL COSTS Amortisation of intangibles PROFIT BEFORE EXCEPTIONAL COSTS Non-recurring costs PROFIT FROM OPERATIONS Non-recurring flotation costs Finance income Finance costs PROFIT BEFORE TAXATION Income tax expense 1 2 2 2 3 4 8 PROFIT FOR THE FINANCIAL PERIOD OTHER COMPREHENSIVE INCOME/(EXPENSE) Actuarial gain/(loss) on retirement benefit obligations 21 Deferred tax on actuarial gain Currency translation differences on foreign currency net investment OTHER COMPREHENSIVE INCOME/(EXPENSE) TOTAL COMPREHENSIVE INCOME FOR THE PERIOD Profit attributable to Equity Holders of the Parent Company Total comprehensive income attributable to Equity Holders of the Parent Company Earnings per share Basic Diluted 23 23 £000 10,001 (7,768) 2,233 (34) 2,199 (388) 1,811 (295) 263 (364) 1,415 (514) 901 (576) 147 18 (411) 490 901 490 11.7p 11.7p £000 9,989 (7,802) 2,187 (47) 2,140 - 2,140 - 735 (407) 2,468 (762) 1,706 (158) 44 (266) (380) 1,326 1,706 1,326 26.3p 26.3p 30 Instem Life Science Systems plc Annual Report, 2010 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2010 Note 31 December 2010 31 December 2009 31 December 2008 ASSETS £000 £000 £000 £000 £000 £000 NON-CURRENT ASSETS Intangible assets Property, plant and equipment Deferred taxation TOTAL NON-CURRENT ASSETS CURRENT ASSETS Inventories Trade and other receivables Cash and cash equivalents Current taxation TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Current taxation Financial liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Trade and other payables Financial liabilities Retirement benefit obligations TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES EQUITY Share capital Share premium Merger reserve Translation reserve Retained earnings 9 11 20 12 13 14 15 16 17 15 21 22 24 24 24 24 6,417 166 321 137 1,595 3,263 - 5,536 85 253 - - 1,477 1,171 7,813 (932) 377 (3,881) 6,090 127 297 6,072 154 345 6,904 6,514 6,571 4,995 11,899 62 1,832 2,716 - 6,310 300 2,552 4,610 11,124 61 2,900 - 30 5,659 - 558 2,991 9,562 5,874 9,162 6,217 1,477 7,351 29 - 1,081 649 - 4,218 359 (4,374) 1,110 10,272 93 2,577 1,149 649 - 4,218 625 (5,966) 3,819 10,036 TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT 4,548 852 474 TOTAL EQUITY AND LIABILITIES 11,899 11.124 9,562 The ﬁ nancial statements on pages 30 to 77 were approved by the board of directors and authorised for issue on 27 April 2011 and are signed on its behalf by: Phil Reason Director Jim McLauchlan Director and Company Secretary Instem Life Science Systems plc Annual Report, 2010 31 COMPANY STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2010 Note 31 December 2010 ASSETS £000 £000 NON-CURRENT ASSETS Investments 10 16,500 TOTAL NON-CURRENT ASSETS 16,500 CURRENT ASSETS Trade and other receivables Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Financial liabilities TOTAL CURRENT LIABILITIES EQUITY Share capital Share premium Merger reserve Retained earnings 13 14 15 17 22 24 24 24 64 3,100 66 253 1,171 7,813 10,702 (341) TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT TOTAL EQUITY AND LIABILITIES 3,164 19,664 319 19,345 19,664 32 Instem Life Science Systems plc Annual Report, 2010 CONSOLIDATED STATEMENT OF CASH FLOWS For the 52 week period ended 31 December 2010 Note 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 £000 £000 £000 CASH FLOWS FROM OPERATING ACTIVITIES Result before taxation 1,415 Adjustments for: Depreciation Amortisation of intangibles Share based payments Retirement benefit obligations Finance income Finance costs CASH FLOWS FROM OPERATIONS BEFORE CHANGES IN WORKING CAPITAL Changes in working capital: (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables CASH GENERATED FROM OPERATIONS Finance costs Income tax paid NET CASH (USED IN)/GENERATED FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Finance income received Income tax paid Purchase of intangible assets Purchase of property, plant and equipment 75 34 21 (206) (263) 364 263 (95) (361) (111) 1,440 (75) 266 (915) 716 (296) (510) (90) 2,468 66 47 - (316) (735) 407 322 (237) (65) (47) 1,937 (1) 1,090 790 3,816 (317) (103) 3,396 NET CASH USED IN INVESTING ACTIVITIES (304) (27) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of ordinary shares Share issue costs Stamp duty Series A Loan notes repaid Payment of finance lease liabilities Alchemy loan note repayment 9,150 (731) (83) (4,897) (3) (2,550) - - - - (9) - NET CASH GENERATED FROM/(USED IN) FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at start of period Effect of exchange rates on cash and cash equivalents CASH AND CASH EQUIVALENTS AT END OF PERIOD 14 886 492 2,716 55 3,263 (9) 3,360 (549) (95) 2,716 Instem Life Science Systems plc Annual Report, 2010 33 COMPANY STATEMENT OF CASH FLOWS for the 52 week period ended 31 December 2010 Note 52 week period ended 31 December 2010 £000 £000 CASH FLOWS FROM OPERATING ACTIVITIES Result before taxation Finance income Finance cost CASH FLOWS FROM OPERATIONS BEFORE CHANGES IN WORKING CAPITAL Changes in working capital: (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables CASH USED IN OPERATIONS Finance costs NET CASH USED IN OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Finance income Purchase of property, plant and equipment NET CASH GENERATED FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Share issue proceeds Share issue costs Stamp duty Loan note repayment NET CASH GENERATED FROM FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at start of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 14 (6) 3 (64) 66 - 6 - 9,150 (731) (83) (4,897) (341) (344) (342) (3) (345) 6 3,439 3,100 - 3,100 34 Instem Life Science Systems plc Annual Report, 2010 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Called up share capital Share Premium Merger Reserve Translation Reserve Retained Earnings Total Equity £000 649 - - - - 649 522 - - - - - - £000 - - - - - - 8,628 (815) - - - - - £000 4,218 - - - - 4,218 - - (5,150) - - - - £000 625 - (266) (266) - 359 - - - - 18 18 - £000 (5,966) 1,706 (114) 1,592 - (4,374) - - - 901 (429) 472 21 £000 (474) 1,706 (380) 1,326 - 852 9,150 (815) (5,150) 901 (411) 490 21 Balance as at 31 December 2008 Profit for the year Other comprehensive income/(expense) Total comprehensive income for the year Share based payments Balance as at 31 December 2009 New share capital Costs of issue Loan notes issued on acquisition Profit for the year Other comprehensive income/(expense) Total comprehensive income for the year Share based payments Balance as at 31 December 2010 1,171 7,813 (932) 377 (3,881) 4,548 COMPANY STATEMENT OF CHANGES IN EQUITY Called up share capital Share Premium Merger Reserve Translation Reserve Retained Earnings Total Equity £000 £000 £000 £000 £000 £000 Balance as at 31 December 2008 New share capital Total comprehensive income Balance as at 31 December 2009 - - New share capital 1,171 Cost of issue Merger relief Loss and total comprehensive income for the year - - - - - 8,628 (815) - - - - - - 10,702 - Balance as at 31 December 2010 1,171 7,813 10,702 - - - - - - - - - - - - - - 9,799 (815) 10,702 (341) (341) (341) 19,345 Instem Life Science Systems plc Annual Report, 2010 35 accounting policies General Information The principal activity of the Group is the provision of world class information solutions for life sciences research and development. Instem Life Science Systems Plc is a Company incorporated in England and Wales under the Companies Act 2006 and domiciled in the UK. The registered ofﬁ ce is Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD. Basis of Accounting The ﬁ nancial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations as endorsed by the EU (“IFRS”) and the requirements of the Companies Act applicable to companies reporting under IFRS. The Group’s accounting reference date is 31 December. The acquisition of the Instem LSS Group does not qualify as a business combination under IFRS 3 ‘Business Combinations’ as Instem Life Science Systems Plc does not meet the deﬁ nition of a business within that standard. As a consequence the transaction is being treated as a pooling of interests to reﬂ ect the substance of the transaction which is that of the continuation of the existing Instem LSS Group. Under the pooling of interests basis the legal shares and share premium of Instem Life Science Systems plc are shown in the current year and comparative year as if they had existed throughout the periods shown. The comparative trading results and retained earnings, together with the full year trade to 31 December 2010, are those of the Instem LSS Group as if that trade had continued throughout. The difference between the consideration given on the acquisition and the share capital and share premium of the Instem LSS Group at that date has been recognised in the merger reserve, together with the merger relief taken by the Company. The loan notes issued in exchange for the shares in Instem LSS Group Limited have been treated as a distribution. The liability for those loan notes has been recognised in the current period when the company was contractually obligated to pay it and the cost of the distribution has been recognised directly in equity. The ﬁ nancial statements have been prepared on the historical cost basis except for the revaluation of certain ﬁ nancial instruments. The accounting policies set out below have, unless otherwise stated, been applied consistently to all years presented in these consolidated ﬁ nancial statements. Basis of Consolidation The consolidated ﬁ nancial statements incorporate those of the parent Company, Instem Life Science Systems Plc, and its subsidiary undertakings made up to 31 December 2010 and 31 December 2009. In preparing the consolidated ﬁ nancial statements, any intra- group balances, unrealised gains and losses or income and expenses arising from intra-group trading are eliminated. Where accounting policies used in individual ﬁ nancial statements of a subsidiary Company differ from Group policies, adjustments are made to bring these policies in line with Group policies. Subsidiaries Subsidiaries are entities over which the Group has the power to govern the ﬁ nancial and operating policies so as to obtain economic beneﬁ ts from their activities. Subsidiaries are consolidated from the date on which control is transferred to the Group up until the date that control ceases. 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. Costs directly attributable to the acquisition are recognised in proﬁ t or loss as they are incurred. Identiﬁ able assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at fair value at the acquisition date irrespective of the extent of any non-controlling interest. In accordance with Section 408 of the Companies Act 2006 the company has elected not to present its own proﬁ t and loss account. The loss for the period of the parent company is £341,000. Going Concern Having made appropriate enquiries, the directors consider that the Group has adequate resources to enable it to continue in operation for the foreseeable future. The Group has a signiﬁ cant proportion of recurring revenue from a well established global customer base, supported by a largely ﬁ xed cost base. A Group working capital facility has been put in place to support the working capital needs in 2011. The ﬁ nancial position of the Group, its cash ﬂ ows and liquidity position are set out in the primary statements of these ﬁ nancial statements. Detailed projections have been made for the 12 months following the approval of the ﬁ nancial statements and sensitivity analysis undertaken. This work gives the directors conﬁ dence as to the future trading performance of the Group. Accordingly the directors continue to adopt the going concern basis for the preparation of the ﬁ nancial statements. Revenue Recognition The Group follows the principles of IAS 18 ‘Revenue Recognition’, in determining appropriate revenue recognition principles. In principle revenue is recognised to the extent that it is probable that the economic beneﬁ ts associated with the transaction will ﬂ ow to the Group. Revenue comprises the value of software licence sales, installation, training, maintenance and support services. Revenue is recognised when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is ﬁ xed and determinable and (iv) collectability is reasonably assured. For software arrangements with multiple elements revenue is recognised dependent on whether vendor-speciﬁ c objective evidence (‘VSOE’) of fair value exists for each of the elements. VSOE is determined by reference to sales made to customers on a stand-alone basis. Where there is no VSOE revenue is recognised over the full term of each contract. 36 Instem Life Science Systems plc Annual Report, 2010 accounting policies Revenue Recognition (continued) Revenue from licence based products is recognised when the risks and rewards of ownership of the product are transferred to the customer. Revenue from software maintenance and other time based contracts are recognised over the invoiced contract period. Revenue from installation and training is recognised on a percentage completion basis on ﬁ xed price contracts or as services are provided in respect of time and materials contracts. The excess of amounts invoiced over revenue is included in accruals and deferred income. If the amount of revenue recognised exceeds the amounts invoiced the excess amount is included within prepayments and accrued income. Profit from Operations Before Amortisation Proﬁ t from operations before amortisation is proﬁ t arising from the Group’s normal trading activities stated before amortisation of intangible assets and non-recurring items, interest and taxation. Profit from Operations Proﬁ t from operations is proﬁ t from the Group’s ordinary activities stated before costs of admission to AIM, ﬁ nance costs and income, and income taxes. Segmental Reporting IFRS 8 ‘Operating Segments’ provides segmental information for the Group on the basis of information reported internally to the chief operating decision-maker for decision-making purposes. The Group considers that the role of chief operating decision- maker is performed by the Group’s board of directors. Since the Group is primarily providing goods and services to the global life sciences market there is only one operating segment which is monitored by the business. Foreign Currencies Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the statement of comprehensive income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the date the fair value was determined. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated at foreign exchange rates ruling at the reporting date. The revenue and expenses of foreign operations are translated at an average rate for the year where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from the translation of foreign operations are taken directly to the translation reserve. They are released into proﬁ t or loss upon disposal of the foreign operation. The presentational currency adopted by the Group is Sterling (£). The functional currencies of the principal companies in the Group are as follows: Instem LSS Group limited - Sterling (£) Instem LSS Limited - Sterling (£) Instem LSS (North America) Limited - US Dollars ($) Instem LSS Asia Limited - Sterling (£) Instem Information Systems (Shanghai) Limited - Renminbi The exchange rates used to translate the ﬁ nancial statements into Sterling (£) are as follows: US Dollar ($) Average rate for period ended 31 December 2008: 1.8032 Closing rate at 31 December 2008: 1.4709 Average rate for period ended 31 December 2009: 1.5647 Closing rate at 31 December 2009: 1.6147 Average rate for period ended 31 December 2010: 1.5474 Closing rate at 31 December 2010: 1.5657 Finance Income Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the ﬁ nancial asset to that asset’s net carrying amount. Finance income includes exchange gains on the translation of intra group funding balances. Finance Costs Net ﬁ nance costs comprise interest payable, exchange losses on the translation of intra group funding balances, ﬁ nance charges on ﬁ nance leases and interest on pension scheme liabilities. Interest payable is recognised in the statement of comprehensive income as it accrues, using the effective interest method. Leasing Where assets are ﬁ nanced by leasing agreements that give rights approximating to ownership (“ﬁ nance leases”), the assets are treated as if they had been purchased outright. The amount capitalised is the fair value or, if lower, the present value of the minimum lease payments payable during the lease term. The corresponding leasing commitments are shown as ﬁ nance lease obligations to the lessor. Lease payments are apportioned between ﬁ nance charges and reduction of lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to ﬁ nance costs in the Statement of Consolidated Income. All other leases are “operating leases” and the annual rentals are charged to the statement of comprehensive income on a straight line basis over the lease term. Instem Life Science Systems plc Annual Report, 2010 37 accounting policies Share-Based Payment Transactions to the period when the asset is realised or the liability is settled. The Group has applied the requirements of IFRS 2 Share-Based Payment. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 31 December 2006. The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant by reference to the fair value of the equity instruments granted. The fair value determined at the grant date of equity-settled share- based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of instruments that will eventually vest with a corresponding adjustment to equity. Fair values are measured by use of the Black-Scholes and the Monte-Carlo simulation models depending on the existence of market based vesting conditions. The expected life used in the model has been adjusted, based on management’s best estimate, for the effect of non-transferability, exercise restrictions, and behavioural considerations. Non-vesting and market vesting conditions are taken into account when estimating the fair value of the option at grant date. Service and non-market vesting conditions are taken into account by adjusting the number of options expected to vest at each reporting date. Intangible Assets Intangible assets purchased separately from a business are capitalised at their cost. The Group makes an assessment of the fair value of intangible assets arising on acquisitions. An intangible asset will be recognised as long as the asset is identiﬁ able and its fair value can be measured reliably. An intangible asset is identiﬁ able if it is separable or if it was obtained through contractual or legal rights. Amortisation is provided on the fair value of the asset and is calculated on a straight line basis over its useful life. Goodwill Goodwill on acquisitions, being the excess of the fair value of the cost of acquisition over the Group’s interest in the fair value of the identiﬁ able assets and liabilities acquired, is capitalised and tested for impairment on an annual basis. Any impairment is recognised immediately in proﬁ t or loss and is not subsequently reversed. For the purpose of impairment testing goodwill is allocated to cost generating units of Instem LSS, which represent the smallest identiﬁ able group of assets that generates cash inﬂ ows that are largely independent of the cash inﬂ ows from other assets of groups of assets. Options over the Company’s shares granted to employees of subsidiaries are recognised as a capital contribution by the Company to the subsidiaries. Computer Software Taxation Taxation expense includes the amount of current income tax payable and the charge for the year in respect of deferred taxation. The income tax payable is based on an estimation of the amount due on the taxable proﬁ t for the year. Taxable proﬁ t is different from proﬁ t before tax as reported in the statement of comprehensive income because it excludes items of income or expenditure which are not taxable or deductible in the year as a result of either the nature of the item or the fact that it is taxable or deductible in another year. The Group’s liability for current tax is calculated by using tax rates that have been enacted or substantially enacted by the balance sheet date. Deferred tax is accounted for on the basis of temporary differences arising from the differences between the tax base and accounting base of assets and liabilities. Deferred tax is recognised for all taxable temporary differences, except to the extent where it arises from the initial recognition of an asset or liability in a transaction that is not a business combination. Deferred tax assets are recognised only to the extent that it is probable that future taxable proﬁ ts will be available against which temporary differences can be utilised. Deferred tax is charged or credited to the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case it is dealt with within equity. It is calculated at the tax rates that are expected to apply Computer software is carried at cost less accumulated amortisation and any impairment loss. Externally acquired computer software and software licences are capitalised and amortised on a straight line basis over their useful economic lives of 3 years. Costs relating to development of computer software for internal use are capitalised once the recognition criteria of IAS 38 “Intangible Assets” are met. When the software is available for its use, these costs are amortised over the estimated useful life of the software. Other intangible assets Internally generated intangible assets Expenditure on research activities is recognised in proﬁ t or loss as incurred. Expenditure arising from the Group’s development of software for sale to third parties is recognised only if all of the following conditions are met: • • • • • • an asset is created that can be identiﬁ ed; it is probable that the asset created will generate future economic beneﬁ ts; the development cost of the asset can be measured reliably; the Group has the intention to complete the asset and the ability and intention to use or sell it; the product or process is technically and commercially feasible; and sufﬁ cient resources are available to complete the development and to either sell or use the asset. 38 Instem Life Science Systems plc Annual Report, 2010 accounting policies Intangible Assets (continued) Where these criteria have not been achieved, development expenditure is recognised in proﬁ t or loss in the period in which it is incurred. Internally-generated intangible assets are amortised, once the product is available for use, on a straight-line basis over their useful lives (ﬁ ve to eight years) to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the assets is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised in proﬁ t or loss immediately. Property, Plant and Equipment Inventory Property, plant and equipment are stated in the statement of ﬁ nancial position at cost less accumulated depreciation and provision for impairments. Depreciation is provided on all assets so as to write off the cost less estimated residual value on the following basis: Short leasehold property - Over term of lease Plant and equipment - 12½% - 25% per annum Motor vehicles - 25% per annum The expected useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively. The carrying value of property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in proﬁ t or loss. Impairment of Assets Excluding Goodwill At each reporting date the Group reviews the carrying value of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where the asset does not generate cash ﬂ ows that are independent from other assets the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. A cash generating unit is the smallest identiﬁ able group of assets that generates cash inﬂ ows that are largely independent of the cash inﬂ ows from other assets or groups of assets. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use the estimated future cash ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the asset, for which the estimates of future cash ﬂ ows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced Inventory is stated at the lower of cost and net realisable value. Provision is made where necessary for obsolete and slow moving inventory. Financial Instruments Classiﬁ cation of ﬁ nancial instruments Financial instruments are classiﬁ ed as ﬁ nancial assets, ﬁ nancial liabilities or equity instruments. Recognition and valuation of ﬁ nancial assets Financial assets are initially recorded at their fair value net of transaction costs. At each reporting date, the Group reviews the carrying value of its ﬁ nancial assets to determine whether there is objective evidence of an indication of impairment. If any such indication exists the recoverable amount is estimated and any identiﬁ ed impairment loss is recognised in the statement of comprehensive income. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and cash deposits which are readily convertible to a known amount of cash. For the purposes of the cash ﬂ ow statement, cash and cash equivalents include bank overdrafts which are repayable on demand as these form an integral part of Group cash management. Trade receivables Trade receivables are classiﬁ ed as loans and receivables and are initially recognised at fair value. They are subsequently measured at their amortised cost using the effective interest method less any provision for impairment. A provision for impairment is made where there is objective evidence that amounts will not be recovered in accordance with original terms of the agreement. A provision for impairment is established when the carrying value of the receivable exceeds the present value of the future cash ﬂ ows discounted using the original effective interest rate. The carrying value of the receivable is reduced through the use of an impairment provision account and any impairment loss is recognised in the statement of comprehensive income. Instem Life Science Systems plc Annual Report, 2010 39 accounting policies Financial Instruments (continued) Deﬁ ned beneﬁ t schemes Financial liabilities and equity Financial liabilities and equity instruments are classiﬁ ed 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. Bank borrowings and loan notes A deﬁ ned beneﬁ t scheme is a pension plan under which the Group pays contributions in order to fund a deﬁ ned amount of pension that the employees under the scheme will receive on retirement. The cost of providing the beneﬁ ts is determined using the projected unit credit method with actuarial valuations being carried out regularly. An asset or liability is recognised equal to the present value of the deﬁ ned beneﬁ t obligation, adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Interest-bearing loan notes and bank overdrafts are recorded initially at their fair value, net of direct transaction costs. Such instruments are subsequently carried at their amortised cost and ﬁ nance charges are recognised in the statement of comprehensive income over the term of the instrument using an effective rate of interest. Finance charges are accounted for on an accruals basis to the statement of comprehensive income. Overdrafts are offset against cash and cash equivalents when the Company has a legal right of off-set. Actuarial gains and losses are recognised in the statement of other comprehensive income in the year in which they occur, whilst expected returns on plan assets, servicing costs and ﬁ nancing costs are recognised in proﬁ t and loss. The rate used to discount the beneﬁ t obligations is based on market yields for high quality corporate bonds with terms and currencies consistent with those of the beneﬁ t obligations. Trade payables Provisions Trade payables are not interest bearing and are stated at their cost. Ordinary share capital Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outﬂ ow of economic beneﬁ ts that can be reliably estimated. For ordinary share capital, the par value is recognised in share capital and the premium in the share premium reserve. The time value of money is not expected to be material and therefore future outﬂ ows have not been discounted. Derivative ﬁ nancial instruments First Time Adoption of IFRS The Group’s activities expose it primarily to foreign currency risk. The Group uses forward contracts to hedge this exposure. The Group does not use derivative ﬁ nancial instruments for speculative purposes. The Group and Company ﬁ nancial statements have been prepared in accordance with IFRS, IASs and International Financial Reporting Interpretations Committee (IFRICs) effective as at the 31 December 2010. The Group and Company have not chosen to adopt any amendments or revised standards early. The Group has not applied IFRS 1 First-time Adoption of IFRS in the current year as it is in substance a continuation of the Group headed by Instem LSS Group Limited. Instem LSS Group Limited’s ﬁ nancial statements for the period ended 31 December 2009 were converted from UK GAAP to EU-adopted IFRS for the purposes of the Company’s admission to AIM in October 2010 along with its comparatives for 2008 and 2007. The Group considers its ﬁ rst ﬁ nancial statements prepared under IFRS to be those for the period ended 31 December 2009. The date of transition is considered to be the beginning of the earliest period presented ie 1 January 2007. For information purposes, the reconciliations of equity and proﬁ t for 2009, 2008 and 2007 in respect of Instem LSS Group Limited have been provided in note 30 along with the equity position as at the date of transition. The Group does not adopt the hedge accounting provisions and as such, these derivatives are classiﬁ ed as ﬁ nancial instruments held for trading in accordance with IAS 39. They are initially and subsequently measured at fair value with gains and losses recognised in the statement of comprehensive income. Retirement Benefits Deﬁ ned contribution schemes A deﬁ ned contribution scheme is a pension plan under which the Group pays a ﬁ xed contribution to a scheme with an external provider. The amount charged to the statement of comprehensive income in respect of pension costs and other post retirement beneﬁ ts is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either other payables or other receivables in the statement of ﬁ nancial position. The Group has no further payment obligations once the contributions have been paid. 40 Instem Life Science Systems plc Annual Report, 2010 accounting policies IFRSs Issued but Not Yet Effective The following IFRSs, IASs and IFRICs have been issued, are not yet effective, and have not been adopted by the Group or the Company in these ﬁ nancial statements. The directors do not believe the adoption will have a material impact on the business. • • • • • • • • • • IFRS 1 ‘First-time Adoption of IFRS - Amendment; Limited Exemption from Comparative IFRS 7 Disclosures for First- time Adopters’ effective for periods commencing on or after 1 July 2010. IFRS 1 ‘First-time Adoption of IFRS - Amendment; Severe Hyper Inﬂ ation and Removal of Fixed Dates for ﬁ rst time adopters’ effective for periods commencing on or after 1 July 2011 (not yet EU endorsed). IFRS 7 ‘Financial Instruments: Disclosures - Amendment; Transfer of Financial Assets’ effective for periods commencing on or after 1 July 2011 (not yet EU endorsed). IAS 12 ‘Income Taxes - Amendment; Deferred Tax Recovery of Underlying Assets’ effective for periods commencing on or after 1 January 2012 (not yet EU endorsed). IAS 24 ‘Revised IAS 24 Related Party Disclosures’ was issued on 4 November 2009 and is effective for periods commencing on or after 1 January 2011. IAS 32 ‘Financial Instruments: Presentation – Amendment; Classiﬁ cation of Rights Issues’ was issued on 8 October 2009 and is effective for periods commencing on or after 1 February 2010. IFRIC 14 ‘Amendment – Prepayments of a Minimum Funding Requirement’ was issued on 26 November 2009 and is effective for periods commencing on or after 1 January 2011. IFRIC 19 ‘Extinguishing Financial Liabilities With Equity Instruments’ effective for periods commencing on or after 1 July 2010. IFRS 9 ‘Financial Instruments’ was issued on 12 November 2009 and is effective for periods commencing on or after 1 January 2013 (not yet EU endorsed). Improvements to IFRS (May 2010) – Amendments to standards effective for periods commencing on or after 1 January 2011. Instem Life Science Systems plc Annual Report, 2010 41 NOTES TO THE FINANCIAL STATEMENTS 1. Segmental Reporting For management purposes, the Group is currently organised into one operating segment – Global Life Sciences. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. THIRD PARTY REVENUE 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 1,953 5,933 789 1,203 123 10,001 £000 2,085 5,803 502 992 607 9,989 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 1,339 2,231 5,822 609 10,001 £000 1,131 2,438 6,125 295 9,989 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 6,353 - 205 25 6,583 £000 6,004 - 213 - 6,217 INFORMATION BY PRODUCT TYPE Licence fees Annual support fees SaaS subscription fees Professional services Funded development initiatives THIRD PARTY REVENUE INFORMATION BY GEOGRAPHICAL LOCATION UK Rest of Europe USA and Canada Rest of World NON-CURRENT ASSETS EXCLUDING DEFERRED TAXATION INFORMATION BY GEOGRAPHICAL LOCATION UK Rest of Europe USA and Canada Rest of World 42 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS Significant Customers The Group generates external revenue from one customer which individually amounts to more than 10% of the Group revenue. Revenue in respect of this customer for the period ending 31 December 2010 amounted to £1.46m (2009: £2.06m) and is reﬂ ected across all of the reportable locations. 2. Profit from Operations 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 £000 Profit from operations includes the following significant items: Depreciation and amounts written off property, plant and equipment: Charge for the year: Owned assets Leased assets Amortisation of intangible assets Research and development costs Foreign exchange (gains)/losses recognised in operating expenses Operating lease rentals: Plant and machinery Land and buildings Amounts payable to Baker Tilly UK Audit LLP and their associates in respect of both audit and non-audit services: Audit services: Statutory audit of parent and consolidated financial information Other services: Audit of subsidiaries where such services are provided by Baker Tilly UK Audit LLP or its associates 67 8 34 1,287 37 136 310 4 29 Taxation services 36 Services pursuant to companies legislation Corporate finance services Other services 4 67 17 157 58 8 47 1,595 110 187 271 7 22 5 - - - 34 Instem Life Science Systems plc Annual Report, 2010 43 NOTES TO THE FINANCIAL STATEMENTS 2. Profit from Operations (continued) The following table analyses the nature of expenses:- Depreciation, amortisation and impairments (see notes 9 and 10) Staff costs (see note 5) Premises costs Marketing expenses Professional fees Other expenses Total operating expenses 2010 £’000 5,190 75 417 141 82 1,863 7,768 2009 £’000 5,219 66 378 51 77 2,011 7,802 Non-Recurring Costs During the year the Group paid a non-recurring bonus of £0.35m (2009: Nil) to the directors of Instem LSS Group Limited in respect of past service. The Group incurred costs of £0.30m in respect of professional advice received in connection with the ﬂ otation of the business. In addition the Group paid £0.04m in respect of non-recurring third party legal and professional expenses for the incorporation of Instem Information Systems (Shanghai) Limited in China. 44 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 3. FINANCE INCOME Bank interest Foreign exchange gains 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 263 - 263 £000 322 413 735 4. FINANCE COSTS 5. EMPLOYEES Bank loans and overdrafts Foreign exchange losses Expected returns on pension scheme assets Interest on pension scheme liabilities Other Average monthly number (including executive directors) By role: Directors, administration, and supervision Software design, sales and customer service 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 297 37 (326) 356 - 364 £000 309 - (237) 327 8 407 52 week period ended 53 week period ended 31 December 2010 31 December 2009 Number Number 28 75 103 21 69 90 52 week period ended 53 week period ended 31 December 2010 31 December 2009 Employment costs: Wages and salaries Social security costs Retirement benefits £000 4,297 414 479 5,190 £000 4,285 403 531 5,219 In 2010 an additional non-recurring payment to shareholder/directors of £0.35m was made, which is not included in the above table. A charge of £0.02m (2009: £nil) arises in respect of share based payments. Instem Life Science Systems plc Annual Report, 2010 45 NOTES TO THE FINANCIAL STATEMENTS 6. Share-Based Payments Equity-Settled Share Option Plan Under the approved and unapproved option schemes, the Remuneration Committee can grant options to employees of the Group. Options are granted with a ﬁ xed exercise price which is equal to the market price at the date of grant. The contractual life is generally ten years from the date of grant. Options become exercisable after three years. Certain options issued to directors and senior employees carry market based performance conditions. Outstanding at the beginning of the period Granted Outstanding at end of the period Exercisable at 31 December Options - 585,711 585,711 - 2010 Weighted average exercise price (£) - 1.75 - 1.75 The options outstanding at December 2010 had an exercise price of £1.75 and a weighted average remaining contractual life of 9.75 years. Options are valued using the Black-Scholes and Monte-Carlo option-pricing models and the fair market value has been estimated using the following key assumptions: Average exercise price £1.75 Average market price £1.75 Total number of options under grant 585,711 Average vesting period (years) 3 Expected volatility 22%-26% Option life (years) Expected life 10 6 Risk free rate 1.9% Expected dividend yield Expected lapse rate 0% 0% Fair value of options £0.38-£0.51 Expected volatility was determined by calculating the historical volatility of a comparable business, prior to the period when the Company’s shares were listed on the AIM market. Volatility since listing has been calculated using the daily mid market share price. The expected life used in the model has been adjusted, based upon the management’s best estimate for the effects of non-transferability, exercise restrictions, and behavioural considerations. Options over 351,426 shares incorporate a market performance condition based on the Company’s share price. 46 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 7. DIRECTORS’ EMOLUMENTS Amounts payable by Instem Life Science Systems plc: Emoluments Amounts payable by subsidiary companies: Emoluments Money purchase pension contributions Total emoluments 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 £000 23 602 40 665 - 395 41 436 52 week period ended 53 week period ended 31 December 2010 31 December 2009 Number Number Number of directors to whom retirement benefits are accruing under: Defined contribution schemes 2 2 The highest paid director is shown in the Directors’ Remuneration Report on page 27. Instem Life Science Systems plc Annual Report, 2010 47 NOTES TO THE FINANCIAL STATEMENTS 8. Taxation Current tax: UK corporation tax on profits of the period Double tax relief Foreign tax Adjustments in respect of previous periods Total current tax Deferred tax: Origination and reversal of timing differences Adjustments in respect of previous periods Pension scheme Total deferred tax Income tax charge 52 week period ended 53 week period ended 31 December 2010 31 December 2009 £000 379 (212) 274 (50) 391 73 - 50 123 514 £000 604 (189) 330 (75) 670 31 (2) 63 92 762 Factors affecting tax charge for the period: £000 £000 52 week period ended 53 week period ended 31 December 2010 31 December 2009 The tax assessed for the period is higher than the standard rate of corporation tax in the UK 28%. The differences are explained below: Profit before tax 1,415 2,468 Profit before tax multiplied by standard rate of corporation tax in the UK 28% Effects of: Expenses not deductible for tax purposes Differences in overseas tax rates Prior period adjustments Total income tax charge for the period 396 84 84 (50) 514 691 6 140 (75) 762 48 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 9. Intangible Assets Group 31 December 2009 Cost at beginning of year Additions Cost at end of period Amounts written off At beginning of year Charged in the year Amortisation at end of period Group 31 December 2010 Cost at beginning of year Additions Cost at end of period Amounts written off At beginning of year Charged in the period Amortisation at end of period Goodwill £000 Software £000 5,858 - 5,858 - - - 5,858 - 5,858 - - - 362 65 427 148 47 195 232 427 361 788 195 34 229 559 Total £000 6,220 65 6,285 148 47 195 6,090 Total £000 6,285 361 6,646 195 34 229 6,417 Net book value at end of period 5,858 Goodwill £000 Software £000 Net book value at end of period 5,858 Impairment of goodwill All the goodwill, amounting to £5.86m, relates to a single cash generating unit, being the Instem business acquired on the management buyout of Instem LSS Limited on 27 March 2002. During the period, goodwill was tested for impairment in accordance with IAS 36 “Impairment of Assets”. The recoverable amounts for the cash generating unit exceeded the carrying amount of goodwill. The recoverable amount for the cash generating unit has been measured on a value in use calculation. The key assumptions used, which are based on management’s past experience, for the value in use calculations are those regarding the discount rates, growth rates and direct costs during the period. The value in use calculations are based on the future cashﬂ ows from approved forecasts for one year which has then been extrapolated to cover a period of ﬁ ve years, being the maximum period which management considers can reliably be forecast. At 31 December 2010 a pre tax discount rate of 8.33% was used in the value in use calculation based on the Company’s cost of capital. In determining the value in use, cashﬂ ows have not been increased to reﬂ ect potential growth. Projected cashﬂ ows were based on detailed Company proﬁ t and cashﬂ ow projections through to 2012 with no assumption of growth beyond 2012. The projections were based on reasonable assumptions in respect of business growth rates, payroll and other cost increases and related cashﬂ ow impacts.Based on the expected value in use compared to the carrying value of goodwill the directors did not consider that a sensitivity analysis was necessary at the reporting date. Instem Life Science Systems plc Annual Report, 2010 49 NOTES TO THE FINANCIAL STATEMENTS 10. Investments Company-cost and net book value £000’s At 31 December 2009 - Investment in Instem LSS Group Limited 16,500 At 31 December 2010 16,500 On 1 October 2010 the Company acquired the entire issued share capital of Instem LSS Group Limited. The Company has one wholly-owned subsidiary and four wholly-owned sub-subsidiaries, details of which are as follows: Company Activity Ownership Instem LSS Group Limited (Company number 04339129) Holding Company England and Wales 100% by Instem Life Science Systems plc Instem LSS Limited Software development, sales, (Company number 03548215) sales support and administrative England and Wales support 100% by Instem LSS Group Limited Instem LSS (North America) Limited (Company number 02126697) England and Wales Instem LSS (Asia) Limited Sales, sales support and administrative support 100% by Instem LSS Limited (Company number 1371107) Holding Company 100% by Instem LSS Limited Hong Kong Instem Information Systems (Shanghai) Limited (Company number 310115400257075) Sales, sales support and service Shanghai, PRC 100% by Instem LSS (Asia) Limited 50 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 11. Property, Plant and Equipment Group Short leasehold Plant and 31 December 2009 property equipment Cost At beginning of year Additions Exchange adjustment Cost at end of period Depreciation At beginning of year Charged in the year Exchange adjustment Depreciation at end of period Net book value at end of period £000 30 - - 30 17 1 - 18 12 £000 2,980 47 (38) 2,989 2,840 64 (30) 2,874 115 Motor vehicles £000 13 - (1) 12 12 1 (1) 12 - Group Short leasehold Plant and 31 December 2010 property equipment Motor vehicles Cost Additions Exchange adjustment Disposals Cost at end of period Depreciation Charged in the period Exchange adjustment Disposals Depreciation at end of period Net book value at end of period £000 30 15 - - 45 18 2 - - 20 25 £000 2,989 96 13 (251) 2,847 2,874 73 10 (251) 2,706 141 £000 12 - - - 12 12 - - - 12 - Total £000 3,023 47 (39) 3,031 2,869 66 (31) 2,904 127 Total £000 3,031 111 13 (251) 2,904 2,904 75 10 (251) 2,738 166 The net book value of plant and equipment includes £Nil in respect of assets held under ﬁ nance leases. Depreciation for the period on these assets was £8,000 (2009:£8,000) Instem Life Science Systems plc Annual Report, 2010 51 NOTES TO THE FINANCIAL STATEMENTS 12. Inventories Group Work in progress Total gross inventories Inventory impairment Inventory impairment: At beginning and end of period 13. Trade and Other Receivables Group Trade receivables Other receivables Prepayments and accrued income Company Other receivables 31 December 2010 31 December 2009 £000 137 £000 62 31 December 2010 31 December 2009 £000 137 - 137 £000 75 (13) 62 31 December 2010 31 December 2009 £000 - £000 13 31 December 2010 31 December 2009 £000 959 32 604 1,595 64 64 £000 1,104 4 724 1,832 - - An allowance has been made for estimated irrecoverable amounts from the sale of goods and services as shown below. This allowance has been based on the knowledge of the ﬁ nancial circumstances of individual customers at the period end. A provision for impairment is made where there is objective evidence of impairment which is usually indicated by a delay in the expected cash ﬂ ows or non payment from customers. An analysis of the provision for impairment of 31 December 2010 31 December 2009 receivables is as follows: £000 £000 At beginning of year (Credit)/charge for the period At end of period 2 - 2 - 2 2 The average credit period taken on sale of goods is 33 days (31 December 2009: 37 days). The directors consider that the carrying amount of trade and other receivables approximates to their fair value. 52 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 13. Trade and Other Receivables (continued) The age proﬁ le of the net trade receivables for the Group at the year-end was as follows: 31 December 2009 Current Debt age – “days overdue” 0-30 days 31-60 days Over 60 days Trade receivables Value (£000) % 923 84 152 14 27 2 2 - Debt age – “days overdue” Total 1,104 100 31 December 2010 Current 0-30 days 31-60 days Over 60 days Total Trade receivables Value (£000) % 834 87 98 10 16 2 11 1 959 100 An analysis of trade and other receivables by currency is as follows: Sterling Euro US Dollar Renminbi 31 December 2010 31 December 2009 £000 714 31 838 12 1,595 £000 885 5 942 - 1,832 Instem Life Science Systems plc Annual Report, 2010 53 NOTES TO THE FINANCIAL STATEMENTS 14. Cash and Cash Equivalents Group Cash at bank Bank overdraft Company Cash at bank 31 December 2010 31 December 2009 £000 £000 12,085 (8,822) 3,263 11,479 (8,763) 2,716 3,100 - The Group overdraft facility has a net limit of £1,200,000 and gross facility of £9,000,000. Interest is charged on the bank overdraft at 3% above base rate up to the above limit and 6% above base rate on any remainder. The bank overdraft is secured by ﬁ xed and ﬂ oating charges over certain of the Group’s assets. All balances are denominated in Sterling. The overdraft facility is renewable annually in March. An analysis of cash and cash equivalents by currency is as follows: Sterling Euro US Dollar Other The carrying amount of these assets approximate to their fair value. 15. Trade and Other Payables Group Current Trade payables Other taxation and social security costs Other payables Accruals and deferred income Non Current Other payables Company Trade payables Group payables 54 Instem Life Science Systems plc Annual Report, 2010 31 December 2010 31 December 2009 £000 2,654 136 394 79 3,263 £000 1,208 142 1,362 4 2,716 31 December 2010 31 December 2009 £000 £000 257 123 29 5,127 5,536 - 37 29 66 291 171 72 5,776 6,310 29 - - - NOTES TO THE FINANCIAL STATEMENTS 15. Trade and Other Payables (continued) An analysis of trade and other payables by currency is as follows: Sterling US Dollar Renminbi 31 December 2010 31 December 2009 £000 2,444 3,022 70 5,536 £000 3,042 3,297 - 6,339 The directors consider that the carrying amount of trade and other payables approximate to fair value due to their short maturities. Trade payables are mainly due to be paid within one month. 16. Current Taxation The current tax payable of £85,000 (31 December 2009: £300,000) represents the amount of income taxes payable in respect of current and prior periods. 17. Financial Liabilities 31 December 2009 Total Less than One to one year two years Two to three years Three to Four to More than four years five years five years £000 £000 £000 £000 £000 Group Loan notes £000 2,549 Finance leases 3 2,552 £000 2,549 3 2,552 - - - 31 December 2010 Total Less than One to one year two years - - - Two to three years - - - - - - - - - Three to Four to More than four years five years five years Group and Company £000 Series B Loan notes 253 253 £000 253 253 £000 £000 £000 £000 £000 - - - - - - - - - - Instem Life Science Systems plc Annual Report, 2010 55 NOTES TO THE FINANCIAL STATEMENTS 17. Financial Liabilities (continued) Loan notes The loan note obligations can be analysed as below: 12.5% Fixed Rate Loan Notes Discounted value Accrued interest The loan notes were redeemed in full on 26 January 2010. Series B Loan Notes 31 December 2010 31 December 2009 £000 - - - £000 1,300 1,249 2,549 The Series B Loan Notes were issued on October 5th 2010. The note is unsecured and bears interest at the rate of 1.75% above bank base rate. The loan note plus accrued interest is repayable in full on 13th October 2011. Due to the short maturity the directors believe the carrying value approximates to fair value. Obligations under finance leases Amounts payable under finance leases Within 1 year Within 2-5 years inclusive After 5 years Less: future finance charges Present value of lease obligations Disclosed as: Current Non-current Minimum lease payments 31 December 2010 £000 - - - - - - - - - Present value of minimum lease payments 31 December 2010 £000 - -- -- - Minimum lease payments 31 December 2009 £000 3 - - - 3 3 - 3 Present value of minimum lease payments 31 December 2009 £000 3 3 56 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 18. Financial Instruments All ﬁ nancial instruments held by the Group, as detailed in this note, are classiﬁ ed as “Loans and Receivables” (trade and other receivables, excluding prepayments, and cash and cash equivalents), “Financial Liabilities Measured at Amortised Cost” (trade and other payables, excluding statutory liabilities, and ﬁ nancial liabilities) and “Fair value through proﬁ t and loss” (other ﬁ nancial liabilities which reﬂ ect derivative contracts) under IAS 39 ‘Financial Instruments: Recognition and Measurement’. Financial Risk Management The Group’s activities expose it to a variety of ﬁ nancial risks including market risk, credit risk and liquidity risk. Market risk includes interest rate risk, foreign exchange rate risk and price risk. The main ﬁ nancial risks managed by the Group, under policies approved by the board, are interest rate risk, foreign currency risk, liquidity risk and credit risk. The Group has in place risk management policies that seek to limit the adverse effects on the ﬁ nancial performance of the Group by using various instruments and techniques. Derivative ﬁ nancial statements are only used to hedge exposures arising in respect of underlying business requirements and not for any speculative purpose. Foreign exchange risk The Group operates internationally and is exposed to foreign currency risk on transactions denominated in a currency other than the functional currency and on the translation of the statement of ﬁ nancial position and statement of comprehensive income of foreign operations into sterling. The currencies giving rise to this risk are primarily US dollars. The Group has both cash inﬂ ows and outﬂ ows in this currency that create a natural hedge. In managing currency risks the Group aims to reduce the impact of short-term ﬂ uctuations on the Group’s cash inﬂ ows and outﬂ ows in a foreign currency. The Group also hedges any material foreign currency transaction exposure. During the year the Group entered into US dollar hedging arrangements with ﬁ xed forward contracts which all expired prior to the reporting date and an American Ratio forward accrual contract. Over the longer term, changes in foreign exchange could have an impact on consolidation of foreign subsidiaries earnings. The assumption in 2010 was based on a forecast that the US Dollar to sterling rate would be 1.60. A 10% decrease in the value of sterling against the US dollar would result in an increase in the Group’s proﬁ t before tax by approximately £0.30m. Interest rate risk The Group operates an interest rate policy designed to minimise interest costs and reduce volatility in reported earnings. The Group bank facility does not allow the US Dollar cash balances to generate interest therefore the Group transfers funds from the US dollar account into the sterling account. This is achieved using currency swaps which maximise the interest gains whilst minimising foreign exchange risks. As at 31 December 2010 indications are that the UK bank rate will increase by 0.5% over the next 12 months. On the basis of the ﬂ oating net cash position at 31 December 2010 and assuming no other changes occur (such as changes in currency exchange rates) and that no further interest rate management action is taken, an increase in interest rates of 0.5% would increase pre-tax net interest income by £14,000. Instem Life Science Systems plc Annual Report, 2010 57 NOTES TO THE FINANCIAL STATEMENTS 18. Financial Instruments (continued) 31 December 2009 Trade and other receivables Cash and cash equivalents Trade payables Fixed rate £000 - - - Loan notes (2,549) Obligations under finance leases - Floating Non-interest rate £000 - 1,207 - - - bearing £000 1,385 1,509 (1,417) - (3) (2,549) 1,207 1,474 31 December 2010 Trade and other receivables Cash and cash equivalents Trade payables Loan notes Obligations under finance leases Fixed rate £000 - - - - - - Floating Non-interest rate £000 - 3,067 - (253) - 2,814 bearing £000 1,250 196 (908) - - 538 Total £000 1,385 2,716 (1,417) (2,549) (3) 132 Total £000 1,250 3,263 (908) (253) - 3,352 Credit risk Management aim to minimise the risk of credit losses. The Group’s ﬁ nancial assets are bank balances and cash and trade and other receivables, which represent the Group’s maximum exposure to credit risk in relation to ﬁ nancial assets. The Group’s credit risk is primarily attributable to its trade receivables and the Group has policies in place to ensure that sales of products and services are made to customers with appropriate creditworthiness. The amounts presented in the Statement of Financial Position are net of impairment provisions, estimated by the Group’s management based on prior experience and their assessment of the present value of estimated future cash ﬂ ows. An allowance for impairment is made where there is an identiﬁ ed loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash ﬂ ows. The Group has signiﬁ cant concentration of credit risk, with signiﬁ cant exposure relating to a number of counterparties: 31 December 2009 Customer A - £190,814 (17%) 31 December 2010 Customer A - £ 223,220 (23%) The Group’s exposure to losses from defaults on trade receivables is reduced due to contractual terms which require support fees to be invoiced and paid annually in advance. 58 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 18. Financial Instruments (continued) Note 13 sets out the impairment provision for credit losses on trade receivables and the ageing analysis of overdue trade receivables. There are no impairment losses recognised on other ﬁ nancial assets. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its ﬁ nancial commitments as they fall due. The Group’s objective is to ensure that adequate facilities are available through use of bank overdrafts and ﬁ nance leases. The Group manages liquidity risk through regular cash ﬂ ow forecasting and monitoring of cash ﬂ ows, management review and regular review of working capital and costs. The Group regularly monitors its available headroom under its borrowing facilities. At 31 December 2010 £1.2m of undrawn facilities was available (31 December 2009: £0.24m). In respect of the Group’s interest-bearing ﬁ nancial liabilities, the table in note 17 includes details at the reporting date of the periods in which they mature. Instem Life Science Systems plc Annual Report, 2010 59 NOTES TO THE FINANCIAL STATEMENTS 19. Derivative Financial Instruments The Group utilises derivatives to hedge its foreign currency exposure arising from future transactions and cash ﬂ ows. During the year the Group entered in to an accrual forward contract to exchange $25,000 per month at an agreed rate of $1.456/£ for a 19 month period. If the exchange rate rises above $1.635, the contract terminates and if the exchange rate falls below $1.395/£1, the Company is committed to exchange a further $25,000 at $1.395/£. The fair value of the derivative at 31 December 2010 is £488 which has been calculated using option pricing models that take into account historical USD/GBP volatility. It falls under level 2 of the fair value hierarchy as its valuation has been based on observable inputs. The derivative and the fair value gain have not been recognised in the ﬁ nancial statements on the grounds of immateriality. At the reporting date, the total notional amount outstanding on foreign exchange forward contracts that the Group has committed to are as follows: 31 December 2010 31 December 2009 $000 $000 US Dollars 275 - 20. Deferred Tax Deferred tax assets - amounts due to be recovered within 12 months - amounts due to be recovered after 12 months Deferred tax liabilities - amounts due to be settled within 12 months - amounts due to be settled after 12 months Net position The movement in the period in the Group’s net deferred tax position was as follows: At beginning of the period Charge/(Credit) to income for the year (Charge)/credit to other comprehensive income for the period Effect of change in tax rate – equity At end of the period 31 December 2010 31 December 2009 £000 - 431 - (110) 321 £000 - 362 - (65) 297 31 December 2010 31 December 2009 £000 297 (123) 157 (10) 321 £000 345 (92) 44 - 297 60 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 20. Deferred Tax (continued) The following are the major deferred tax assets and liabilities recognised by the Group and the movements thereon during the period: Deferred tax asset/(liabilities) depreciation Accelerated tax At 31 December 2008 Charge to profit or loss for the period Charge to equity for the period At 31 December 2009 Charge to profit or loss for the period Charge to equity for the period £000 (30) (20) - (50) (54) - At 31 December 2010 (104) Tax losses £000 Retirement benefit obligations £000 54 (9) - 45 (19) - 26 321 (63) 44 302 (50) 147 399 Total £000 345 (92) 44 297 (123) 147 321 Instem Life Science Systems plc Annual Report, 2010 61 NOTES TO THE FINANCIAL STATEMENTS 21. Retirement Benefit Obligations Deﬁ ned contribution pension scheme The Company has 3 active deﬁ ned contribution schemes and a closed deﬁ ned contribution scheme: Group Personal Pension Plan- the scheme was created on 31 December 2008. The Scheme is a contributory money purchase scheme with the employer matching employee contributions to a maximum of 5%. The employer also contributes to the Scheme for former members of the Instem LSS Pension Scheme at rates varying from 5% to 18%. Employer contributions for the period ended 31 December 2010 were £0.37m (31 December 2009: £0.37m). Contracted In Money Purchase Scheme (CIMP) - the Scheme was created on 31 December 2008. The Scheme is a non-contributory scheme created for former members of the Instem LSS Pension Scheme who are US residents. Employer contributions for the year ended 31 December 2010 were £0.03m (31 December 2009: £0.04m). Instem LSS (North America) Limited 401k Plan - the scheme was created for the beneﬁ t of employees of Instem LSS (North America) Limited in the USA. The Scheme is a contributory money purchase scheme with the employer matching contributions to the scheme to a maximum of 4.8%. Instem LSS Stakeholder Scheme - the Scheme was a contributory money purchase scheme which closed on 31 December 2008. Employer contributions for the year ended 31 December 2010 were £ Nil (31 December 2009: £3,000). Deﬁ ned beneﬁ t pension scheme The Group also operates a pension scheme providing beneﬁ ts based on ﬁ nal pensionable pay. This scheme was closed to new members with effect from 8 October 2001 and the rate of future beneﬁ t accrual reduced from 1/60th of ﬁ nal pensionable pay per year of service to 1/80th with effect from 6 April 2003. The scheme closed to future accrual on 31 December 2008. The latest full actuarial valuation was carried out at 5 April 2008 and was updated to 31 December 2010 by a qualiﬁ ed independent actuary. 62 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 21. Retirement Benefit Obligations (continued) The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment portfolio. Expected yields on bonds are based on gross redemption yields at the balance sheet date whilst the expected returns on the equity and property investments reﬂ ect the long-term real rates of return experienced in the respective markets. Discount rate Expected return on plan assets Inflation Rate of increase in salaries Rate of increase in pensions in payment Rate of increase in pensions in deferment 31 December 2010 31 December 2009 % 5.8 6.1 3.6 N/A 3.6 3.6 % 6.1 6.7 3.4 N/A 3.4 3.4 ANALYSIS OF AMOUNT CHARGED TO THE STATEMENT OF 31 December 2010 31 December 2009 COMPREHENSIVE INCOME £000 £000 Current service cost Past service cost Total operating charge - - - - - - ANALYSIS OF AMOUNT CREDITED TO OTHER FINANCE 31 December 2010 31 December 2009 COSTS Expected returns on pension scheme assets Interest on pension scheme liabilities Net finance charge £000 326 (356) (30) £000 237 (327) (90) ANALYSIS OF AMOUNT RECOGNISED IN OTHER 31 December 2010 31 December 2009 COMPREHENSIVE INCOME Actual return less expected return on pension scheme assets Experience losses arising on scheme liabilities Changes in assumptions underlying the present value of the scheme liabilities Actuarial gain/(loss) recognised in other comprehensive income £000 235 (77) (734) (576) £000 557 (18) (697) (158) Instem Life Science Systems plc Annual Report, 2010 63 NOTES TO THE FINANCIAL STATEMENTS 21. Retirement Benefit Obligations (continued) CHANGES IN THE PRESENT VALUE OF THE DEFINED 31 December 2010 31 December 2009 BENEFIT OBLIGATION Opening defined benefit obligation Service cost Interest cost Actuarial (gain)/loss Benefits paid Closing defined benefit obligation CHANGES IN THE FAIR VALUE OF PLAN ASSETS Opening plan assets Expected return Actuarial (loss)/gain Contributions by employer Benefits paid Closing plan assets Present value of funded obligations Fair value of plan assets Deficit Related deferred tax asset Net pension liability £000 5,893 - 356 811 (104) 6,956 £000 4,901 - 327 715 (50) 5,893 31 December 2010 31 December 2009 £000 4,812 326 235 210 (104) 5,479 £000 3,752 237 557 316 (50) 4,812 31 December 2010 31 December 2009 £000 (6,956) 5,479 (1,477) 399 (1,078) £000 (5,893) 4,812 (1,081) 302 (779) 64 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 21. Retirement Benefit Obligations (continued) ANALYSIS OF CUMULATIVE AMOUNT RECOGNISED IN OTHER COMPREHENSIVE INCOME Actual return less expected return on pension scheme assets Experience gains and losses arising on scheme liabilities Changes in assumptions underlying the present value of the scheme liabilities Cumulative actuarial (loss)/gain recognised in other comprehensive income Cumulative Cumulative 31 December 2010 31 December 2009 £000 (51) (910) 590 (371) £000 (286) (833) 1,324 205 MAJOR CATEGORIES OF PLAN ASSETS AS A PERCENTAGE OF FAIR VALUE OF TOTAL PLAN ASSETS 31 December 2010 31 December 2009 Equities Property Bonds Corporate Bonds Cash Other £000 4,054 110 438 219 603 55 % 74 2 8 4 11 1 The ﬁ ve year history of experience adjustments are as follows: 5,479 100 £000 3,512 100 473 525 202 - 4,812 % 73 2 10 11 4 - 100 31 December 31 December 31 December 31 December 31 December 2010 £000 2009 £000 2008 £000 2007 £000 2006 £000 Present value of defined benefit obligation (6,956) (5,893) (4,901) (6,303) (6,078) Fair value of plan assets 5,479 Deficit (1,477) Experience adjustments on plan liabilities Experience adjustments on plan assets (77) 235 4,812 (1,081) (18) 557 3,752 (1,149) (431) (1,390) 4,335 (1,968) (31) (7) 3,646 (2,432) (71) 176 The Company expects to contribute £310,500 to its deﬁ ned beneﬁ t plans in the next ﬁ nancial year (31 December 2010: £210,000). Instem Life Science Systems plc Annual Report, 2010 65 NOTES TO THE FINANCIAL STATEMENTS 22. Share Capital 31 December 2010 31 December 2009 £000 £000 Allotted, called up and fully paid 11,714,286 ordinary shares of 10p each 1,171 - The following share capital movements occurred in the period: • • • • On incorporation one ordinary share of £1 was incurred at par. On 5 October 2010 the one ordinary share of £1 was sub-divided into 10 ordinary shares of 10p each. On 5 October 2010 6,485,900 ordinary shares of 10p each were issued at a premium of £10,701,735. On 13 October 2010 5,228,376 ordinary shares of 10p each were issued at a premium of £8,626,820. Under the pooling of interests basis the share capital as at 5 October 2010 is deemed to have been in existence throughout the periods presented. 23. Earnings Per Share Basic earnings per share is calculated by dividing the proﬁ t attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year . Diluted earnings per share is calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential shares arising from the share option scheme. The dilutive impact of the share options is calculated by determining the number of shares that could have been acquired at fair value (determined as the average market share price of the Company’s shares) based on the monetary value of the subscription rights attached to the outstanding share options. Profit after tax (£000’s) 2010 Weighted average number of shares (000’s) Earnings per Profit after tax 2009 Weighted average Earnings per share (pence) (£000’s) number of share (pence) shares (000’s) Earnings per share- basic Potentially dilutive shares Earnings per share- diluted 901 7,698 23 901 7,721 11.7 - 11.7 1,706 6,486 - - 1,706 6,486 26.3 - 26.3 66 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 23. Earnings Per Share (continued) Adjusted earnings per share 2010 Weighted average Profit after tax Earnings per Profit after tax 2009 Weighted average Earnings per (£000’s) number of share (pence) (£000’s) number of share (pence) shares (000’s) shares (000’s) 901 21 683 (191) 1,414 7,698 11.7 1,706 6,486 26.3 - - - - 23 0.3 8.9 (2.5) 18.4 - - - - - - - - - - - - - - - - 1,414 7,721 18.4 1,706 6,486 26.3 Earnings per share- basic Effect of share-based payments Effect of non-recurring items Effect of tax on non- recurring items Adjusted earnings per share Potentially dilutive shares Adjusted earnings per share-diluted 24. Reserves Called up share capital The share capital account includes the par value for all shares issued and outstanding. Share premium account The share premium account is used to record amounts received in excess of the nominal value of shares on issue of new shares less the costs of new share issues. Translation reserve The translation reserve incorporates the cumulative net exchange gains and losses recognised on the translation of subsidiary Company ﬁ nancial information to the presentational currency of Sterling (£). Under IFRS 1 the translation reserve was deemed to be £nil at the date of transition. Retained earnings The retained earnings reserve includes the accumulated proﬁ ts and losses arising from the consolidated ‘Statement of Comprehensive Income’ and certain items from ‘Other Comprehensive Income’ attributable to equity shareholders net of distributions to shareholders. Merger reserve The merger reserve represents the difference between the consideration payable at the date of acquisition, net of merger relief, and the share capital and share premium of Instem LSS Group Limited. Capital management The Group’s main objective when managing capital is to protect returns to shareholders by ensuring the Group will continue to trade proﬁ tably in the foreseeable future. The Group also aims to maximise its capital structure of debt and equity so as to minimise its cost of capital. Instem Life Science Systems plc Annual Report, 2010 67 NOTES TO THE FINANCIAL STATEMENTS 24. Reserves (continued) The Group manages its capital with regard to the risks inherent in the business and the sector within which it operates by monitoring its gearing ratio on a regular basis. The Group considers its capital to include share capital, share premium, translation reserve, retained earnings, and net debt as noted below. Net debt includes short and long-term borrowings (including overdrafts, redeemable preference shares and lease obligations) net of cash and cash equivalents. The Group has not made any changes to its capital management during the year. 25. Capital Commitments There were no capital commitments at the end of the ﬁ nancial period. 26. Operating Leases Payable Minimum lease payments under operating leases recognised as an expense in the period At the balance sheet date, the Group has outstanding commitments under operating leases, which fall due as follows: Land and buildings Within one year In the second to fifth year inclusive After five years Plant and machinery Within one year In the second to fifth year inclusive After five years 31 December 31 December 2010 £000 446 2009 £000 458 31 December 31 December 2010 £000 334 1,220 1,411 119 65 - 2009 £000 271 952 1,396 142 207 17 3,149 2,985 Operating lease payments represent rentals payable by the Group for certain equipment. Leases have varying terms and renewal rights. The above leasing arrangements do not contain any restrictive covenants, contingent rents or purchase options. The operating leases in relation to the properties at Stone and Liverpool contain dilapidation clauses whereby Instem LSS Group Limited must make good any damage to the demised premises on expiration of the leases. The directors estimate that the current liability is not material to warrant provision at the period end. 68 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 27. Related Party Transactions Transactions between Group companies have not been disclosed as these have all been eliminated in the preparation of the ﬁ nancial information. During the year the Company has traded in its normal course of business with shareholders and consultancy businesses in which directors have a material interest as follows; Key management compensation: 2010 £000 Fees for services provided as non-executive directors Salaries and short term benefits 380 Executive directors Salaries and short term benefits 285 Other key management Salaries and short term employee benefits 227 2009 £000 105 331 321 In addition the Company paid £0.02m (2009: Nil) to Instem Ventures, a company owned by Adrian Gare, a shareholder. The balance outstanding at the end of the year was £Nil (2009: Nil) Key management are considered to be the directors together with the Senior Vice-President of Client Services and the Senior Vice- President of Product Development 28. Accounting Estimates and Judgements Some asset and liability amounts reported in the ﬁ nancial information are based on management estimates and assumptions. There is therefore a risk of signiﬁ cant changes to the carrying amounts for these assets and liabilities within the next ﬁ nancial year. The estimates and assumptions are made on the basis of information and conditions that exist at the time of the valuation. Inventory impairment provisions The Group makes provision for work in progress deemed to be irrecoverable. This provision is established on a speciﬁ c contract by contract basis based on management’s prior experience and their assessment of the present value of estimated future cash ﬂ ows. Receivables impairment provisions The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the present value of estimated future cash ﬂ ows. Pension valuation assumptions Assumptions are used in the actuarial valuation of the Group’s deﬁ ned beneﬁ t pension schemes. Details of these assumptions are disclosed in note 21. Goodwill impairment At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash ﬂ ows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Instem Life Science Systems plc Annual Report, 2010 69 NOTES TO THE FINANCIAL STATEMENTS 29. Post Balance Sheet Events On March 4th 2011 the Company acquired BioWisdom Ltd (“BioWisdom”), a leading provider of software solutions for extracting intelligence from R&D related healthcare data, for an initial enterprise value of £0.90 million and a maximum total enterprise value of £1.50 million, subject to certain performance criteria. Initial cash consideration paid was £0.2m plus £0.7m of unsecured creditors which were taken on. The additional performance related consideration will be paid equally in cash and by the issue of shares. At the date of approval of the ﬁ nancial statements, the initial accounting for this acquisition is incomplete and therefore full information required by IFRS 3 (revised) relating to the acquisition cannot be disclosed. 30. Reconciliation to IFRS The effects of the transition from UK GAAP to IFRS are shown in the reconciliation statements on the following pages. The UK GAAP columns included in the reconciliations represent the numbers previously reported. However the presentation has been amended to comply with IAS 1 (Revised). There were no material adjustments to the statement of cash ﬂ ows. The adjustments relate to the following: Intangible assets Under IFRS 3, goodwill is not amortised on a straight line basis but instead is subject to annual impairment testing. Consequently the goodwill balances were reviewed for impairment at 31 December 2007, 26 December 2008 and 31 December 2009 and no impairment adjustments were identiﬁ ed. The Company has elected not to apply IFRS 3 Business Combinations retrospectively to business combinations prior to date of transition. Amortisation expensed under UK GAAP since the date of transition has been added back to the carrying value of goodwill in the statement of ﬁ nancial position and amortisation of intangibles for the period reduced. Purchase software and licences Under UK GAAP, purchased software and licences were included within tangible ﬁ xed assets on the Balance Sheet. Under IAS 38 ‘Intangible Assets’ such items are disclosed as intangible assets and are amortised over their remaining useful lives. A reclassiﬁ cation from property, plant and equipment to intangible assets has been accounted for. Internal Development Costs Development costs under UK GAAP have been expensed. Development costs meeting the criteria of IAS 38 for capitalisation have been capitalised and amortised over their useful lives with a corresponding adjustment to operating expenses. Financial liabilities A number of leases have been reclassiﬁ ed between operating and ﬁ nance leases. Although the ﬁ nance lease test under UK GAAP is broadly similar to IFRS, on review of the lease contracts, a number of leases met the criteria under IAS 17 for capitalisation as ﬁ nance leases which were previously recognised as operating leases under UK GAAP. These have therefore been capitalised within the statement of ﬁ nancial position within property, plant and equipment with their relevant liability being included in ﬁ nancial liabilities. The assets are being depreciated over their remaining useful lives. Deferred tax (IAS 12) In accordance with IAS 12 the deferred taxation relating to the deﬁ ned beneﬁ t pension scheme obligation has been reclassiﬁ ed to be shown separately from the retirement beneﬁ t obligation at the end of each period. In addition, deferred tax has been re-presented and shown as non-current on the face of the statement of ﬁ nancial position in accordance with IAS 1 (Revised) Presentation of ﬁ nancial statements. The effects of changes in foreign exchange rates (IAS 21) UK GAAP permitted exchange differences arising on retranslation of overseas operations to be recognised against retained earnings. IAS 23 requires a separate translation reserve to be created within equity. Under IFRS 1 the translation reserve was deemed to be £nil at the date of transition. 70 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 30 a) Reconciliation of consolidated statement of ﬁ nancial position as at 1 January 2007 As previously reported UK Adjustments GAAP £000 £000 ASSETS NON-CURRENT ASSETS Intangible assets 5,858 Property, plant and equipment Deferred tax 132 - TOTAL NON-CURRENT ASSETS 5,990 CURRENT ASSETS Inventories Trade and other receivables Cash and cash equivalents Deferred tax TOTAL CURRENT ASSETS 276 1,212 7,339 202 9,029 TOTAL ASSETS 15,019 LIABILITIES CURRENT LIABILITIES Trade and other payables Current taxation Financial liabilities 4,634 370 8,126 TOTAL CURRENT LIABILITIES 13,130 NON-CURRENT LIABILITIES Trade and other payables Financial liabilities Retirement benefit obligations TOTAL NON-CURRENT LIABILITIES 211 1,951 1,702 3,864 - - - - - - (7,339) - (7,339) (7,339) 17 - (7,339) (7,322) - - - - TOTAL LIABILITIES 16,994 (7,322) EQUITY Share capital Share premium Translation reserve 1 4,866 - Retained earnings (6,842) EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT (1,975) - - - (17) (17) As restated UK GAAP £000 5,858 132 - 5,990 276 1,212 - 202 1,690 7,680 4,651 370 787 5,808 211 1,951 1,702 3,864 9,672 1 4,866 - (6,859) (1,992) Effect of transition to IFRS £000 43 (17) 923 949 - - - (202) (202) 747 - - 1 1 - 1 730 731 732 - - - 15 15 Restated under IFRS £000 5,901 115 923 6,939 276 1,212 - - 1,488 8,427 4,651 370 788 5,809 211 1,952 2,432 4,595 10,404 1 4,866 - (6,844) (1,977) TOTAL EQUITY AND LIABILITIES 15,019 (7,339) 7,680 747 8,427 Instem Life Science Systems plc Annual Report, 2010 71 NOTES TO THE FINANCIAL STATEMENTS 30 b) Reconciliation of consolidated statement of comprehensive income for the 52 weeks ended 31 December 2007 As previously IAS 19 reported UK Holiday pay GAAP £000 7,990 REVENUE Operating expenses (6,219) PROFIT FROM OPERATIONS BEFORE AMORTISATION 1,771 Amortisation of intangibles (1,116) PROFIT FROM OPERATIONS Finance income Finance costs PROFIT BEFORE TAXATION Income tax expense (LOSS)/PROFIT FOR THE FINANCIAL YEAR Other comprehensive income Actuarial gain on retirement benefit obligations 655 563 (992) 226 (638) (412) 208 Deferred tax on actuarial gain (103) Currency translation differences on foreign currency net investment OTHER COMPREHENSIVE INCOME (36) 69 provision £000 - (2) (2) - (2) - - (2) - (2) - - - - As restated UK GAAP £000 7,990 (6,221) 1,769 (1,116) 653 563 (992) 224 (638) (414) 208 (103) (36) 69 Effect of transition to IFRS £000 - 24 24 1,092 1,116 - - 1,116 1 1,117 - - - - TOTAL COMPREHENSIVE (EXPENSE) / INCOME FOR THE YEAR (343) (2) (345) 1,117 Restated under IFRS £000 7,990 (6,197) 1,793 (24) 1,769 563 (992) 1,340 (637) 703 208 (103) (36) 69 772 72 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 30 c) Reconciliation of consolidated statement of ﬁ nancial position as at 31 December 2007 As previously reported UK Adjustments As restated UK GAAP £000 £000 GAAP £000 ASSETS NON-CURRENT ASSETS Intangible assets 4,742 Property, plant and equipment Deferred tax 116 - TOTAL NON-CURRENT ASSETS 4,858 CURRENT ASSETS Inventories Trade and other receivables Cash and cash equivalents Deferred tax 148 2,093 8,242 168 TOTAL CURRENT ASSETS 10,651 - - - - - - (8,242) - - TOTAL ASSETS 15,509 (8,242) LIABILITIES CURRENT LIABILITIES Trade and other payables Current taxation Financial liabilities 5,351 81 8,604 TOTAL CURRENT LIABILITIES 14,036 NON-CURRENT LIABILITIES Trade and other payables Financial liabilities Retirement benefit obligations TOTAL NON-CURRENT LIABILITIES 173 2,201 1,417 3,791 19 - (8,242) (8,223) - - - - TOTAL LIABILITIES 17,827 (8,223) EQUITY Share capital 1 Share premium 4,866 Translation reserve - Retained earnings (7,185) EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT (2,318) - - - (19) (19) Effect of transition to IFRS £000 1,171 3 711 1,885 (12) - (168) (180) 1,705 - - 10 10 - 12 551 563 573 - - (36) 1,168 Restated under IFRS £000 5,913 119 711 6,743 136 2,093 - - 2,229 8,972 5,370 81 372 5,823 173 2,213 1,968 4,354 10,177 1 4,866 (36) (6,036) 4,742 116 - 4,858 148 2,093 - 168 2,409 7,267 5,370 81 362 5,813 173 2,201 1,417 3,791 9,604 1 4,866 - (7,204) (2,337) 1,132 (1,205) TOTAL EQUITY AND LIABILITIES 15,509 (8,242) 7,267 1,705 8,972 Instem Life Science Systems plc Annual Report, 2010 73 NOTES TO THE FINANCIAL STATEMENTS 30 d) Reconciliation of consolidated statement of comprehensive income for the 52 weeks ended 31 December 2008 As previously IAS 19 reported UK Holiday pay GAAP £000 8,808 REVENUE Operating expenses (7,030) PROFIT FROM OPERATIONS BEFORE AMORTISATION 1,778 Amortisation of intangibles (1,116) PROFIT FROM OPERATIONS Finance income Finance costs (LOSS)/PROFIT BEFORE TAXATION Income tax expense 662 522 (2,287) (1,103) (464) (LOSS) FOR THE FINANCIAL YEAR (1,567) Other comprehensive income Actuarial gain on retirement benefit obligations 588 Deferred tax on actuarial gain (165) Currency translation differences on foreign currency net investment 661 OTHER COMPREHENSIVE INCOME 1,084 provision £000 - (2) (2) - (2) - - (2) - (2) - - - - As restated UK GAAP £000 8,808 (7,032) 1,776 (1,116) 660 522 (2,287) (1,105) (464) (1,569) 588 (165) 661 1,084 Effect of transition to IFRS £000 - 163 163 1,090 1,253 - - 1,253 (37) 1,216 - - - - Restated under IFRS £000 8,808 (6,869) 1,939 (26) 1,913 522 (2,287) 148 (501) (353) 588 (165) 661 1,084 TOTAL COMPREHENSIVE INCOME FOR THE YEAR (483) (2) (485) 1,216 731 74 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 30 e) Reconciliation of consolidated statement of ﬁ nancial position as at 31 December 2008 As previously reported UK Adjustments As restated UK GAAP IFRS 3 business combinations Restated under IFRS £000 £000 £000 £000 GAAP £000 ASSETS NON-CURRENT ASSETS Intangible assets 3,626 Property, plant and equipment Deferred tax 195 - TOTAL NON-CURRENT ASSETS 3,821 CURRENT ASSETS Inventories Trade and other receivables Cash and cash equivalents Current taxation Deferred tax TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES 61 2,900 8,163 30 96 11,250 15,071 Trade and other payables 5,638 Current taxation Financial liabilities Deferred tax - 8,712 27 - - - - - - (8,163) - - (8,163) (8,163) 21 - (8,163) - 3,626 195 - 3,821 61 2,900 - 30 96 3,087 6,908 5,659 - 549 27 TOTAL CURRENT LIABILITIES 14,377 (8,142) 6,235 NON-CURRENT LIABILITIES Trade and other payables Financial liabilities Retirement benefit obligations TOTAL NON-CURRENT LIABILITIES 93 2,574 828 3,495 - - - - TOTAL LIABILITIES 17,872 (8,142) EQUITY Share capital 1 Share premium 4,866 Translation reserve - Retained earnings (7,668) EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT (2,801) - - - (21) (21) 93 2,574 828 3,495 9,730 1 4,866 - (7,689) 2,446 (41) 345 2,750 - - - - (96) (96) 2,654 - - 9 (27) (18) - 3 321 324 306 - - 625 1,723 6,072 154 345 6,571 61 2,900 - 30 - 2,991 9,562 5,659 - 558 - 6,217 93 2,577 1,149 3,819 10,036 1 4,866 625 (5,966) (2,822) 2,348 (474) TOTAL EQUITY AND LIABILITIES 15,071 (8,163) 6,908 2,654 9,562 Instem Life Science Systems plc Annual Report, 2010 75 NOTES TO THE FINANCIAL STATEMENTS 30 f) Reconciliation of consolidated statement of comprehensive income for the 53 weeks ended 31 December 2009 As previously IAS 19 reported UK Holiday pay GAAP £000 9,815 REVENUE Operating expenses (7,692) PROFIT FROM OPERATIONS BEFORE AMORTISATION 2,123 Amortisation of intangibles (1,116) PROFIT FROM OPERATIONS Finance income Finance costs PROFIT BEFORE TAXATION Income tax expense PROFIT FOR THE FINANCIAL YEAR Other comprehensive income Actuarial loss on retirement benefit obligations 1,007 735 (407) 1,335 (757) 578 (158) Deferred tax on actuarial loss 44 Currency translation differences on foreign currency net investment (266) OTHER COMPREHENSIVE EXPENSE (380) provision £000 - (2) (2) - (2) - - (2) - (2) - - - - TOTAL COMPRENSIVE INCOME FOR THE YEAR 198 (2) As restated Transition to UK GAAP £000 9,815 (7,694) 2,121 (1,116) 1,005 735 (407) 1,333 (757) 576 (158) 44 (266) (380) 196 IFRS £000 - 66 66 1,069 1,135 - - 1,135 (5) 1,130 - - - - 1,130 Restated under IFRS £000 9,815 (7,628) 2,187 (47) 2,140 735 (407) 2,468 (762) 1,706 (158) 44 (266) (380) 1,326 76 Instem Life Science Systems plc Annual Report, 2010 NOTES TO THE FINANCIAL STATEMENTS 30 g) Reconciliation of consolidated statement of ﬁ nancial position for the 53 weeks ended 31 December 2009 As previously reported UK Adjustments As restated UK GAAP £000 £000 GAAP £000 ASSETS NON-CURRENT ASSETS Intangible assets 2,510 Property, plant and equipment Deferred tax 176 - TOTAL NON-CURRENT ASSETS 2,686 CURRENT ASSETS Inventories Trade and other receivables 28 1,866 - - - - 34 (34) Cash and cash equivalents 11,479 (8,763) Current taxation Deferred tax TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Current taxation - 72 13,445 16,131 6,287 300 - - (8,763) (8,763) 23 - Financial liabilities 11,312 (8,763) Deferred tax 27 - TOTAL CURRENT LIABILITIES 17,926 (8,740) NON-CURRENT LIABILITIES Trade and other payables Retirement benefit obligations TOTAL NON-CURRENT LIABILITIES 29 779 808 - - - 2,510 176 - 2,686 62 1,832 2,716 - 72 4,682 7,368 6,310 300 2,549 27 9,186 29 779 808 TOTAL LIABILITIES 18,734 (8,740) 9,994 EQUITY Share capital 1 Share premium 4,866 Translation reserve - Retained earnings (7,470) EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT (2,603) - - - (23) (23) 1 4,866 - (7,493) (2,626) Effect of transition to IFRS £000 3,580 (49) 297 3,828 - - - (72) (72) 3,756 - - 3 (27) (24) - 302 302 278 - - 359 3,119 3,478 Restated under IFRS £000 6,090 127 297 6,514 62 1,832 2,716 - - 4,610 11,124 6,310 300 2,552 - 9,162 29 1,081 1,110 10,272 1 4,866 359 (4,374) 852 TOTAL EQUITY AND LIABILITIES 16,131 (8,763) 7,368 3,756 11,124 The equity structure above represents that of the trading subsidiary Group prior to the reconstruction. Since the consolidated ﬁ nancial statements have been prepared using the pooling of interests basis, the share capital and related share premium at acquisition have deemed to have been in existence throughout the periods presented. This has created a difference in the equity capital structure of the Group shown in the comparative period to that presented above. Instem Life Science Systems plc Annual Report, 2010 77 Company Statement of Comprehensive Income 52 week period ended 31 Note December 2010 REVENUE 1 Operating expenses LOSS FROM OPERATIONS BEFORE AMORTISATION Amortisation of intangibles LOSS FROM OPERATIONS Finance income Finance costs 3 4 LOSS BEFORE TAXATION Income tax expense LOSS FOR THE FINANCIAL YEAR OTHER COMPREHENSIVE INCOME/(EXPENSE) Actuarial gain/(loss) on retirement benefit obligations Deferred tax on actuarial gain/(loss) Currency translation differences on foreign currency net investment OTHER COMPREHENSIVE INCOME/(EXPENSE) TOTAL COMPREHENSIVE EXPENSE FOR THE YEAR (LOSS)/PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY TOTAL COMPREHENSIVE (EXPENSE)/INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY This page does not form part of the statutory ﬁ nancial statements. £000 - (344) (344) - (344) 6 (3) (341) - (341) - - - - (341) (341) (341) 78 Instem Life Science Systems plc Annual Report, 2010 NOTES Instem Life Science Systems plc Annual Report, 2010 79 NOTES 80 Instem Life Science Systems plc Annual Report, 2010 Directors and Advisers DIRECTORS D Gare (Non-executive Chairman) MF McGoun (Independent Non-executive) DM Sherwin (Non-executive) PJ Reason J McLauchlan SECRETARY J McLauchlan REGISTERED OFFICE Diamond Way Stone Business Park Stone Staffordshire ST15 0SD Tel: +44 1785 825600 Fax: +44 1785 825633 www.instem.com Company No: 07148099 AUDITORS Baker Tilly UK Audit LLP Chartered Accountants 3 Hardman Street Manchester M3 3HF SOLICITORS DWF LLP 1 Scott Place, 2 Hardman Street, Manchester M3 3AA BANKERS Nat West Bank 1 Spinningfields Square Manchester M2 3AP NOMINATED ADVISER AND BROKER Brewin Dolphin 12 Smithfield Street, London EC1A 9BD REGISTRARS Computershare The Pavilions, Bridgwater Road, Bristol BS13 8AE FINANCIAL PUBLIC RELATIONS Threadneedle Communications 3rd Floor, Aldermary House 10-15 Queen Street London EC4N 1TX Our clients include these fine organisations... UK Global Headquarters - UK & European Operations Diamond Way Stone Business Park Stone Staffordshire, ST15 0SD United Kingdom Tel: +44 (0) 1785 825600 USA North American Headquarters Eight Tower Bridge 161 Washington Street Suite 1550, 15th Floor Conshohocken, PA 19428 United States Tel: (610) 941 0990 China Asia-Pacific Headquarters Room 205, Building 16 88 Darwin Road Zhangjiang High-Tech Park, Pudong District Shanghai China, 201203 Tel: +86 (0) 21 5131 2080 The Company employs over 110 people in six offices in the US, UK, and China; with additional resource locations in India and a full service distributor in Japan. e-mail investors@instem.com instem.com

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