As filed with the Securities and Exchange Commission on May 20, 2004
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FINANCIAL PERIOD ENDED DECEMBER 31, 2003
Commission file number 333-11268
AVECIA GROUP plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
P.O. Box 42
Hexagon House
Blackley, Manchester
M9 8ZS
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
| Name of each exchange | |
| Title of each class | on which registered |
| 11% Senior Notes due 2009 16% Pay-in-Kind Preference Shares due 2010 | Luxembourg Stock Exchange None |
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common
stock as of the close of the period covered by the annual report.
Ordinary shares of £1.00 each 329,100,001 (as at December 31, 2003)
Preference shares of $1.00 each 2,591,298 (as at December 31, 2003)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes 
No 
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 Item 18
Registered number: 3768265
Avecia Group plc
20-F
Year ended December 31, 2003
Registered number: 3768265 | 1 |
Avecia Group plc
20-F
Year ended December 31, 2003
Introduction |
Avecia Group plc, formerly known as Zeneca Specialties, is the successor company to the specialty chemicals business of AstraZeneca plc. See Item 4 ‘Information on the company’ for a description of the acquisition transaction.
In this report references to the ‘company’, ‘we’, ‘us’, ‘Avecia’, ‘Avecia Group’ or the ‘group’ are to Avecia Group plc, either alone or together with its consolidated subsidiaries, as the context requires. Avecia Group plc is a wholly owned subsidiary of Avecia Holdings plc.
In order to utilize the ‘Safe Harbour’ provisions of the United States Private Securities Litigation Reform Act of 1995, Avecia is providing the following cautionary statement. This 2003 Form 20-F contains certain forward-looking statements with respect to the financial condition, results of operations and business of Avecia and certain of the plans and objectives of Avecia with respect to these items. In particular, certain statements contained in the 2003 Form 20-F, including the statements in ‘Item 4 Information on the company’ with regard to strategic vision, management objectives, estimated filing and launch dates for products in development, patent protection, trends in market shares, trends in competitive position and product volumes and environmental obligations, the statements in ‘Item 5 Operating and financial review and prospects’ with regard to trends in results of operations, margins, overall market trends, debt levels, risk management, market risk and exchange rates, the statements in ‘Item 8 Financial information’ with regard to the likely outcome and financial impact on Avecia of litigation and other proceedings and the statements in ‘Item 11 Quantitative and qualitative disclosures about market risk’ with regard to risk management, market risk and exchange rates are forward-looking in nature. By their nature, forward-looking statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors are highlighted below:
| • | Avecia’s high degree of leverage and significant debt service obligations as well as future cash flow and earnings; |
| • | Avecia’s sales growth across its principal businesses, its strategy for improving margins, and increasing manufacturing capacity and capability. |
| • | the failure of market conditions in the major industry sectors and regions in which Avecia operates; |
| • | the failure of products to perform as anticipated, including the successful development of the market for DNA Medicines and the continued development of an outsourcing market in pharmaceutical intermediates; |
| • | the highly competitive nature of diverse specialty chemical markets and competition from generic manufacturers; |
| • | Avecia’s technological and manufacturing assets and the ability to utilize them to further increase sales and the profitability of the businesses; |
| • | Avecia’s ability to retain existing and obtain new customers; |
| • | Avecia’s ability to generate future growth through acquisitions; |
| • | risks related to environmental costs, liabilities or claims; |
| • | Avecia’s strategy to gain market share in the pharmaceutical intermediates outsourcing market; |
| • | Avecia’s strategy to improve the sales mix in the businesses; |
| • | exchange rate fluctuations; |
| • | the risk that research and development will not yield new products that achieve commercial success; |
| • | price controls and price reductions; |
| • | risk of loss or expiration of patents or trademarks; |
| • | difficulties of obtaining and maintaining regulatory approvals for products and operations; and |
| • | risk of substantial product liability or other claims. |
Registered number: 3768265 | 2 |
Avecia Group plc
20-F
Year ended December 31, 2003
Avecia and its management undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Registered number: 3768265 | 3 |
Avecia Group plc
20-F
Year ended December 31, 2003
Part I
Item 1 Identity of directors, senior management and advisors |
Not applicable.
Not applicable.
Selected financial data
Avecia Group plc acquired the shares and assets comprising the business of Zeneca Specialties on June 30, 1999. Accordingly, the selected historical combined financial information through the period ended June 30, 1999 (prior to the date of the acquisition) represents Zeneca Specialties’ historical financials. After June 30, 1999 the selected historical consolidated financial information represents the financial results of Avecia Group plc subsequent to the date of the acquisition. The acquisition of Zeneca Specialties was accounted for as a purchase and, accordingly, the assets and liabilities of Avecia Group plc (successor to Zeneca Specialties) were recorded at their fair values at that date. The fair value exercise resulted in a net reduction in the carrying value of the acquired net assets of Zeneca Specialties. As a result of the transaction the consolidated financial statements for the periods after the acquisition are presented on a different cost basis to that of the combined financial statements for the period before acquisition and, therefore, are not comparable.
The selected historical consolidated financial information presented below as at December 31, 2003, 2002, 2001, 2000 and 1999 and for the financial years ended December 31, 2003, 2002, 2001 and 2000 and the 6 month financial period ended December 31, 1999, has been derived from the audited historical consolidated financial statements of Avecia Group plc. The selected historical combined financial information presented below as at June 30, 1999 and for the 6 month financial period ended June 30, 1999 have been derived from the audited historical combined financial statements of Zeneca Specialties.
Avecia Group plc and Zeneca Specialties prepare financial statements in accordance with UK GAAP, which differs in certain significant respects from US GAAP. A description of the significant differences between UK and US GAAP applicable to Avecia and Zeneca Specialties and a reconciliation of profit after taxation (or net income) and shareholders’ funds (or net assets) are included within note 34 to the financial statements. Additional disclosures required by US GAAP are set out in the financial statements.
Registered number: 3768265 | 4 |
Avecia Group plc
20-F
Year ended December 31, 2003
| Avecia Group plc Consolidated (a) | Zeneca Specialties Combined | ||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Proforma year Ended December 31, | 6 months Ended December 31, | 6 months Ended June 30, | |||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | 1999 | 1999 | |||||||||||
£ million | £ million | £ million | £ million | £ million | £ million | £ million | |||||||||||
(Restated) | (Restated) | ||||||||||||||||
Profit and loss account information | |||||||||||||||||
| Amounts in accordance with UK GAAP | |||||||||||||||||
| • | Turnover from continuing operations | 361.4 | 417.2 | 431.0 | 399.7 | 388.7 | 215.2 | 173.5 | |||||||||
| • | Turnover from discontinued operations (b) | 123.8 | 158.5 | 372.6 | 389.9 | 361.7 | 177.4 | 184.3 | |||||||||
| • | Total group turnover | 485.2 | 575.7 | 803.6 | 789.6 | 750.4 | 392.6 | 357.8 | |||||||||
| • | Operating profit / (loss) from continuing operations | (102.5 | ) | (28.5 | ) | (4.0 | ) | 14.4 | 26.6 | 15.2 | 11.4 | ||||||
| • | Operating profit from discontinued operations (b) | 21.4 | 11.3 | 52.4 | 60.4 | 51.6 | 22.4 | 29.2 | |||||||||
| • | Total group operating profit / (loss) | (81.1 | ) | (17.2 | ) | 48.4 | 74.8 | 78.2 | 37.6 | 40.6 | |||||||
| • | (Loss)/profit after taxation (c) | (94.5 | ) | (42.6 | ) | (38.3 | ) | (35.5 | ) | 30.5 | 0.6 | 29.9 | |||||
| • | (Loss)/profit after taxation and minority interest | (94.5 | ) | (42.6 | ) | (38.3 | ) | (35.5 | ) | 30.4 | 0.5 | 29.9 | |||||
| Amounts in accordance with US GAAP | |||||||||||||||||
| • | Turnover from continuing operations | 361.4 | 418.4 | 440.7 | 551.5 | 539.7 | 284.8 | 254.9 | |||||||||
| • | Turnover from discontinued operations (b) | 123.8 | 158.5 | 372.6 | 225.0 | 210.7 | 107.8 | 102.9 | |||||||||
| • | Total group turnover | 485.2 | 576.9 | 813.3 | 776.5 | 750.4 | 392.6 | 357.8 | |||||||||
| • | Operating profit/(loss) from continuing operations | (106.9 | ) | 8.9 | (13.8 | ) | 18.2 | (1.1 | ) | (22.4 | ) | 21.3 | |||||
| • | Operating profit/(loss) from discontinued operations (b) | 22.1 | — | 51.7 | 31.6 | 18.2 | 6.5 | 11.7 | |||||||||
| • | Total group operating profit | (84.8 | ) | 8.9 | 37.9 | 49.8 | 17.1 | (15.9 | ) | 33.0 | |||||||
| • | (Loss)/profit after taxation | (103.4 | ) | (20.4 | ) | (53.8 | ) | (54.4 | ) | (21.4 | ) | (45.3 | ) | 23.9 | |||
| • | (Loss)/profit after taxation and minority interest | (103.4 | ) | (20.4 | ) | (53.8 | ) | (54.4 | ) | (21.5 | ) | (45.4 | ) | 23.9 | |||
| • | SFAS No.142 adoption | — | — | (41.8 | ) | (41.4 | ) | (19.9 | ) | (19.9 | ) | — | |||||
| • | (Loss)/profit after taxation and minority interest had SFAS No. 142 been adopted | (103.4 | ) | (20.4 | ) | (12.0 | ) | (13.0 | ) | (1.6 | ) | (25.5 | ) | 23.9 | |||
Registered number: 3768265 | 5 |
Avecia Group plc
20-F
Year ended December 31, 2003
| Avecia Group plc Consolidated (a) | Zeneca Specialties Combined | ||||||||||||||||
Year Ended December 31, 2003 | Year Ended December 31, 2002 | Year Ended December 31, 2001 | Year ended December 31, 2000 | Proforma year ended December 31, 1999 | 6 months ended December 31, 1999 | 6 months ended June 30, 1999 | |||||||||||
£ million | £ million | £ million | £ million | £ million | £ million | £ million | |||||||||||
Other financial information | |||||||||||||||||
| Amounts in accordance with UK GAAP | |||||||||||||||||
| • | Depreciation amortization and impairment | 136.2 | 102.8 | 89.1 | 79.1 | 58.6 | 37.8 | 20.8 | |||||||||
| • | Expenditure on tangible and intangible fixed assets and fixed asset investments | 50.0 | 46.0 | 61.2 | 60.3 | 61.5 | 28.7 | 32.8 | |||||||||
| Amounts in accordance with US GAAP | |||||||||||||||||
| • | Depreciation , amortization and impairment | 131.9 | 124.3 | 97.2 | 85.5 | 67.2 | 43.2 | 24.0 | |||||||||
| • | Expenditure on tangible and intangible fixed assets and fixed asset investments | 50.0 | 46.0 | 61.2 | 60.3 | 61.5 | 28.7 | 32.8 | |||||||||
Registered number: 3768265 | 6 |
Avecia Group plc
20-F
Year ended December 31, 2003
| Avecia Group plc Consolidated (a) | Zeneca Specialties Combined | ||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | Year ended December 31, | Proforma year ended December 31, | 6 months ended December 31, | 6 months ended June 30, | |||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | 1999 | 1999 | |||||||||||
£ million | £ million Restated | £ million Restated | £ million | £ million | £ million | £ million | |||||||||||
Balance Sheet information (at end of period) | |||||||||||||||||
| Amounts in accordance with UK GAAP | |||||||||||||||||
| • | Net Current Assets | 10.2 | 106.5 | 154.7 | 156.3 | — | 189.1 | 168.7 | |||||||||
| • | Total assets | 745.4 | 920.4 | 1,250.8 | 1,338.3 | — | 1,314.8 | 611.7 | |||||||||
| • | Net assets | 18.7 | 138.5 | 273.5 | 314.8 | — | 346.1 | 493.9 | |||||||||
| • | Ordinary Share Capital | 330.6 | 330.5 | 329.1 | 329.1 | — | 329.1 | — | |||||||||
| • | Number of Ordinary Shares outstanding (million) | 70.9 | 70.9 | 70.9 | 70.9 | — | 70.9 | — | |||||||||
| Amounts in accordance with US GAAP | |||||||||||||||||
| • | Net Current Assets | (23.3 | ) | 73.3 | 114.4 | 120.7 | — | 189.1 | 168.7 | ||||||||
| • | Total assets | 839.3 | 1,016.3 | 1,359.2 | 1,461.0 | — | 1,457.4 | 774.6 | |||||||||
| • | Net assets | 104.8 | 251.9 | 315.6 | 373.7 | — | 445.7 | 619.0 | |||||||||
| • | Ordinary Share Capital | 330.6 | 330.5 | 329.1 | 329.1 | — | 329.1 | — | |||||||||
| • | Number of Ordinary Shares outstanding (million) | 70.9 | 70.9 | 70.9 | 70.9 | — | 70.9 | — | |||||||||
Cash flow data | |||||||||||||||||
| Amounts in accordance with UK GAAP | |||||||||||||||||
| • | Net cash inflow from operating activities | 47.3 | 107.8 | 120.5 | 147.2 | 133.6 | 109.6 | 24.0 | |||||||||
| • | Net cash inflow/ (outflow) from investing activities | 76.6 | 196.2 | (31.1 | ) | (100.8 | ) | (1,156.7 | ) | (1,149.9 | ) | (6.8 | ) | ||||
| • | Net cash inflow/ (outflow) from financing | (40.6 | ) | (201.2 | ) | (20.3 | ) | (12.5 | ) | 1,155.2 | 1,130.6 | 24.6 | |||||
| Amounts in accordance with US GAAP | |||||||||||||||||
| • | Net cash provided by operating activities | 3.2 | 52.3 | 42.4 | 66.1 | 113.9 | 88.0 | 25.9 | |||||||||
| • | Net cash (used in) investing activities | 76.6 | 196.2 | (31.1 | ) | (100.8 | ) | (1,156.7 | ) | (1,149.9 | ) | (6.8 | ) | ||||
| • | Net cash provided by/ (used in) financing activities | (40.6 | ) | (201.2 | ) | (20.3 | ) | (12.5 | ) | 1,155.2 | 1,130.6 | 24.6 | |||||
| (a) | As discussed in note 1 to the consolidated financial statements, Avecia Group plc acquired Zeneca Specialties on June 30, 1999 in a business combination accounted for as a purchase. As a result of this transaction the consolidated financial statements for the period after the acquisition are presented on a different cost basis than that of the combined financial statements for the periods before acquisition and, therefore, are not comparable. |
| (b) | Discontinued activities comprise the Specialty Products businesses: Metal Extraction Products and Intermediates & Stabilisers which were sold on July 31, 2003, Additives which was sold on January 31, 2004 and the Biocides business, the sale of which was completed on April 2, 2004. This is discussed further in ‘Item 5 Operating and financial review and prospects’ |
| (c) | Financial Reporting Standard 19 — ‘Deferred Tax’ was adopted for the year ended December 31, 2001. Financial information for years prior to 2001, has not been retrospectively restated as this change in accounting policy has not had a material impact on the financial statements. |
| (d) | Financial Reporting Standard 17 ‘Retirement Benefits’ has been adopted for the year ended 31 December 2003. The financial information for 2002 and 2001 has been adjusted retrospectively. An adjustment has not been made for years prior to 2001 as the information was not readily available. |
Registered number: 3768265 | 7 |
Avecia Group plc
20-F
Year ended December 31, 2003
Exchange rate data |
The financial statements of Avecia included in this annual report are presented in pounds sterling. In this document, references to ‘US $’, ‘US dollars’ or ‘$’ are United States dollars, and references to ‘pounds sterling’, ‘£’, ‘pence’ or ‘p’ are UK currency.
The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York expressed in US dollars per £1.00.
The average rate means the average of the exchange rates on the last day of each month during a year.
| Financial period ended | Exchange rates | ||||||||||||
| Rate at year end | Highest rate | Lowest rate | Average rate | ||||||||||
| 1999 | 1.62 | 1.68 | 1.55 | 1.62 | |||||||||
| 2000 | 1.50 | 1.65 | 1.40 | 1.52 | |||||||||
| 2001 | 1.45 | 1.50 | 1.37 | 1.44 | |||||||||
| 2002 | 1.61 | 1.61 | 1.41 | 1.51 | |||||||||
| 2003 | 1.78 | 1.78 | 1.55 | 1.64 | |||||||||
Month ended | Highest rate | Lowest rate | ||||||||
| November 2003 | 1.72 | 1.67 | ||||||||
| December 2003 | 1.78 | 1.72 | ||||||||
| January 2004 | 1.85 | 1.79 | ||||||||
| February 2004 | 1.90 | 1.82 | ||||||||
| March 2004 | 1.87 | 1.79 | ||||||||
| April 2004 | 1.86 | 1.77 | ||||||||
| On April 30, 2004 the Noon Buying Rate was $1.7744 per pound. |
Risk factors |
Financing – Failure to abide by the terms of our senior secured credit facility could lead to additional financing costs or withdrawal of the facility. |
Under the terms of our senior secured credit facility we are required to ensure that our financial performance stays in compliance with specified pre-agreed financial ratio limits, and we are prohibited from carrying out certain types of finance transactions. Failure to keep our performance within these ratios or meet other terms of the facility, and subsequent failure to rectify such a breach could lead to additional financing charges in the form of penalties or interest, or withdrawal of part of the facilities, or at worst withdrawal of all the facilities, and a demand for immediate repayment of amounts outstanding. In this event we would be unable to assure the ongoing operation of our business and meet our other financial commitments.
Registered number: 3768265 | 8 |
Avecia Group plc
20-F
Year ended December 31, 2003
Customer concentration– Our profitability will be hindered if we are unable to continue to generate repeat business. |
Many of our products are sold to a small number of large industrial and pharmaceutical enterprises. Some of these customers, particularly in Electronic Materials and Fine Chemicals, are not bound by long-term contracts. As a result, we cannot assure you that we will continue to generate repeat business for such products. In Electronic Materials in particular, over 80% of our sales are made to the four leading printer manufacturers. Any significant adverse variation in our relationship and/or sales to any one of these customers would have a material adverse effect on our results of operations and on our stated strategy of growing the business and increasing our profitability. In Fine Chemicals, our current growth has been supported by a small number of contracts. Continued and future growth will depend on our ability to maintain these contracts with existing customers and to obtain new contracts with existing and new clients, and the success or otherwise of our customer products for which we supply materials or intermediates.
Quality – We may lose business or be exposed to customers’ claims if we do not make product to specification or adhere to agreed processes. |
Many of our Fine Chemicals products are made to the customers’ technical specifications. Failure to make to these specifications could lead to customers terminating their manufacturing and supply agreements with us, and potentially making claims against us for damages caused. In addition some of these products are made following rigorous pre-defined processes, which may be subject to audit by customers or registration authorities. Failure to meet the prescribed quality standards could lead to termination of our manufacture of these products with consequent loss of revenues.
Performance – We may be unable to produce products in a timely fashion. This could result in the loss of important contracts, damage our relationship with our clients, and adversely impact our sales, profitability, cash flow and margins. |
Our Fine Chemicals business depends on our ability to develop manufacturing processes and products which meet customers’ specifications and to deliver them in a timely fashion. These products involve complex chemical processes and may require us to expand or modify our manufacturing capabilities. It is not always possible to meet clients’ demands. If we fail to meet their demands, we may be liable for liquidated damages and other penalties, unless customers choose to waive these contractual provisions. We cannot assure you that we will not become subject to such penalties.
Business strategy – The areas we have selected for growth may not prove successful in which case our financial performance and results of operations would be adversely impacted. |
We have made investments in research and development as well as in strategic alliances and acquisitions based on current trends in the industries in which we operate. If some of these trends were to change or if some of our strategic alliances prove unsuccessful, there could be a material adverse effect on our business, results of operations, financial condition or prospects. For example, we anticipate continued outsourcing in pharmaceutical intermediates, a continued development of, and demand for, DNA and microbial medicines, growth in new Electronic Materials markets including inkjet printing, electrophotography and flat panel displays, growth in demand for water-based resins, and growth in biocide products for personal hygiene and home consumables. Consequently, we have made significant investments in research, development and technology processes, and manufacturing capability. See Item 4 — Information on the company.
Liability – We may be liable for damages based on product liability or other claims. |
Because many of our products provide critical performance attributes to our customers’ products, the sale of these products involves the risk of product liability claims. A successful product liability claim or series of claims against us in excess of our insurance coverage for payments for which we are not otherwise indemnified could have a material adverse effect on our financial condition and results of operations.
Registered number: 3768265 | 9 |
Avecia Group plc
20-F
Year ended December 31, 2003
In addition, we are involved from time to time in various other claims and law suits incidental to the ordinary course of the business, such as contract disputes, personal injury claims and workers’ compensation claims. Although we believe our insurance coverage is adequate, we could, however, be required to pay a material amount if a claim is made against us that is not covered by insurance or for which we are not otherwise indemnified. Any such claim could have a material adverse effect on our financial condition or results of operations.
Technological innovation– Our profitability and cash flow could be hampered if we fail to keep up with the technological innovation in the speciality chemicals business. This could adversely impact our sales, profitability, cash flow and margins. |
All of our businesses experience periodic technological change and ongoing product improvements and obsolescence of existing products. Manufacturers periodically introduce new generations of products or require new technological capacity to develop customized products. Our future growth will depend on our continued ability to gauge the direction of the commercial and technological progress in all key markets and upon our ability to successfully develop, manufacture and market products in such changing markets. We will have to continue to identify, develop and market innovative products on a timely basis to replace existing products in order to maintain our profit margins and our competitive position.
In Electronic Materials, for example, our future growth will depend in large part on our ability to successfully produce and commercialize the next generation of ink jet printing materials. Also, our growth in this business will depend on our successful development of Displays products, based on organic light emitting materials technology and Electrophotography products, both of which are new markets.
Our future growth will depend on our ability to meet the technological and production requirements involved in producing large quantities of high-purity chemicals and complex chemical intermediates. We intend to devote significant resources to the development of new technologically advanced products and manufacturing processes and intend to continue to devote a substantial amount of spending to the research, development and technology process functions of our businesses. However, we cannot assure you that we will be successful in developing new products and/or technology or that such products will be accepted by our customers. If we fail to keep pace with the evolving technological innovations in our markets, then our sales, profitability and cash flow will suffer.
Environmental regulation– We are exposed to the risk that our business could be adversely and materially affected by environmental compliance expenditures. |
The specialty chemicals business is highly regulated in many countries. A number of increasingly stringent regulations govern the manufacturing processes used, and our waste and emissions disposal treatment in all of the jurisdictions in which we do business will continue to require material ongoing costs. Some of our manufacturing sites have an extended history of industrial chemical processes, including historical waste disposal on site. Soil, groundwater, surface water and sedimentary contamination has occurred in the past at some of our sites and might occur or be discovered at other sites in the future.
An Environmental Deed of Covenant entered into by companies in the AstraZeneca group, notably Zeneca Limited (as a principal seller of the business to the group) and AstraZeneca plc (as guarantor), on the group’s acquisition of AstraZeneca’s specialty chemicals business, provides certain indemnities to and by group companies for environmental liabilities and costs arising from events or circumstances existing prior to the acquisition. These include liabilities relating to or arising out of pre-acquisition contamination at sites which were transferred to group companies in 1999 but which have subsequently been disposed of and historic liabilities arising on any sites previously owned by companies acquired by the group in the course of the acquisition transaction but where the sites in question were not themselves part of the acquisition transaction. The liability of the AstraZeneca group to indemnify group companies in respect of these matters is, subject to certain exceptions, subject to maximum caps of liability, de minimis levels of liability, time limits for claims to be made and/or contributions by group companies. Where time limits or caps on liability apply, on the expiry of the relevant time limit or if the environmental liabilities and costs exceed the relevant cap, the environmental liabilities and costs, or excess thereof, would be the responsibility of group companies.
Registered number: 3768265 | 10 |
Avecia Group plc
20-F
Year ended December 31, 2003
On the disposal of certain businesses out of the group, where purchasers have assumed liabilities which may be subject to indemnity from the AstraZeneca group under the Environmental Deed or which may otherwise be the responsibility of group companies under the deed in relation to the sites or businesses being disposed of, the benefits and obligations under the Environmental Deed have, insofar as they relate to the sold sites or businesses, generally been assigned to the purchasers subject to appropriate limitations on the maximum amounts which the purchasers may claim under the Environmental Deed. Notably, on the disposal of the Stahl business in January 2002, the ownership of the St Clair du Rhone site, France, was transferred to the purchaser of that business and on the disposal of the Metal Extraction Products and Intermediates and Stabilizers businesses in July 2003 the ownership of the Mount Pleasant site, Tennessee, was transferred to the purchaser of those businesses. There is, or is thought to be, extensive contamination at these sites arising from the period prior to their acquisition by the group in June 1999. £65 million of the total cap of £325 million under the Environmental Deed was assigned to the purchaser of the Stahl business in connection with that disposal and £36.6 million of the cap was assigned to the purchaser of the Metal Extraction Products and Intermediates and Stabilizers businesses in connection with that disposal.
Management believes that the reserves it has established for environmental matters, together with the indemnity provisions of the Environmental Deed, will be adequate to meet our currently known and anticipated potential environmental liabilities and claims against us. However, we may be exposed to liability, and our financial results may be adversely affected, to the extent that:
| (a) | AstraZeneca does not fulfill its obligations under the Environmental Deed with respect to environmental liabilities relating to our operations and facilities prior to June 1999; |
| (b) | Environmental liabilities relating to our operations and facilities exceed AstraZeneca’s indemnity under the Environmental Deed or arise after the expiry of the relevant time limits for indemnity; |
| (c) | Our environmental liabilities exceed the amounts that we have reserved with respect to them; and |
| (d) | Other contingent liabilities related to our sites arise. |
Currency fluctuations– We are exposed to the risk of currency fluctuations in many countries which may adversely impact our turnover and operating margins. |
Our operations are conducted through subsidiaries in 16 countries. The results of the operations and the financial position of these subsidiaries are reported in the relevant foreign currencies or the appropriate functional currency and then translated into pounds sterling at the applicable exchange rates for inclusion in our combined financial statements. The exchange rates between these currencies and the pound sterling in recent years have in the past and may in the future fluctuate substantially. Because we generate a significant percentage of our revenues and a substantially lower percentage of our operating expenses in currencies other than the pound sterling, fluctuations in the value of the pound sterling against other currencies have had in the past, and may have in the future, a material effect on our turnover and operating margins.
In addition, because our financial statements are stated in pounds sterling, the translation effect of such fluctuations have had in the past, and may have in the future, a material effect on our results of operations and financial position and may significantly affect the comparability of our results between financial periods.
Proprietary technologies– We may not be able to adequately protect our intellectual proprietary rights. |
Proprietary rights are important to our success and our competitive position. We establish and protect the proprietary rights and technologies used in our products and processes by the use of patents, trade secrets, copyrights and trademarks. We also utilize non-disclosure and invention assignment agreements.
The expiration of a patent can result in intense competition, particularly from generic producers, with consequent erosion of profit margins.
Our actions to protect our proprietary rights may be insufficient to prevent others from developing similar products to ours. In addition, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the European Union and the United States.
Registered number: 3768265 | 11 |
Avecia Group plc
20-F
Year ended December 31, 2003
Competitive product markets and new generic product competitors– We may face price pressure in the markets we operate in which would reduce our turnover and operating margins. |
The markets for some of our products are highly competitive. We are exposed to the competitive characteristics of several different geographic markets and industries. In addition, we believe that rapid identification of new product applications and the ability to supply commercial quantities of products that enable such applications are important competitive factors. Some of our competitors have greater financial, technical and marketing resources than we do. As the markets for our products expand, we expect that additional competition will emerge and that existing competitors may commit more resources to the markets in which we participate. In a few cases, as the patent protection for our products has expired, new generic competitors entered the market and generic competition resulted in lower prices for those products. We cannot assure you that we will be able to compete effectively in these various areas in the future. See Item 4 Information on the company.
Our principal competitors vary from business to business and range from large international companies such as BASF, Bayer, Ciba, Clariant, Lonza, and Rohm & Haas to a large number of smaller regional companies of varying sizes.
Litigation – We may be exposed to litigation based on intellectual property infringements which could adversely affect our profitability. |
In the past we have received communications asserting that our products or their applications infringe on a third party’s proprietary rights. Currently, there is no pending litigation against us regarding any intellectual property claim but we cannot assure that there will not be future claims. Such claims, with or without merit, could subject us to costly litigation and divert our technical and management personnel from their regular responsibilities. Furthermore, successful claims could suspend the manufacture of products using the contested invention, and have a material adverse effect on our business, financial condition and results of operations.
International operations – As a global business, we are exposed to local business risks in several different countries which could have a material adverse effect on our financial condition or results of operations.
We manufacture and distribute our products in many countries around the world. We are confronted with different legal and regulatory requirements in many jurisdictions. These include:
| • | tariffs and trade barriers; |
| • | requirements relating to withholding taxes on remittances and other payments by subsidiaries; and |
| • | different regimes controlling the protection of our intellectual property. |
Our international operations also expose us to different local business risks and challenges. For example:
| • | we are faced with potential difficulties in staffing and managing local operations; and |
| • | we have to design local solutions to manage credit risks of local customers and distributors. |
Our expansion in emerging markets requires us to respond to rapid changes in market conditions in these countries. Therefore, our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We cannot assure you that we will continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business.
Several countries in which we operate have sophisticated tax regimes. Our operations and the significant reorganizations of our business that have taken place in recent years have added to the complexity of our tax affairs.
In addition, some of our major subsidiaries have not been subject to a tax audit for a number of years. As a result, changes in tax regulations, policy or enforcement in different countries could adversely affect our overall financial condition.
Registered number: 3768265 | 12 |
Avecia Group plc
20-F
Year ended December 31, 2003
Item 4 Information on the company |
History and development of the company |
Avecia Group plc, a wholly owned subsidiary of Avecia Holdings plc, is a group of focused specialty chemicals businesses. We develop, manufacture and sell high quality, technologically advanced, value-added chemical products to customers in a wide range of industries, and provide process development and manufacturing services to healthcare customers.
Avecia Group plc was incorporated as Iliad on May 6, 1999 and was re-registered as a public limited company, changing its name to ZSC Specialty Chemicals PLC on June 4, 1999 and finally to Avecia Group plc on July 1, 1999. On June 30, 1999, Avecia Group plc acquired the specialty chemicals business of AstraZeneca plc, formerly known as Zeneca Specialties, and became the successor business to the Zeneca Specialties business.
The company is domiciled in the United Kingdom and its registered office is:
Hexagon House
Blackley
Manchester M9 8ZS
United Kingdom
Telephone (00 44) 161 740 1460
From December 31, 1999 to December 31, 2003 the company has continued to operate its business within the same major business segments and end markets except for the disposal of the Stahl segment in 2002. However the Specialty Products businesses are now classified as discontinued: Metal Extraction Products and Intermediates and Stabilizers were sold on July 31, 2003, Additives was sold on January 31, 2004 and Biocides was sold on April 2, 2004. We made two significant acquisitions during 2000 and in January 2002 we sold our Stahl business for €378.7 million as described in Item 5 — Operating and Financial Review and Prospects. These are discussed in full in the business overviews below.
Cash flows in respect of capital expenditures and disposals for the last three calendar years are as follows:
| Avecia Group plc Consolidated | ||||||||||
| Year ended | Year ended | Year ended | ||||||||
| December 31, | December 31, | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
| Purchase of tangible fixed assets | (49.9 | ) | (42.9 | ) | (59.9) | |||||
| Purchase of intangible fixed assets | (0.3 | ) | (0.3 | ) | (2.7) | |||||
| Sales of trade investments | — | — | — | |||||||
| Sales of plant and machinery | 0.6 | 0.1 | 0.5 | |||||||
| Sale of Novacote business | — | — | 33.2 | |||||||
| Sale of Stahl business (net) | 20.3 | 201.4 | — | |||||||
| Sale of Metal Extraction Products and Intermediates and Stabilizers businesses | 58.4 | — | — | |||||||
In July 2003 the group completed the disposal of the Metal Extraction Products and Intermediates and Stabilizers businesses to Cytec Industries Inc. The group proceeds arising on the disposal were USD 81.83 million (£58.6 million) which was received on July 31, 2003. This resulted in the repayment of £52.3 million of Term Debt as required by the bank facilities agreement.
In January 2002 we completed the disposal of the Stahl business to Luxembourg 101 SA and its affiliates. The gross proceeds arising on the transaction were €378.7 million (£234.9 million), of which €346.8 million (£215.1 million) was received as cash in January 2002, with the remainder received in January 2003. The sale of the Stahl business resulted in the repayment of £187.3 million of term debt in 2002, as required by the bank facilities agreement.
Registered number: 3768265 | 13 |
Avecia Group plc
20-F
Year ended December 31, 2003
In 2004, we have budgeted that the purchase of tangible fixed assets will decrease by some £22.0 million, mainly due to the completion in 2003 of the large scale biologics manufacturing facility (ABC 5000) in the UK. The total expenditure will be funded from internal cash resources.
Business overview |
Avecia is a global group of focused specialty chemicals businesses. We provide a comprehensive range of process development and manufacturing services to a high standard of quality assurance, and we develop, manufacture and sell high quality, technologically advanced, value-added chemical products to customers in a wide range of industries.
Avecia operates through four main business segments and 13 strategic business units. Its businesses are linked by core competencies in organic chemistry, polymer and biological science and process technology. These businesses are supported by a network of 12 manufacturing facilities located in 6 countries.
The following table sets forth Avecia’s principal businesses and end markets:
Business | Strategic Business Units | Principal applications and end markets | ||
| (1) Fine Chemicals | • Pharmaceutical intermediates • Biotechnology • Agrochemical intermediates • Intermediates and stabilizers • Special Drug Products | Complex custom chemical intermediates, and active ingredients for pharmaceutical and agrochemical products and for DNA and Biologics medicines. Monomer stabilizers. | ||
| (2) Electronic Materials | • Ink jet printing materials • Electrophotography • Displays • Image Polymers | Color and black dyes and pigment based inks for ink jet printers, consumables for photocopiers and laser printers. Organic light emitting polymers for flat panel displays. | ||
| (3) NeoResins | Waterborne resins used as binders and additives in the paint, coating, adhesive and printing ink industries. | |||
| (4) Specialty Products | • Pool and spa • Protection and hygiene • Pigments and Additives • Metal extraction products | Chemical sanitizers for pools and spas. Preservatives, fungicides and disinfectants for industrial and consumer products. Intermediate and specialty chemicals for a range of industries including copper extraction, paints, and plastic. |
The Specialty Products businesses are now classified as discontinued: Metal Extraction Products was sold on July 31, 2003, Additives was sold on January 31, 2004 and the Biocides (Pool and Spa and Protection and Hygiene) business, was sold on April 2, 2004. The Intermediates and Stabilizers business of Fine Chemicals was also sold on July 31, 2003.
Registered number: 3768265 | 14 |
Avecia Group plc
20-F
Year ended December 31, 2003
The tables below set out turnover information for each of the business segments and for each of the geographic regions by origin.
| Avecia Group plc Consolidated | ||||||||||
| Year ended | Year ended | Year ended | ||||||||
| December 31 | December 31 | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
Total sales to third parties | ||||||||||
Business Segment | ||||||||||
| Fine Chemicals | 112.7 | 175.8 | 193.0 | |||||||
| Electronic Materials | 63.0 | 63.8 | 67.5 | |||||||
| Neoresins | 175.8 | 167.1 | 158.6 | |||||||
| Other | 9.9 | 10.5 | 11.9 | |||||||
| Continuing Operations | 361.4 | 417.2 | 431.0 | |||||||
| Stahl (Discontinued) | — | — | 213.5 | |||||||
| Specialty Products (Discontinued) | 123.8 | 158.5 | 159.1 | |||||||
| 485.2 | 575.7 | 803.6 | ||||||||
| Year ended | Year ended | Year ended | ||||||||
| December 31 | December 31 | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
Total sales to third parties | ||||||||||
Geographic Region | ||||||||||
| UK | 130.5 | 164.0 | 200.9 | |||||||
| Continental Europe | 131.1 | 122.9 | 211.3 | |||||||
| The Americas | 178.1 | 241.9 | 294.1 | |||||||
| Asia, Africa and Australasia | 45.5 | 46.9 | 97.3 | |||||||
| 485.2 | 575.7 | 803.6 | ||||||||
| (1) | Fine Chemicals |
Through its Pharmaceutical and Biotechnology business units Fine Chemicals provides a comprehensive range of process development and manufacturing services to a high standard of quality assurance (for example cGMP), making a core contribution to the clinical development, speed to market, and commercialization of its customers new medicines.
The Agrochemicals Intermediates business unit provides chemical intermediates used to manufacture crop treatment products. An intermediate is a chemical entity which, when combined with other chemicals, produces a different chemical entity or form. Although Fine Chemicals does not invent these new molecules, it provides proprietary expertise in process development and manufacturing for pharmaceutical, biotechnology and agrochemical companies. Fine Chemicals also has strengths in the supply of chemicals into applications, where the product provides a specific desired effect.
Acquisitions |
On August 3, 1999, Avecia acquired Boston BioSystems Inc., a United States based DNA-medicines manufacturing business for US $6 million in cash. Based in Bedford, Massachusetts, Boston BioSystems is a manufacturer of oligonucleotides for clinical development and therapeutics. The assets acquired include fully equipped “clean rooms” for the development and manufacture of DNA-medicines.
Avecia acquired the Canadian based company Torcan Chemical Ltd on May 29, 2000. Torcan, based in Aurora Canada, supplies pre-clinical, clinical and commercial active ingredients for major pharmaceutical and biotechnology customers around the world. Purchase consideration and costs of acquisition amounted to £27.6 million.
Registered number: 3768265 | 15 |
Avecia Group plc
20-F
Year ended December 31, 2003
The acquisition of the business and assets of the specialty products division of Hybridon Inc. was successfully completed on September 21, 2000. The business assets acquired include a 36,000 sq. ft. DNA manufacturing facility in Milford Massachusetts, together with intellectual property for large-scale manufacturing, patents covering novel reagents, processes and instrumentation for the cost effective manufacture of synthetic DNA. On completion of the acquisition, the DNA operations of Boston BioSystems were relocated to Milford. By early 2001 Milford offered pilot and full scale manufacturing facilities for both DNA medicines and peptide pharmaceuticals. Purchase consideration and costs of acquisition amounted to £11.1 million.
On December 11, 2002 Avecia completed the acquisition of the fine chemicals business of Synthon Chiragenics Corporation for consideration of US$2.5m. This acquisition gives Avecia access to nearly 150 intermediates and complex chiral compounds, adding to Avecia Pharmaceuticals existing chiral technologies.
Disposals |
The Intermediates and Stabilisers business unit was sold to Cytec Industries Inc on July 31, 2003.
Products and markets |
The following table sets forth Fine Chemicals’ principal products and applications:
Business Sector | Products | Application | |||||
Pharmaceutical Intermediates | Complex custom chemical intermediates and active ingredients | Used in the manufacture of pharmaceutical products. | |||||
| Special drug mixtures | Nitroglycerin for treating angina and heart failure. | ||||||
| Aromatic phosphines | Used in the manufacture of pharmaceutical products. | ||||||
Biotechnology | DNA Medicines | ||||||
| Process development services and manufacture of Oligonucleotides for clinical trails and launched products | Used by pharmaceutical and biotechnology companies in the manufacture of DNA medicines. | ||||||
| Biologics and Peptides | |||||||
| Process development services and manufacture of biopharmaceuticals for clinical trials and licensed products | Healthcare compounds manufactured using microbial biotechnology and peptide chemistry. | ||||||
Agrochemical Intermediates | Standard and custom chemical intermediates and toll manufacture | Agrochemical compounds. | |||||
Intermediates and Stabilizers (disposed) | Monomer stabilizers | Acrylic acid, acrylates and vinyl monomers. | |||||
| Aromatic phosphines | Photoinitiators, catalysts ligands and fire retardants. |
Registered number: 3768265 | 16 |
Avecia Group plc
20-F
Year ended December 31, 2003
Pharmaceutical Intermediates |
Through its Pharmaceutical business unit Fine Chemicals provides a comprehensive range of process development and manufacturing services to a high standard of quality assurance, making a core contribution to the clinical development, speed to market, and commercialization of its customers new medicines.
Avecia’s Pharmaceutical Intermediates business is focused on the custom synthesis of complex intermediates and active ingredients, as part of a customer’s new drug development and commercialisation process. The business has both a broad organic chemistry capability and specific technology strengths, notably in the manufacture of ‘chiral’ compounds, hydride reductions, organometallic reagents and processes involving hazardous raw materials, such as cyanogen chloride and phosgene. Through its Torcan, Canadian subsidiary and other small scale units in the UK, and its large scale asset base, the business provides services to its customers across the full drug development pipeline from early phase process invention to manufacture of launched medicines. These activities are carried out according to the requirement of Current Good Manufacturing Practice (cGMP). cGMP is the standard of procedures and controls required by the Federal Drug Agency of USA, and other international regulatory authorities for the manufacture of advanced pharmaceutical intermediates, active ingredients, and final formulated/packaged drugs.
The market for supply of pharmaceutical intermediates and active ingredients to the global pharmaceutical and biotechnology industries is estimated today at $7-8 billion. This market has shown substantial growth due to these companies focusing spend on drug development and marketing and outsourcing manufacturing. More recently there has been a contraction in the market place due to fewer New Chemical entities (NCEs) being launched and the impact of generic competition which has resulted in spare capacity becoming available at the large Pharmaceutical companies.
Avecia’s business is characterised by a large pipeline of projects for drugs progressing through clinical trials, and supplies for launched medicines to companies including GSK, AZ, Merck and Allergan.
A specific technology-based unit within Avecia’s pharmaceutical intermediates business is:
Special drug mixtures |
Fine Chemicals supplies pharmaceutical-grade nitroglycerin in a number of formulations for treating angina pectoris and heart failure. Dilute nitroglycerin, which acts as a vasodilator on the heart and blood vessels, is sold under the SDM trademark. Fine Chemicals is the only nitroglycerin supplier distributing from facilities located in the United States. The extreme care required in handling nitroglycerin, together with the business’s customer services, has enabled the business to gain a significant share of the US pharmaceutical nitroglycerin market with sales to major US manufacturers of transdermal anti-angina patches.
Avecia also supplies customized drug mixtures for a range of nitroglycerin therapeutics delivery options, from tablets and ointments to intravenous preparations and transdermal patches.
Biotechnology |
DNA Medicines |
Oligonucleotides are used in a range of therapeutic and diagnostic applications, in particular for drugs which use an antisense mechanism. Anti-sense drugs work at the genetic level to interrupt the process by which disease-causing proteins are produced. and have the potential to be more selective and, as a result, more effective and with fewer side effects than traditional drugs. As such, they are being designed to treat a wide range of diseases including infectious, inflammatory and cardiovascular diseases and cancer. DNA medicines also have application in a range of new approaches to disease treatment such as immunotherapeutics, molecular decoys and RNAi. The business is involved in a range of projects addressing development of such drugs.
Avecia believes that its existing relationships with clients requiring clinical trial materials and its investment in assets and technology, make the business well positioned to take advantage of opportunities that may emerge in the field of DNA medicines. Avecia has a 5 year contract with Genta Inc to supply its lead compound Genasense for both clinical and commercial use. Genta have applied for approval for Genasense from the FDA. However following negative feedback from the ODAC (Oncology Drugs Advisory Committee), approval is not envisaged in the near term.
Registered number: 3768265 | 17 |
Avecia Group plc
20-F
Year ended December 31, 2003
The business has a solid phase capability for peptide synthesis using ‘FMOC’ chemistry – a specific solid phase process. The production of peptides also requires chromatographic separation techniques to achieve high purity. This technology can also be used in advanced molecules such as oligonucleotides (DNA) and recombinant proteins.
Biologics |
Biologics provide development and manufacturing services using both microbial fermentation and mammalian cell culture.
Biologics represent proteins and similar molecules used as therapeutics, medical devices and diagnostics. Sales of medicines of this type are estimated to be over $15 billion per annum. There are currently in the region of 450 biologic compounds in clinical development, largely driven by biotechnology companies in the United States and, increasingly, in Europe. They form a growing proportion of all new drug approvals.
The business focus is on developing scaleable and robust manufacturing processes for biologics and works with clients throughout the drug development life-cycle. The business has a range of pilot-scale assets and a large-scale (2 x 5000 litre) microbial fermentation facility in the UK providing capability to manufacture biologics for commercial use.
The business recently won an award to develop an anthrax vaccine for the US Government which has lead to an extension of activity beyond contract manufacturing of drug substance into management of fill/finish, clinical trials and regulatory submissions.
Agrochemical Intermediates |
Standard and custom intermediates and toll manufacture |
In the Agrochemical area Fine Chemicals manufactures “building block” products, which are supplied to a number of customers, and custom products including manufacture of active ingredients.
Fine Chemicals’ standardized agrochemical products are fluoroaromatics and chloropropionic acid. The business’s products are used in a number of leading fungicides and herbicides.
Fine Chemicals currently has custom synthesis agreements for products used in the manufacture of a range of herbicide and fungicides. In addition the business has entered into contracts for the toll manufacture of certain existing products for Syngenta’s (formerly AstraZeneca’s) agrochemical business.
Intermediates and Stabilizers |
Monomer stabilizers |
During 2003 Fine Chemicals produced both phenothiazine, sold under the PTZ trademark, and Xenoxyl, a stable free radical stabilizer for vinyl monomers. These materials are the most cost-effective inhibitors of unwanted polymerization reactions that can occur during production and storage of acrylic acid, acrylates and certain vinyl monomers.
Aromatic phosphines |
During 2003 Fine Chemicals manufactured two core aromatic phosphines, Phenylphosphonous Dichloride and Diphenyl Chlorophosphine. Aromatic phosphines are used in a wide range of applications, including pharmaceuticals, agrochemicals, flame-retardants, photo-initators and stabilizers for polymers.
The Intermediates and Stabilisers business was sold on July 31, 2003.
Registered number: 3768265 | 18 |
Avecia Group plc
20-F
Year ended December 31, 2003
Customers, sales and distribution |
Fine Chemicals markets its products directly to its customers and generally does not use intermediaries or agents. Close customer partnerships are important to Fine Chemicals as the majority of its products are designed to meet individual customer specifications. Fine Chemicals has a number of major manufacturing contracts with key customers including Glaxo Wellcome, BASF, Merck, Genta, Essex Pharmaceuticals, Allergan, 3M, Cheminova and Syngenta.
Typically, contracts in both the healthcare and agrochemical businesses have a term of three to five years and cover aspects of development, capital and manufacturing costs. Fine Chemicals’ obligation under these contracts is to supply products to specification. Liability is typically contractually capped at the value of products supplied, or, in a few cases, to the annual value of the contract. Fine Chemicals does not assume any liability for the performance of the final product.
The following table summarizes Fine Chemicals’ key contractual arrangements for manufacture and provision of services for customers:
Customer | End Product/Service | Contract Duration | Contract Expiry | ||||||||
| BASF | Agrochemical Fungicide | 4 years | December 2004 | ||||||||
| Cheminova | Agrochemical Fungicide | 5 years | December 2006 | ||||||||
| Syngenta | Contract 1 | Herbicide | 5 years | June 2007 | |||||||
| Contract 2 | Plant growth regulator | Evergreen | 24 months notice | ||||||||
| Contract 3 | Intermediate | Evergreen | 24 months notice | ||||||||
| Essex Pharmaceuticals | Animal Health | 24 months notice | |||||||||
| Merck | Opthalmic | 10 years | November 2005 | ||||||||
| Lubrizol | Additives | 5 years | February 2009 | ||||||||
| Arch | Biocides | 5 years | April 2009 | ||||||||
| 3M Company | Cardiovascular | 5 years | Jan 2009 | ||||||||
| Allergan | Opthalmic drugs | Several years | Various | ||||||||
| Genta | Anti-cancer | 5 years | December 2007 | ||||||||
Competition |
Fine Chemicals competes in a highly fragmented market. There are approximately 600 fine chemical suppliers world-wide. Most participants in this market are either small to medium-sized independent enterprises or members of large diversified chemical companies. A number of competitors have significantly greater sales and resources than Avecia. The table below lists some of the key competitors in the various segments:
Pharmaceutical Intermediates | Agrochemical and other Intermediates | Biotechnology | |||||
| DSM | Clariant | Lonza | |||||
| Lonza | Bayer | DSM | |||||
| Bayer | Kemira | Diosynth | |||||
| Rhodia Chirex | Contract Chemicals | Cambrex | |||||
| Degussa | Allessa | Boehringer Ingleheim | |||||
| Clariant | Lonza | Bachem | |||||
| Albermarle | UCB | ||||||
| Polypeptide | |||||||
| Proligo/Degussa | |||||||
| Isis | |||||||
| Dow | |||||||
| Biochemie | |||||||
Registered number: 3768265 | 19 |
Avecia Group plc
20-F
Year ended December 31, 2003
| (2) | Electronic Materials |
Avecia’s Electronic Materials business currently designs, develops, manufactures and sells products for use in the two principal non-impact printing technologies:
(1) Ink Jet Printing : High purity dyes and liquid inks; and
(2) Electrophotographic Printing : Materials for use in laser printers, photocopiers, and digital presses.
Avecia believes that Electronic Materials is the world’s leading supplier of dyes and is one of the major manufacturers of liquid inks for ink jet printers by share of market and sales value. As a pioneer of this market, with research programs dating back to the mid-1980s, Electronic Materials has developed leading proprietary technologies and strong relationships with the world’s principal original equipment manufacturers in the ink jet printer market.
In addition, the business is currently developing chemical technology for use in the flat panel display market, which includes items from simple cellular phone displays to larger monitor displays. This segment of the business is referred to as the “Displays” business.
Products and markets |
The following table sets forth Electronic Materials’ principal products and applications:
Business Unit | Products | Application | |||||
| Ink Jet Printing Materials | Dyes; dye and pigment based inks | Inks for ink jet printers. | |||||
| Electrophotography | Chemically produced toners and charge control agents | Laser photocopiers and printers, both color and monochrome. | |||||
| Infra-red absorbers | Security applications and thermal lithographic printing plates. | ||||||
| Displays | Organic light emitting materials | Flat panel display products, such as mobile phones. | |||||
Ink Jet Printing Materials (IJPM) |
The main product categories of the IJPM business are high purity dyes and a range of pigment-based and dye-based inks (aqueous and non-aqueous) for use in ink jet printers. The business has developed leading proprietary technologies to synthesize new generations of high performance ink jet dyes and pigmented inks based on novel dispersants, resins and formulations.
The IJPM activities are currently focused primarily on the small office and home applications of ink jet printing technology. Sales of ink jet products in the small office and home segment have grown significantly in recent years due both to the increased penetration of personal computers into the consumer segment and to the creation of new print applications as a result of improvements in technology (for example network printers, digital photography).
Avecia believes that future growth in the market for ink jet products will be driven primarily by the following factors:
| • | The increased use of home printing for internet, fax and computing outputs (All In One printers), the migration of ink jet into businesses printing applications and the emergence of new applications such as digital photography printing, (with high ink consumption per page relative to text printing). |
| • | Renewed growth in sales of personal computers and corresponding printers, as well as increased demand for printers in developing countries, most particularly in Asia, and |
| • | Adoption of ink jet printing in new industrial applications (e.g., packaging, printed circuit boards, etc.). |
Registered number: 3768265 | 20 |
Avecia Group plc
20-F
Year ended December 31, 2003
In addition, the continued advances in ink jet technology have significantly improved the quality of outputs as well as printhead life. These improvements have been achieved through continuous development of technology for controlling the size and placement of ink droplets and other technological advances such as in nozzle count and firing frequency. Further achievements in resolution, speed and color quality would allow ink jet printers to enter diverse markets such as color filters for liquid crystal displays, wide format printing for graphic arts and proofing, textile, commercial, medical and industrial printing. Some of these markets are very large and have historically satisfied their printing requirements with traditional analogue print technologies (e.g., screen printing) or other non-impact printers (e.g., laser printers). Electronic Materials is currently working with a number of manufacturers and customers to develop the appropriate technology to address many of these markets.
Electrophotography |
The electrophotography business unit was established in 1996 to build on the business’s strengths in non-impact printing. The principal current investments in electrophotography are aimed at developing two technologies, chemically produced toners for color laser applications and the development of infra red absorber technology.
The color laser printer and photocopier market is in its early stage but is already showing growth rates of approximately 30% per year. Avecia believes that growth will continue as new, lower cost, high-speed color photocopiers and laser printers become available. Avecia believes that chemically produced toners have advantages over traditional toners, facilitating improvements in print quality and resolution at potentially lower cost than traditional color toners.
Avecia believes that these advantages will favor the adoption of chemically produced toner technology in the next generation of color laser printers and photocopiers.
Infrared absorber technology is used in a variety of applications involving laser imaging and recognition. Avecia is particularly active in the areas of security marking and computer to plate digital printing.
Displays |
The business is currently developing organic light emitting materials for electroluminescent flat panel displays. Organic light emitting materials can be used to manufacture thin, lightweight displays with excellent viewing characteristics and low power consumption, ideal for portable applications. Organic light emitting materials include both dye-based and polymer-based materials.
In April 1999, an agreement was entered into in relation to Covion Organic Semiconductors GmbH, the organic semiconductors business of Celanese Ventures GmbH (formerly Aventis Research and Technologies GmbH & Co KG). Under this agreement the business acquired a 15% equity stake in Covion in 1999, the right to acquire know-how and intellectual property, with an option to acquire the remaining equity at the end of 2001. In December 2001 Avecia exercised that option and acquired the remaining equity in Covion. Covion has a leading position in light- emitting polymers through its patented materials and active supply of new materials and is working closely with several of the leading electronics companies in this field. Covion has research and development programs relating to both polymer and dye-based material with numerous other display manufacturers based in Europe, Asia and the United States.
Image Polymers |
Avecia has a 50-50 joint venture with Mitsui Chemicals, called Image Polymers. This joint venture manufactures and markets bi-modal toner resins for use in black and white photocopiers and laser printers for the European and North American markets. The partnership began in 1988 with the establishment of the Image Polymers Company in the United States and construction of a U.S. manufacturing plant in 1991. In 1997, it was further expanded with the establishment of Image Polymers Europe and construction of an identical manufacturing facility at Grangemouth, Scotland.
Customers, sales and distribution |
The market for ink jet printers is highly concentrated with the four largest printer manufacturers, Hewlett Packard, Seiko Epson, Canon and Lexmark accounting for over 90% of all sales of ink jet printers.
Registered number: 3768265 | 21 |
Avecia Group plc
20-F
Year ended December 31, 2003
In addition to these core customers, the business also maintains relationships with a number of recent entrants into the ink jet printer market. Avecia believes these relationships will enable the business to participate in any future market share growth as these new entrants develop new vertical markets and applications for ink jet printing.
Sales and distribution are handled directly with customers for Inkjet and Electrophotography, except in Japan and selectively in North America, where a local distributor manages distribution and delivery. Sales and distribution of Display products are handled directly with customers.
Competition |
The main competitor for the supply of ink jet ink is DuPont, while there are several competitors for ink jet dyes, including Mitsubishi, Orient, Dainippon Kayaku and Daiwa. Competitors often specialize in particular segments of the market. For example, DuPont specializes in pigmented inks and Daiwa is a low cost provider of non-patented dyes. While competition from generic producers is increasing, Avecia’s strategy is generally to avoid competing in the supply of commodity products where possible, but rather to focus efforts on developing and selling custom- designed ink jet printing materials.
The main competition for the new electrophotography products under development (chemically produced toners and charge transport materials) are traditional suppliers to the industry such as Mitsubishi and Tomoegawa & Kao for toners, new suppliers of chemically produced toner including Nippon Zeon, and the major original equipment manufacturers such as Canon, Ricoh and Xerox which at least partly source existing products in-house.
Competitors to Covion in the new organic light emitting materials include Idemitsu Kosan and Eastman Kodak in the field of small molecule products, and Dow Chemicals and Sumitomo Chemicals in the field of polymers products.
| (3) | NeoResins |
The NeoResins business is a global supplier of performance polymers, primarily water-based resins which are used as binders and additives in the paint, coatings, adhesives and printing ink industries.
The NeoResins business was a pioneer in the development of waterborne urethanes, and Avecia believes that it remains a global leader in the targeted market segments through its fast growth and technological strength in water-borne urethanes and acrylic resins. The business is focused on serving three market segments, which are fast growing in water-borne product offerings: coatings, graphic arts and adhesives.
Over the past years, the NeoResins division has undergone a re-focusing process, which has involved a number of divestments of non-core activities and sites, re-structuring under-performing regional operations and shifting the market focus towards the more specialized end of the resins market. As part of this process, the business exited low-margin, low-growth business such as pressure sensitive adhesives (transferred in 1996 to Stahl), optical fiber coatings (sold in 1996), polyester powder (sold in 1997), Winnofil (sold in 1999) and Viclan products (sold in 1999/2000). NeoResins has also divested its Singapore manufacturing asset (sold in 1997), shut down research and technology operations in a site shared with ICI (1998) and ceased production at Napa, a California site (1999) and Hillhouse, a UK site (2001). NeoResins has also made small acquisitions of know-how and business information from the acrylic emulsion business of Dyno in 1997 and DSM acrylic emulsion technology in 1999. It has significantly expanded capacity and/or product capability at its four core production sites (1999 – 2003) and will continue to do so over the next three years (2004 – 2006).
As part of continuous improvement, NeoResins is currently engaged in a business process-streamlining project, which will result in the implementation of global business processes and replacement of the existing SAP R2 system, by SAP R3.
Registered number: 3768265 | 22 |
Avecia Group plc
20-F
Year ended December 31, 2003
Products and markets |
The following table sets forth NeoResins’ principal products and applications:
Brand Name | Product Family | Application Use | |||||
| Haloflex | Vinyl Acrylic Emulsions | Industrial Coatings for Metal; Rust Converters Adhesives and Sealants | |||||
Lumiflon1 | Fluoro Resins | Industrial Coatings for Metal and Plastics, including Construction, Coil, Automotive OEM, Aerospace | |||||
| NeoCryl | Acrylic Emulsions | Industrial Coatings for Metal, Wood, and Plastic applications Architectural Coatings exterior and interior Decorative paints Industrial and household Floor Polishes, Parquet and Concrete Flooring Flexo Inks, Adhesives and Film Coatings | |||||
| NeoCryl | Solid Acrylic Resins | Industrial Coatings for Marine, Traffic, and Plastics applications Architectural Coatings and Aerosols Heat Seal Lacquers, Gravure and Screen Inks | |||||
| NeoPac | Urethane Acrylic Hybrids | Architectural Coatings including decorative paints, Parquet and Concrete Flooring; Industrial Coatings for Wood, Metal and Plastic applications | |||||
| NeoRad | UV Curing Acrylics and Urethanes | Industrial Coatings for Wood, Plastics, and Flooring Printing Inks | |||||
| NeoRez | Polyurethane Dispersions | Industrial Coatings for Plastic, Metal and Wood Architectural Coatings including parquet lacquers Laminating Adhesives and Film Primers | |||||
| NeoRez | Polyurethane Solution Polymers | Architectural Coatings for Concrete and Wood Gravure Laminating Inks | |||||
| 1 | Agent and Distributor for Asahi Glass. |
Coatings |
Through NeoResins, Avecia supplies both aqueous, solvent-based and ‘dry’ state acrylic products used in the production of coatings. NeoResins offers a range of technologies, including urethane and acrylic resins, urethane/acrylic copolymers, vinyl-acrylic dispersions, additives, cross-linkers and other copolymers. Key applications in coatings include decorative, joinery finishes for windows and doors, flooring products (particularly clear lacquer finishes), automotive metal for components and plastic applications, general metal and plastics finishes (for electronics and toys), heavy duty maintenance and traffic paints.
With technology strength in aqueous-based emulsions, the business has benefited, and expects to continue to benefit, from a gradual evolution away from solvent-based coatings, driven by consumer preference and regulatory change. NeoResins’ core technologies are supported by highly developed, market-specific technical service and application/formulation expertise focusing on targeted application segments within architectural and industrial coatings.
Registered number: 3768265 | 23 |
Avecia Group plc
20-F
Year ended December 31, 2003
Graphic Arts and Adhesives |
NeoResins supplies water-borne NeoCryl emulsions, solid acrylics (beads) and NeoRez polyurethane dispersions, sold as binders for liquid inks, for flexo and gravure, film primers and coatings, paint varnishes, paper coatings, heat seal lacquers and imaging products such as ink jet resins and receptive coatings. Adhesives – after divestment of Winnofil and Pressure Sensitive Adhesives (PSA) – is now a minor application area for NeoResins and based solely on urethane and hybrid technologies. These products are currently sold into rigid bonding (furniture and millwork), packaging, construction and non-rigid bonding (shoe and fabric) application areas.
Customers, sales and distribution |
NeoResins’ client base ranges from major paint producers to small regional specialty coating producers. The customer list is long and stable, with no one Customer accounting for even 10% of total sales, the top 10 Customers account for only 23% of the annual sales revenue and 90% of all Customers remaining the same over the past five (5) years.
Historically, NeoResins has worked closely with its customers to develop products, which fit their specific requirements. These collaborative efforts resulted in the invention and development of waterborne resin technology, in which NeoResins’ technical staff played a significant role. Current clients with whom the business maintains close long-term co-operation include (alphabetically): Akzo Nobel, BASF, Bona Chemie, PPG, RPM, Sherwin Williams, SICPA, Sigma and Sun Chemicals.
Competition |
NeoResins’ main coating competitors (alphabetically) are Alberdink & Boley, BASF, Clariant, Crompton/Witco, Noveon, Reichhold, Rohm & Haas, S.C. Johnson, and many smaller regional companies. In Graphic Arts products for traditional liquid inks, the main competitors are Rohm & Haas and S.C. Johnson, with other coating acrylic emulsion and beads producers participating to a much smaller extent. In specialty beads, the competition involves several different companies (principally Degussa, Lucite, and Mitsubishi), with pricing trends and volume growth following the developments of specific application areas. The business expects Bayer and BASF to remain the market-share leaders for urethane-based products in adhesive technologies.
While NeoResins has relatively low market shares in each of the three markets, Avecia believes the business’s products hold niche positions in applications where technology shifts favor its product portfolio.
(4) | Specialty Products |
The Specialty Products business is classified as discontinued: Metal Extraction Products was sold on July 31, 2003, Additives was sold on January 31, 2004 and the Biocides sale (Protection and Hygiene and Pool and Spa) was completed on April 2, 2004.
During 2003, the Specialty Products segment was comprised of a variety of businesses which develop, manufacture, and supply specialty performance chemicals to a wide range of end market applications, such as coatings, disinfectants, copper extraction, plastics, and also into the pool and spa market. Products include biocides used as preservatives, fungicides and disinfectants in a diverse group of end-use industrial and consumer applications, a comprehensive range of chlorine-free and bromine-free pool and spa sanitizers and related products, metal extraction products, performance pigments and additives for paints, inks and plastics.
Registered number: 3768265 | 24 |
Avecia Group plc
20-F
Year ended December 31, 2003
Products and markets |
The following table sets forth Specialty Products’ principal products and applications:
Market | Trademarks | Application | |||||
| Pool and spa | Baquacil | A range of chlorine-free products for sanitizing and maintaining pool water. | |||||
| BaquaSpa | A range of chlorine-free and bromine-free products for sanitizing and maintaining spa water. | ||||||
| Protection and Hygiene | Proxel | A preservative used in a wide range of industrial water based products including Polymer latex, paint and household products. | |||||
| Densil | A family of fungicides/algaecides used in a wide range of applications, from coatings such as paints and sealants, to leather processing and plastic for automobiles. | ||||||
| Vantocil | A non-medical disinfectant used as a food industry disinfectant and as a household surface disinfectant. | ||||||
| Cosmocil | A preservative for personal care applications. | ||||||
| Vanquish | Fungicide/bactericide use in plastics and polymeers. | ||||||
| Reputex | Bactericide used in cotton textiles. | ||||||
| Purista | Bactericide used in cotton textiles. | ||||||
| Additives | Solsperse | Hyperdispersant used in paints, inks and plastics. | |||||
| Pigments | Monastral and Monolite | Pigments for paints. | |||||
| Vynamon and Polymon | Pigments for plastics. | ||||||
| Metal Extraction Products | Acorga | Specialty chemical extractants used in the extraction and production of copper. |
Pool and Spa |
Avecia was the world’s leading supplier until the date of sale, by sales value, of chlorine/bromine-free pool and spa sanitizers. Biocides are used in recreational water to prevent the build-up of bacteria and other organisms.
The business’s core pool and spa products are BaquaSpa sanitizer for spas and Baquacil sanitizer for pools, both based on polyhexamethylenebiguanide. These are supplemented by a comprehensive range of products that together provide a complete maintenance system for chlorine-free pools and bromine-free spas.
Baquacil is the world’s first and still, despite the expiry of its patent protection several years ago, the leading chlorine-free sanitizer with approximately 6% of the US pool sanitizer market. BaquaSpa is a sanitizer, which is used in the spa market. BaquaSpa currently has a market share of approximately 6% of the US spa market. It is priced on a comparable basis to bromine, (the market leading spa sanitizer), but has significant benefits compared to bromine and therefore represents a growth opportunity.
Baquacil is priced at a premium to chlorine-based products. It is advantageous over chlorine based products for the following reasons:
| (1) | Baquacil is not affected by sunlight and therefore has greater stability than chlorine; |
| (2) | Baquacil causes less eye and skin irritation than chlorine; |
| (3) | Unlike chlorine Baquacil has no bleaching effect on clothes, hair and pool liners; and |
| (4) | Baquacil based products have no unpleasant odors or taint. |
The business also distributes some products based on chlorine and bromine.
Registered number: 3768265 | 25 |
Avecia Group plc
20-F
Year ended December 31, 2003
Protection and Hygiene |
The business develops and manufactures a wide range of cost-effective biocides for a diverse group of end markets, including paints, coatings, dyes and pigments, plastics and household surface disinfectants. The business is regionally focused, utilizing its expertise in a broad range of product solutions to satisfy diverse regional and industry specific requirements. These requirements are defined by the needs of the customers, responding to differences in climate, the range of bacteria, algae or fungi present, regulatory specifications, local custom and practice and the business’s historic regional strengths.
The business can provide customers with customized products because it offers customers access to a research team with experience in anti-microbial research ranging from the discovery of new active ingredients to process technology and product formulation. The business draws upon extensive experience with FDA and EPA filings for its own products, and a wider, up-to-date database of toxicological and regulatory data in order to custom-make new products.
The business’s most important protection and hygiene product is the range of Proxel preservatives based on benzisothiazolene. Through Proxel products, the business is the world’s largest supplier, by sales value, of benzisothiazolene-based preservatives, despite the expiry of benzisothiazolene’s patent protection several years ago.
The business’s traditional markets in protection and hygiene have been coatings, disinfectants, polymer emulsions and household products. Although these markets have been subject to increased competition over the last few years, the business continued to grow, and has also recently identified new growth opportunities within these established sectors.
In addition, growth opportunities are now being pursued in the following areas:
| • | Plastic protection: the business is launching the new Vanquish range of products for materials such as polyurethane and polyvinylchloride, seeking to displace older products such as OBPA, an organo arsenic compound; and |
| • | Consumer Antimicrobials: the Reputex technology is being applied to render antimicrobial properties to cellulosic fibres. |
Additives |
Avecia supplies a range of polymeric dispersing agents and specialty thickeners primarily for application in the paint, ink and plastics industries. The range is sold under the trade names ‘SOLSPERSE’ and ‘SOLTHIX’ for the paint and ink industries and under the ‘SOLPLUS’ trade name for the plastics industries.
The products/product variants launched since 1998 include:
| • | Improved offerings for the automotive and general industrial paint sectors; |
| • | Improved offerings for the UV and printing inks sectors; |
| • | A thickener for coating systems under the ‘SOLTHIX’ trade name; and |
| • | Dispersants and thickeners for thermoset plastics under the ‘SOLPLUS’ trade name |
The business has a significant product development pipeline aimed at updating the range of dispersants and thickeners.
Pigments
In August 2002 Avecia announced the transfer of its pigments business to Heubach Colour Ltd, effective 1st January 2003.
Registered number: 3768265 | 26 |
Avecia Group plc
20-F
Year ended December 31, 2003
Metal Extraction Products |
Avecia believes the business is the leading global supplier of reagents to the copper solvent extraction market by market share of sales value. It manufactures and sells a range of solvent extraction reagents for copper under the Acorga brand name, and provides on-site customer support and process optimization services to copper mining companies. The business’s products and related technology have emerged in the 1990s as the preferred technology for copper production from oxide ore deposits due to their cost and environmental advantages over traditional copper smelting processes. It maintains these advantages through its own technology and formulation patents, which generally have many years to go before expiration.
Customers, sales and distribution |
The key customers in the protection and hygiene market tend to be large corporations who utilize a range of biocide products and expertise in protecting their manufacturing processes and finished goods from microbial spoilage. Paint and coatings manufacturers are the largest purchasers of Avecia’s protection and hygiene products, followed by the automotive industry.
The customers of the pool and spa business tend to be small retailers who sell Avecia’s branded products directly to end users. Most of the businesses products are aimed at residential swimming pools, hot tubs and spas. Overall demand in the pool and spa market is influenced by the sale of new pools which in turn reflects the strength of the US economy.
BaquaSpa and Baquacil are sold through authorized independent retailers. These independent retailers range in size from single store locations to national chains.
Among other actions, the business has taken the following steps to improve the distribution network:
| • | Signed specialized dealers in each spa and pool market who can deliver better market focus and support, and in the process has amended its contracts to remove geographical exclusivity; |
| • | Entered into a collaboration with a leading US chain of pool stores, with approximately 350 stores across the United States; |
| • | Added to its selling resources in California, where in 1997 both BaquaSpa and Baquacil were approved by the US Environmental Protection Agency (EPA). California is the largest US pool market, with 35% of residential spas and 16% of residential swimming pools; and |
| • | Increased its advertising and promotional efforts to take advantage of the opportunity Avecia believes exists in tapping the market for chlorine users who would like an alternative to chlorine but have little knowledge about Baquacil. |
The principal customers for paint products are automotive top coat and refinish manufacturers and general industrial paint manufacturers. For ink products, the main applications include publication gravure, offset, packaging and heat transfer/ribbon inks.
Metal extraction products are marketed worldwide directly to mining companies.
Competition |
The market for protection and hygiene products is highly fragmented with a broad range of competitors, including large multinationals such as BASF, Dow and Bayer and specialty chemical producers such as BTP, Degussa, Ciba, Lonza and Rohm & Haas. The main competitor in protection and hygiene is Rohm & Haas, who offers CMIT, a product similar to Proxel. In addition, a number of generic producers offer biocide compounds across several markets served by the business, the expiry of patent protection resulted in a number of generic producers of benzisothiazolene based products entering the market. Both generic and functional competition have been present in the market for some time.
The only competitive supplier of polyhexamethylenebiguanide in the United States, Mareva, entered the market in 1999. Mareva is based in France, and is operating through distributors in the United States. Other pool chemical companies supply polyhexamethylenebiguanide based products, but these are mainly based on polyhexamethylenebiguanide sourced from Avecia. Other suppliers of biocides for recreational water management applications include Aqua Clear Industries, Bio-Lab (Great Lakes Chemical), Buckman Laboratories, FMC and Lonza (Alusuisse- Lonza).
Registered number: 3768265 | 27 |
Avecia Group plc
20-F
Year ended December 31, 2003
The additives industry is extremely fragmented. The relevant niche market segment for the business can be described as specialty polymeric dispersing additives and thickeners for solvent and water-based coatings and inks and also for thermoset plastics applications. Many small and medium-sized companies compete in this sector. Some of the more significant companies are BYK, Tego-Chemie, Elementis and Efka (now owned by Ciba). Avecia’s development activity is increasing in the field of products for water-based coatings where some larger companies such as Air Products, Cognis and Rohm & Haas are also important competitors
The main competitor in the metal extraction chemicals market is Cognis, the second largest global supplier to the copper extraction market.
Sourcing |
Avecia purchases raw materials and chemical intermediates from a large number of third parties. Purchasing is shared between businesses or centralized wherever it is possible to generate advantages through greater purchasing power or economies of scale. For instance, the UK purchasing group is responsible for several requirements of individual businesses in the UK, such as certain shared raw materials, information technology, utilities, engineering and general services.
Dual sourcing (where available) has been secured for most key non-commodity raw materials.
Raw Materials |
Overall, Avecia purchases chemicals aggregating approximately £200 million annually. The prices of most principal raw materials are not volatile, and in the small proportion of cases where raw materials can vary quickly in line with chemical commodity prices, appropriate risk management is undertaken to dampen the volatility of such changes.
Seasonality |
Avecia is subject to seasonal trends in respect of its Pool business (within Specialty Products). The majority of Pool sales take place between May and September each year. However this business has now been disposed of and Avecia generally is not subject to seasonality in the remaining segments of its business.
Regulation |
Avecia is subject to regulations imposed by various authorities and jurisdictions. Compliance with the requirements of the US Environmental Protection Agency and the Food and Drug Administration is discussed within the Environmental matters and Business overview sections of this item respectively. Compliance with Treasury regulations is discussed in detail within the Taxation section of ‘Item 10 Additional Information’.
Organizational structure |
Avecia Group plc is a wholly owned subsidiary of Avecia Finance plc, which is itself a subsidiary of Avecia Holdings plc. Avecia Holdings plc is owned by Avecia (Jersey) Limited.
The table below provides details of the principal subsidiaries of Avecia Group plc:
Subsidiary undertakings | Country of incorporation | Principal activity | Percentage of equity owned | |||||||
| Avecia Investments Limited | UK | Holding company | 100% | * | ||||||
| Avecia UK Holdings Limited | UK | Holding company | 100% | * | ||||||
| Avecia Limited | UK | Chemical manufacture | 100% | * | ||||||
| Avecia Holdings BV | The Netherlands | Holding company | 100% | * | ||||||
| Avecia Holdings Inc. | USA | Holding company | 100% | * | ||||||
| Avecia BV | The Netherlands | Chemical manufacture | 100% | * | ||||||
| Avecia Inc. | USA | Chemical manufacture | 100% | * | ||||||
| Torcan Chemical Ltd | Canada | Chemical manufacture | 100% | * | ||||||
| NeoResins Inc. | USA | Chemical manufacture | 100% | * | ||||||
| Avecia Biotechnology Inc. | USA | Chemical manufacture | 100% | * | ||||||
| Avecia Spain SL | Spain | Chemical manufacture | 100% | * | ||||||
Joint ventures | ||||||||||
| Image Polymers Europe | UK | Chemical manufacture | 50% | α | ||||||
| Image Polymers Company | USA | Chemical manufacture | 50% | α | ||||||
| * | all ordinary shares held |
| α | represents percentage share of limited partnership |
Registered number: 3768265 | 28 |
Avecia Group plc
20-F
Year ended December 31, 2003
Property, plant and equipment |
Avecia currently has 12 manufacturing facilities in 6 countries. The sites are principally polymerization and formulation facilities and organic chemistry facilities.
The table below lists the main characteristics of Avecia’s significant sites, based on net book value of land and buildings:
Site Location | Business | Size (metres2) | Freehold/Leasehold | Use |
| Blackley, UK | Fine Chemicals Specialty Products Electronic Materials NeoResins | 80,938 | Freehold | International headquarters and research and development facilities | |||||||||
| Grangemouth, UK | Fine Chemicals Specialty Products Electronic Materials | 708,208 | Freehold | Chemical manufacture | |||||||||
| Huddersfield, UK | Fine Chemicals Specialty Products Electronic Materials | 61,902 | Freehold | Chemical manufacture | |||||||||
| New Castle, DE, US | Electronic Materials | 101,018 | Freehold | Chemical manufacture | |||||||||
| Waalwijk, The Netherlands | NeoResins | 81,333 | Freehold | Chemical manufacture | |||||||||
| Billingham, UK | Fine Chemicals | 131,704 | Freehold | Chemical manufacture | |||||||||
| Aurora, Canada | Fine Chemicals | 42,222 | Freehold | Chemical manufacture | |||||||||
| Milford, MA, US | Fine Chemicals | 65,182 | Freehold | Chemical manufacture | |||||||||
| Wilmington, MA, US | NeoResins | 133,551 | Freehold | Chemical manufacture | |||||||||
| Frankfort, IN, US | NeoResins | 139,622 | Freehold | Chemical manufacture | |||||||||
| Parets, Spain | NeoResins | 27,215 | Freehold | Chemical manufacture |
Registered number: 3768265 | 29 |
Avecia Group plc
20-F
Year ended December 31, 2003
Avecia also has a smaller site at Frankfurt, Germany (Electronic materials).
In 2003 the Large Scale Biologics Manufacturing Facility (ABC 5000), sanctioned in February 2002, became operational. This project significantly expands production capabilities at Billingham, UK, creating 10,000 litres of manufacturing capacity for microbially-derived biologics.
The site at Mount Pleasant, TN, US was sold as part of the disposal of Metal Extraction Products and Intermediates & Stabilizers. The site at Seal Sands, UK, was disposed of as part of the Biocides disposal in April 2004.
Two of the major sites in the UK, Grangemouth and Huddersfield, are presently shared with Syngenta Group businesses and the company’s title in these is freehold, subject to long leases back to Syngenta of certain ‘island properties’, or long leasehold, in which case Syngenta retains the freehold interest not only in relation to the company’s site but also in relation to the surrounding property. The long leases, whether Avecia or Syngenta is the tenant, provide that the leases will come to an end if the relevant property ceases to be used for the manufacture of chemicals in commercial quantities. In this event, the tenant is obliged to clear the site by demolishing buildings and to carry out environmental remediation works. Avecia’s lease of the east site at Huddersfield, which related exclusively to the Biocides business, was transferred to the buyer of that business in April 2004.
In the case of Grangemouth, where the company acquired the freehold, Syngenta has options to re-acquire part of the property if the site ceases to be used for the manufacture of chemicals in commercial quantities.
The group also owns a combined research process technology and headquarters establishment at Blackley, UK.
Environmental matters |
Avecia’s Safety, Health and Environmental Policy and Management System is applicable to all sites and businesses wherever they are located. The business units have procedures covering issues such as waste management, safety systems, soil and groundwater protection, emergency plans and product stewardship. Performance is monitored internally and reviewed to facilitate the achievement of continuous improvement in this area. Internal guidelines are available to cover the details necessary for interpreting the standards and providing the procedures necessary to implement the policies.
Avecia’s operations are experienced and effective in containing and handling a range of aggressive chemicals, including chlorine, bromine, thionyl chloride, and ethylene oxide. Production and marketing of chemical substances are regulated by national and international laws.
Although almost every country has its own legal procedures for registration and import, laws and regulations in the European Union, the United States and Japan are most significant to the business, including the European inventory of existing commercial chemical substances, the European list of notified chemical substances, the United States Toxic Substances Control Act and the chemical list of the Japanese Ministry of Trade and Industry. Chemicals which are on one or more of the above lists can usually be registered and imported without additional testing in any other country, although additional administrative hurdles may exist.
Avecia will continue to invest in plant and equipment so as to ensure compliance with relevant environment regulations. However there are no current major planned projects relating to environmental control facilities which would result in any material capital expenditure.
Avecia’s interest in the Mount Pleasant site, Tennessee, was transferred to Cytec Industries Inc. on the disposal of the Metal Extraction Products and Intermediates and Stabilizers businesses in July 2003. In 1998 Zeneca Group had entered into an agreement with the EPA in relation to certain breaches, in 1994, of regulatory limits on benzene levels in the deep well disposal facility at this site and as part of this agreement, they stopped deep well injection at the site on April 22, 1999, following the commissioning of a new effluent treatment plant.
Registered number: 3768265 | 30 |
Avecia Group plc
20-F
Year ended December 31, 2003
The wells were formally closed at that time. Significant pollution prevention and waste minimization projects have also been implemented at this site. In 1998, Zeneca Group paid the EPA a $3.5 million penalty relating to these violations. As part of the acquisition of Zeneca Specialties, Avecia entered into an Environmental Deed agreement with AstraZeneca. Under the Environmental Deed, AstraZeneca has agreed, amongst other things, to indemnify Avecia against liabilities relating to or arising out of any existing contamination at waste burial sites at Mount Pleasant. There is no time limit for claims arising from this matter, but AstraZeneca’s liability under the Environmental Deed is limited with respect to this and certain other claims by an overall cap of £325 million. Avecia assigned to Cytec Industries Inc. its rights under the Environmental Deed with respect to the Mount Pleasant site and Cytec Industries Inc. assumed liabilities in relation to the site.
Intellectual property |
Avecia’s business is dependent to a large extent on intellectual property rights, principally patents, trade marks and accumulated technical know-how.
Where appropriate, new technology is protected, particularly active ingredients and formulations ingredients, their applications and their manufacturing processes, by seeking patent protection, typically through patent registration in major markets. In addition to patent protection, the business also relies on the know-how and technical expertise in many of the manufacturing processes for developing and maintaining market position. Trade-marks are a valuable means for associating goods with Avecia as manufacturer, in particular the trade mark ‘Avecia’ provides a uniform trading name for Avecia companies to operate under.
Avecia has nearly 2,400 patents and patent applications grouped in over 450 patent families, each representing a distinct invention, 72 percent of which have been filed since 1993. These patent families support, in particular, Electronic Materials (205), Fine Chemicals and Biotechnology (102), NeoResins (51), and Specialty Products (93). Avecia has over 1,400 pending and registered trade-marks in over 115 trade-mark families. Over the past year the largest rise in patent numbers has been in the Electronic Materials and the Fine Chemicals and Biotechnology fields.
As part of the acquisition from AstraZeneca, intellectual property of all types used in the businesses was purchased. Certain of these patents and know-how were, prior to the acquisition, shared between Zeneca Group’s agrochemicals, pharmaceuticals and specialties businesses. Where these shared rights were predominantly used in the specialties businesses, they were acquired by Avecia subject to licenses back to AstraZeneca.
Where these shared rights were predominantly used in the retained Zeneca Group businesses, they were retained by AstraZeneca, but licenses were granted to Avecia to enable it to continue using the rights in question.
These licenses are worldwide, royalty free licenses, and their duration is generally linked to the life of the relevant licensed rights. Certain licenses also deal with future development of specified products and collaboration projects. Arrangements were also put in place to transfer regulatory data to Avecia, which was solely or predominantly used by the specialties businesses, subject in certain cases to a license back to Syngenta. Avecia has user licenses for data, which was historically used in the specialties business prior to the acquisition but was predominately used by other Zeneca Group businesses. Avecia has also entered into arrangements, which give access to certain Syngenta data, which relates to obtaining and maintaining regulatory approvals for both existing and new products and product applications. Avecia has also contracted to supply certain support services to Syngenta for a transitional period.
AstraZeneca and/or Avecia may terminate certain of these agreements for:
| (i) | specified insolvency events; |
| (ii) | material breach which cannot be remedied in 60 days; or |
| (iii) | challenges by the licensee of the licensed intellectual property rights. |
In the case of (ii) and (iii) above the right to terminate is restricted to the specific patent or technology area in which the breach occurred and there is no right to terminate in respect of other classes of patents or technology areas. Furthermore if the affected patent lies within the more fundamental areas of common technology, there is no right of termination, merely the right to seek financial redress.
Registered number: 3768265 | 31 |
Avecia Group plc
20-F
Year ended December 31, 2003
Although the business has been able to maintain the relative exclusivity of certain products such as PHMB (an antimicrobial cationic polymer which is the active agent in the biocide products ‘Vantocil’, ‘Reputex’, ‘Baquacil’ and ‘Baquaspa’), following patent expiration through manufacturing scale, technical know-how and service expertise, the expiration of a patent can result in intense competition, particularly from generic producers, with consequent erosion of profit margins. Prior to and following expiration of the patent for a key active ingredient, the business will generally focus its efforts on developing patentable derivatives or new patentable formulations containing the active ingredient.
Avecia believes that its intellectual property rights, in particular its patent portfolio, is an important factor in protecting its businesses from price erosion. The loss of such intellectual property rights would be expected to have a material adverse effect on profitability. However, given the number of patents in Avecia’s portfolio, their diverse nature and their remaining lifetimes, such a loss is not likely on a concerted basis.
Overview |
Avecia is a global group of focused specialty chemicals businesses that develops, manufactures and sells high quality, technologically advanced, value-added chemical products to customers in a wide range of industries. For the year ended December 31, 2003, Avecia businesses generated turnover of £485.2 million.
The four main business segments of the group as at December 31, 2003 were:
| • | Fine Chemicals |
| • | Electronic Materials |
| • | Specialty Products (discontinued) |
| • | NeoResins |
In 2003, 36.7% of group sales were in the Americas, 27.0% were in Europe, and 36.3% were in the rest of the world. In addition, Avecia also has an “other” business segment that consists of the provision of manufacturing services to third parties in the UK, and central costs.
Currency fluctuation |
Our business operations are geographically diversified, with sales in over 70 countries and 12 manufacturing facilities located in 6 countries. In 2003, 73% of sales were made outside the United Kingdom and over 55% of the fixed production and cost base was in the United Kingdom. Results of operations and financial position are therefore significantly impacted by the fluctuation of the pound sterling against the other major currencies in which the group transacts business, primarily the US Dollar, the Japanese Yen, Euro and other European currencies.
The following table illustrates the fluctuations of the pound sterling against the group’s principal trading currencies since 2000 and the percentage of our turnover and costs in pound sterling and the other major currencies in which the group transacts business:
| Pound appreciation/ (depreciation) | % Turnover (a) | % Costs (b) | ||||||||||||||||
| 2003-2002 | 2002-2001 | 2000-2001 | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||
| US Dollar | 9% | 4% | (6% | ) | 37% | 42% | 37% | 33% | 33% | 34% | ||||||||
| Euro/equivalent | (9% | ) | (1% | ) | (2% | ) | 27% | 21% | 26% | 23% | 17% | 25% | ||||||
| Japanese Yen | 1% | 8% | 6% | 6% | 6% | 5% | 5% | 4% | 4% | |||||||||
| Pound Sterling | — | — | — | 27% | 28% | 25% | 37% | 44% | 31% | |||||||||
| (a) | percentage of group turnover in each of the currencies. |
| (b) | percentage of group fixed and variable costs in each of the currencies. |
Registered number: 3768265 | 32 |
Avecia Group plc
20-F
Year ended December 31, 2003
Divested operations |
In July 2001 the Novacote business, which formed part of the Stahl class of business, was sold. Subsequently the disposal of the remainder of the Stahl business was completed in January 2002. On July 31, 2003 Metal Extraction Products and Intermediates and Stabilizers were sold. Additives was sold on January 31, 2004 and the Biocides sale was completed on April 2, 2004.
Financial results |
Set forth below is a discussion of the financial condition and results of operations for the company. This discussion should be read in conjunction with our consolidated financial statements and notes included herein, which have been prepared in accordance with UK GAAP.
Year ended December 31, 2003 compared to the year ended December 31, 2002 |
The following table sets forth turnover for each of 2003 and 2002.
| Year ended December 31, 2003 | Year ended December 31, 2002 | Actual % change | |||||
| £ million | £ million | ||||||
Businesses | |||||||
| Continuing operations: | |||||||
| Fine Chemicals | 112.7 | 175.8 | (35.9 | ) | |||
| Electronic Materials | 63.0 | 63.8 | (1.3 | ) | |||
| NeoResins | 175.8 | 167.1 | 5.2 | ||||
| Other | 9.9 | 10.5 | (5.7 | ) | |||
| Turnover from continuing operations | 361.4 | 417.2 | (13.4 | ) | |||
| Discontinued operations: Specialty Products | 123.8 | 158.5 | (21.9 | ) | |||
| Total historical turnover | 485.2 | 575.7 | (15.7 | ) | |||
The following table sets forth operating (loss)/ profit for each of 2003 and 2002:
| Year ended December 31, 2003 | Year ended December 31, 2002 | Change in Operating Profit | Change in Depreciation & Amortisation | ||||||
| £ million | £ million Restated | £ million | £ million | ||||||
Businesses | |||||||||
| Continuing operations: | |||||||||
| Fine Chemicals | (87.8 | ) | (4.7 | ) | (83.1 | ) | (43.2 | ) | |
| Electronic Materials | 3.8 | 2.1 | 1.7 | (0.2 | ) | ||||
| NeoResins | 27.4 | 29.9 | (2.5 | ) | (0.2 | ) | |||
| Other including unallocated cost | (45.9 | ) | (61.6 | ) | 15.7 | 9.5 | |||
| Restructuring and site closure costs | — | (11.1 | ) | 11.1 | — | ||||
| Operating (loss)/profit from continuing operations | (102.5 | ) | (45.4 | ) | (57.1 | ) | (34.1 | ) | |
| Discontinued operations: Specialty Products | 21.4 | 28.2 | (6.8 | ) | 0.7 | ||||
| Total operating (loss)/profit | (81.1 | ) | (17.2 | ) | (63.9 | ) | (33.4 | ) | |
| 2002 has been restated to reflect the adoption of FRS 17. |
Registered number: 3768265 | 33 |
Avecia Group plc
20-F
Year ended December 31, 2003
In Fine Chemicals sales were significantly reduced by lower volumes manufactured for both DNA medicine customers and pharmaceutical companies. In 2002 significant volumes of DNA medicine were manufactured and supplied for a customers phase III clinical trial program. In 2003 there was an extensive programme to validate this manufacturing process up to the cGMP standard required for registration of the customer product, and this validation process precluded manufacture until completion. The validation process was completed to the customers’ satisfaction in December 2003, when manufacture of product commenced for the expected launch of the product by the customer in 2004.
Custom manufacture of pharmaceutical products was reduced in 2003, because demand for two intermediates from one customer was reduced due to delays in the launch of their product and the extent of the intermediates already stockpiled. In addition, due to a worldwide decline in demand from pharmaceutical companies for custom intermediates, it was not possible to secure volumes of new products for manufacture in the assets that were consequently under-occupied.
Sales in Fine Chemicals were also reduced by the disposal of the Intermediates and Stabilizers business in July 2003.
Operating losses in Fine Chemicals were significantly increased in 2003 by the impact of the lower volumes of DNA medicines and pharmaceutical intermediates manufactured in 2003. Although variable costs of raw material also decreased in line with the lower manufacture, other operating cost remained at or near 2002 levels. In DNA this was due to the need for manufacturing resource to conduct the process validation, thus reducing the opportunity for cost savings. In Pharmaceuticals Intermediates, assets were mothballed and staff surplus to requirements removed under the voluntary severance programme announced at the end of 2002. Although these measures saved some costs, they were only able to partly offset the lost margin from the Intermediates not supplied.
As a consequence of the reduction in utilisation for Fine Chemicals assets, and the consequent generation of profit, there was a significant charge of £55.3 million taken against the tangible assets utilised in the Pharmaceutical Intermediate businesses.
Electronic material sales were more than 1% lower in 2003 than 2002. However, the reduction was caused mainly by the significant weakening of the US Dollar against Sterling between the two years.
The main component of this growth is increased demand from customers for our Inkjet dyes and inks, which in part represents a recovery from the period of destocking pursued by our customers during 2002.
As a consequence of this increase in sales volumes operating profit in the Electronic Materials segment improved in 2003, despite the adverse effects of currency.
NeoResins increased its sales by over 5% over 2002, although over 3% of this increase was caused by the relative strength of the Euro over Sterling. The business attained this growth through moderate improvement in demand from its coatings customers in Europe, and high increases in volume sales to both coating and graphic arts customers in the Asia-Pacific region, reflecting both increased demand in that region through high levels of economic growth in China, and through the businesses improvement in its share of markets in the region.
NeoResins profit was reduced in 2003 compared to 2002 as the volume gains noted above were offset by the impact of raw material prices caused by the increased price of oil, and supply imbalance for key acrylic raw materials. In addition many of the volume gains came in product segments with lower than average margins, while temporary increase in freight costs caused by planned production changes across different manufacturing sites also held back profit growth.
Registered number: 3768265 | 34 |
Avecia Group plc
20-F
Year ended December 31, 2003
Speciality Product sales in 2003 at a headline level fell by nearly 22% from 2002 levels. Although business divestments and closures contributed to this the main impact on the fall was due to the effect of adverse currency (a weaker US Dollar).
All businesses in the segment managed to improve volumes through improved customer demand for their products. In our Biocides Protection and Hygiene business, price decreases made in the US market, in response to a competitors policy of aggressive price reductions, negated these volume improvement.
This segment’s operating profits fell between 2002 and 2003 by £6.8 million. All of the decrease is attributable to the adverse impact of currency, the effect of disposing of the Metal Extraction Products businesses in July 2003, and the adverse selling price movements noted above.
Analysis of other Items and Net Losses
| 2003 | 2002 | £m change | ||||
| Share of operating profit from JV | 1.7 | 2.2 | (0.5 | ) | ||
| Profit on disposal of business | 15.4 | 9.4 | 6.0 | |||
| Net interest and finance costs | (29.6 | ) | (30.9 | ) | 1.3 | |
| Taxation | (0.9 | ) | (6.5 | ) | 5.6 | |
| Net loss | (94.5 | ) | (43.0 | ) | (51.5 | ) |
Share of operating profits from our Joint Venture, Image Polymers, reduced in 2003 due to lower sales in the joint venture, caused by reduced customer demand for its toner products.
The profit on disposal represents the profits realised through the sale of the Metal Extraction Products and Intermediates & Stabilizers businesses to Cytec in July 2003. In 2002 the profit represented that realised on the disposal of the Stahl business.
Analysis of Net Interest and Finance Costs
| 2003 | 2002 | £m change | |||||
| Net interest payable on Bank loans | (10.6 | ) | (13.2 | ) | 2.6 | ||
| Interest on other loans | (39.5 | ) | (41.9 | ) | 2.4 | ||
| Net exchange gains and losses | 28.1 | 31.1 | (3.0 | ) | |||
| Amortisation of finance fees | (4.8 | ) | (6.4 | ) | 1.6 | ||
| FRS 17 | (2.4 | ) | — | (2.4 | ) | ||
| Other finance costs | (0.4 | ) | (0.5 | ) | 0.1 | ||
| (29.6 | ) | (30.9 | ) | 1.3 | |||
Net interest payable on bank loans decreased in 2003 due to the reduction in bank debt arising from term debt prepaid from the disposals in 2003, plus the favourable impact of reduced interest rates.
Interest on other loans represents interest paid in US Dollars on the 11% senior notes, and the reduction in 2003 reflects the weakening of the US Dollar to £ Sterling exchange rate in 2003.
Conversely the net exchange gain fell in 2003 again due to the move in exchange rates between 2002 and 2003.
Registered number: 3768265 | 35 |
Avecia Group plc
20-F
Year ended December 31, 2003
Under UK GAAP the finance fees associated with raising debt in 1999 were capitalised at that time and are written back against profit over the lifetime of the loans. With the early prepayment of debt, the relevant amount of unamortized fees are written off, leaving a reduced balance to be amortised during 2003.
Taxation was reduced in 2003 due to the impact of the reduction in operating profits described above which increased our loss on ordinary activities for the period. In addition two items, which created deferred tax charges in 2002 did not recur in 2003.
Year ended December 31, 2002 compared to the year ended December 31, 2001
The following table sets forth turnover for each of 2002 and 2001.
| Year ended December 31, 2002 | Year ended December 31, 2001 | Actual % change | ||||
| £ million | £ million | |||||
Businesses | ||||||
| Continuing operations: | ||||||
| Fine Chemicals | 175.8 | 193.0 | (8.9 | ) | ||
| Electronic Materials | 63.8 | 67.5 | (5.5 | ) | ||
| NeoResins | 167.1 | 158.6 | 5.4 | |||
| Other | 10.5 | 11.9 | (11.8 | ) | ||
| Turnover from continuing operations | 417.2 | 431.0 | (3.2 | ) | ||
| Discontinued operations: Stahl | — | 213.5 | ||||
| Discontinued operations: Specialty Products | 158.5 | 159.1 | (0.4 | ) | ||
| Total historical turnover | 575.7 | 803.6 | (28.4 | ) | ||
The following table sets forth operating (loss)/ profit for each of 2002 and 2001:
| Year ended December 31, 2002 | Year ended December 31, 2001 | Change in Operating Profit | Change in Depreciation & Amortisation | |||||
| £ million Restated | £ million Restated | £ million | £ million | |||||
Businesses | ||||||||
| Continuing operations: | ||||||||
| Fine Chemicals | (4.7 | ) | 13.2 | (17.9 | ) | (12.1 | ) | |
| Electronic Materials | 2.1 | 6.7 | (4.6 | ) | (1.0 | ) | ||
| NeoResins | 29.9 | 26.5 | 3.4 | 0.5 | ||||
| Other including Unallocated cost | (61.6 | ) | (50.4 | ) | (11.2 | ) | (8.3 | ) |
| Restructuring and site closure costs | (11.1 | ) | — | (11.1 | ) | — | ||
| Operating (loss)/profit from continuing operations | (45.4 | ) | (4.0 | ) | (41.4 | ) | (20.9 | ) |
| Discontinued operations: Stahl | — | 28.8 | (28.8 | ) | 7.0 | |||
| Discontinued operations: Specialty Products | 28.2 | 23.6 | 4.6 | 1.0 | ||||
| Total operating (loss)/profit | (17.2 | ) | 48.4 | (65.6 | ) | (12.9 | ) | |
Registered number: 3768265 | 36 |
Avecia Group plc
20-F
Year ended December 31, 2003
Financial Reporting Standard 17 ‘Retirement Benefits’ has been adopted for the year ended 31 December 2003. The financial information for 2002 and 2001 has been adjusted retrospectively.
Fine Chemicals’ turnover decreased mainly due to reductions in standardized agrochemical intermediates through the decision to exit manufacture of fluoruaromatic products, and exit of the major manufacturing stage of chloropropionic acid. Biotechnology sales reduced marginally due to timing of call-offs by customers, while sales of other chemical intermediates reduced due to lower demand from customers.
Operating profits in Fine Chemicals were slightly lower in 2002. The effect of the lower sales were partially offset by lower raw material costs and improved yields. The reduction in operating profits was caused by increased costs associated with expansion of resource in the DNA business, increased depreciation on new assets to support increased manufacture in Biotechnology and Pharmaceutical intermediates, and impairment charges on assets and goodwill.
Electronic Materials’ sales have decreased mainly due to lower demand from suppliers and manufacturers of Ink Jet printers caused by de-stocking in the face of lower sales of personal computers and printers.
Lower sales of Inkjet products were partially offset by lower materials and resource costs. Profit decreased due to the impact of consolidating Covion’s operating losses for the year ending December 31, 2002, following its acquisition on December 31, 2001.
NeoResins’ turnover increased mainly due to higher demand from Coating, Graphic Arts and Adhesives customers in the USA and Europe. The increase in operating profit was due primarily to the increased sales, together with lower net raw material costs.
Specialty Products’ turnover decreased in 2002 mainly due to the effect of exchange rates, the lower demand for Pool and Spa products caused by poor weather during the USA pool season, and price reductions in Protection and Hygiene in the USA due to competitive pressures. These factors were offset by higher demand from Additives customers, the sale of Pigments stock to Heubach who took over the business, and increased sales of metal extraction products due to four major mine project fills secured in the year.
Lower costs arising from reduced headcount and increased efficiency resulted in an increase in Specialty Products’ operating profit for the year
Unallocated costs include amortization of goodwill, and costs held centrally outside of business segments. Goodwill amortization decreased from £41.8 million for the year ended December 31, 2001 to £30.7 million for the year ended December 31, 2002 due to the goodwill written off as part of the Stahl disposal. This decrease was offset by £21.5 million of goodwill impairment charges for the year ended December 31, 2002 arising from reviews of carrying value in non-healthcare Fine Chemicals business sectors.
Other central costs, excluding amortization of goodwill, increased from £8.5 million for the year ended December 31, 2001 to £12.8 million for the year ended December 31, 2002. The increase in costs was due to adverse exchange movements on working capital balances caused by the weakening of the US dollar relative to the pound, being charged to profit.
For the year ended December 31, 2002 a charge of £11.1 million was taken for a voluntary severance programme initiated in 2002 and a small site closure announced in 2002. These actions will result in a reduction in headcount of nearly 200 in 2003, leading to full year reductions in costs of over £7 million by the end of 2004.
Profit on disposal of business
The profit on disposal of business of £9.4 million in the year ended December 31, 2002 relates primarily to the disposal of the Stahl business.
Net interest
The net interest expense for 2002 decreased significantly from 2001 mostly due to a reversal in the impact of unrealized exchange effects, and the effect of lower levels of debt arising from debt repayments made from the proceeds of the Stahl disposal.
Registered number: 3768265 | 37 |
Avecia Group plc
20-F
Year ended December 31, 2003
Taxation
The net taxation charge of £0.9 million arises as a consequence of non recognition of tax credits in certain loss making jurisdictions.
Liquidity and capital resources |
The group’s consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001 are set out below.
| Avecia Group plc Consolidated | ||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||
| 2003 | 2002 | 2001 | ||||
| £ million | £ million | £ million | ||||
| Cash inflow from operating activities | 47.3 | 107.8 | 120.5 | |||
| Dividends from joint ventures | 3.0 | 5.5 | 2.9 | |||
| Returns on investments and servicing of finance | (47.0 | ) | (56.9 | ) | (73.3 | ) |
| Taxation | (0.1 | ) | (4.1 | ) | (7.7 | ) |
| Capital expenditure | (49.6 | ) | (43.1 | ) | (62.1 | ) |
| Acquisitions and disposals | 76.6 | 196.2 | 31.1 | |||
Cash (outflow)/inflow before financing | 30.2 | 205.4 | 11.4 | |||
| Financing | (40.6 | ) | (201.2 | ) | (20.3 | ) |
(Decrease)/Increase in cash in the period | (10.4 | ) | 4.2 | (8.9 | ) | |
Operating activities |
Cash generated from operating activities declined to £3.2 million in 2003. The decrease was due to lower earnings and an outflow from increased working capital of £18.8 million, compared with an inflow from reduced working capital of £8.3 million in 2002.
Inventory levels for most businesses are managed on a day’s sales basis, which optimises the level of inventories while ensuring adequate supply for our customers. However, within our Fine Chemicals business where product is custom manufactured to customers’ specification there were higher levels of product not shipped at the end of 2003, either because they were in the process of being quality approved, or because manufacture was only recently commenced for new products. In addition the movement on creditors in 2003 reflect the impact of significant cash spend against the £11.1 million restructuring provision taken in 2002.
Investing Activities |
Capital expenditures in 2003 were £49.6 million compared with £43.1 million in 2002 and £62.1 million in 2001. Capital expenditure is authorised on a project by project basis, and during 2003 we authorised projects totalling £18.8 million compared with £67.4 million in 2002 and £39.6 million in 2001. Significant capital expenditure in 2003 included the continued construction and commissioning of our new large scale Biologics manufacturing facility in Billingham, UK, together with an expansion of our DNA manufacturing capability at Milford, Massachusetts. In 2004 we are planning for capital expenditure totalling £28 million. As at December 31, 2003, commitments relating to this capital expenditure totaled £4.3 million. This expenditure will be funded from internal cash generation.
Registered number: 3768265 | 38 |
Avecia Group plc
20-F
Year ended December 31, 2003
In July 2003 the group completed the disposal of the Metal Extraction Products and Intermediates and Stabilizers businesses to Cytec Industries Inc. The group proceeds arising on the disposal were $81.8 million (£58.5 million), which was received on July 31, 2003. This resulted in the repayment of £52.3 million of Term Debt as required by the bank facilities agreement.
In January 2002 the Group completed the disposal of the Stahl business to Luxembourg 101 S.A. and its affiliates. The gross proceeds arising on the disposal were Euros 378.7 million (£234.9 million), of which Euros 346.8 million (£215.1 million) was received as cash in January 2002, with the remainder received in January 2003. This resulted in the repayment of £187.3 million Term Debt as required by the bank facilities agreement. The net assets of the Stahl business at 31 December 2001 were £95.7 million, plus £124.1 million of associated goodwill, and during 2001 the business had delivered cash from operating activities of £24.4 million. The sale of the Stahl business in 2002, combined with the sale of the Novacote business in 2001, represented the disposal of the entire class of business previously reported as Stahl in the segmental analysis of the Group’s results.
In January 2004 Avecia completed the disposal of the Additives business to the Lubrizol Corporation for a consideration of £71m. In April 2004 Avecia completed the sale of the Protection & Hygiene and Pool & Spa businesses to Arch Chemicals for cash proceeds of $200m together with consideration in the form of shares valued at $15m. For further information on these disposals see Note 31, Post Balance Sheet Events.
Financing |
Cash used in financing activities in 2003 was £40.6 million, which includes scheduled debt repayments of £ 25.9 million and term debt prepaid from the proceeds of the business disposals amounting to £57.8 million. This compares with scheduled debt prepaid from disposal proceeds of £201.2 million in 2002.
During 2003 the business reduced cash balances by £8.2 million and drew down £44.0 million under the revolver facility available.
The group finances its operations by a mixture of bank borrowings and high yield bonds. The group’s long-term loans are raised centrally by group finance companies which fund operating subsidiaries, on commercial terms, all of which are included in the consolidated financial statements. The group borrows in the major global debt markets in a range of currencies at both fixed and floating rates of interest, using derivatives where appropriate to generate the desired interest rate profile. The derivatives used for this purpose are principally interest rate swaps and interest rate caps.
At December 31, 2003 the group had outstanding external borrowings of £473.2 million, comprising £306.2 million of 11% Senior Notes due 2009, £95.2 million of Senior Secured Credit Facility repayable in semi-annual installments between 2000 and 2006 (Term Loan A), £36.6 million of Senior Secured Credit Facility repayable in 2006/2007 (Term Loan B) and £35.2 million of Senior Secured Credit Facility repayable in 2007/2008 (Term Loan C). These facilities were originally established at the time of the Avecia Group plc acquisition of the specialty chemicals business of AstraZeneca plc and along with new share capital issued during the 6 months ended December 31, 1999 represent the greatest part of the financing.
The group also had available to it an undrawn £31.0 million Senior Secured Revolving Credit Facility until 2006. During the year ended December 31, 2003 Avecia drew down £64 million and repaid amounts totaling £20 million over several separate occasions under this facility, with a maximum drawing during the period of £44 million.
Under the terms of the banking facilities prior to the amendment thereto described in the following paragraph, the group would have been required to make scheduled principal repayments of approximately £27 million of the Senior Debt in 2004, comprising approximately £15 million on June 30, 2004 and £12 million on December 31, 2004.
Following the successful disposal of its Additives and Biocides businesses after 31 December 2003, the group used the proceeds of these disposals to prepay all term debt outstanding under the banking facilities, leaving only outstanding the drawn down amounts under the Revolving Credit Facility.
This financing structure was considered no longer appropriate for the needs of the group in the medium term and the group has secured amended bank financing to replace the revolving credit drawn down. The amended financing is for term debt of £100 million, repayable at 31 December 2005, together with a Revolving Credit Facility of £50 million. The amended facilities agreement is attached as Exhibit 4.(a).1 to this Form 20-F. As at 31 December 2003, the group was in breach of one of the financial covenants in force under the facilities agreement prior to this amendment but this has been waived by the group’s continuing banks.
Registered number: 3768265 | 39 |
Avecia Group plc
20-F
Year ended December 31, 2003
As part of the group’s ongoing strategy the group will continue to effect further divestments at such times as the directors believe will generate appropriate value. The directors’ view is that the amended bank financing will either be prepaid by further disposals or will be renegotiated by 31 December 2005.
The amended Senior Secured facilities also require the group to operate within certain financial ratios, including:
| i. | a ratio of Consolidated EBITDA to Consolidated Net Interest Charges (as defined in the Credit Agreement) |
| ii. | a ratio of Adjusted Cash Flow to Relevant Expenditure (as defined in the Credit Agreement) |
| iii. | a ratio of Net Senior Debt to Consolidated EBITDA (as defined in the Credit Agreement) |
| iv. | a maximum limitation on capital expenditure in each financial year. |
These ratios will be tested periodically (either quarterly or annually depending on the specific covenant) and compliance confirmed to the group’s bankers. The limits currently applicable to the financial ratios for each period are set out in the amended Senior Debt facilities agreement.
The principal sources of funds continue to be the cash flows generated from operating activities and utilization of the undrawn term and revolving credit facility discussed above.
Under the terms of the Senior Notes, Avecia Group plc and certain of its subsidiaries are subject to restrictions over the sale of assets unless certain, specified conditions are met.
In addition, Avecia Group plc has committed:
| – | that none of the restricted subsidiaries may declare or pay any dividend or other distribution on account of Avecia or any of its restricted subsidiaries’ equity interests unless certain, specified conditions are met; |
| – | not to purchase, redeem or otherwise acquire or retire any equity interest of itself or any intermediate holding company; |
| – | not to make any payment on or in respect of any subordinated debt with specified exceptions; |
| – | not to make any restricted investment; |
| – | to comply with specified restrictions over the incurrence of debt and issuance of preferred stock; |
| – | to comply with specified restrictions on merger, consolidation or sale of all or substantially all assets; |
| – | to comply with specified restrictions on transactions with affiliates; |
| – | to comply with specified restrictions on issuing guarantees of debt by restricted subsidiaries; |
| – | to comply with specified restrictions on designations of unrestricted subsidiaries. |
The Directors annually review the Group’s budget for the year and outline projections for the subsequent year, including cashflows and forecasts of headroom available against debt covenants. Following this review the Directors have formed a judgement that working capital is sufficient for the Group’s present requirements.
For details on the maturity profile of debt, currency and interest rate structure, see note 19 to the consolidated financial statements.
Research, development and process technology |
Avecia’s research, development and process technology base has a long history of achievement in organic chemistry and color science and has significant expertise in polymer science, colloid science and microbial fermentation. A total of £57.7 million in 2003, £58.5 million in 2002 and £60.5 million in 2001 has been spent in research, development and process technology.
Over the years, the group’s technological abilities and continuous high levels of research, development and process technology investment have enabled it to achieve significant milestones. For example in the 1980s, Electronic Materials helped pioneer non-smudging inks for ink jet printers, and today the business is developing novel products for color copiers, laser printers and flat panel display products. Other research, development and process technology efforts have allowed Fine Chemicals to establish a strong position in the fast-growing market for pharmaceutical intermediates and a leading position in the emerging DNA medicines market. Similarly, efforts in NeoResins and several Specialty Products businesses have enabled each business to develop key products and technology, which differentiate them from their competitors in the key markets.
Registered number: 3768265 | 40 |
Avecia Group plc
20-F
Year ended December 31, 2003
The research, development and process technology efforts are driven by the specific requirements and market trends in each of the businesses. Where appropriate, research, development and process technology efforts are managed in cross-functional teams, which include commercial and manufacturing personnel. This structure supports clear business and customer focus.
Most of the research and development activities across all businesses are driven by specific customer programs and in many cases are carried out through collaborative arrangements. The largest research centre in Avecia is located at Blackley, near Manchester, with 245 scientists. A further 80 scientists are located at Waalwijk in the Netherlands and 62 scientists in Frankfurt in Germany. In addition, Fine Chemicals has specialist research, development and process technology operations in Teesside and process technology departments at Grangemouth and Huddersfield. Blackley now supports the research, development and process technology functions of Electronic Materials and Specialty Products and is also home to corporate centers of excellence in polymers and analytical science, chemical hazards and knowledge management — which support all the businesses. NeoResins’ research, development and process technology operations are headquartered in Waalwijk.
The process technology groups, responsible for process research and development, are principally located at the main manufacturing sites, with substantial groups at Huddersfield, Grangemouth and Billingham in the United Kingdom, Waalwijk in the Netherlands, and in the United States and Canada.
A substantial number of technical service personnel work in customer service laboratories close to the customers and the markets in which the individual businesses operate. For more complex problems requiring in-depth investigation, the laboratories refer to the research and process technology groups. Electronic Materials and Fine Chemicals’ research, development and process technology is organized into customer-focused teams. This organization structure enables scientists and technicians to be in close contact with major customers in order to provide rapid solutions to customer problems and needs. The business strives to support innovation by devoting significant resources and managerial support to project management and rigorous stage-gate processes to reduce lead times and facilitate market entry for products.
Fine Chemicals and Electronic Materials have been identified as the principal sources of growth in the future, and Avecia therefore intends to devote additional amounts to research, development and process technology to support these businesses.
The following table sets forth the current focus areas in each of the businesses:
Business | Targeted applications | ||
| Fine Chemicals | • | Asymmetric hydrogen transfer catalysis and biotransformations (for chiral compounds) | |
| • | Solid phase/solution phase oligonucleotide assembly technology, novel expression systems for protein production, biosynthesis of large peptides. | ||
| • | Solid phase peptide assembly and purification technology and automated techniques for process development. | ||
| • | Phosphine derivatives for pharmaceuticals and catalyst ligands. | ||
| • | Advanced systems used for the prevention of autopolymerization of monomers during manufacture. | ||
| Electronic Materials | • | Dye materials, ink and pigment materials for ink jet printers. | |
| • | Chemically produced toners, charge transport materials and infra-red absorbers in electrophotography. | ||
| • | Organic light emitting materials for use in flat panel display products. | ||
| • | Maintaining technical leadership in the Image Polymers Joint Venture. | ||
| NeoResins | • | Maintaining technical leadership and formulations expertise in targeted application segments in Coatings and Graphic Arts. | |
| • | Continuous improvements in process chemistry. | ||
| Specialty Products (disposed) | • | Fungicides for PVC, PU & silicones and antibacterial surfaces in particular textiles and food preparation areas. | |
| • | Improved systems for the preservation of Industrial water based products. | ||
| • | Novel polymeric hyperdispersants and rheology modifiers for use in coatings, inks and plastics. |
Registered number: 3768265 | 41 |
Avecia Group plc
20-F
Year ended December 31, 2003
Critical accounting policies |
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are those described below:
Revenue recognition – Revenue is recognized when services have been rendered and significant risks and rewards in respect of ownership of the products are passed to the customer. Open market sales form the basis of most of Avecia’s turnover, and are recognized when legal title on manufactured product passes to the customer. Within Fine Chemicals, our dealings with customers are often governed by detailed contracts, which can have a significant bearing on determining when revenue should be recognized. Avecia evaluates the terms contained in such contracts in accordance with UK GAAP, using judgement to determine whether the risks and rewards of ownership have transferred to the customer, in arriving at the amounts to be recognized as revenue in each period. In the twelve months to December 31, 2003 the value of sales where contractual terms were a factor in determining revenue amounted to approximately £81 million.
Goodwill, impairment and amortisation – Purchased goodwill is capitalised and amortized over its estimated useful life, which is currently estimated to be 15 years. In addition goodwill is reviewed for impairment. The need for an impairment write down is assessed with reference to discounted cash flows estimates. As at December 31, 2003, Avecia held £277.7 million of unamortized goodwill in its balance sheet, having amortised £29.6 million of goodwill in the twelve months to December 31, 2003. A write-down of goodwill arising from impairment occurred during the same period amounting to £13.4 million. A change in the estimated life of goodwill, or a change in circumstances which may lead to an impairment of goodwill, would impact both the value of goodwill in the balance sheet and the amount of amortisation charged to operating profit in the period. We estimate that a reduction of one year in the estimated useful life of goodwill would increase the annual amortisation charge by £2.0 million.
Fixed Assets, depreciation and impairment – The book value of each fixed asset is written off evenly over its estimated remaining life. Reviews are made periodically of the estimated remaining lives of individual productive assets, taking account of commercial and technological obsolescence as well as normal wear and tear. A change in the estimated remaining useful life of an asset may lead to a material impairment, reducing the asset value in the balance sheet and resulting in an increased depreciation charge in the profit and loss account. At December 31, 2003, Avecia held £263.2 million of tangible fixed assets at net book value in the balance sheet. During the year ended 2003 Avecia charged £34.3 million of depreciation, and charged a further impairment of £55.3 million in respect of under-utilized assets in the Pharmaceuticals business.
Post Retirement Benefits – Avecia operates both Defined Benefit and Defined Contribution schemes, and has adopted FRS17 in full for the year ended December 31, 2003. In the case of defined benefit schemes, assets are measured using market values. Liabilities are measured using a projected unit method and discounted at the current rate of return of a high quality corporate bond of equivalent term and currency. Costs and liabilities are assessed in accordance with the advice of independent qualified actuaries using certain assumptions, for example rate of inflation, rate of salary increases, etc (see Note 27 : Pensions). Variations in investment returns or assumptions will have a material impact on the value of pension assets and liabilities.
Financial instruments – Receipts and payments on interest rate instruments are recognized on an accrual basis over the lives of the instruments, whilst gains and losses on contracts hedging forecast transaction cash flows are recognized in the same hedged periods. At December 31, 2003 the group had fixed interest rate swaps with a notional value of £32.9 million, with a remaining maturity of 0.5 years. In addition, at December 31, 2003 the group had £96.5 million interest caps in place. At December 31, 2003 the group had £49.3 million of outstanding gross foreign exchange contracts as a result of the transaction exposure cover outlined above. At December 31, 2003 the difference between book value and fair value of all financial instruments was an additional £11.0 million liability. Financial instruments were discounted at the current market yield rates.
Registered number: 3768265 | 42 |
Avecia Group plc
20-F
Year ended December 31, 2003
US GAAP |
The net US GAAP result for the year ended December 31, 2003 was a loss of £109.8 million. The corresponding figure under UK GAAP was a loss of £94.5 million. The most significant differences compared to UK GAAP were the removal of goodwill amortization according to SFAS 142 (£29.6 million profit) the additional goodwill impairment charged under US GAAP (£11.7 million loss) and the additional fixed asset impairment charged under US GAAP (£23.1 million loss). A full reconciliation of the differences is included in Item 18 Financial Statements, note 34.
New accounting standards |
UK GAAP |
Amendment to FRS5 “Reporting the substance of transactions”: Revenue Recognition was issued in November 2003. This replaces the Exposure Draft issued in February 2003. This Application Note does not represent a change to existing Accounting Practice but provides additional guidance in specific areas. Adoption has not had a material impact on Avecia’s financial statements.
Financial Reporting Standard 17 (FRS 17) — “Retirement Benefits” sets out the requirements for accounting for retirement benefits, including the fair value of assets and liabilities arising from employer’s obligations, the treatment of related costs, and the level of disclosure. Avecia has fully adopted FRS 17 for the year ended December 31, 2003. The comparative figures have been restated accordingly. The adoption of FRS17 has reduced profit in 2003 by £1.9 million (2002: £0.4 million 2001: £nil) on recognition of service costs and other finance costs and income, has reduced the Profit and Loss reserve by £113.2 million (2002: £93.9 million) on recognition of the pension liability, and has reduced net assets on the balance sheet by £108.4 million (2002: £81.3 million) on recognition of the net pension liability less pension assets and liabilities previously recognised in other balance sheet lines.
US GAAP |
| US Reporting Standards |
SFAS No. 143 “Accounting for Asset Retirement Obligation” was issued during 2001 and is effective for accounting periods beginning on or after June 15, 2002. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets. The adoption of SFAS143 has not had a material impact on the financial statements.
In November 2002, the Emerging Issues Task Force (EITF) issued its consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses the issues of how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.
SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” was issued in April 2003. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Other than the specified exceptions, this Statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the financial statements.
SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” was issued in May 2003. This Statement requires an issuer to classify the following instruments as liabilities (or assets in some circumstances):
Registered number: 3768265 | 43 |
Avecia Group plc
20-F
Year ended December 31, 2003
A financial instrument issued in the form of shares that is mandatorily redeemable – that embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur
A financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets (for example, a forward purchase contract or written put option on the issuer’s equity shares that is to be physically settled or net cash settled)
A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is based solely or predominantly on any of the following:
| (i) | A fixed monetary amount known at inception, for example, a payable settleable with a variable number of the issuer’s equity shares |
| (ii) | Variations in something other than the fair value of the issuer’s equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer’s equity shares |
| (iii) | Variations inversely related to changes in the fair value of the issuer’s equity shares, for example, a written put option that could be net share settled. |
SFAS No.132 (revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106” was issued in December 2003.This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by existing Standards.
FIN No. 46R “Consolidation of variable interest entities” is effective immediately for all entities/structures created after March 31, 2003. For structures created prior to this date it becomes effective at the end of the first fiscal year beginning after June 15, 2003 (for non-public companies). Variable Interest Entities include entities that have one or more of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity the finance its activities without additional subordinated financial support; (2) the equity investors lack essential characteristics of a controlling financial interest (as defined by FIN46R) and (3) the equity investors have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. Avecia does not currently have any such entities and adoption of FIN46R is not expected to have a material impact on the financial statements.
Recent trends |
The most significant trend recognised during 2003 was the continued impact of adverse worldwide economic conditions on many of our businesses. These trends have continued since 31 December 2003, with only limited improvement apparent which would create significantly greater demand from our customers for our products. Our levels of production and inventories in these businesses are therefore being maintained at levels consistent with 2003 for the time being. A major part of our production and revenues in Fine Chemicals arises from the manufacture and supply of DNA medicines, peptides, and pharmaceutical intermediates according to customers’ specific requirements. The lack of demand from Fine Chemicals customers for our manufacturing services of pharmaceutical intermediates experienced during 2003 has continued, and consequently a large part of our manufacturing capacity for these products remains underutilised.
Off-Balance Sheet Arrangements |
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Registered number: 3768265 | 44 |
Avecia Group plc
20-F
Year ended December 31, 2003
Aggregate Contractual Arrangements |
The following table sets out the group’s contractual cash obligations under debt arrangements, leases, and other non-cancellable purchase commitments.
| Payments due by period | ||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||
| Long term debt obligations | 517.2 | 74.1 | 82.0 | 54.9 | 306.2 | |||||||||||
| Capital lease obligations | 5.4 | 0.9 | 1.4 | 1.3 | 1.8 | |||||||||||
| Operating lease obligations | 4.2 | 0.8 | 1.3 | 1.0 | 1.1 | |||||||||||
| Purchase obligations | 4.3 | 4.3 | — | — | — | |||||||||||
| Total | 531.1 | 80.1 | 84.7 | 57.2 | 309.1 | |||||||||||
Purchase obligations represent purchase commitments in respect of capital expenditure. The above liabilities exclude pensions, post-retirement and other non-contractual liabilities. Liabilities relating to pensions and post-retirement benefits are set out in Note 27 to the Financial Statements. In addition the group has £2.5 million of contingent obligations relating to guarantees and standby letter of credit issued in the ordinary course of business to financial institutions and suppliers to secure short term support for a variety of commercial and operational transactions.
Registered number: 3768265 | 45 |
Avecia Group plc
20-F
Year ended December 31, 2003
Directors and senior management
The following table sets forth information regarding the directors and executive officers of Avecia Group plc.
Name | Position | Term of office | Period of service in this capacity | |||||||
| Mr Jeremy P Scudamore | Chief Executive Officer, Director | Ongoing | Appointed June 23, 1999 | |||||||
| Mr David C Greensmith | Chief Operating Officer, Director | Ongoing | Appointed June 23, 1999 | |||||||
| Mr Derrick A Nicholson | Chief Financial Officer, Director | Ongoing | Appointed June 23, 1999 |
All of the Directors set out above are directors of Avecia Holdings plc and Avecia Finance plc.
Jeremy Scudamore is aged 57. He joined ICI’s (subsequently Zeneca’s) agrochemical businesses in 1970, culminating in appointment as Business Director for Zeneca Agrochemicals in 1994. He was appointed Chief Executive Office of Zeneca Specialties (the predecessor business to Avecia) in 1997, and Chief Executive Officer of Avecia in 1999. He is on the board of the Chemical Industries Association, and on the editorial board of European Chemical News, and the advisory board of Chemical and Engineering News.
David Greensmith is aged 51. He joined ICI (subsequently Zeneca) in 1976 and held a variety of commercial roles in different chemicals businesses prior to being appointed Business Director for Zeneca Specialties in 1997, and subsequently Chief Operating Officer for Avecia in 1999.
Derrick Nicholson is aged 54. He joined ICI (subsequently Zeneca) in 1975 and held a range of financial positions in a number of different international chemical businesses within the group, culminating in his appointment as the Zeneca Group Corporate Finance Manager in 1997. He was appointed Chief Financial Officer for Avecia in 1999.
Compensation
None of the directors or executive officers of Avecia Group plc had interests in options or ordinary shares of Avecia Group plc or its subsidiaries at the end of the financial period.
During the year ended December 31, 2003, the aggregate amount of compensation paid by group companies to all directors and officers of Avecia Group plc was £819,715.
The executive directors have service contracts, on indefinite terms, with an appropriate group company, which are capable of termination on 12 months notice by the company. The directors’ service contracts provide for specified benefits upon termination of employment: where termination is by reason of redundancy or unfair dismissal the benefit is 175% of annual base salary, and where by any other reason (other than for cause) is 125% of monthly base salary for the unexpired period of notice up to 12 months maximum.
The directors are contributing members of the Avecia UK Pension Fund. Refer to note 27 to the financial statements included herein for further details.
Board practices
The board of the parent company, Avecia Holdings plc has established the following standing committees, each with defined terms of reference, procedures, responsibilities and powers. The minutes of committee meetings are made available to all directors.
Audit committee: The audit committee comprises all the non-executive directors of Avecia Holdings plc and is normally chaired by a director other than the Chairman of Avecia Holdings plc. The names of the committee members are : M Askari, JGG Clarke, RD Lapthorne, BA Linden, PE Yea, T de Boysson .
The Chief Executive and Chief Financial Officer, together with the external auditors, Group Controller, Head of Internal Audit and Company Secretary, attend all meetings of the Committee but are not members of the Committee. The committee also meets the external auditors without management present. The audit committee is charged with monitoring the adequacy and effectiveness of the systems of internal control and audit function, appointing, reviewing the scope and results of the work of the external auditors and reviewing the annual and interim financial statements of the group and related policies and assumptions.
Registered number: 3768265 | 46 |
Avecia Group plc
20-F
Year ended December 31, 2003
Remuneration committee: The remuneration committee comprises all the members of the Audit Committee, but it is chaired by the Chairman of Avecia Holdings plc. The Chief Executive attends meetings of the committee (save when his own remuneration is under consideration). The functions of the committee are to determine remuneration policy (including share option and incentive arrangements) for the executive directors and senior managers in the group and determine the amount of remuneration to be paid.
During the year ended December 31, 2003, the aggregate amount set aside or accrued by Avecia Group plc to provide pension, retirement or similar benefits for directors and officers of Avecia Group plc, who are members of the Avecia Group pension scheme, pursuant to any existing plan provided or contributed to by the company was £59,460.
Employees
The following tables set out employee figures by business and by geographic region.
| Avecia Group plc Consolidated | ||||||||||
Average number of employees | For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | |||||||
| United Kingdom | 1,766 | 1,934 | 1,969 | |||||||
| Continental Europe | 604 | 605 | 1,236 | |||||||
| The Americas | 673 | 843 | 1,283 | |||||||
| Asia, Africa and Australasia | 58 | 58 | 295 | |||||||
| 3,101 | 3,440 | 4,783 | ||||||||
| Avecia Group plc Consolidated | ||||||||||
Average number of employees | For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | |||||||
| Fine Chemicals | 1,225 | 1,381 | 1,267 | |||||||
| Electronic Materials | 487 | 558 | 453 | |||||||
| Specialty Products (Discontinued) | 508 | 591 | 695 | |||||||
| Neoresins | 666 | 678 | 698 | |||||||
| Stahl (Discontinued) | — | — | 1,445 | |||||||
| Other | 215 | 232 | 225 | |||||||
| 3,101 | 3,440 | 4,783 | ||||||||
Of the current employees approximately 1,000 work in research and development and technical services, 1,200 are employed in manufacturing and 900 are employed in the marketing and selling of products and administration of the businesses. Approximately 1,300 of these employees are members of trade unions.
Responsibility for employees rests with the separate businesses and functional departments. The human resources function is partly centralized at Manchester for the UK and Wilmington, Delaware for the US, from where employee-related matters such as salaries and benefits, training and development, health and safety and communications issues are co-ordinated.
Registered number: 3768265 | 47 |
Avecia Group plc
20-F
Year ended December 31, 2003
Most of the employees are on full-time permanent contracts. As most operations are relatively complex and require advanced skills and knowledge, the level of employee commitment is highly valued. Extensive training programs exist at all locations covering all levels of workforce, including senior management.
Historically, the business has enjoyed good labor relationships and is committed to maintaining these relationships. There has been no significant labor dispute in any of the business’s sites since the formation of Avecia. A constructive approach to union relationships is taken where there are unionized sites and the business has been able to secure the co-operation of both unions and the workforce with regard to significant changes and the process of continuous improvement.
Share ownership
None of the directors or executive officers of Avecia Group plc who served during the period own or have options to purchase securities from the registrant or its subsidiaries.
Major shareholders
Avecia Group plc is a wholly owned subsidiary of Avecia Finance plc, which is itself a wholly owned subsidiary of Avecia Holdings plc. Avecia Holdings plc is owned by Avecia (Jersey) Limited. Avecia (Jersey) Limited is controlled by the affiliates of Investcorp SA and Cinven Limited.
| Investcorp | Cinven | |||
| Investcorp House | Pinners Hall | |||
| 48 Grosvenor Street | 105-108 Old Broad Street | |||
| London | London | |||
| W1Y 6DH | EC2N 1EH |
The major shareholders do not have different voting rights. The voting rights of preference shareholders are described in Item 10.
Avecia does not know of any arrangements, the operation of which might result in a change in control of the company.
Related party transactions
In June 1999, Cinven and Investcorp S.A. jointly directed the formation of Avecia, and its acquisition of the Zeneca Specialties business. Cinven and Investcorp S.A. continue to provide consulting services to the Group, for which they may receive payments of up to £400,000 per annum. In January 2002 Avecia completed the sale of its Stahl business to Luxembourg 101 S.A. and its affiliates. The final cash payment was received in January 2003. The purchase of Stahl from Avecia was managed by Investcorp S.A. on behalf of Luxembourg 101 SA and its affiliates, which under the terms of the Bond Indenture means that Luxembourg 101 SA is considered a related party. The sale of the Stahl business was therefore conducted under the terms of the bond indenture relating to related party transactions.
Other than with respect to employment agreements and compensation arrangements, there have been no material transactions between the company and management during the period covered by this 2003 20-F (or in any previous year in the last three years), nor are there presently proposed to be any material transactions, to which the company or any of its subsidiaries was or is a party and in which any director or executive officer, or ten per cent shareholder, or any relative or spouse thereof had or is to have a direct or indirect material interest.
During such periods there has been no, and at present there is no, material outstanding indebtedness to the company owed or owing by an director or executive officer of the company or any associate thereof.
Registered number: 3768265 | 48 |
Avecia Group plc
20-F
Year ended December 31, 2003
Consolidated financial statements and other financial information
Refer to item 18 for details of the financial statements included in this annual report.
Legal proceedings
The company is involved from time to time in various claims and law suits incidental to the ordinary course of the business, such as contract disputes, product liability, personal injury claims and workers’ compensation claims. The company maintains insurance and in certain circumstances has recourse to AstraZeneca and, to the extent that the amounts in dispute may not be covered by such insurance, maintains provisions in those situations where management deems it appropriate in accordance with UK GAAP.
Although we believe our insurance coverage is adequate, we could, however, be required to pay a material amount if a claim is made against us that is not covered by insurance or for which we are not otherwise indemnified. Any such claim could have a material adverse effect on our financial condition and results of operations.
Export sales
Turnover by geographic destination is shown in note 3 ‘Segmental Information’ for the years ended December 31, 2003 and 2002. The percentage and amount of export sales in the total amount of sales volume for the year ended December 31, 2003 is summarized below:
Sales destination | Sales value £million | Percentage of total sales value | |||||
| Continental Europe | £172.1 million | 35.5% | |||||
| The Americas | £183.2 million | 37.8% | |||||
| Asia, Africa and Australasia | £78.5 million | 16.2% | |||||
Dividends
Avecia Group plc has no plans to pay dividends in the foreseeable future.
Significant changes
On January 31, 2004 Avecia completed the sale of the Additives business to The Lubrizol Corporation for a consideration of £71 million. The business’ principle manufacturing asset at Huddersfield, UK is included in the sale. Other manufacturing facilities at Grangemouth, Scotland will continue to be operated by Avecia under a long term supply agreement. Approximately 110 employees transferred to Lubrizol upon completion.
In March 2004 Avecia signed a definitive agreement to sell its Biocides business to Arch Chemicals Inc for approximately US$215 million. The disposal was completed on April 2, 2004. Dedicated manufacturing assets at Huddersfield, Grangemouth and Seals Sands in the UK, and Mount Pleasant in the USA, transferred to Arch as part of the sale. Arch also acquired as a technical service laboratory and commercial offices in various locations. Approximately 290 employees worldwide have been transferred to Arch.
Registered number: 3768265 | 49 |
Avecia Group plc
20-F
Year ended December 31, 2003
Price history
Avecia Group plc is a wholly owned subsidiary of Avecia Holdings plc and accordingly, shares in Avecia Group plc are not publicly traded. The table below sets out for the year ended December 31, 2003 and for the quarters and months indicated, the reported high and low market values for the 11% senior notes due 2009, based on financial information provided by Datastream:
| Luxembourg Stock Exchange per 11% senior note due 2009 | |||||||
| High | Low | ||||||
Annual high and low market prices | |||||||
| Year ending December 31, 2001 | 105.8 | 93.3 | |||||
| Year ending December 31, 2002 | 104.0 | 79.4 | |||||
| Year ending December 31, 2003 | 93.0 | 79.4 | |||||
| High | Low | ||||||
Quarterly high and low market prices | |||||||
| Quarter ending March 31, 2002 | 103.5 | 96.0 | |||||
| Quarter ending June 30, 2002 | 104.0 | 98.5 | |||||
| Quarter ending September 30, 2002 | 98.5 | 94.5 | |||||
| Quarter ending December 31, 2002 | 97.5 | 79.4 | |||||
| Quarter ending March 31, 2003 | 84.1 | 79.4 | |||||
| Quarter ending June 30, 2003 | 89.5 | 87.0 | |||||
| Quarter ending September 30, 2003 | 90.0 | 88.0 | |||||
| Quarter ending December 31, 2003 | 93.0 | 85.0 | |||||
| Quarter ending March 31, 2004 | 94.3 | 85.0 | |||||
Monthly high and low market prices | |||||||
| October 2003 | 93.0 | 87.0 | |||||
| November 2003 | 93.0 | 85.0 | |||||
| December 2003 | 93.0 | 88.5 | |||||
| January 2004 | 94.3 | 92.0 | |||||
| February 2004 | 92.5 | 87.0 | |||||
| March 2004 | 89.0 | 85.0 | |||||
Markets
The outstanding exchange 11% senior notes due 2009 are listed on the Luxembourg Stock Exchange. The 16% redeemable pay-in-kind preference shares due 2010 are not registered for trading on any exchange.
The ordinary shares, preference shares and deferred shares of the company are not listed for trading on any exchange.
Registered number: 3768265 | 50 |
Avecia Group plc
20-F
Year ended December 31, 2003
Memorandum and articles of association |
General |
Avecia Group plc was incorporated under the Companies Acts of England and Wales 1985 to 1989 as a public company limited by shares, registered under company number 3768265. The object for which the company was established can be found in Section IV of its Memorandum of Association, being to carry on business as a general commercial company.
Directors |
Directors’ interests |
Provided that a director who is interested in a contract declares the nature of his interest at a meeting of the directors, that director may vote in respect of any contract or proposed contract or arrangement in which he is interested, and if he does vote his vote shall be counted and he will be counted in the quorum for the meeting.
Directors’ remuneration |
The aggregate remuneration (if any) of the directors is determined by an ordinary resolution of the company. The aggregate remuneration is divided among the directors as they may agree. The directors, without the approval of any resolution of the company, may establish and contribute to an employee’s share scheme, option or incentive schemes and pension and life assurance funds.
Directors’ powers |
The directors may borrow and raise money, including the giving of any guarantee, contract of indemnity or suretyship and the grant of any security, mortgage, charge or discharge for any debt or obligation of the company in any manner or way in which the company itself is empowered so to raise, give or grant.
Directors’ term of office and shareholding requirements |
The directors are not required to retire by rotation and there is no age limit at which a director must retire. A director need not hold shares in the company in order to qualify for office as a director.
Share rights |
Avecia Group plc has issued both US dollar denominated preference shares and sterling ordinary shares. The preference shares have a nominal value of US$1 each and were issued with a premium of US$24 each, giving an issue price of US$25. The ordinary shares have a nominal value of £1 each. The ordinary shares rank parri passu among themselves. The preference shareholders have certain income, redemption and repayment rights in priority to the holders of the ordinary shares.
Dividends |
The preference shareholders have the right to receive dividends in priority to the ordinary shareholders at a fixed rate per annum of 16% of the issue price together with any arrears or accruals of dividends. There is provision for the payment of additional dividends to the preference shareholders if there is a default in the registration rights attaching to the preference shares. Prior to July 1, 2004, to the extent that the company decides not to pay the dividends upon the preference shares in cash, such dividend may be paid by the company through the issue and allotment of further preference shares to the preference shareholders. Ordinary shareholders are entitled to dividends only as and when declared by the company.
Registered number: 3768265 | 51 |
Avecia Group plc
20-F
Year ended December 31, 2003
Capital |
The preference shareholders have priority of repayment of capital on a winding up or other return of capital. Capital must be applied first in repayment of the issue price of the preference shares plus any unpaid arrears and accruals of dividends. Any balance is returned to the holders of the ordinary shares.
Redemption |
The company may redeem all, but not some, of the preference shares for a redemption price per share equal to 116% of the liquidation preference value ($25 per share). The company may redeem all or any of the preference shares after January 1, 2005 at varying redemption prices. All outstanding preference shares must be redeemed on July 1, 2010 at 110% of the issue price.
Board representation |
The holders of the preference shares may appoint one person to be a non-executive director of the company in certain circumstances, including the failure by the company to redeem the preference shares when it is obliged to do so and if, after July 1, 2004, three or more installments of the fixed dividend on the preference shares are not paid in full.
Variation of Rights |
The rights attaching to each class of shares may only be varied with the consent in writing of more than three quarters of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of that class.
Voting |
The preference shares do not carry voting rights in respect of general meetings of the company. However in the event that a resolution is proposed affecting the rights of the preference shareholders in relation to the repayment of capital, the variation of the rights attaching to the preference shares or for the winding up or liquidation of the company, then the holders of the preference shares shall be entitled to receive notice of, attend and vote at such general meetings. Ordinary shares carry full voting rights.
Annual and extraordinary general meetings |
The annual general meeting of the company, and any extraordinary general meeting called for passing a special resolution, require twenty-one clear days’ notice.
Other extraordinary general meetings may be convened by fourteen clear days’ notice. Shorter notice periods may be given if in the case of an annual general meeting, all members entitled to attend and vote agree and, in the case of an extraordinary general meeting, ninety-five percent of members entitled to attend and vote agree. Any notice of a general meeting of the company must specify the time and place of the meeting and state the general nature of the business to be transacted.
The quorum at a general meeting is generally set at one member.
Transfers of shares and change of control |
There are provisions regulating the sale and transfer of ordinary shares in the event that such a sale and transfer would result in less than 50% of the issued ordinary shares of the company being held by Avecia Finance plc. No such transfer of shares will be permitted unless all the holders of the preference and ordinary shares are entitled to sell their shares to the proposed purchaser on the same terms and conditions as the original offer was made.
If a sale and transfer of shares is proposed which would result in certain changes in the beneficial ownership of the company, an offer must be made by the company to redeem all the preference shares.
Registered number: 3768265 | 52 |
Avecia Group plc
20-F
Year ended December 31, 2003
Disclosure requirements |
The Companies Act 1985 applies to the disclosure of share ownership in the company. The initial threshold for disclosure of shareholding is that any person having a material interest in 3% or more of the ordinary shares of the company will be required to notify the company of his holding. A person having an interest, material or otherwise, in 10% or more of the ordinary shares of the company will also be required to notify the company of his holding. The requirements of the City Code of Takeovers and Mergers will apply to any shareholder seeking to increase his holdings in the company above certain thresholds.
Material contracts |
The company has not entered into any material contracts outside the ordinary course of the business.
Exchange controls |
There are no UK foreign exchange controls currently in force that restrict the export or import of capital or which affect the remittance of interest, dividends or other payments to non UK resident holders of the company’s securities (except as otherwise detailed in Taxation section below).
There are no limitations imposed by UK law or the company’s memorandum and articles of association which restrict the right of non UK resident or non UK citizen owners to hold or vote the securities of the company.
Taxation |
11% senior notes due 2009 |
UK tax considerations |
The following summary describes the principal United Kingdom tax consequences of the ownership of the 11% senior notes due 2009 (hereinafter referred to as ‘the notes’). Except where stated otherwise, this description deals only with the position of persons who are the absolute beneficial owners of their notes.
Avecia does not address all the tax consequences that may be relevant to a note holder. Nor do they address any of the tax consequences to holders that may be subject to special tax treatment, such as dealers in securities. The discussion below is generally based upon current United Kingdom tax laws and United Kingdom Inland Revenue practice in effect as at the date of this document which may be subject to change possibly on a retroactive basis.
Prospective investors are advised to consult their own tax advisers concerning United Kingdom tax consequences in the light of their particular situations as well as any consequences arising under the law of any other relevant tax jurisdiction. Avecia make no representations with respect to the tax consequences to any particular holder of notes.
Interest on the global notes and definitive notes |
The global notes and definitive notes constitute “quoted Eurobonds” within the meaning of section 349(4) of the Income and Corporation Taxes Act 1988 (“ICTA”) as long as they continue to be listed on a “recognized stock exchange” within the meaning of section 841 of ICTA. The Luxembourg Stock Exchange is currently recognized for these purposes. Payments of interest on the global notes may be made without withholding on account of United Kingdom income tax.
If a UK collecting agent receives interest on the notes on your behalf and pays it on to you, the collecting agent may be required to make a return of information to the Inland Revenue under section 18 TMA1970.
Interest on the notes may be subject to income tax by direct assessment even where paid without withholding as it will be United Kingdom source income for United Kingdom tax purposes. If you are a holder who is not resident in United Kingdom and UK source interest is received without deduction or withholding of UK tax you will not be chargeable to UK tax unless you carry on a trade, profession or vocation in the United Kingdom through a United Kingdom branch or agency in connection with which the interest is received or to which the notes are attributable. There are exemptions for interest received by certain categories of agent (such as some brokers and investment managers).
Registered number: 3768265 | 53 |
Avecia Group plc
20-F
Year ended December 31, 2003
United Kingdom corporate taxpayers |
If you are a corporate note holder within the charge to United Kingdom corporation tax you will in general be charged to tax on all returns on and fluctuations in value of the notes (whether attributable to currency fluctuations or otherwise) broadly in accordance with your statutory accounting treatment. You will generally be charged to tax in each accounting period by reference to interest accrued in that period and any profit or loss which, in accordance with your authorized accounting method, is applicable to that period.
Other United Kingdom taxpayers |
Taxation of chargeable gains. The notes do not constitute “qualifying corporate bonds” within the meaning of section 117 of the Taxation of Chargeable Gains Act 1992. If you are a note holder resident or ordinarily resident in the United Kingdom or carry on a trade, profession or vocation in the United Kingdom to which the notes are attributable, you may, depending on your circumstances, realize a chargeable gain or an allowable loss for the purposes of the United Kingdom taxation of chargeable gains upon a disposal of the notes.
Accrued income scheme. If you are a note holder who is resident or ordinarily resident in the United Kingdom or carries on a trade in the United Kingdom through a branch or agency to which the notes are attributable, who sells redeems or otherwise disposes of your notes, any interest which has accrued since the last interest payment date (or where no interest payment date has accrued, the issue of the notes) may be chargeable to tax as income.
Stamp duty and stamp duty reserve tax |
You will not be subject to United Kingdom stamp duty or stamp duty reserve tax on the issue to you or the transfer by delivery of notes.
EU withholding tax directive |
In June 1998, the European Commission presented to the Council of Ministers of the European Union a proposal for a Council Directive to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community. The European Union has released a draft proposed European Union Savings Directive following agreement reached by Member States at the Feira European Council in June 2000 and the EU’s Council of Finance Ministers in November 2000.
Under Section 199 Finance Act 2003, the UK Treasury may make regulations to implement into UK law this directive. It is due to come into force on 1 January 2005.
Under the directive, prescribed UK paying agents will have to report details of the income and the payee to the Inland Revenue, who will then pass on the information to the corresponding tax authority in the payee’s country of residence. Similar information regarding UK resident payees will flow in the other direction. Austria, Belgium and Luxembourg are expected to impose, for a transitional period, a withholding tax as an alternative to exchanging information.
US Federal income tax considerations |
The following discussion describes the principal United States federal income tax consequences of the ownership and disposition of the notes by US holders (as defined below). This discussion applies to you only if you hold one or more notes as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986, as amended, (the ‘Internal Revenue Code’) and purchased the notes for cash pursuant to the original offering at their initial issue price. This description is based on the Internal Revenue Code, Treasury regulations, IRS rulings and pronouncements and judicial decisions all as in effect on the date of this annual report. All of these authorities are subject to change, possibly with retroactive effect. This discussion does not include any description of any state, local, estate or foreign tax consequences.
A “US Holder” is a holder of a note that for US federal income tax purposes is an individual citizen or resident of the United States; a corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia); an estate whose income is subject to US federal income taxation regardless of source; a trust if a US court can exercise primary supervision over its administration, and one or more US persons have the authority to control all of its substantial decisions.
This discussion does not address all of the tax consequences that may be relevant to you. This discussion also does not address any of your tax consequences if, you are subject to special tax treatment because you are a financial institution, United States expatriate, tax-exempt organization, insurance company, dealer or trader in securities or currencies, or otherwise, your functional currency is not the US dollar, or you will hold the notes as part of a position in a straddle or as part of a hedging, conversion or other integrated transaction, among others.
Registered number: 3768265 | 54 |
Avecia Group plc
20-F
Year ended December 31, 2003
You are advised to consult your own tax advisors to determine the US federal tax consequences of purchasing, owning and disposing of the notes in light of your own particular circumstances, as well as to determine the effect of any state, local, estate or foreign tax laws on you.
Exchange of notes |
If you exchange your outstanding notes for exchange notes in the exchange offer, you will not recognize gain or loss upon the receipt of your exchange notes. Your holding period in the exchange notes will include the holding period of your outstanding notes. Your tax basis in the exchange notes immediately after the exchange will be the same as your tax basis in the outstanding notes immediately before the exchange.
Interest on the notes |
You will be taxed either when you receive interest or as you accrue interest, depending on your method of accounting for tax purposes. If you use the cash method of accounting, you are required to include the interest in your income when it is paid or payable. If you use the accrual method of accounting, you are required to include the interest in your income when it is earned, even though you may not actually receive a payment of interest at that time.
You will have to treat the interest that you include in income as foreign source income. In computing your foreign tax credit, with certain exceptions, you will have to treat the interest you include in income as “passive” or “financial services” income, which you treat separately from your other types of income.
Disposition of notes |
When you sell or otherwise dispose of a note, including when, if ever, the group redeems or retires a note that you hold, you will recognize taxable gain or loss equal to the difference between the amount you realize on your disposition of your note and your adjusted tax basis in your note. For this calculation, you should exclude from the amount you realize the amount that is attributable to your accrued but unpaid interest, which you must treat as taxable ordinary interest income. Your adjusted tax basis in a note generally will be your purchase price for the note.
Pay-in-kind preference shares |
UK tax considerations |
The following discussion summarizes certain UK tax consequences of the ownership of pay-in-kind preference shares. Except where stated, it deals only with a holder of pay-in-kind preference shares who holds pay-in-kind preference shares as capital assets and does not deal with special situations such as that of dealers in securities or where the dividends on the pay-in-kind preference shares are, for tax purposes, deemed to be the income of any other person.
Taxation of dividends |
UK holders of pay-in-kind preference shares |
Under current UK taxation legislation, no withholding tax will be deducted from dividends paid by us.
Dividends paid in cash |
A UK holder who is a UK resident individual who receives a cash dividend on the pay-in-kind preference shares will be entitled to a tax credit of an amount equal to 10% of the combined amount of the cash dividend and tax credit.
An individual so resident whose income is within the lower or basic rate tax bands will be liable to tax at 10% on the total of the cash dividend and the related tax credit and the tax credit will satisfy his income tax liability on the cash dividend. If the tax credit exceeds the individual’s liability to income tax on the total cash dividend and tax credit, the individual will not be able to claim payment of the excess. Higher rate taxpayers will be liable to tax on the dividend at the rate of 32.5% of the aggregate of the cash dividend received and the tax credit.
Subject to certain exceptions (inter alia particularly applicable to financial traders), a UK holder of pay-in-kind preference shares which is a UK resident company and which receives a dividend paid by the group will not be taxable on the dividend. The dividend and related tax credit will be treated as franked investment income. Such tax credit will be an amount equal to one ninth of the dividend. Pension providers and most UK resident companies are not entitled to the payment of tax credits in respect of dividends paid to them.
Registered number: 3768265 | 55 |
Avecia Group plc
20-F
Year ended December 31, 2003
US holders of pay-in-kind preference shares |
A new US – UK income tax treaty came into force during 2003. US holders are no longer entitled to receive from the Inland Revenue payments equal to the amount of tax credits, as reduced by withholding taxes. Under the terms of the new tax treaty, withholding taxes on dividends are reduced in certain circumstances. However under UK domestic tax law, no withholding taxes are deducted from dividends paid by UK companies.
Dividends paid by the issuance of additional pay-in-kind preference shares |
UK holders of pay-in-kind preference shares |
The issuance of additional pay-in-kind preference shares paid up out of share premium account by Avecia to a UK holder of pay-in-kind preference shares should not give rise to a liability upon the holder to UK income tax or, in respect of corporate shareholders, corporation tax unless treated as a capital distribution for the purposes of corporation tax on chargeable gains, see “— Taxation of Capital Gains”. As such additional pay-in-kind preference shares will be paid up out of the share premium account, they will be deemed to be issued for new consideration for UK tax purposes and therefore the receipt of such shares by existing pay-in-kind preference shareholders will not give rise to a tax charge.
UK taxation of capital gains |
UK capital gains tax (or, for companies, corporation tax on chargeable gains) applies to a UK holder on the disposal (including on redemption) of preference shares, ordinary pay-in-kind preference shares, if held as a capital asset.
On such disposal the capital gain or allowable loss is calculated by reference to the difference between the acquisition cost for UK tax purposes and the net proceeds realized. The issue price of each unit was allocated between the pay-in-kind preference share and the warrant based on a reasonable estimate of the relative fair market value of the warrants and the pay-in-kind preference shares on the issue date. £13.79 was allocated to each of the pay-in-kind preference shares. It is assumed that the Inland Revenue will accept such allocation for the purposes of the base cost of the warrants and the pay-in-kind preferred shares.
For disposals by holders of pay-in-kind preference shares other than companies subject to UK corporation tax, the amount of any gain brought into charge to tax will be reduced by reference to tapering relief depending on the period of ownership.
Capital gains realized by UK holders who are individuals are currently taxed at the highest marginal tax rate applicable to the individual’s income (subject to exemptions and reliefs including the annual exemption which is currently £7,900). Chargeable gains of UK holders who are companies are taxed at 30% for the financial year 1999 (subject to lower rates for small companies).
If a holder of pay-in-kind preference shares who is resident or ordinarily resident in the United Kingdom receives additional pay-in-kind preference shares his existing pay-in-kind preference shares and the additional pay-in-kind preference shares will be treated for the purposes of UK taxation of chargeable gains as the same asset acquired at the same time as his existing pay-in-kind preference shares. The exchange of pay-in-kind preference shares for exchange preference shares should not normally give rise to a liability to capital gains tax in respect of UK holders.
If a holder of pay-in-kind preference shares who is so resident disposes (including upon redemption) of the whole or part of his enlarged holding of pay-in-kind preference shares, he may, depending upon his individual circumstances, incur a liability to United Kingdom taxation of the chargeable gain.
A US holder that is not resident or ordinarily resident for tax purposes in the UK will not be liable for UK tax on capital gains on the disposal of the pay-in-kind preference shares unless the US holder carries on a trade, profession or vocation in the UK through a branch or agency and such shares are or have been used by, held by, or acquired for use by or for the purpose of such trade, profession, vocation, branch or agent.
UK stamp duty and stamp duty reserve tax |
Stamp duty reserve tax, generally at a rate of 1/2 % on the consideration, is currently payable on any agreement to transfer shares or any interest therein unless: (i) an instrument transferring the shares is executed; and (ii) stamp duty, generally at a rate of 1/2 % is paid. The duty will, however, be refundable if within six years the agreement is completed by an instrument which has been duly stamped, generally at the rate of 1/2 %. Generally, however, neither stamp duty or stamp duty reserve tax should be payable on the transfer of interests in shares under the applicable procedures of a clearing agency.
Stamp duty is currently payable at the rate of 1 1/2 % on the transfer or issue of shares to the custodian of a depository or the nominee of a clearing agency on the value of such shares. Avecia has agreed to pay any tax or duty arising pursuant to the arrangements relating to the deposit of the pay-in-kind preference shares and the additional pay-in-kind shares, in a clearing agency as described in this prospectus.
Registered number: 3768265 | 56 |
Avecia Group plc
20-F
Year ended December 31, 2003
US Federal income tax considerations |
The following discussion is a summary of the material United States federal income tax considerations relevant to the ownership and disposition of the pay-in-kind preference shares by holders who purchased the pay-in-kind preference shares for cash at their original “issue price” pursuant to the units offering. For this purpose, the “issue price” is the first price to the public (not including bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers) at which a substantial amount of the pay-in-kind preference shares is sold for money. This summary does not purport to be a complete analysis of all potential tax effects, and pertains only to a holder or beneficial owner of pay-in-kind preference shares who is a “US Holder” as defined above under “The Notes — US Federal Income Tax Considerations”.
The discussion is based upon the Internal Revenue Code, Treasury regulations, IRS rulings and pronouncements and judicial decisions all as in effect on the date of this annual report, all of which are subject to change at any time, possibly with retroactive effect.
The discussion does not address all of the US federal income tax consequences that may be relevant to a US Holder in light of such holder’s particular circumstances or to US Holders subject to special rules, such as certain financial institutions, insurance companies, dealers in securities, tax-exempt entities, US expatriates and persons holding the pay-in-kind preference shares as part of a “straddle”, “hedge” or “conversion transaction”. Moreover, the effect of any applicable state, local or foreign tax laws is not discussed. The discussion deals only with pay-in-kind preference shares held as “capital assets” within the meaning of section 1221 of the Internal Revenue Code.
Avecia has not sought and will not seek any ruling from the IRS with respect to its position discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of the ownership or disposition of the pay-in-kind preference shares.
Exchange of pay-in-kind preference shares |
If you exchange your outstanding pay-in-kind preference shares for exchange pay-in-kind preference shares in the exchange offer, you will not recognize gain or loss upon the receipt of your exchange pay-in-kind preference shares. Your holding period in the exchange pay-in-kind preference shares will include the holding period of your outstanding pay-in-kind preference shares. Your tax basis in the exchange pay-in-kind preference shares immediately after the exchange will be the same as your tax basis in the outstanding pay-in-kind preference shares immediately before the exchange.
Allocation of unit purchase price between pay-in-kind preference shares and warrants |
The issue price of each unit was allocated between the pay-in-kind preference share, the preference warrant and the ordinary warrant based on a reasonable estimate of the relative fair market values of each such component of the unit on the issue date. With respect to each unit, Avecia intends to allocate approximately £13.79 to each pay-in-kind preference share and approximately £1.41 to each ordinary warrant and approximately £0.33 to each preference warrant. Each US Holder of pay-in-kind preference shares will be bound by such allocation for US federal income tax purposes unless such US Holder discloses on a statement attached to its tax return for the taxable year that includes the acquisition date of such unit that its allocation differs from this allocation. No assurance can be given that the IRS will accept this allocation. If this allocation were successfully challenged by the IRS, the issue price, the amount of redemption premium accrual on the pay-in-kind preference shares, and gain or loss on the sale or other disposition of a pay-in-kind preference share or warrant would be different from that resulting under the allocation determined by Avecia.
Distributions |
Distributions on the pay-in-kind preference shares (including the amount of any UK withholding tax as discussed above in “UK Tax Considerations”), whether paid in cash or in additional pay-in-kind preference shares (and including any deemed distributions resulting either from a redemption premium on the pay-in-kind preference shares or upon a redemption of the pay-in-kind preference shares, all as discussed below), will be taxable as ordinary dividend income to the extent paid (or deemed paid) out of Avecia’s current or accumulated earnings and profits (as determined for US federal income tax purposes). To the extent that the amount of a distribution exceeds current and accumulated earnings and profits, the distribution will be treated as a return of capital, thus reducing the US Holder’s adjusted tax basis in such pay-in-kind preference shares. The amount of any such excess distribution that is greater than the US Holder’s adjusted basis in the pay-in-kind preference shares will be taxed as capital gain. For purposes of the remainder of this discussion, the term “dividend” refers to a distribution paid out of allocable earnings and profits, unless the context indicates otherwise. Dividends received by corporate holders will not be eligible for the dividends-received deduction allowed under section 243 of the Internal Revenue Code.
Registered number: 3768265 | 57 |
Avecia Group plc
20-F
Year ended December 31, 2003
Subject to certain complex limitations, any UK withholding tax discussed above in “UK Tax Considerations” will be treated for US tax purposes as a foreign tax that may be claimed as a foreign tax credit against the US Holder’s US federal income tax liability. Dividends paid with respect to the pay-in-kind preference shares will be treated as “passive income” or, in the case of certain US Holders, as “financial services income”, for purposes of computing allowable foreign tax credits for US tax purposes. Foreign tax credits allowable with respect to each category of income cannot exceed US federal income tax otherwise payable with respect to such income. The consequences of the separate limitation calculation will depend on the nature and sources of each US Holder’s income and the deductions allowable thereto. The rules governing the foreign tax credit are complex. Investors are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Alternatively, a US Holder may claim the foreign tax paid as an itemized deduction in the taxable year. A deduction does not reduce US tax on a dollar for dollar basis like a tax credit. The deduction, however, is not subject to the limitations described above.
Distributions of additional pay-in-kind preference shares |
Pursuant to section 305(b) of the Internal Revenue Code, a distribution in the form of additional pay-in-kind preference shares will be treated as a taxable distribution, and therefore will be a dividend to the extent paid out of Avecia’s current or accumulated earnings and profits. See “— Distributions”. The amount of the distribution will be equal to the fair market value of the distributed pay-in-kind preference shares on the date of distribution (which generally will equal the related amount of the cash distribution that would have been payable by Avecia had the distribution not been paid in kind). A US Holder’s initial tax basis in any additional pay-in-kind preference shares distributed by Avecia will be equal to the amount that the US Holder is required to include in income in respect of such shares, which generally will be equal to the fair market value thereof on the date of distribution. The US Holder’s holding period for any such additional shares will begin on the day following the date of their distribution.
Redemption Premium |
The redemption price of the pay-in-kind preference shares issued in the units offering exceeds their issue price by more than a de minimis amount. As a result, under section 305(c) of the Internal Revenue Code, such excess (the “redemption premium”) will be treated as a constructive distribution of additional pay-in-kind preference shares on pay-in-kind preference shares, which is required to be included in income by a US Holder as a distribution over the term of the pay-in-kind preference shares using a constant yield method similar to that used for accruing original issue discount on debt instruments.
For this purpose, the issue price of a pay-in-kind preference share acquired in the units offering will be equal to the portion of the issue price of a unit properly allocable to the pay-in-kind preference share, as described above in “— Allocation of unit purchase price between pay-in-kind preference shares and warrants”. As a result, a US Holder will recognize taxable income before receiving cash payments to which such income is attributable.
US Holders are advised to consult their own tax advisors regarding the application of the redemption premium rules to the pay-in-kind preference shares.
Redemption |
If a redemption of the pay-in-kind preference shares for cash is treated as a sale or exchange under section 302 of the Internal Revenue Code, the redemption would result in capital gain or loss equal to the difference between the amount of cash and the fair market value of any other proceeds received in such redemption and the US Holder’s adjusted tax basis in the pay-in-kind preference shares redeemed in the manner described below under “— Sale or Other Disposition”. Alternatively, if a redemption of pay-in-kind preference shares is treated as a distribution, the redemption distribution will be taxable as a dividend to the extent of Avecia’s current or accumulated earnings and profits (as determined for federal income tax purposes). See “— Distributions”.
A redemption of pay-in-kind preference shares for cash generally will be treated as a sale or exchange under section 302 of the Internal Revenue Code only if:
| (i) | after the redemption the US Holder does not own, actually or constructively within the meaning of section 318 of the Internal Revenue Code, any of Avecia’s shares, |
Registered number: 3768265 | 58 |
Avecia Group plc
20-F
Year ended December 31, 2003
| (ii) | the redemption is “substantially disproportionate” with respect to the redeeming US Holder as such term is defined in section 302(b)(2) of the Internal Revenue Code, or |
| (iii) | the redemption is “not essentially equivalent to a dividend” with respect to the redeeming US Holder under section 302(b)(1) of the Internal Revenue Code. Whether a redemption qualifies as “substantially disproportionate” or as ‘’not essentially equivalent to a dividend” as to a US Holder will depend upon all the relevant facts and circumstances at the time of the redemption. |
In particular, although a redemption of any preferred shares (such as pay-in-kind preference shares) from a US shareholder who does not own (directly or indirectly) any ordinary shares in the same company generally would be treated for US tax purposes as “not essentially equivalent to a dividend”, there is a risk that the IRS may take the position that a redemption of pay-in-kind preference shares from a US Holder who also owns ordinary shares of Avecia Group plc or of Avecia Holdings plc (or warrants to acquire any such ordinary shares) that are not also redeemed or contemporaneously disposed of cannot qualify as a sale or exchange and instead must be treated as a distribution taxable as a dividend. US Holders of both pay-in-kind preference shares and ordinary warrants (or ordinary shares of the company or Holdings) should consult their own tax advisors on whether any particular redemption of pay-in-kind preference shares would be treated as a sale or exchange or alternatively as a distribution taxable as a dividend.
Sale or other disposition |
Upon the sale, exchange or other disposition of pay-in-kind preference shares, a US Holder will recognize gain or loss for US federal income tax purposes in an amount equal to the difference between the amount realized and the US Holder’s adjusted tax basis in the pay-in-kind preference share. In general, a US Holder’s adjusted tax basis in a pay-in-kind preference share is the portion of the issue price of a unit properly allocable to the pay-in-kind preference share (as described above in “— Allocation of unit purchase price between pay-in-kind preference shares and warrants”) plus any amount included in gross income as a constructive distribution of redemption premium taxable as a dividend (as described above in “— Redemption Premium”), less the amount of any prior distribution treated as a nontaxable return of capital. Such gain or loss will be a capital gain or loss and will be long-term capital gain or loss if the pay-in-kind preference share was held for more than one year. Gain or loss from the sale or exchange of pay-in-kind preference shares generally will be treated as US source gain or loss for foreign tax credit purposes. In the case of individual US Holders, capital gains are subject to US federal income tax at preferential rates if the prescribed minimum holding periods are met. The deductibility of capital losses is subject to certain limitations.
If a US Holder receives pounds sterling (or another foreign currency) on a redemption, sale or exchange of pay-in-kind preference shares, such holder may recognize ordinary income or loss as a result of currency fluctuations between the date of such redemption, sale or exchange and the date the proceeds are converted into US dollars.
US Information reporting and backup withholding |
A US Holder of notes or pay-in-kind preference shares may be subject to US information reporting and possible backup withholding at a rate of 28% with respect to payments of principal and interest on the notes or dividends paid on the pay-in-kind preference shares or gross proceeds upon a sale or other disposition of any of such securities. Certain exempt recipients (such as corporations) are not subject to these information reporting requirements. Backup withholding will not apply to a holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification, or who is otherwise exempt from backup withholding. Any US persons required to establish their exempt status generally must file IRS Form W-9 (‘Request for Taxpayer Identification Number and Certification’). Non-US holders generally will not be subject to US information reporting or backup withholding. However, such holders may be required to provide certification of non-US status in connection with payments received in the United States or through certain US-related financial intermediaries.
Backup withholding is not an additional tax; any amounts so withheld are creditable against the US Holder’s federal income tax, provided the required information is timely provided to the IRS. Finalized Treasury regulations that have recently become effective have generally expanded the circumstances under which the US information reporting and backup withholding rules are applicable.
Holders are advised to consult their own tax advisors regarding the application of the US information reporting and backup withholding rules, including the finalized Treasury regulations.
Registered number: 3768265 | 59 |
Avecia Group plc
20-F
Year ended December 31, 2003
Documents on display |
Documents referred to in this document are retained at the company’s registered office at:
PO Box 42
Hexagon House
Blackley
Manchester M9 8ZS
United Kingdom
Telephone (+ 44) 161 740 1460
Subsidiary information |
Details of the subsidiaries of Avecia Group plc are disclosed in ‘Item 4 — Information on the company’ under the title ‘Organizational structure’.
All of the figures in Item 11 have been prepared under UK GAAP.
Risk management |
The group’s funding, liquidity and exposure to interest rate and foreign exchange rate risks are managed by the group’s treasury department. Treasury operations are conducted within a framework of policies reviewed and agreed by the board.
The group holds or issues financial instruments for two main purposes:
| • | to finance operations; and |
| • | to manage the interest rate and currency risk arising from its operations and from its sources of finance. |
These are transacted by specialist treasury personnel and the internal control environment is reviewed regularly.
Excluding risks arising from changes in the market for and prices of individual raw materials, the principal market risks to which Avecia is exposed are:
| • | interest rates on debt; and |
| • | foreign exchange rates. |
The following risk management discussion and the estimated amounts generated from the analytical techniques are forward-looking statements of market risk assuming certain market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The analysis methods used by Avecia to assess and mitigate the risks discussed above should not be considered projections of future events or losses.
Interest rate risk |
The group has an exposure to interest rate risk and, within this category of market risk is most vulnerable to changes in US dollar, sterling and euro interest rates. To manage interest rate risk, the group manages its proportion of fixed to variable rate borrowings within limits approved by the board, primarily through issuing long term fixed rate and deep discount bonds and variable rate term loans, and by utilizing interest rate swaps and interest rate caps. The group’s policy is to manage its exposure to interest rate fluctuations on its borrowings and deposits by using interest rate swaps and interest rate caps. The group’s policy is to keep at least 50 per cent of net external debt at fixed or capped rates of interest for the period of the borrowing. At the year end and after taking account of interest rate swaps, the proportion of the group’s borrowings at fixed rates was 72% (2002:64%). In addition, 23% (2002:19%) of the group’s borrowings were floating rate but were covered by interest rate caps.
See note 19 of the UK GAAP consolidated financial statements for additional information on interest rate risks.
Registered number: 3768265 | 60 |
Avecia Group plc
20-F
Year ended December 31, 2003
On June 30, 1999 the company issued 11% senior notes with a gross value of $540 million which represents £306million at December 31, 2003 gross of fees. Net of fees the carrying value of the notes was £297 million at December 31, 2003. The company also issued variable rate senior debt of £470 million (out of a total facility of £485 million) with variable interest rates between LIBOR plus 2% and LIBOR plus 3% which on July 6, 1999 was redenominated into $229 million (with a variable interest rate initially set at 7.7% on $95 million and 8.2% on $134 million) and €497 million with a variable interest rate initially set at 4.6% on €436 million and 5.1% on €61 million. Effective on August 2, 1999 the interest rates of a portion of these variable rate loans ($58 million and €131 million) were swapped for fixed rates of 6.53% on the US Dollar loan and 3.83% on the Euro loan, and the interest rates of a further $58 million and €131 million were capped at rates of 6.5% and 4%, respectively and were effective on August 2, 1999 and June 30, 1999, respectively. On October 1, 1999 the final £15 million was issued and denominated into €24 million. Taking into account the interest rate swaps, approximately 5% (£22 million) of the total debt is now subject to variable interest rates when relevant interest rates are above the capped rates and 28% (£128 million) is subject to variable interest rates when relevant interest rates are below the capped rates.
Currency risk |
The group publishes its financial statements in pounds sterling and conducts businesses in many foreign currencies. As a result, it is subject to foreign currency exchange risk due to exchange rate movements which will affect the group’s transaction costs and revenues and the translation of the results and underlying net assets of its subsidiaries.
The group hedges a substantial portion of its exposure to fluctuations on the translation into pounds sterling of its foreign currency net assets by holding borrowings in foreign currencies.
Exchange differences arising on the retranslation of foreign currency net borrowings and foreign exchange swaps are recognized in the statement of total recognized gains and losses to match exchange differences on foreign equity investments, in accordance with the UK accounting standard SSAP 20 – Foreign Currency Translation.
For the year ended December 31, 2003, 73% of Avecia’s sales were made outside of the United Kingdom and over 55% of the fixed production and cost base was in the UK. Avecia’s results of operations and financial position are thus significantly impacted by the fluctuation of the pound sterling against the major currencies in which the group transacts, namely the US Dollar, the Euro and the Japanese Yen.
In order to manage Avecia’s currency exposure, part of the debt is denominated in those currencies where the group has positive cash flow. The Avecia board’s policy is to hedge at least 50% of its projected foreign currency net cash flow after interest and tax. For those currencies not absorbed by debt service, the group hedges, on a rolling 12 month basis, the translation of a proportion of its forecast future net cash flows denominated in US dollars, Euro currencies and Japanese yen with forward foreign currency contacts. This limits in part the transactional exposure of the group’s net cash flows to movements in exchange rates. The gain or loss on the hedge is recognized at the same time as the underlying transaction.
In respect of its debt at December 31, 2003, Avecia is exposed to the fluctuation of the US Dollar and the Euro with regard to the recorded balance sheet amount of such debt. The fixed rate notes of $540 million are denominated in US Dollars which translated at December 31, 2003 rate equate to £306 million gross value (£297 million net of unamortised fees); long term bank debt established in US Dollars and Euros as at December 31, 2003 comprising $127 million (£72 million gross value and £70 million net of fees valued at December 31, 2003 rate) of US Dollar debt and €135 million (£95 million gross value and £90 million net of fees valued at December 31, 2003 rate) of Euro denominated loans give an additional exposure to exchange rate movements. A 10% favorable change compared with the December 31, 2003 rates in both the US Dollar and Euro exchange rates simultaneously would result in an overall increase in the recorded amount of the debt of approximately £43 million.
Sensitivity analysis |
For financial instruments held, the group has used a sensitivity analysis technique that measures the change in the fair value of the group’s financial instruments from hypothetical changes in market rates.
The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from those projected results due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed, which therefore should not be considered a projection of likely future events and losses. The sensitivity analysis presented below does not take into account the possibility that rates of the currencies of different countries can move in opposite directions and that gains from one category may or may not be offset by losses from another category. Market values have been used to determine the fair value of forward foreign currency contracts and all listed debt issued. The fair values of all other items have been calculated by discounting expected future cash flows at prevailing interest rates. The estimated changes in fair values for interest rate movements are based on an instantaneous decrease of 1% (100 basis points) in the specific rate of interest applicable to each class of financial instruments from the levels effective at December 31, 2003, with all other variables remaining constant. The estimated changes in the fair value for foreign exchange rates are based on an instantaneous 10% weakening in sterling against all other currencies from the levels applicable at December 31, 2003, with all other variables remaining constant. Such analysis is for illustrative purposes only – in practice, market rates rarely change in isolation.
Registered number: 3768265 | 61 |
Avecia Group plc
20-F
Year ended December 31, 2003
The impact on the income statement of fluctuating exchange rates on the interest expense is as follows: assuming December 31, 2003 foreign currency debt levels of £160 million and taking into account the changes in the levels of foreign currency interest rates and interest rate swaps and caps, a ten per cent unfavorable change in the US Dollar and Euro exchange rates would impact net interest expense by £7 million.
Assuming December 31, 2003 variable rate debt levels of £160 million and taking into account the interest rate swaps which were transacted on June 10, 1999, a one-point change in interest rates would impact net interest expense by £0.2 million when relevant interest rates are above the capped rates. When relevant interest rates are below the capped rates this impact would increase to £1.3 million.
This sensitivity analysis does not take into account the possibility that gains from one category may be offset by losses from another category.
Fixed rate debt outstanding at December 31, 2003 with a carrying value of £297 million and fair value of £266 million at December 31, 2003 exchange rates has been excluded from the above interest expense sensitivity analysis.
Assuming December 31, 2003 fixed rate debt levels, using December 31, 2003 exchange rates, a one per cent fall in interest rates would adversely impact the fair value of the fixed rate debt by £19 million.
The 16% preference shares of $70.9 million, which were issued on June 30, 1999 are classified within shareholders’ equity for UK GAAP purposes and have been excluded from the above sensitivity analysis.
Liquidity risk |
Group policy is to match currency cash expenditure with currency cash income subject to the existence of a free market for that debt and differences in funding costs between markets. Net group borrowings comprise bank debt (£160 million; 2002: £236 million), which is due to be repaid by June 2008 and a High Yield Bond (£297 million; 2002 £326 million) due 2009. 6% (2002: 5%) of the group’s total borrowings at the year end will become due in the next 12 months, 87% (2002: 90%) in more than two years and 67% (2002: 65%) will become due in more than five years.
At 31 December 2003, the group also had undrawn committed borrowing facilities of £31 million (2002: £98.0 million).
Credit risk |
Avecia contains credit risk by ongoing review procedures. Counterparties to the interest rate swaps and foreign exchange contracts are all commercial banks with a long term credit rating of A1- or better.
Exchange rates |
Exchange rate movements during the year favourably impacted profit before exceptional items and tax by £3.2 million. The favourable impact of exchange rate movements on the translation of overseas operating profit was £0.6 million and on transactions in the year was £2.6 million, giving a total impact on operating profit of £3.2 million. Exchange rate movements also favorably affected the interest charge by £3.2 million.
Not applicable to annual reports filed on Form 20-F.
Registered number: 3768265 | 62 |
Avecia Group plc
20-F
Year ended December 31, 2003
Part II
No matters to report.
No matters to report.
Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Group’s disclosure controls and procedures (as defined in US Exchange Act Rules 15d-15(e)) as of the end of the period covered by this Form 20- F, have concluded that, as of such date, the Group’s disclosure controls and procedures were effective.
Internal Control Over Financial Reporting. There were no changes in the Group’s internal control over financial reporting that occurred during the year ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Group’s internal control over financial reporting.
Avecia Holdings plc, the parent company of the group, has established an Audit Committee to act on behalf of that company and for its subsidiaries, including Avecia Group plc. The members of this Audit Committee are the non-executive directors of Avecia Holdings plc. Avecia Group plc does not itself have its own audit committee. The Board of Directors has therefore determined that Avecia Group plc does not have an “audit committee financial expert” as defined in Item 16-A of Form 20F serving on its audit committee. It is the Board’s opinion that the members of the audit committee of Avecia Holdings plc collectively have sufficient experience and expertise, to be able to provide appropriate independent review and oversight of Avecia Group plc’s financial reporting processes, internal controls and independent auditors.
We have adopted a code of ethics that applies to all employees. A copy of the code of ethics is filed as Exhibit 11 to this Form 20-F.
Registered number: 3768265 | 63 |
Avecia Group plc
20-F
Year ended December 31, 2003
KPMG Audit Plc has served as Avecia’s independent public accountants for each of the fiscal years in the three year period ended December 31, 2003, for which audited financial statements appear in this annual report on Form 20-F. The auditors are elected annually by the Annual General Meeting.
The following table presents the aggregate fees for professional services and other services rendered by KPMG to Avecia in 2003 and 2002.
| 2003 | 2002 | ||||
| £m | £m | ||||
| Audit Fees (1) | 0.4 | 0.4 | |||
| Audit-related Fees (2) | — | — | |||
| Tax Fees (3) | 0.3 | 0.1 | |||
| Total | 0.7 | 0.5 |
| 1. | Audit Fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor reasonably can provide, and include the Group audit; statutory audits; comfort letters and consents; attest services; and services associated with the filing of documents with the SEC. |
| 2. | Audit-related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the external auditor, and include consultations concerning financial accounting and reporting standards; due diligence related to acquisitions; accounting assistance and audits in connection with proposed or completed acquisitions; and employee benefit plan audits. |
| 3. | Tax Fees include fees billed for tax compliance services, advice on original and amended tax returns and claims for refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, tax advice related to mergers and acquisitions, transfer pricing, and requests for rulings or technical advice from taxing authorities; tax planning services; and expatriate tax planning and services. |
Audit Committee Pre-approval Policies and Procedures |
The Audit Committee has adopted the following pre-approval policies and procedures to govern the arrangements by which audit and non-audit services are approved:
| (i) | The Audit Committee will approve, at its first meeting in each calendar year, those categories of service which are pre-approved for the following 12 month period. |
| (ii) | The pre-approved categories of service are defined as Audit Services, Audit Related Services, and Tax Services. |
| (iii) | Additions to the schedule of pre-approved categories of service may be approved at any time by the Chairman of the Audit Committee. Any such changes will be notified to the Audit Committee at its next quarterly meeting. |
| (iv) | Engagement of the external auditors to provide services not on the schedule of pre-approved categories of service, must be approved in advance of the engagement by the Chairman of the Audit Committee. Any such pre-approvals will be notified to the Audit Committee at its next quarterly meeting. |
| (v) | Not withstanding paragraphs i) to iv) above: |
| – | any audit or non-audit assignment in excess of £250,000 requires specific pre-approval by Chairman of the Audit Committee. |
| – | the Chairman of the Audit Committee will notify the Audit Committee at its next quarterly meeting of any approvals granted. |
| – | any individual audit or non audit assignment below the limit above is notified to the Group Controller. |
Registered number: 3768265 | 64 |
Avecia Group plc
20-F
Year ended December 31, 2003
During 2003 on the introduction of the above policy, the following transitional arrangements applied: non-audit services that were being provided pursuant to engagements that were already in effect on 6 May 2003, were not pre-approved by the Audit Committee subject to such engagements not extending beyond 6 May 2004. Any other engagements which were not covered by the schedule of pre-approved categories of service should nonetheless be notified to the Group Controller.
During 2003, 100% of Audit and non-Audit Fees were approved by the Audit Committee under the policy set out above.
Registered number: 3768265 | 65 |
Avecia Group plc
20-F
Year ended December 31, 2003
Not applicable.
Index to Consolidated and Combined financial statements
| Report of independent auditors | 68 | |||
| Consolidated profit and loss accounts for the years ended December 31, 2003, 2002, and 2001. | 69 | |||
| Consolidated balance sheets at December 31, 2003 and 2002. | 70 | |||
| Consolidated cash flow statements for the years ended December 31, 2003, 2002, and 2001. | 71 | |||
| Consolidated statements of total recognized gains and losses for the years ended December 31, 2003, 2002 and 2001. | 72 | |||
| Reconciliation of consolidated movements in shareholders’ funds for the years ended December 31, 2003, 2002 and 2001. | 72 | |||
| Notes to the consolidated financial statements | 73 |
Please refer to item 10 — Additional information for Avecia’s Memorandum and Articles of Association.
Registered number: 3768265 | 66 |
Avecia Group plc
20-F
Year ended December 31, 2003
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Avecia Group plc
Registrant
signed \D A NICHOLSON\
D A Nicholson
Chief Financial Officer
Dated May 14, 2004
Registered number: 3768265 | 67 |
Avecia Group plc
20-F
Year ended December 31, 2003
Report of independent auditors
to the shareholders and board of directors of Avecia Group plc
We have audited the accompanying consolidated balance sheets of Avecia Group plc and subsidiaries as at December 31, 2003 and 2002 and the related consolidated profit and loss accounts, consolidated cash flow statements, consolidated statements of total recognized gains and losses and reconciliations of consolidated movements in shareholders’ funds for the years ended December 31, 2003, 2002 and 2001. These consolidated financial statements are the responsibility of the Avecia Group plc’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in the United Kingdom and in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avecia Group plc and subsidiaries as at December 31, 2003 and December 31, 2002 and the financial results for the years ended December 31, 2003, December 31, 2002 and December 31, 2001 in conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 34 to the financial statements.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
Manchester, England
May 14, 2004
Registered number: 3768265 | 68 |
Avecia Group plc
20-F
Year ended December 31, 2003
Consolidated profit and loss accounts
Avecia Group plc | For the year ended December 31, 2003 | For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | For the year ended December 31, 2001 | ||||||||||||||||
Restated | Restated | Restated | Restated | |||||||||||||||||||
| Note | £million | £million | £million | £million | £million | £million | ||||||||||||||||
| Turnover: group and share of joint ventures | 497.6 | 589.2 | 815.1 | |||||||||||||||||||
| Less: share of joint ventures’ turnover | (12.4 | ) | (13.5 | ) | (11.5 | ) | ||||||||||||||||
Group turnover | 3 | |||||||||||||||||||||
| Continuing operations | 361.4 | 417.2 | 431.0 | |||||||||||||||||||
| Discontinued operations | 123.8 | 158.5 | 372.6 | |||||||||||||||||||
| 485.2 | 575.7 | 803.6 | ||||||||||||||||||||
| Operating costs | 4 | (501.1 | ) | (559.3 | ) | (759.4 | ) | |||||||||||||||
| Exceptional operating costs | 4 | (69.3 | ) | (41.2 | ) | — | ||||||||||||||||
| Other operating income | 4 | 4.1 | 7.6 | 4.2 | ||||||||||||||||||
Group operating (loss)/profit | ||||||||||||||||||||||
| Continuing operations | 4 | (102.5 | ) | (28.5 | ) | (4.0 | ) | |||||||||||||||
| Discontinued operations | 4 | 21.4 | 11.3 | 52.4 | ||||||||||||||||||
| (81.1 | ) | (17.2 | ) | 48.4 | ||||||||||||||||||
| Share of operating profit of Joint Ventures | 1.7 | 2.2 | 1.4 | |||||||||||||||||||
| Profit on disposal of business | 5 | 15.4 | 9.4 | 4.0 | ||||||||||||||||||
| (Loss)/Profit on ordinary activities before interest and taxation | (64.0 | ) | (5.6 | ) | 53.8 | |||||||||||||||||
| Other interest receivable and similar income | 9 | 34.3 | 34.5 | 2.6 | ||||||||||||||||||
| Interest payable and similar charges | 10 | (61.5 | ) | (65.4 | ) | (88.9 | ) | |||||||||||||||
| Other Finance (cost)/increase | (2.4 | ) | — | — | ||||||||||||||||||
| Loss on ordinary activities before taxation | (93.6 | ) | (36.5 | ) | (32.5 | ) | ||||||||||||||||
| Taxation on loss on ordinary activities | 11 | (0.9 | ) | (6.5 | ) | (5.8 | ) | |||||||||||||||
| Loss on ordinary activities after taxation | 3-10 | (94.5 | ) | (43.0 | ) | (38.3 | ) | |||||||||||||||
| Appropriation | (6.4 | ) | (6.0 | ) | (5.4 | ) | ||||||||||||||||
Retained loss for the financial period | (100.9 | ) | (49.0 | ) | (43.7 | ) | ||||||||||||||||
Prior years have been restated to reflect the adoption of FRS17.
The accompanying notes are an integral part of these financial statements.
Registered number: 3768265 | 69 |
Avecia Group plc
20-F
Year ended December 31, 2003
Consolidated balance sheet |
| Avecia Group plc Consolidated | ||||||||||
| Balance Sheet as at | ||||||||||
December 31, 2003 | December 31, 2002 | |||||||||
Restated | ||||||||||
Note | £ million | £ million | ||||||||
Fixed assets | ||||||||||
| Intangible assets | 12 | |||||||||
Goodwill | 277.7 | 318.3 | ||||||||
Other intangible assets | 10.1 | 11.7 | ||||||||
| 287.8 | 330.0 | |||||||||
| Tangible assets | 13 | 263.2 | 336.1 | |||||||
| Investments | ||||||||||
Investments in joint ventures | 14 | |||||||||
Share of gross assets and goodwill | 20.4 | 23.3 | ||||||||
Share of gross liabilities | (1.6 | ) | (1.5 | ) | ||||||
| 18.8 | 21.8 | |||||||||
| 569.8 | 687.9 | |||||||||
Current assets | ||||||||||
| Stocks | 15 | 74.9 | 83.8 | |||||||
| Debtors | 16 | 92.8 | 132.5 | |||||||
| Cash at bank and in hand | 8.0 | 16.2 | ||||||||
| 175.7 | 232.5 | |||||||||
Creditors: amounts falling due within one year | 17 | (165.5 | ) | (126.0 | ) | |||||
Net current assets | 10.2 | 106.5 | ||||||||
Total assets less current liabilities | 580.0 | 794.4 | ||||||||
Creditors: amounts falling due after more than one year | 18 | (440.6 | ) | (543.7 | ) | |||||
Provisions for liabilities and charges | 20 | (7.5 | ) | (18.3 | ) | |||||
Net assets excluding pension liability | 131.9 | 232.4 | ||||||||
| Pension Liability | 27 | (113.2 | ) | (93.9 | ) | |||||
Net assets including pension liability | 18.7 | 138.5 | ||||||||
Capital and reserves | ||||||||||
| Called up share capital | 22 | 330.6 | 330.5 | |||||||
| Share premium account | 23 | 13.4 | 15.2 | |||||||
| Profit and loss account | 23 | (328.3 | ) | (210.0 | ) | |||||
| Shares to be issued | 23 | 3.0 | 2.8 | |||||||
Shareholders’ funds | 18.7 | 138.5 | ||||||||
of which: equity shareholders’ funds | (19.0 | ) | 103.5 | |||||||
non-equity shareholders’ funds | 37.7 | 35.0 | ||||||||
| 18.7 | 138.5 | |||||||||
| Minority interests | 24 | — | — | |||||||
Shareholders’ funds and minority interests | 18.7 | 138.5 | ||||||||
Prior year has been restated to reflect the adoption of FRS17.
The accompanying notes are an integral part of these financial statements
Registered number: 3768265 | 70 |
Avecia Group plc
20-F
Year ended December 31, 2003
Consolidated cash flow statements |
| Avecia Group plc Consolidated | |||||||||||||
For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | |||||||||||
2003 | 2002 | 2001 | |||||||||||
Restated | Restated | ||||||||||||
Note | £ million | £ million | £ million | ||||||||||
| Cash inflow from operating activities | 28 | 47.3 | 107.8 | 120.5 | |||||||||
| Dividends from joint ventures | 29 | 3.0 | 5.5 | 2.9 | |||||||||
| Returns on investments and servicing of finance | 29 | (47.0 | ) | (56.9 | ) | (73.3 | ) | ||||||
| Taxation | (0.1 | ) | (4.1 | ) | (7.7 | ) | |||||||
| Capital expenditure and financial investment | 29 | (49.6 | ) | (43.1 | ) | (62.1 | ) | ||||||
| Acquisitions and disposals | 29 | 76.6 | 196.2 | 31.1 | |||||||||
| Cash inflow before financing | 30.2 | 205.4 | 11.4 | ||||||||||
| Financing | 29 | (40.6 | ) | (201.2 | ) | (20.3 | ) | ||||||
| (Decrease)/Increase in cash in the period | (10.4 | ) | 4.2 | (8.9 | ) | ||||||||
Reconciliation of net cashflow to movement in net debt |
| Avecia Group plc Consolidated | |||||||||||||
For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | |||||||||||
2003 | 2002 | 2001 | |||||||||||
Note | £ million | £ million | £ million | ||||||||||
(Decrease)/increase in cash in the period | (10.4 | ) | 4.2 | (8.9 | ) | ||||||||
| Cash inflow from increase in debt and lease financing | (64.0 | ) | (39.0 | ) | (63.0 | ) | |||||||
| Cash outflow from decrease in debt and lease financing | 104.7 | 240.3 | 82.6 | ||||||||||
| Change in net debt resulting from cash flows | 30.3 | 205.5 | 10.7 | ||||||||||
| Cash/(loans and finance leases) acquired with subsidiary | — | — | 0.5 | ||||||||||
| Translation differences | 26.8 | 41.2 | (10.1 | ) | |||||||||
| Non-cash items | (4.2 | ) | (5.1) | 0.9 | |||||||||
Movement in net debt in the period | 52.9 | 241.6 | 2.0 | ||||||||||
| Net debt at the start of the period | (551.3 | ) | (792.9 | ) | (794.9 | ) | |||||||
Net debt at the end of the period | 30 | (498.4 | ) | (551.3 | ) | (792.9 | ) | ||||||
The accompanying notes are an integral part of these financial statements.
Registered number: 3768265 | 71 |
Avecia Group plc
20-F
Year ended December 31, 2003
Consolidated statements of total recognized gains and losses |
| Avecia Group plc Consolidated | ||||||||||
For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||
2003 | 2002 | 2001 | ||||||||
Restated | Restated | |||||||||
£ million | £ million | £ million | ||||||||
Loss for the financial period | ||||||||||
| Group | (96.2 | ) | (45.2 | ) | (39.8 | ) | ||||
| Share of joint ventures | 1.7 | 2.2 | 1.5 | |||||||
| (94.5 | ) | (43.0 | ) | (38.3 | ) | |||||
| Net exchange differences on the retranslation of net investments and related borrowings | 1.6 | (9.0) | (3.4 | ) | ||||||
| Actuarial gain/(loss) relating to pensions liability | (29.2 | ) | — | — | ||||||
Total recognized losses relating to the financial period | (122.1 | ) | (52.0 | ) | (41.7 | ) | ||||
| Prior Year Adjustment (FRS 17) | (81.3) | |||||||||
| Total recognized losses since last annual report | (203.4) | |||||||||
Reconciliation of consolidated movements in shareholders’ funds |
| Avecia Group plc Consolidated | |||||||||||||
For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | |||||||||||
2003 | 2002 | 2001 | |||||||||||
Restated | Restated | ||||||||||||
Note | £ million | £ million | £ million | ||||||||||
Loss for the financial period | (94.5 | ) | (43.0 | ) | (38.3 | ) | |||||||
| Appropriation of profit relating to non equity shares | (6.4 | ) | (6.0 | ) | (5.4 | ) | |||||||
| (100.9 | ) | (49.0 | ) | (43.7 | ) | ||||||||
| Other recognized gains and losses relating to the period (net) | 23 | (25.3 | ) | (52.7 | ) | (32.5 | ) | ||||||
| New share capital subscribed | 22 | 0.2 | 0.2 | 0.1 | |||||||||
| Premium on share issues (net of issue costs) | 23 | 5.6 | 5.3 | 4.6 | |||||||||
| Shares to be issued | 23 | 0.3 | 0.2 | 0.4 | |||||||||
| Amortization of share issue costs | 23 | 0.3 | 0.4 | 0.4 | |||||||||
Net addition to shareholders’ funds | (119.8 | ) | (95.6 | ) | (70.7 | ) | |||||||
Opening shareholders’ funds as previously stated | 219.8 | 272.4 | 313.7 | ||||||||||
| Prior year adjustment | (81.3 | ) | (38.3 | ) | (8.9 | ) | |||||||
| Opening shareholders funds restated | 138.5 | 234.1 | 304.8 | ||||||||||
Closing shareholders’ funds | 18.7 | 138.5 | 234.1 | ||||||||||
The accompanying notes are an integral part of these financial statements.
Registered number: 3768265 | 72 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements
(forming part of the financial statements)
| 1 | Basis of preparation |
General |
The financial statements have been prepared in accordance with generally accepted accounting standards in the United Kingdom (‘UK GAAP’), and under the historical cost accounting rules. These accounting standards differ in certain significant aspects from generally accepted accounting principles in the United States (‘US GAAP’) (see note 34).
Consolidated financial statements |
The consolidated financial statements include the financial position of the company and its subsidiary undertakings for the years ended December 31, 2003 and December 31, 2002 and the financial results of the company and its subsidiary undertakings for the years ended December 31, 2003, December 31, 2002 and December 31, 2001. The acquisition method of accounting has been adopted. Under this method, the results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. All significant intercompany accounts and transactions have been eliminated.
A joint venture is an undertaking in which the group has a long-term interest and over which it exercises joint control. The group’s share of the profits less losses of joint ventures is included in the consolidated profit and loss account, and its interest in their net assets is included in investments in the consolidated balance sheet.
Going Concern |
The financial statements have been prepared on the assumption that the Group remains a going concern. The following paragraphs summarise the issues and basis on which the directors have reached their conclusion.
At 31 December 2003 the Group has had debt under its Banking Facilities secured by a fixed and floating charge over its properties, assets and undertakings. Under the terms of these facilities, the Group must comply with certain covenants including certain financial ratio limits.
Following the successful disposal of its Additives and Biocides businesses after 31 December 2003, the Group used the proceeds of these disposals to repay all term debt outstanding under the banking facilities, leaving only outstanding the current drawn down amounts under the Revolving Credit Facility.
This financing structure was considered no longer appropriate for the needs of the Group in the medium term and the Group has secured amended committed bank financing to replace the existing revolving credit drawn down. The amended financing is for term debt of £100 million, repayable at 31 December 2005, together with a Revolving Credit Facility of £50 million.
As part of the Group’s ongoing strategy the Group will continue to effect further divestments at such times as the directors believe will generate appropriate value. The directors’ view is that the amended bank financing will either be repaid by further disposals or will be renegotiated by 31 December 2005.
The directors have reviewed the Group’s budget for the current year and outline projections for the subsequent year, including cash flows and forecasts of headroom available against debt covenants under the amended facility debt arrangements. Following this review, the directors have formed a judgement that, at the time of approval of the financial statements, the Group has sufficient resources to continue operating for the foreseeable future. For these reasons the directors continue to prepare the financial statements on a going concern basis.
Registered number: 3768265 | 73 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
New accounting standards |
UK GAAP |
Amendment to FRS5 “Reporting the substance of transactions”: Revenue Recognition was issued in November 2003. This replaces the Exposure Draft issued in February 2003. This Application Note does not represent a change to existing Accounting Practice but provides additional guidance in specific areas. Adoption has not had a material impact on Avecia’s financial statements.
Financial Reporting Standard 17 (FRS 17) — “Retirement Benefits” sets out the requirements for accounting for retirement benefits, including the fair value of assets and liabilities arising from employer’s obligations, the treatment of related costs, and the level of disclosure. Avecia has fully adopted FRS 17 for the year ended December 31, 2003. The comparative figures have been restated accordingly. The adoption of FRS17 has reduced profit in 2003 by £1.9 million (2002: £0.4 million 2001:£nil) on recognition of service costs and other finance costs and income, and has reduced the Profit and Loss reserve by £113.2 million (2002: £93.9 million) on recognition of the pension liability.
US GAAP |
SFAS No. 143 “Accounting for Asset Retirement Obligation” was issued during 2001 and is effective for accounting periods beginning on or after June 15, 2002. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets. The adoption of SFAS143 has not had a material impact on the financial statements.
In November 2002, the Emerging Issues Task Force (EITF) issued its consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses the issues of how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after 15 June 2003.
SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” was issued in April 2003. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Other than the specified exceptions, this Statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the financial statements.
SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” was issued in May 2003. This Statement requires an issuer to classify the following instruments as liabilities (or assets in some circumstances):
A financial instrument issued in the form of shares that is mandatorily redeemable – that embodies an unconditional obligation requiring the issuer to redeem it by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur
A financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets (for example, a forward purchase contract or written put option on the issuer’s equity shares that is to be physically settled or net cash settled)
A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is based solely or predominantly on any of the following:
| (i) | A fixed monetary amount known at inception, for example, a payable settleable with a variable number of the issuer’s equity shares; |
| (ii) | Variations in something other than the fair value of the issuer’s equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer’s equity shares; |
| (iii) | Variations inversely related to changes in the fair value of the issuer’s equity shares, for example, a written put option that could be net share settled. |
Registered number: 3768265 | 74 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
SFAS No.132 (revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106” was issued in December 2003.This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by existing Standards.
FIN No. 46R “Consolidation of variable interest entities” is effective immediately for all entities/structures created after 31 March 2003. For structures created prior to this date it becomes effective at the end of the first fiscal year beginning after 15 June 2003 (for non-public companies). Variable Interest Entities include entities that have one or more of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity the finance its activities without additional subordinated financial support; (2) the equity investors lack essential characteristics of a controlling financial interest (as defined by FIN46R) and (3) the equity investors have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. Avecia does not currently have any such entities and adoption of FIN46R is not expected to have a material impact on the financial statements.
2 | Accounting policies |
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements.
Goodwill |
On the acquisition of a business, fair values are attributed to the net assets acquired. Purchased goodwill, representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired, is capitalized and is amortized to nil by equal annual installments over its estimated useful life.
Goodwill arising on the acquisition of the Specialty Chemicals division of AstraZeneca plc is being amortized over 15 years. Goodwill arising on subsequent acquisitions is also being amortized over 15 years.
On the subsequent disposal or termination of a business acquired, the profit or loss on disposal or termination is calculated after charging/crediting the unamortized amount of any related goodwill/negative goodwill.
Goodwill is reviewed for impairment whenever events or changes in circumstances indicate that the full carrying amount may not be recoverable.
Investments |
A joint venture is an entity in which an interest is held on a long term basis and which is jointly controlled with one or more other venturers under a contractual agreement.
The share of the profits and losses of all significant joint ventures is included in the consolidated profit and loss account on the equity accounting method. The holding value of significant joint ventures in the balance sheet is calculated by reference to equity in the net assets of such joint ventures, as shown by the most recent accounts available, adjusted where appropriate.
Depreciation and amortization |
The book value of each tangible fixed asset is written off evenly over its estimated remaining life. Reviews are made periodically of the estimated remaining lives of individual productive assets, taking account of commercial and technological obsolescence as well as normal wear and tear. Under this policy it becomes impracticable to calculate average asset lives exactly. However, the total lives approximate to 15 years for buildings and 10 years for plant and equipment. Depreciation of assets qualifying for grants is calculated on their full cost. Intangible assets acquired, including patents and intellectual property rights, are capitalized and amortized on a straight line basis over their estimated useful lives (not exceeding 20 years). If related products fail, the remaining unamortized amounts are immediately written off to revenue expense. Internally developed intangible assets are not capitalized.
Registered number: 3768265 | 75 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
Impairment of long-lived assets |
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such an asset to future net cash flows expected to be generated by them. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed their fair value. Assets to be disposed of are reported at the lower of their carrying amount or fair value less costs to sell.
Environmental liabilities |
The business is exposed to environmental liabilities relating to operations, principally in respect of soil and groundwater remediation costs. Provisions for these costs are made when expenditure on remedial work is probable and the cost can be estimated within a reasonable range of possible outcomes.
Foreign currencies |
Profit and loss accounts in foreign currencies are translated into sterling at average rates for the relevant accounting periods. Assets and liabilities are translated at rates prevailing at the balance sheet date.
Exchange differences on short-term foreign currency borrowings and deposits are included within net interest payable. Exchange differences on all other transactions, except relevant foreign currency loans, are taken to operating profit. In the consolidated financial statements exchange differences arising from the translation of the net investments of overseas subsidiaries, joint ventures and associates are taken directly to reserves. Differences on relevant foreign currency loans, together with related tax, are taken to reserves via the statement of total recognized gains and losses and offset against the differences on net investments, as they are considered to be a hedge against movements on the net investments.
Government grants |
Government grants made as a contribution towards revenue expenditure, or for an objective with an associated revenue cost (such as job creation) are included on the balance sheet as deferred income and released to the profit and loss account in line with the costs being incurred.
Capital based government grants are included within accruals and deferred income in the balance sheet and credited to operating profit over the estimated useful economic lives of the assets to which they relate.
Where grants comprise both capital and revenue elements, these elements are split out on a reasonable basis and each element is treated as described above.
Leases |
Assets held under finance leases are capitalized and included in tangible fixed assets. Each asset is depreciated over the shorter of the lease term or its useful life. The obligations related to finance leases, net of finance charges in respect of future periods, are included as appropriate under creditors due within, or creditors due after, one year. The interest element of the rental obligation is allocated to accounting periods during the lease term to reflect a constant rate of interest on the remaining balance of the obligation for each accounting period. Rentals under operating leases are charged to the profit and loss account on a straight-line basis over the lease term.
Post-retirement benefits |
Avecia operates both Defined Benefit and Defined Contribution schemes. The assets of the pension schemes are held separately from those of the Group. In the case of defined benefit schemes, assets are measured using market values. Liabilities are measured using a projected unit method and discounted at the current rate of return of a high quality corporate bond of equivalent term and currency. Costs and liabilities are assessed in accordance with the advice of independent qualified actuaries. The pension scheme surplus (to the extent that it is recoverable) or deficit is recognised in full. The movement in the scheme surplus/deficit is split between operating charges, finance items and, in the statement of total recognised gains and losses, actuarial gains and losses. In the case of Defined Contribution schemes, the amount charged to the profit and loss account represents the contributions payable to the scheme in the period.
Registered number: 3768265 | 76 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
Research and development and advertising expenditure |
Research and development and advertising expenditure is charged to the profit and loss account in the period in which it is incurred.
Stocks valuation |
Stocks are stated at the lower of cost and net realisable value. The first in, first out or an average method of valuation is used. In determining cost, depreciation is included but selling expenses and certain overhead expenses (principally central administration costs) are excluded. Net realisable value is determined as selling price less costs of disposal.
Taxation |
The charge for taxation is based on the profits for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and for accounting purposes. Deferred tax assets are recognized to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there would be suitable profits from which the future reversal of the underlying timing differences can be deducted.
Turnover and revenue recognition |
The company generates revenue through sales of specialty chemicals in the open market, through raw material conversion and supply and development contracts. Turnover excludes inter-segment turnover and value added taxes.
Revenue is recognized when services have been rendered and significant risks and rewards in respect of ownership of the products are passed to the customer. Where multiple-element sales arrangements exist, this entails the company recognizing revenue on individual contract elements for work performed or services rendered during the period.
Cash and liquid resources |
Cash, for the purpose of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.
Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources comprise term deposits of less than one year (other than cash), government securities and investments in money market managed funds.
Financial instruments |
Financial instruments are used to hedge exposures to fluctuations in interest and foreign exchange rates. Instruments accounted for as hedges are structured so as to reduce the market risk associated with the underlying transaction being hedged and are designated as a hedge at the inception of the contract. Receipts and payments on interest rate instruments are recognized on an accrual basis over the lives of the instruments. Gains and losses on contracts hedging forecast transaction cash flows are recognized in the same hedged periods. Cash flows associated with derivative financial instruments are classified in the cash flow statement in a manner consistent with those of the transactions being hedged. Finance costs associated with debt issuances are netted against the carrying value of the related debt and charged to the profit and loss account over the lives of the issue. If the underlying transaction to a hedge ceases to exist, the hedge is terminated and the profits and losses on termination are recognized in the profit and loss account immediately.
If the hedge transaction is terminated, the profits and losses on termination are held on the balance sheet and amortized over the life of the original underlying transaction.
Registered number: 3768265 | 77 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
Use of estimates |
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 3 | Segmental information |
Classes of business |
Avecia is a global group of specialized chemical businesses, which develop, manufacture and market chemical products to customers in a wide range of industries.
The following is a brief description of each business segment:
Fine Chemicals – produces chemical intermediates for pharmaceutical and agrochemical products and for biotechnology applications;
Electronic Materials – supplier of color and black ink for ink jet printers, consumables for color photocopiers and laser printers; and organic light emitting polymers for flat panel displays;
Specialty Products – manufacture of chlorine-free and bromine-free sanitizers for pools and spas; and of preservatives, fungicides and disinfectants for industrial and consumer products, copper extraction products, pigments and additives for coatings and plastics products. The Metal Extraction Products business contained within this segment was sold during 2003 (see note 5, Disposals) and the Additives and Biocides businesses have been sold subsequent to the year end (see note 31, Post Balance Sheet Events). This entire segment is therefore classified as discontinued;
NeoResins – a supplier of water-borne resins used as binders and additives in the paint, coating, adhesives and printing ink industries;
The Stahl business was sold in January 2002 and is classified as discontinued.
The following tables analyze certain profit and loss and net asset items by business segment. No segment allocation has been shown for interest and taxation as they have not historically been allocated to these businesses. The accounting policies for each segment are the same as those for the consolidated/combined business. Central costs and overheads are not allocated to individual segments. The Group’s policy is to transfer products internally at external market prices.
Registered number: 3768265 | 78 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 3 | Segmental information (continued) |
The tables below set out information for each of the industry segments and geographic areas of operation.
Avecia Group plc consolidated |
| For the year ended December 31, 2003 | ||||||||||||||||||||||
| Fine Chemicals | Electronic Materials | Specialty Products (Discontinued) | NeoResins | Stahl (Discontinued) | Other | Total | ||||||||||||||||
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||||
Turnover | ||||||||||||||||||||||
| Total sales | 112.7 | 75.4 | 124.3 | 175.9 | — | 9.9 | 498.2 | |||||||||||||||
| Inter-segmental sales | — | — | (0.5 | ) | (0.1 | ) | — | — | (0.6 | ) | ||||||||||||
| Joint venture sales | — | (12.4 | ) | — | — | — | — | (12.4 | ) | |||||||||||||
| Sales to third parties | 112.7 | 63.0 | 123.8 | 175.8 | — | 9.9 | 485.2 | |||||||||||||||
Segment operating profit before: | (87.8 | ) | 3.8 | 21.4 | 27.4 | — | 0.4 | (34.8 | ) | |||||||||||||
| Share of operating profit in joint ventures | — | 1.7 | — | — | — | — | 1.7 | |||||||||||||||
| Profit on disposal of business | 15.4 | 15.4 | ||||||||||||||||||||
Segment profit before interest, taxation and minority interests | (87.8 | ) | 5.5 | 21.4 | 27.4 | — | 15.8 | (17.7 | ) | |||||||||||||
| Unallocated costs | (46.3 | ) | ||||||||||||||||||||
Group profit before interest, taxation and minority interests | (64.0 | ) | ||||||||||||||||||||
Net assets as at December 31, 2003 | 139.8 | 60.6 | 51.3 | 70.9 | — | 9.7 | 332.3 | |||||||||||||||
| Unallocated net liabilities | (323.1 | ) | ||||||||||||||||||||
| Share of joint ventures’ net assets | — | 9.5 | — | — | — | — | 9.5 | |||||||||||||||
Total net assets as at December 31, 2003 | 18.7 | |||||||||||||||||||||
Unallocated costs relate to amortization, depreciation and UK and US head office costs.
Unallocated net liabilities relate to goodwill less corporate liabilities and external loans.
Registered number: 3768265 | 79 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 3 | Segmental information (continued) |
Avecia Group plc consolidated |
| For the year ended December 31, 2002 Restated | ||||||||||||||||||||||
| Fine Chemicals | Electronic Materials | Specialty Products (Discontinued) | NeoResins | Stahl (Discontinued) | Other | Total | ||||||||||||||||
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||||
Turnover | ||||||||||||||||||||||
| Total sales | 175.8 | 77.3 | 158.9 | 167.2 | — | 10.5 | 589.7 | |||||||||||||||
| Inter-segmental sales | — | — | (0.4 | ) | (0.1 | ) | — | — | (0.5 | ) | ||||||||||||
| Joint venture sales | — | (13.5 | ) | — | — | — | — | (13.5 | ) | |||||||||||||
| Sales to third parties | 175.8 | 63.8 | 158.5 | 167.1 | — | 10.5 | 575.7 | |||||||||||||||
Segment operating profit before: | (4.7 | ) | 2.1 | 28.2 | 29.9 | — | 1.1 | 56.6 | ||||||||||||||
| Share of operating profit in joint ventures | — | 2.2 | — | — | — | — | 2.2 | |||||||||||||||
| Profit on disposal of business | — | — | — | — | — | 9.4 | 9.4 | |||||||||||||||
Segment profit before interest, taxation and minority interests | (4.7 | ) | 4.3 | 28.2 | 29.9 | — | 10.5 | 68.2 | ||||||||||||||
| Unallocated costs | (73.8 | ) | ||||||||||||||||||||
Group (loss)/profit before interest, taxation and minority interests | (5.6 | ) | ||||||||||||||||||||
Net assets as at December 31, 2002 | 210.8 | 61.6 | 73.5 | 71.7 | — | 10.6 | 428.2 | |||||||||||||||
| Unallocated net liabilities | (299.8 | ) | ||||||||||||||||||||
| Share of joint ventures’ net assets | — | 10.1 | — | — | — | — | 10.1 | |||||||||||||||
Total net assets as at December 31, 2002 | 138.5 | |||||||||||||||||||||
Unallocated costs relate to amortization, depreciation and UK and US head office costs.
Unallocated net liabilities relate to goodwill plus corporate assets and external loans.
2002 results have been restated to reflect the adoption of FRS17.
Registered number: 3768265 | 80 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
3 | Segmental information (continued) |
Avecia Group plc consolidated |
| For the year ended December 31, 2001 (Restated) | ||||||||||||||||||||||
| Fine Chemicals | Electronic Materials | Specialty Products (Discontinued) | NeoResins | Stahl (Discontinued) | Other | Total | ||||||||||||||||
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||||
Turnover | ||||||||||||||||||||||
| Total sales | 193.6 | 79.6 | 160.1 | 162.1 | 215.4 | 11.9 | 822.7 | |||||||||||||||
| Inter-segmental sales | (0.6 | ) | (0.6 | ) | (1.0 | ) | (3.5 | ) | (1.9 | ) | — | (7.6 | ) | |||||||||
| Joint venture sales | — | (11.5 | ) | — | — | — | — | (11.5 | ) | |||||||||||||
| Sales to third parties | 193.0 | 67.5 | 159.1 | 158.6 | 213.5 | 11.9 | 803.6 | |||||||||||||||
Segment operating profit before: | 13.2 | 6.7 | 23.6 | 26.5 | 28.8 | 0.7 | 99.5 | |||||||||||||||
| Share of operating profit in joint ventures | — | 1.4 | — | — | — | — | 1.4 | |||||||||||||||
| Profit on disposal of business | — | — | — | — | 4.0 | — | 4.0 | |||||||||||||||
Segment profit before interest, taxation and minority interests | 13.2 | 8.1 | 23.6 | 26.5 | 32.8 | 0.7 | 104.9 | |||||||||||||||
| Unallocated costs | (51.1 | ) | ||||||||||||||||||||
Group profit before interest, taxation and minority interests | 53.8 | |||||||||||||||||||||
Net assets as at December 31, 2001 | 203.9 | 65.9 | 89.3 | 72.3 | 95.7 | 14.6 | 541.7 | |||||||||||||||
| Unallocated net liabilities | (320.4 | ) | ||||||||||||||||||||
| Share of joint ventures’ net assets | — | 12.8 | — | — | — | — | 12.8 | |||||||||||||||
Total net assets as at December 31, 2001 | 234.1 | |||||||||||||||||||||
Unallocated costs relate to amortization, depreciation and UK and US head office costs.
Unallocated net liabilities relate to goodwill less corporate liabilities and external loans.
2001 results have been restated to reflect the adoption of FRS17.
Registered number: 3768265 | 81 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
3 | Segmental information (continued) |
Avecia Group plc consolidated |
| For the year ended December 31, 2003 | ||||||||||||||||
| UK | Continental Europe | The Americas | Asia, Africa and Australasia | Total | ||||||||||||
| £ million | £ million | £ million | £ million | £ million | ||||||||||||
Turnover | ||||||||||||||||
Sales by destination | ||||||||||||||||
| Total sales | 51.9 | 175.6 | 192.2 | 78.5 | 498.2 | |||||||||||
| Inter-segmental sales | (0.1 | ) | (0.4 | ) | (0.1 | ) | — | (0.6 | ) | |||||||
| Sales to joint ventures | (0.4 | ) | (3.1 | ) | (8.9 | ) | — | (12.4 | ) | |||||||
| Sales to third parties | 51.4 | 172.1 | 183.2 | 78.5 | 485.2 | |||||||||||
Sales by origin | ||||||||||||||||
| Total sales | 135.5 | 131.2 | 186.0 | 45.5 | 498.2 | |||||||||||
| Inter-segmental sales | (0.4 | ) | (0.1 | ) | (0.1 | ) | — | (0.6 | ) | |||||||
| Joint venture sales | (4.6 | ) | — | (7.8 | ) | — | (12.4 | ) | ||||||||
| Sales to third parties | 130.5 | 131.1 | 178.1 | 45.5 | 485.2 | |||||||||||
Segment operating profit before: | (48.2 | ) | (11.7 | ) | (23.1 | ) | 1.9 | (81.1 | ) | |||||||
| Share of operating profit in joint ventures | 1.0 | — | 0.7 | — | 1.7 | |||||||||||
| Profit on Disposal of Business | 6.1 | 0.6 | 8.9 | (0.2 | ) | 15.4 | ||||||||||
Segment/group profit before interest, taxation and minority interests | (41.1 | ) | (11.1 | ) | (13.5 | ) | 1.7 | (64.0 | ) | |||||||
Net assets as at December 31, 2003 | (85.8 | ) | 124.5 | (35.1 | ) | 5.6 | 9.2 | |||||||||
| Joint ventures | 5.8 | — | 3.7 | — | 9.5 | |||||||||||
Total net assets as at December 31, 2003 | 18.7 | |||||||||||||||
Registered number: 3768265 | 82 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 3 | Segmental information (continued) |
Avecia Group plc consolidated |
| For the year ended December 31, 2002 (Restated) | ||||||||||||||||
UK | Continental Europe | The Americas | Asia, Africa and Australasia | Total | ||||||||||||
£ million | £ million | £ million | £ million | £ million | ||||||||||||
Turnover | ||||||||||||||||
Sales by destination | ||||||||||||||||
| Total sales | 91.6 | 163.3 | 254.5 | 80.3 | 589.7 | |||||||||||
| Inter-segmental sales | (0.2 | ) | (0.3 | ) | — | — | (0.5 | ) | ||||||||
| Sales to joint ventures | — | (3.2 | ) | (10.3 | ) | — | (13.5 | ) | ||||||||
| Sales to third parties | 91.4 | 159.8 | 244.2 | 80.3 | 575.7 | |||||||||||
Sales by origin | ||||||||||||||||
| Total sales | 168.7 | 123.0 | 251.1 | 46.9 | 589.7 | |||||||||||
| Inter-segmental sales | (0.3 | ) | (0.1 | ) | (0.1 | ) | — | (0.5 | ) | |||||||
| Joint venture sales | (4.4 | ) | — | (9.1 | ) | — | (13.5 | ) | ||||||||
| Sales to third parties | 164.0 | 122.9 | 241.9 | 46.9 | 575.7 | |||||||||||
Segment operating profit before: | (10.5 | ) | (14.3 | ) | 5.7 | 1.9 | (17.2 | ) | ||||||||
| Share of operating profit in joint ventures | 0.9 | — | 1.3 | — | 2.2 | |||||||||||
| Profit on Disposal of Business | (15.9 | ) | 34.0 | (10.6 | ) | 1.9 | 9.4 | |||||||||
Segment/group profit before interest, taxation and minority interests | (25.5 | ) | 19.7 | (3.6 | ) | 3.8 | (5.6 | ) | ||||||||
Net assets as at December 31, 2002 | (82.6 | ) | 221.0 | (11.6 | ) | 1.6 | 128.4 | |||||||||
| Joint ventures | 6.0 | — | 4.1 | — | 10.1 | |||||||||||
Total net assets as at December 31, 2002 | 138.5 | |||||||||||||||
2002 results have been restated to reflect the adoption of FRS17.
Registered number: 3768265 | 83 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 3 | Segmental information (continued) |
Avecia Group plc consolidated |
| For the year ended December 31, 2001 (Restated) | ||||||||||||||||
| UK | Continental Europe | The Americas | Asia, Africa and Australasia | Total | ||||||||||||
| £ million | £ million | £ million | £ million | £ million | ||||||||||||
Turnover | ||||||||||||||||
Sales by destination | ||||||||||||||||
| Total sales | 122.4 | 239.3 | 328.0 | 133.0 | 822.7 | |||||||||||
| Inter-segmental sales | (1.2 | ) | (5.1 | ) | (1.2 | ) | (0.1 | ) | (7.6 | ) | ||||||
| Sales to joint ventures | — | (2.9 | ) | (8.6 | ) | — | (11.5 | ) | ||||||||
| Sales to third parties | 121.2 | 231.3 | 318.2 | 132.9 | 803.6 | |||||||||||
Sales by origin | ||||||||||||||||
| Total sales | 205.6 | 216.1 | 303.6 | 97.4 | 822.7 | |||||||||||
| Inter-segmental sales | (1.5 | ) | (4.8 | ) | (1.2 | ) | (0.1 | ) | (7.6 | ) | ||||||
| Joint venture sales | (3.2 | ) | — | (8.3 | ) | — | (11.5 | ) | ||||||||
| Sales to third parties | 200.9 | 211.3 | 294.1 | 97.3 | 803.6 | |||||||||||
Segment operating profit before: | 6.9 | 23.4 | 5.1 | 13.0 | 48.4 | |||||||||||
| Share of operating profit in joint ventures | 0.4 | — | 1.0 | — | 1.4 | |||||||||||
| Profit on disposal of business | (3.6 | ) | 9.3 | (1.0 | ) | (0.7 | ) | 4.0 | ||||||||
Segment/group profit before interest, taxation and minority interests | 3.7 | 32.7 | 5.1 | 12.3 | 53.8 | |||||||||||
Net assets as at December 31, 2001 | 103.3 | 109.3 | (10.3 | ) | 19.0 | 221.3 | ||||||||||
| Joint ventures | 6.9 | — | 5.9 | — | 12.8 | |||||||||||
Total net assets as at December 31, 2001 | 234.1 | |||||||||||||||
2001 results have been restated to reflect the adoption of FRS17.
Registered number: 3768265 | 84 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 3 | Segmental information (continued) |
| Avecia Group plc Consolidated | |||||||
Total assets | As at December 31, 2003 | As at December 31, 2002 Restated | |||||
| £million | £million | ||||||
| Fine Chemicals | 175.1 | 248.7 | |||||
| Electronic Materials | 80.9 | 83.2 | |||||
| Specialty Products (Discontinued) | 61.8 | 93.8 | |||||
| NeoResins | 97.3 | 91.5 | |||||
| Stahl (Discontinued) | — | — | |||||
| Other | 330.4 | 403.2 | |||||
| 745.5 | 920.4 | ||||||
Other includes all goodwill.
| Avecia Group plc Consolidated | ||||||||||
Capital expenditure on tangible and intangible fixed assets | For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | |||||||
| £ million | £ million | £ million | ||||||||
| Fine Chemicals | 38.8 | 34.9 | 34.1 | |||||||
| Electronic Materials | 3.3 | 4.7 | 3.9 | |||||||
| Specialty Products (Discontinued) | 1.8 | 2.5 | 3.7 | |||||||
| NeoResins | 5.8 | 3.3 | 9.9 | |||||||
| Stahl (Discontinued) | — | — | 7.7 | |||||||
| Other | 0.3 | 0.6 | 1.9 | |||||||
Total | 50.0 | 46.0 | 61.2 | |||||||
Registered number: 3768265 | 85 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 3 | Segmental information (continued) |
| Avecia Group plc Consolidated | ||||||||||
Depreciation and amortization | For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | |||||||
| £ million | £ million | £ million | ||||||||
| Fine Chemicals | 73.2 | 30.0 | 17.9 | |||||||
| Electronic Materials | 6.7 | 6.5 | 5.4 | |||||||
| Specialty Products (discontinued) | 4.7 | 5.4 | 6.5 | |||||||
| NeoResins | 6.3 | 6.1 | 6.6 | |||||||
| Stahl (discontinued) | — | — | 7.6 | |||||||
| Other | 45.3 | 54.8 | 45.1 | |||||||
Total | 136.2 | 102.8 | 89.1 | |||||||
Included in the year ended 31 December, 2003 is £55.2 million of fixed asset impairment charge in Fine Chemicals (2002: £8.6 million; 2001:£3.3 million). Other includes amortization of all goodwill.
Registered number: 3768265 | 86 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 3 | Segmental information (continued) |
Geographic areas |
| Avecia Group plc Consolidated | |||||||
Net assets | As at December 31, 2003 | As at December 31, 2002 Restated | |||||
| £ million | £ million | ||||||
| United Kingdom | (80.0 | ) | (76.6 | ) | |||
| Continental Europe | 124.5 | 221.0 | |||||
| The Americas | (31.4 | ) | (7.5 | ) | |||
| Asia, Africa and Australasia | 5.6 | 1.6 | |||||
| 18.7 | 138.5 | ||||||
| Avecia Group plc Consolidated | |||||||
Tangible fixed assets | As at December 31, 2003 | As at December 31, 2002 | |||||
| £ million | £ million | ||||||
| United Kingdom | 171.1 | 208.8 | |||||
| Continental Europe | 39.2 | 35.9 | |||||
| The Americas | 52.6 | 91.0 | |||||
| Asia, Africa and Australasia | 0.3 | 0.4 | |||||
| 263.2 | 336.1 | ||||||
| Avecia Group plc Consolidated | ||||||||||
| Average number of employees | For the year ended | For the year ended | For the year ended | |||||||
| December 31, | December 31, | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| United Kingdom | 1,766 | 1,934 | 1,969 | |||||||
| Continental Europe | 604 | 605 | 1,236 | |||||||
| The Americas | 673 | 843 | 1,283 | |||||||
| Asia, Africa and Australasia | 58 | 58 | 295 | |||||||
| 3,101 | 3,440 | 4,783 | ||||||||
Registered number: 3768265 | 87 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 4 | Group operating profit |
| Avecia Group plc Consolidated | |||||||||||||||||||
| For the year ended December 31, 2003 | For the year ended December 31, 2002 Restated | ||||||||||||||||||
| Continuing operations | Discontinued operations | 2003 Total | Continuing operations | Discontinued operations | 2002 Total | ||||||||||||||
| £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
Operating costs | |||||||||||||||||||
| Cost of sales | (288.9 | ) | (58.6 | ) | (347.5 | ) | (282.9 | ) | (78.8 | ) | (361.7 | ) | |||||||
| Distribution costs | (16.1 | ) | (6.7 | ) | (22.8 | ) | (17.8 | ) | (9.1 | ) | (26.9 | ) | |||||||
| Research and development | (49.9 | ) | (7.8 | ) | (57.7 | ) | (50.1 | ) | (8.7 | ) | (58.8 | ) | |||||||
| Selling, general and administrative expenses | (44.0 | ) | (29.1 | ) | (73.1 | ) | (76.8 | ) | (35.1 | ) | (111.9 | ) | |||||||
| (398.9 | ) | (102.2 | ) | (501.1 | ) | (427.6 | ) | (131.7 | ) | (559.3 | ) | ||||||||
Exceptional operating costs | |||||||||||||||||||
| Restructuring and site closure | — | — | — | (11.1 | ) | — | (11.1 | ) | |||||||||||
| Impairment of Goodwill, Intangible and Tangible Assets | (69.3 | ) | — | (69.3 | ) | (13.4 | ) | (16.7 | ) | (30.1 | ) | ||||||||
| (69.3 | ) | — | (69.3 | ) | (24.5 | ) | (16.7 | ) | (41.2 | ) | |||||||||
Other operating income | |||||||||||||||||||
| Royalty income | 0.2 | — | 0.2 | 0.8 | — | 0.8 | |||||||||||||
| Other income | 3.7 | 0.2 | 3.9 | 5.3 | 1.5 | 6.8 | |||||||||||||
| 3.9 | 0.2 | 4.1 | 6.1 | 1.5 | 7.6 | ||||||||||||||
| Total charge for depreciation and amortization included above | (130.6 | ) | (4.7 | ) | (135.3 | ) | (96.4) | (5.4 | ) | (101.8 | ) | ||||||||
| Avecia Group plc Consolidated | ||||||||||
| For the year ended December 31, 2001 Restated | ||||||||||
| Continuing Operations | Discontinued operations | Total | ||||||||
| £ million | £ million | £ million | ||||||||
Operating costs | ||||||||||
| Cost of sales | (411.1 | ) | (87.0 | ) | (498.1 | ) | ||||
| Distribution costs | (38.3 | ) | (7.7 | ) | (46.0 | ) | ||||
| Research and development | (50.7 | ) | (9.8 | ) | (60.5 | ) | ||||
| Selling, general and administrative expenses | (123.2 | ) | (31.6 | ) | (154.8 | ) | ||||
| (623.3 | ) | (136.1 | ) | (759.4 | ) | |||||
Other operating income | ||||||||||
| Royalty income | 0.1 | 0.1 | 0.1 | |||||||
| Other income | 3.5 | 0.6 | 4.1 | |||||||
| 3.6 | 0.7 | 4.2 | ||||||||
| Total charge for depreciation and amortization included above | (74.0 | ) | (13.5 | ) | (87.5 | ) | ||||
Registered number: 3768265 | 88 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 5 | Profit on disposal of business |
In July 2003 the Group completed the sale of the Metal Extraction Products and Intermediates and Stabilizers businesses to Cytec Industries Inc.
The principal effects on the reported results are as follows:
| 2003 | ||||
| £ million | ||||
Cash flow | ||||
| Working capital settlement | 0.1 | |||
| Cash disposed | (0.1 | ) | ||
| Sale of business | 58.4 | |||
Profit on disposal | ||||
| Goodwill written off on disposal | 0.1 | |||
| Net assets disposed | 38.5 | |||
| Disposal costs | 5.2 | |||
| Profit on disposal | 14.9 | |||
| 58.7 | ||||
Consideration | ||||
| Cash | 58.6 | |||
| Deferred | 0.1 | |||
| 58.7 | ||||
Additionally, during the year the group reported £0.2 million profit and received £20.0 million deferred consideration relating to the sale of Stahl which took place in 2002, and £0.3 million of provisions relating to the disposal of the Novacote business in 2001 were written back to profit.
Registered number: 3768265 | 89 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 6 | (Loss)/profit on ordinary activities before taxation |
| Avecia Group plc Consolidated | |||||||||||
| For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | |||||||||
| £ million | £ million | £ million | |||||||||
(Loss)/profit on ordinary activities before taxation is stated after charging | |||||||||||
| Auditors’ remuneration: | |||||||||||
| Group | – audit | 0.4 | 0.4 | 0.4 | |||||||
| – fees paid to the auditors and their associates in respect of other services | 0.3 | 0.1 | 0.1 | ||||||||
| Depreciation and other amounts written off tangible fixed assets: | |||||||||||
| Owned | 33.1 | 39.1 | 41.0 | ||||||||
| Leased | 1.1 | 0.3 | 0.8 | ||||||||
| Impairment of tangible and intangible fixed assets | 55.9 | 8.6 | 3.3 | ||||||||
| Impairment of goodwill | 13.4 | 21.5 | — | ||||||||
| Amortization of goodwill | 29.6 | 30.7 | 41.8 | ||||||||
| Amortization of goodwill for joint ventures | 0.9 | 1.0 | 1.1 | ||||||||
| Amortization of intellectual property rights | 2.1 | 1.6 | 1.1 | ||||||||
| Exchange losses | 5.1 | 1.4 | — | ||||||||
| Other operating leases | 0.2 | 0.4 | 0.3 | ||||||||
| Research and development expenditure | 57.7 | 58.8 | 60.5 | ||||||||
after crediting | |||||||||||
| Exchange gains | 34.8 | 33.1 | 0.1 | ||||||||
Registered number: 3768265 | 90 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 7 | Remuneration of directors |
| Avecia Group plc | ||||||||||
| For the year Ended December 31, 2003 | For the year ended December 31, 2002 | For the Year Ended December 31, 2001 | ||||||||
| £’000 | £’000 | £’000 | ||||||||
| Directors’ emoluments | 820 | 801 | 844 | |||||||
| Included in the above amounts paid to third parties in respect of directors’ services | — | — | — | |||||||
The aggregate of emoluments of the highest paid director were £366,253 for the year ended December 31, 2003, (2002: £342,938) and company pension contributions of £ 11,880 (2002: £11,644) were made to a money purchase scheme on his behalf.
| Number of directors | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
| Retirement benefits are accruing to the following number of directors under: | ||||||||||
| Money purchase schemes | 2 | 2 | 2 | |||||||
| Defined benefit schemes | 1 | 1 | 1 | |||||||
Registered number: 3768265 | 91 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 8 | Staff numbers and costs |
The average number of persons employed (including directors) during the period, analyzed by business segment, was as follows:
| Number of employees | ||||||||||
| Avecia Group plc Consolidated | ||||||||||
| For the year ended | For the year ended | For the year ended | ||||||||
| December 31 2003 | December 31 2002 | December 31 2001 | ||||||||
| Fine Chemicals | 1,225 | 1,381 | 1,267 | |||||||
| Electronic Materials | 487 | 558 | 453 | |||||||
| Specialty Products | 508 | 591 | 695 | |||||||
| NeoResins | 666 | 678 | 698 | |||||||
| Stahl | — | — | 1,445 | |||||||
| Other | 215 | 232 | 225 | |||||||
| 3,101 | 3,440 | 4,783 | ||||||||
| The aggregate payroll costs were as follows: | ||||||||||
| Avecia Group plc Consolidated | ||||||||||
| For the year ended | For the year ended | For the year ended | ||||||||
| December 31, | December 31, | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| Restated | Restated | |||||||||
| £ million | £ million | £ million | ||||||||
| Wages and salaries | 105.6 | 114.0 | 141.1 | |||||||
| Social security costs | 11.6 | 11.6 | 16.6 | |||||||
| Other pension costs | 14.9 | 12.5 | 18.0 | |||||||
| 132.1 | 138.1 | 175.7 | ||||||||
| Other employment costs: | ||||||||||
| Severance costs | 10.8 | 2.5 | 4.4 | |||||||
| Post retirement costs | 0.5 | 0.5 | 1.3 | |||||||
| Other | — | 0.5 | 2.0 | |||||||
| 11.3 | 3.5 | 7.7 | ||||||||
| 143.4 | 141.6 | 183.4 | ||||||||
Registered number: 3768265 | 92 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 9 | Other interest receivable and similar income |
| Avecia Group plc Consolidated | ||||||||||
| For the year ended | For the year ended | For the year ended | ||||||||
| December 31, | December 31, | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
| Net exchange gains | 33.3 | 32.6 | — | |||||||
| On bank deposits | 1.0 | 1.9 | 2.0 | |||||||
| Other | — | — | 0.5 | |||||||
| Share of net interest receivable from joint ventures | — | — | 0.1 | |||||||
| 34.3 | 34.5 | 2.6 | ||||||||
10 Interest payable and similar charges | ||||||||||
| Avecia Group plc Consolidated | ||||||||||
| For the year ended | For the year ended | For the year ended | ||||||||
| December 31, | December 31, | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
| Net exchange losses | 5.2 | 1.5 | 5.1 | |||||||
| On bank loans and overdrafts | 11.6 | 15.1 | 34.5 | |||||||
| On all other loans | 39.5 | 41.9 | 42.2 | |||||||
| Amortization of finance fees | 4.8 | 6.4 | 6.6 | |||||||
| Finance charges payable in respect of finance leases and hire purchase contracts | 0.4 | 0.4 | 0.5 | |||||||
| Losses on early repayments of debt | — | 0.1 | — | |||||||
| 61.5 | 65.4 | 88.9 | ||||||||
Registered number: 3768265 | 93 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 11 | Taxation |
The provision for tax is as follows:
| Avecia Group plc Consolidated | ||||||||||
| For the year ended | For the year ended | For the year ended | ||||||||
| December 31, | December 31, | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
UK taxation charge at United Kingdom corporation tax rate of 30% for year ended December 31, 2003 (30% for year ended December 31, 2002; 30% for year ended December 31, 2001) | ||||||||||
| — | — | — | ||||||||
| Deferred taxation | 0.2 | 4.4 | (0.6 | ) | ||||||
| Overseas taxation | 0.7 | 2.1 | 6.4 | |||||||
| 0.9 | 6.5 | 5.8 | ||||||||
The total tax expense differs from the amount computed by applying the UK rate of 30% to income before tax as a result of the following:
| Avecia Group plc Consolidated | ||||||||||
| For the year ended | For the year ended | For the year ended | ||||||||
| December 31, | December 31, | December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
| Profit on ordinary activities before taxation | (93.6 | ) | (36.5 | ) | (32.5 | ) | ||||
| Taxation (credit) / charge at United Kingdom corporation tax rate of 30% for year ended December 31, 2003 (30% for year ended December 31, 2002; 30% for year ended December 31, 2001) | ||||||||||
| (28.1 | ) | (10.9 | ) | (9.8 | ) | |||||
| Overseas tax rates | 0.7 | 2.1 | 5.8 | |||||||
| Other | 28.3 | 15.3 | 9.8 | |||||||
| Taxes on income from ordinary activities | 0.9 | 6.5 | 5.8 | |||||||
At December 31, 2003 there were £159.8 million of UK tax losses to be carried forward with no expiration date (2002: £262.0 million). In addition, at that date, the group had US$ 41.2 million of US federal tax net operating losses which expire in years 2019 to 2022 (2002: $59.9 million).
No deferred tax asset was recognized in respect of these losses which results in the high effective tax rate for the group. All deferred tax is non-current.
Registered number: 3768265 | 94 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 11 | Taxation (continued) |
Factors affecting tax charge for period |
The tax assessed for the period is higher than the standard rate of corporation tax in the UK (30 per cent). The differences are explained below:
| For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | ||||||||
| £m | £m | £m | ||||||||
| Loss on ordinary activities before tax | (93.6 | ) | (36.5 | ) | (32.5 | ) | ||||
| Loss on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% | (28.1 | ) | (10.8 | ) | (9.8 | ) | ||||
| Effects of: | ||||||||||
| Expenses not deductible for tax : | ||||||||||
| Goodwill amortisation | 6.4 | 12.6 | 9.1 | |||||||
| Depreciation for the period in excess of capital allowances | 14.7 | (8.2 | ) | (3.2 | ) | |||||
| Deferral of interest deduction | — | — | 4.4 | |||||||
| Disposal of UK assets | — | 7.9 | 10.1 | |||||||
| Non taxable income | (3.9 | ) | (0.3 | ) | 0.2 | |||||
| Gain on disposal of subsidiary not taxable | — | (2.8 | ) | (7.1 | ) | |||||
| Adjustment of depreciation and goodwill on business disposals | 0.8 | — | — | |||||||
| Generation of additional tax losses in the year | 21.6 | 2.6 | 2.5 | |||||||
| Higher rates on overseas earnings | — | 0.4 | 0.2 | |||||||
| Pension fund payment | — | (2.3 | ) | — | ||||||
| Tax losses utilised | (10.7 | ) | — | — | ||||||
| State taxes | 0.2 | 0.9 | — | |||||||
| Profit in inventory | (0.3 | ) | 2.1 | — | ||||||
| Total Current taxes | 0.7 | 2.1 | 6.4 | |||||||
| Deferred tax charge for the period | 0.2 | 4.4 | (0.7 | ) | ||||||
| Deferred Taxes | ||||||||||
| US deferred tax asset write back | — | 2.8 | (2.8 | ) | ||||||
| Netherlands Acceleration of tax redemption for pension payment | — | 2.3 | — | |||||||
| Other timing differences | 0.2 | (0.7 | ) | 2.1 | ||||||
| Total deferred Taxes | 0.2 | 4.4 | (0.7 | ) | ||||||
| Taxes on income from Ordinary Activities | 0.9 | 6.5 | 5.8 | |||||||
All current and deferred income tax expense for the year is attributable to foreign operations.
Analysis of loss on ordinary activities before taxation:
| For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
| UK activities | (63.6 | ) | (46.9 | ) | (57.8) | |||||
| Non UK activities | (30.1 | ) | 10.4 | 25.3 | ||||||
| Total | (93.6 | ) | (36.5 | ) | (32.5 | ) | ||||
Registered number: 3768265 | 95 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 12 | Intangible fixed assets |
| Avecia Group plc Consolidated as at December 31, 2003 | ||||||||||
| Goodwill | Intellectual property rights | Total | ||||||||
| £ million | £ million | £ million | ||||||||
Cost or valuation | ||||||||||
| At beginning of year | 444.2 | 15.4 | 459.6 | |||||||
| Additions | — | 0.2 | 0.2 | |||||||
| Reclassifications | — | 0.3 | 0.3 | |||||||
| Disposals | (1.6 | ) | — | (1.6 | ) | |||||
| Translation adjustments | 1.0 | 0.8 | 1.8 | |||||||
| At end of year | 443.6 | 16.7 | 460.3 | |||||||
Amortization | ||||||||||
| At beginning of year | 125.9 | 3.7 | 129.6 | |||||||
| Charge for year | 29.6 | 2.1 | 31.7 | |||||||
| Impairment | 13.4 | 0.7 | 14.1 | |||||||
| Disposals | (1.6 | ) | — | (1.6 | ) | |||||
| Translation adjustments | (1.4 | ) | 0.1 | (1.3 | ) | |||||
| At end of year | 165.9 | 6.6 | 172.5 | |||||||
Net book value | ||||||||||
At December 31, 2003 | 277.7 | 10.1 | 287.8 | |||||||
The Goodwill impairment of £13.4 million charged during the year relates to Fine Chemicals, mainly goodwill created on the acquisition of Torcan.
Registered number: 3768265 | 96 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 12 | Intangible fixed assets (continued) |
| Avecia Group plc Consolidated as at December 31, 2002 | ||||||||||
| Goodwill | Intellectual property rights | Total | ||||||||
| £ million | £ million | £ million | ||||||||
Cost or valuation | ||||||||||
| At beginning of year | 599.7 | 13.6 | 613.3 | |||||||
| Acquisition of subsidiaries | 0.6 | 1.5 | 2.1 | |||||||
| Additions | — | 0.3 | 0.3 | |||||||
| Disposals | (147.5 | ) | — | (147.5 | ) | |||||
| Translation adjustments | (8.6 | ) | — | (8.6 | ) | |||||
| At end of year | 444.2 | 15.4 | 459.6 | |||||||
Amortization | ||||||||||
| At beginning of year | 99.3 | 2.2 | 101.5 | |||||||
| Charge for year | 30.7 | 1.6 | 32.3 | |||||||
| Impairment | 21.5 | — | 21.5 | |||||||
| Disposals | (23.8 | ) | — | (23.8 | ) | |||||
| Translation adjustments | (1.8 | ) | (0.1 | ) | (1.9 | ) | ||||
| At end of year | 125.9 | 3.7 | 129.6 | |||||||
Net book value | ||||||||||
At December 31, 2002 | 318.3 | 11.7 | 330.0 | |||||||
The acquisition values of intellectual property rights acquired as part of the business represent the fair value at the acquisition date. Goodwill is being amortized evenly over the directors’ estimate of the weighted average useful life of 15 years, following a detailed review of the factors affecting its durability, including the estimated life span of the group’s products and technology, the stability of the industry and the group’s competitive position within it.
The £13.4 million impairment charged during 2003 was calculated with reference to value in use of the income generating units using a discount rate of 10%.
Registered number: 3768265 | 97 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 13 | Tangible fixed assets |
| Avecia Group plc Consolidated as at December 31, 2003 | |||||||||||||
| Land and buildings | Plant and equipment | Assets in course of construction | Total | ||||||||||
| £ million | £ million | £ million | £ million | ||||||||||
Cost or valuation | |||||||||||||
| At beginning of year | 61.7 | 329.3 | 37.0 | 428.0 | |||||||||
| Additions | 0.1 | 8.5 | 41.2 | 49.8 | |||||||||
| Disposals | (8.2 | ) | (34.9 | ) | (0.4 | ) | (43.5 | ) | |||||
| Transfers | 1.6 | 16.4 | (18.0 | ) | — | ||||||||
| Translation adjustments | (0.4 | ) | (3.5 | ) | 0.1 | (3.8 | ) | ||||||
| At end of year | 54.8 | 315.8 | 59.9 | 430.5 | |||||||||
Depreciation | |||||||||||||
| At beginning of year | 2.9 | 89.0 | — | 91.9 | |||||||||
| Charge for year | 6.0 | 28.3 | — | 34.3 | |||||||||
| Impairment | — | 55.2 | — | 55.2 | |||||||||
| Disposals | (0.9 | ) | (11.6 | ) | — | (12.5 | ) | ||||||
| Translation adjustments | (0.2 | ) | (1.4 | ) | — | (1.6 | ) | ||||||
| At end of year | 7.8 | 159.5 | — | 167.3 | |||||||||
Net book value | |||||||||||||
At December 31, 2003 | 47.0 | 156.3 | 59.9 | 263.2 | |||||||||
Registered number: 3768265 | 98 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 13 | Tangible fixed assets (continued) |
| Avecia Group plc Consolidated as at December 31, 2002 | |||||||||||||
| Land and buildings | Plant and equipment | Assets in course of construction | Total | ||||||||||
| £ million | £ million | £ million | £ million | ||||||||||
Cost or valuation | |||||||||||||
| At beginning of year | 88.6 | 370.4 | 23.9 | 482.9 | |||||||||
| Reclassifications | — | (1.4 | ) | 1.1 | (0.3 | ) | |||||||
| Additions | 3.9 | 7.7 | 34.1 | 45.7 | |||||||||
| Disposals | (36.3 | ) | (45.0 | ) | (5.0 | ) | (86.3 | ) | |||||
| Transfers | 9.2 | 7.5 | (16.7 | ) | — | ||||||||
| Translation adjustments | (3.7 | ) | (9.9 | ) | (0.4 | ) | (14.0 | ) | |||||
| At end of year | 61.7 | 329.3 | 37.0 | 428.0 | |||||||||
Depreciation | |||||||||||||
| At beginning of year | 10.2 | 70.9 | — | 81.1 | |||||||||
| Reclassifications | 1.6 | (1.9 | ) | — | (0.3 | ) | |||||||
| Charge for year | 3.7 | 35.7 | — | 39.4 | |||||||||
| Impairment | — | 8.6 | — | 8.6 | |||||||||
| Disposals | (11.6 | ) | (19.9 | ) | — | (31.5 | ) | ||||||
| Translation adjustments | (1.0 | ) | (4.4 | ) | — | (5.4 | ) | ||||||
| At end of year | 2.9 | 89.0 | — | 91.9 | |||||||||
Net book value | |||||||||||||
At December 31, 2002 | 58.8 | 240.3 | 37.0 | 336.1 | |||||||||
Registered number: 3768265 | 99 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 13 | Tangible fixed assets (continued) |
The net book value of land and buildings comprises:
| Avecia Group plc Consolidated | |||||||
| December 31, 2003 | December 31, 2002 | ||||||
| £ million | £ million | ||||||
| Freehold | 46.7 | 58.5 | |||||
| Long leasehold | 0.3 | 0.3 | |||||
| Short leasehold | — | — | |||||
| 47.0 | 58.8 | ||||||
The cost of land and buildings includes £40.6 million of depreciable assets at December 31, 2003 (2002: £44.8 million).
Included in the total net book value of land and buildings is £0.4 million in respect of assets held under finance leases at December 31, 2003 (2002: £0.9 million). Depreciation for the year ended December 31, 2003 on these assets was £0.3 million (2002: £0.3 million). In respect of plant and equipment the net book value of assets held under finance leases is £5.4 million (2002: £5.5 million). Depreciation on these assets was £3.3 million (2002: £2.2 million).
Depreciation was not charged on land with a cost of £6.4 million included in land and buildings during the year ended December 31, 2003 (2002: £10.9 million).
Where applicable, the impairment charged during the year was calculated with reference to value in use of the assets using a discount rate of 10%.
Registered number: 3768265 | 100 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 14 | Fixed asset investments |
| Avecia Group plc Consolidated as at December 31, 2003 | ||||
| Investments in joint ventures | ||||
| £ million | ||||
Cost | ||||
| At beginning of year | ||||
| Goodwill | 15.5 | |||
| Exchange movements on goodwill | 10.6 | |||
| Share of net assets | (1.3 | ) | ||
| Translation adjustments | (0.5 | ) | ||
| Capital contributions | (0.4 | ) | ||
| At end of year | 23.9 | |||
Share of post acquisition reserves | ||||
| At beginning of year | (0.4 | ) | ||
| Retained profits less losses | 2.7 | |||
| Dividends received | (2.6 | ) | ||
| At end of year | (0.3 | ) | ||
Amortization | ||||
| At beginning of year | (3.8 | ) | ||
| Charged for the year | (1.0 | ) | ||
| At end of year | (4.8 | ) | ||
Net book value | ||||
At December 31, 2003 | 18.8 | |||
| At December 31, 2002 | 21.8 | |||
Net book value of £18.8 million comprises net assets of £9.4 million and goodwill of £9.4 million.
Registered number: 3768265 | 101 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 14 | Fixed asset investments (continued) |
| Avecia Group plc Consolidated as at December 31, 2002 | ||||
| Investments in joint ventures | ||||
| £ million | ||||
Cost | ||||
| At beginning of year | ||||
| Goodwill | 17.1 | |||
| Exchange movements on goodwill | (1.6 | ) | ||
| Share of net assets | 11.9 | |||
| Translation adjustments | (0.5 | ) | ||
| Capital contributions | (0.9 | ) | ||
| At end of year | 26.0 | |||
Share of post acquisition reserves | ||||
| At beginning of year | 0.9 | |||
| Retained profits less losses | 3.3 | |||
| Dividends received | (4.6 | ) | ||
| At end of year | (0.4 | ) | ||
Amortization | ||||
| At beginning of year | (2.7 | ) | ||
| Charged for the year | (1.1 | ) | ||
| At end of year | (3.8 | ) | ||
Net book value | ||||
At December 31, 2002 | 21.8 | |||
| At December 31, 2001 | 27.2 | |||
Registered number: 3768265 | 102 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 14 | Fixed asset investments (continued) |
The principal undertakings of Avecia Group plc are as follows.
| Country of incorporation | Principal activity | Percentage of equity owned | ||||||||
Subsidiary undertakings | ||||||||||
| Avecia Corporation Limited | UK | Holding company | 100%* | |||||||
| Avecia Investments Limited | UK | Holding company | 100%* | |||||||
| Avecia UK Holdings Limited | UK | Holding company | 100%* | |||||||
| Avecia Limited | UK | Chemical manufacture | 100%* | |||||||
| Avecia Holdings BV | The Netherlands | Holding company | 100%* | |||||||
| Avecia BV | The Netherlands | Chemical manufacture | 100%* | |||||||
| Avecia Inc. | USA | Chemical manufacture | 100%* | |||||||
| Avecia Holdings Inc. | USA | Holding company | 100%* | |||||||
| Torcan Chemical Limited | Canada | Chemical manufacture | 100%* | |||||||
| NeoResins Inc. | USA | Chemical manufacture | 100%* | |||||||
| Avecia Biotechnology Inc. | USA | Chemical manufacture | 100%* | |||||||
| Avecia Spain SL | Spain | Chemical manufacture | 100%* | |||||||
Joint ventures | ||||||||||
| Image Polymers Europe | UK | Chemical manufacture | 50%* | |||||||
| Image Polymers Company | USA | Chemical manufacture | 50%* | |||||||
| * | All ordinary shares held. |
Under the terms of certain financing agreements, distribution by subsidiary undertakings beyond Avecia Investments Limited are restricted to specific purposes.
Registered number: 3768265 | 103 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 14 | Fixed asset investments (continued) |
Joint ventures |
The following information is relevant to an understanding of the investments in joint ventures.
The amounts included in respect of joint ventures comprise the following:
| Avecia Group plc Consolidated | ||||||||||
| As at/period ended December 31, | As at/period ended December 31, | As at/period ended December 31, | ||||||||
| 2003 | 2002 | 2001 | ||||||||
| £ million | £ million | £ million | ||||||||
| Share of turnover of joint ventures | 12.3 | 13.5 | 11.5 | |||||||
| Share of assets | 11.0 | 11.6 | 13.9 | |||||||
| Share of liabilities | (1.6 | ) | (1.5 | ) | (1.1 | ) | ||||
| Share of net assets | 9.4 | 10.1 | 12.8 | |||||||
The net book value of joint ventures as disclosed on the balance sheet includes goodwill of £9.4 million at December 31, 2003 (2002: £11.7 million).
Registered number: 3768265 | 104 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 15 | Stocks |
| Avecia Group plc Consolidated | |||||||
December 31, | December 31, | ||||||
2003 | 2002 | ||||||
£ million | £ million | ||||||
| Raw materials and consumables | 30.5 | 34.8 | |||||
| Work in progress | 8.8 | 8.5 | |||||
| Finished goods and goods for resale | 35.6 | 40.5 | |||||
| 74.9 | 83.8 | ||||||
Stock is stated net of provisions of £3.8 million at December 31, 2003, (2002: £4.0 million).
| 16 | Debtors |
| Avecia Group plc Consolidated | |||||||
December 31, | December 31, | ||||||
2003 | 2002 | ||||||
£ million | Restated £ million | ||||||
| Trade debtors (net of provisions for bad debts) | 61.0 | 80.4 | |||||
| Other debtors | 7.9 | 28.5 | |||||
| Prepayments and accrued income | 5.9 | 5.4 | |||||
| Amounts owed by parent undertakings | 17.2 | 17.3 | |||||
| Amounts receivable from joint ventures | 0.8 | 0.9 | |||||
| 92.8 | 132.5 | ||||||
Total debtors include trade debtors of £nil million, other debtors of £0.8 million, prepayments and accrued income of £nil million and pensions prepayments of £nil million due after more than one year at December 31, 2003. At December 31, 2002 the comparative amounts were £1.3 million, £1.3 million, £0.3 million and £nil million respectively. Amounts owed by parent undertakings are due after more than one year and do not bear interest.
At December 31, 2003, debtors of £12.5 million (2002: £31.0 million) were in respect of sales made by the US businesses.
Provision for bad and doubtful debts |
| Avecia Group plc Consolidated | ||||||||||
December 31, | December 31, | December 31, | ||||||||
2003 | 2002 | 2001 | ||||||||
£ million | £ million | £ million | ||||||||
Provision for bad and doubtful debts | ||||||||||
| At beginning of year | 4.3 | 7.6 | 6.4 | |||||||
| (Credit)/Charge for period | (2.3 | ) | 2.5 | 2.9 | ||||||
| Amount utilized and other movements | (0.2 | ) | (5.8 | ) | (1.7 | ) | ||||
| At end of year | 1.8 | 4.3 | 7.6 | |||||||
Registered number: 3768265 | 105 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 17 | Creditors: amounts falling due within one year |
| Avecia Group plc Consolidated | |||||||
December 31, | December 31, | ||||||
2003 | 2002 | ||||||
Restated | |||||||
£ million | £ million | ||||||
| Bank loans and overdrafts (see note 19) | 70.0 | 26.4 | |||||
| Obligations under finance leases and hire purchase contracts (see note 19) | 0.7 | 0.7 | |||||
| Trade creditors | 55.5 | 53.6 | |||||
| Taxation and social security | 8.8 | 9.3 | |||||
| Other creditors | 4.9 | 6.3 | |||||
| Accruals and deferred income | 25.6 | 29.7 | |||||
| 165.5 | 126.0 | ||||||
The weighted average interest rate for short-term borrowings, before interest hedging, at December 31, 2003 was 5.4% (2002: 5.56%).
Bank loans at December 31, 2003 are shown net of finance costs of £4.2 million (2002: £4.2 million) which are being amortized over the life of the debt.
| 18 | Creditors: amounts falling due after more than one year |
| Avecia Group plc Consolidated | |||||||
December 31, | December 31, | ||||||
2003 | 2002 | ||||||
Restated | |||||||
£ million | £ million | ||||||
| Bank loans and overdrafts (see note 19) | 132.8 | 210.3 | |||||
| Other loans (see note 19) | 298.3 | 324.5 | |||||
| Amounts owed to related undertakings | 2.2 | 2.2 | |||||
| Obligations under finance leases and hire purchase contracts (see note 19) | 4.6 | 5.6 | |||||
| Other creditors | 1.3 | — | |||||
| Accruals and deferred income | 1.4 | 1.1 | |||||
| 440.6 | 543.7 | ||||||
Bank loans and other loans as at December 31, 2003 are shown net of finance costs of £12.0 million (2002: £16.2 million) which are being amortized over the life of the debt.
Registered number: 3768265 | 106 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management |
Analysis of debt shown net of unamortized issuance costs |
| Avecia Group plc Consolidated | |||||||
Gross repayable | Net of fees | ||||||
December 31, | December 31, | ||||||
2003 | 2003 | ||||||
£ million | £ million | ||||||
| Debt can be analyzed as falling due: | |||||||
| In one year or less, or on demand | 74.1 | 70.0 | |||||
| Between one and two years | 38.6 | 34.4 | |||||
| Between two and three years | 43.4 | 40.4 | |||||
| Between three and four years | 36.6 | 34.4 | |||||
| Between four and five years | 18.3 | 16.5 | |||||
| In five years or more | 306.2 | 305.3 | |||||
| 517.2 | 501.0 | ||||||
Amounts repayable in more than five years:
Gross repayable December 31, | Net of fees December 31, | ||||||
2003 | 2003 | ||||||
£ million | £ million | ||||||
| High Yield Bonds | 306.2 | 305.3 | |||||
| 306.2 | 305.3 | ||||||
Registered number: 3768265 | 107 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
| Avecia Group plc Consolidated | |||||||
Gross repayable December 31, | Net of fees December 31, | ||||||
2002 | 2002 | ||||||
£ million | £ million | ||||||
| Debt can be analyzed as falling due: | |||||||
| In one year or less, or on demand | 30.6 | 26.4 | |||||
| Between one and two years | 33.8 | 29.6 | |||||
| Between two and three years | 45.1 | 40.9 | |||||
| Between three and four years | 52.4 | 49.3 | |||||
| Between four and five years | 53.8 | 51.8 | |||||
| In five years or more | 365.9 | 363.2 | |||||
| 581.6 | 561.2 | ||||||
Amounts repayable in more than five years:
Gross repayable December 31, | Net of fees December 31, | ||||||
2002 | 2002 | ||||||
£ million | £ million | ||||||
| Term A Loan | — | — | |||||
| Term B Loan | — | — | |||||
| Term C Loan | 28.9 | 28.8 | |||||
| High Yield Bonds | 337.0 | 334.4 | |||||
| 365.9 | 363.2 | ||||||
Term Debt |
Debt is repayable between 2004 and 2008. Approximately 86% (2002: 60%) of the term debt is fixed or capped at rates between 4.0% (2002: 4.0%) and 6.5% (2002: 6.5%). The balance carries interest at LIBOR plus a margin of between 2% and 3%.
High Yield Bond |
The High Yield Bond is repayable in 2009 and interest is fixed at 11%. The debt listed above is shown in order of priority. The difference between net and gross repayable is unamortised fees.
Registered number: 3768265 | 108 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
Debt covenants and restrictions |
Term loans |
Under the conditions of the term loans entered into by the group, Avecia Corporation Limited, a wholly owned subsidiary of Avecia Group plc, and certain of its subsidiaries have guaranteed the obligations of each other. In addition, the various obligations under the credit agreement are secured by security interests created over certain of the assets of Avecia Corporation Limited and its subsidiaries.
The agreement entered into by Avecia Corporation Limited and Avecia Investments Limited with the lenders of the term loans contains customary events of default and various restrictive covenants. These covenants place restrictions on the actions of Avecia Investments Limited and its subsidiaries, in particular in relation to the payment of dividends and other specified payments to Avecia Corporation Limited or any of its holding companies, other than in certain specific circumstances. The credit agreement also contains financial covenants, including maintenance of financial ratios, including among others:
| – | a ratio of Consolidated EBITDA to Consolidated Net Interest Charges |
| – | a ratio of Adjusted Cash Flow to Relevant Expenditure |
| – | a ratio of Net Senior Debt to Consolidated EBITDA |
| – | a maximum limitation on capital expenditure. |
High yield bond |
The high yield bond issued by Avecia Group plc is guaranteed by Avecia Corporation Limited. Payments under the guarantee will be subordinated to the guarantor’s payment of its obligations under the term loan agreements. Under the terms of the bond, Avecia Group plc and certain of its subsidiaries are subject to restrictions over the sale of assets unless certain, specified conditions are met.
In addition, Avecia Group plc has committed:
| – | that none of the restricted subsidiaries may declare or pay any dividend or other distribution on account of Avecia or any of its restricted subsidiaries’ equity interests unless certain, specified conditions are met; |
| – | not to purchase, redeem or otherwise acquire or retire any equity interest of itself or any intermediate holding company; |
| – | not to make any payment on or in respect of any subordinated debt with specified exceptions; |
| – | not to make any restricted investment; |
| – | to comply with specified restrictions over the incurrence of debt and issuance of preferred stock; |
| – | to comply with specified restrictions on merger, consolidation or sale of all or substantially all assets; |
| – | to comply with specified restrictions on transactions with affiliates; |
| – | to comply with specified restrictions on issuing guarantees of debt by restricted subsidiaries; |
| – | to comply with specified restrictions on designations of unrestricted subsidiaries. |
Registered number: 3768265 | 109 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
The maturity of obligations under finance leases and hire purchase contracts is as follows:
| Avecia Group plc Consolidated | |||||||
December 31, 2003 | December 31, 2002 | ||||||
£ million | £ million | ||||||
| Within one year | 1.3 | 1.3 | |||||
| Between one and two years | 1.1 | 1.2 | |||||
| Between two and three years | 0.9 | 1.0 | |||||
| Between three and four years | 0.8 | 0.8 | |||||
| Between four and five years | 0.8 | 0.8 | |||||
| Over five years | 1.9 | 2.7 | |||||
| 6.8 | 7.8 | ||||||
| Less future finance charges | (1.4 | ) | (1.5 | ) | |||
| 5.4 | 6.3 | ||||||
At December 31, 2003, £132.7 million (2002: £207.5 million) of borrowings falling due after more than one year were secured on assets of the group.
Operations |
The Group’s funding, liquidity and exposure to interest rates and foreign exchange rate are managed by the Group’s treasury department.
The Group holds or issues financial instruments for two main purposes:
| • | to finance its operations; |
| • | to manage the interest rate and currency risks arising from its operations and from its sources of finances. |
In addition, various financial instruments – for example, trade debtors, trade creditors, accruals and pre-payments – arise directly from the Group’s operations.
The Group finances its operations by a mixture of bank borrowings and high yield bonds. The Group’s long term loans are raised centrally by Group finance companies which fund operating subsidiaries, on commercial terms, all of which are included in the consolidated financial statements. The Group borrows in the major global debt markets in a range of currencies at both fixed and floating rates of interest, using derivatives where appropriate to generate the desired interest rate profile. The derivatives used for this purpose are principally interest rate swaps and interest rate caps.
The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and market price risk. The board reviews and agrees policies for managing each of these risks and they are summarized below. These policies have remained unchanged since incorporation.
Financial instruments comprise net borrowings together with other instruments deemed to be financial instruments under FRS 13.
Registered number: 3768265 | 110 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
Finance and interest rate risk |
The group’s policy is to manage exposure to interest rate fluctuations on its borrowings and deposits by using interest rate swaps and interest rate caps. The group’s policy is to keep at least 50 per cent of net external debt at fixed or capped rates of interest for the period of the borrowing. At the year-end, after taking account of interest rate swaps, the proportion of the group’s borrowings at fixed rates was 72 per cent (2002: 64 per cent). In addition, 23 per cent (2002: 19 per cent) of the group’s borrowings were floating rate but were covered by interest rate caps.
Liquidity risk |
Group policy is to match currency cash expenditure with currency cash income subject to the existence of a free market for that currency’s debt and differences in funding costs between markets. Group borrowings comprise bank debt £160.4 million (2002: £235.7 million) which is due to be repaid by June 2008 and a High Yield Bond £296.9 million (2002: £325.5 million) due 2009, both shown net of unamortized fees. 6 per cent (2002: 5 per cent) of the group’s total borrowings at the year end will become due in the next 12 months, 87 per cent (2002: 90 per cent) in more than two years and 67 per cent (2002: 65 per cent) will become due in more than five years.
At December 31, 2003, the group also had undrawn committed borrowing facilities of £31.0 million (2001: £98.0 million). Commitment fees are paid on the undrawn portion of these facilities.
Currency risk |
The group publishes its financial statements in pounds sterling and conducts businesses in many foreign currencies. As a result, it is subject to foreign currency exchange risk due to exchange rate movements which will affect the group’s transaction costs and revenues, and the translation of the results and underlying net assets of its subsidiaries. By holding borrowings in foreign currencies, the group hedges a substantial portion of its exposure to fluctuations on the translation into pounds sterling of its foreign currency net assets.
The group hedges, on a rolling 12 month basis, the translation of a proportion of its forecast future net cash flow denominated in US Dollars (50%), European currencies (50%) and Japanese Yen (75%) with forward foreign currency contracts. This limits in part the transactional exposure of the group’s net cash flow to movements in exchange rates. The gain or loss on the hedge is recognized at the same time as the underlying transaction.
At December 31, 2003 the group had £49.3 million of outstanding gross foreign exchange contracts as a result of the transaction exposure cover outlined above. Of the total £32.0 million were to sell US Dollars, £15.2 million were to sell Japanese Yen, £2.1 million were to buy US Dollars.
At December 31, 2002 the group had £59.6 million of outstanding gross foreign exchange contracts as a result of the transaction exposure cover outlined above. Of the total, £36.5 million were to sell US Dollars, £16.4 million to sell Japanese Yen, £6.7 million were to buy US Dollars.
Registered number: 3768265 | 111 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
Interest rate risk profile of financial liabilities and assets
After taking account of interest rate swaps and caps, the currency and interest rate profile of the financial liabilities and assets of the group at December 31, 2003 was as follows:
Floating rate interest | Capped rate interest | Fixed rate interest | Zero rated interest | Total | Weighted average fixed interest rate | Weighted average period for which rate is fixed | Weighted average period for which no interest is payable | ||||||||||||||||||
£ million | £ million | £ million | £ million | £ million | % | Years | Years | ||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||
| Sterling | 5.4 | — | — | 1.7 | 7.1 | — | — | 11.4 | |||||||||||||||||
| US dollar | 4.4 | 32.9 | 369.7 | — | 407.0 | 11.1 | 5.2 | — | |||||||||||||||||
| Euro | 26.6 | 63.6 | — | — | 90.2 | — | — | — | |||||||||||||||||
| Total | 36.4 | 96.5 | 369.7 | 1.7 | 504.3 | 11.1 | 5.2 | 11.4 | |||||||||||||||||
Financial assets | |||||||||||||||||||||||||
| Sterling | 1.1 | — | — | 2.3 | 3.4 | ||||||||||||||||||||
| US dollar | 0.8 | — | — | — | 0.8 | ||||||||||||||||||||
| Other | 3.7 | — | — | — | 3.7 | ||||||||||||||||||||
| Total | 5.6 | — | — | 2.3 | 7.9 | ||||||||||||||||||||
As at December 31, 2002 :
Floating rate interest | Capped rate interest | Fixed rate interest | Zero rated interest | Total | Weighted average fixed interest rate | Weighted average period for which rate is fixed | Weighted average period for which no interest is payable | ||||||||||||||||||
£ million | £ million | £ million | £ million | £ million | % | Years | Years | ||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||
| Sterling | 6.3 | — | — | 16.4 | 22.7 | — | — | 11.5 | |||||||||||||||||
| US dollar | 32.2 | 36.2 | 396.8 | — | 465.2 | 11.0 | 6.2 | — | |||||||||||||||||
| Euro | 60.8 | 70.2 | — | — | 131.0 | — | — | — | |||||||||||||||||
| Total | 99.3 | 106.4 | 396.8 | 16.4 | 618.9 | 11.0 | 6.2 | 11.5 | |||||||||||||||||
Financial assets | |||||||||||||||||||||||||
| Sterling | (5.9 | ) | — | — | 3.7 | (2.2 | ) | 0.5 | |||||||||||||||||
| US dollar | 14.2 | — | — | — | 14.2 | — | |||||||||||||||||||
| Other | 7.9 | — | — | — | 7.9 | — | |||||||||||||||||||
| Total | 16.2 | — | — | 3.7 | 19.9 | 0.5 | |||||||||||||||||||
Registered number: 3768265 | 112 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
The floating rate financial liabilities comprise bank borrowings bearing interest at rates fixed six months in advance by reference to the six month LIBOR.
The financial assets include cash balances placed on money market at call.
At December 31, 2003 the group had a US dollar interest rate swap to pay fixed with a notional of £32.9 million. The interest rate is 6.5%. The remaining maturity of the swap is 0.5 years. In addition, at December 31, 2003 the group had a £63.6 million Euro interest cap in place at 4% and a £32.9 million US Dollar cap at 6.5%.
Currency exposures |
At December 31, 2003, the net monetary assets and liabilities denominated in currencies other than the functional currencies of the group companies (other than certain non-sterling borrowings treated as hedges of net investments in overseas operations), were as follows:
| Functional currency of group operation | Avecia Group plc Consolidated Net foreign currency monetary assets/(liabilities) | ||||||||||||||||||
Sterling | US dollar | Euro | Japanese yen | Other | Total | ||||||||||||||
£ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
| Sterling | — | (275.5 | ) | 4.0 | 1.6 | 0.3 | (269.6) | ||||||||||||
| US dollar | — | 65.1 | — | — | — | 65.1 | |||||||||||||
| Euro | 0.7 | (0.8 | ) | 10.6 | — | — | 10.5 | ||||||||||||
| Japanese yen | — | — | — | — | — | — | |||||||||||||
| Other | — | — | — | — | — | — | |||||||||||||
| Total | 0.7 | (211.2 | ) | 14.6 | 1.6 | 0.3 | (194.0 | ) | |||||||||||
As at December 31, 2002 |
| Functional currency of group operation | Avecia Group plc Consolidated Net foreign currency monetary assets/(liabilities) | ||||||||||||||||||
Sterling | US dollar | Euro | Japanese yen | Other | Total | ||||||||||||||
£ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
| Sterling | — | (233.7 | ) | (11.4 | ) | 4.8 | 0.9 | (239.4) | |||||||||||
| US dollar | — | — | — | — | — | — | |||||||||||||
| Euro | 0.8 | 2.0 | — | — | — | 2.8 | |||||||||||||
| Japanese yen | — | — | — | — | — | — | |||||||||||||
| Other | — | 0.8 | — | — | 2.0 | 2.8 | |||||||||||||
| Total | 0.8 | (230.9 | ) | (11.4 | ) | 4.8 | 2.9 | (233.8 | ) | ||||||||||
Registered number: 3768265 | 113 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
Maturity of financial liabilities |
The maturity profile of the group’s financial liabilities at December 31, 2003 was as follows:
| Avecia Group plc Consolidated | |||||||
Gross repayable | Net of fees | ||||||
£ million | £ million | ||||||
| In one year or less, or on demand | 31.4 | 26.9 | |||||
| In more than one year but not more than two years | 39.8 | 35.2 | |||||
| In more than two years but not more than five years | 100.7 | 93.2 | |||||
| In more than five years | 351.1 | 349.0 | |||||
| 523.0 | 504.3 | ||||||
The above figures include preference shares, the redemption of which is mandatory on July 1, 2010. They may, however, be redeemed at the option of the company on or after January 1, 2005 or earlier on certain public equity offerings at a redemption value equal to the liquidation preference value ($25 per share) plus all accumulated and unpaid dividends to the date of redemption.
Registered number: 3768265 | 114 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
The maturity profile of the group’s financial liabilities at December 31, 2002 was as follows:
| Avecia Group plc Consolidated | |||||||
Gross repayable | Net of fees | ||||||
£ million | £ million | ||||||
| In one year or less, or on demand | 31.9 | 27.4 | |||||
| In more than one year but not more than two years | 35.0 | 30.6 | |||||
| In more than two years but not more than five years | 153.9 | 143.9 | |||||
| In more than five years | 420.8 | 417.0 | |||||
| 641.6 | 618.9 | ||||||
The above figures include preference shares, the redemption of which is mandatory on July 1, 2010. They may, however, be redeemed at the option of the company on or after January 1, 2005 or earlier on certain public equity offerings at a redemption value equal to the liquidation preference value ($25 per share) plus all accumulated and unpaid dividends to the date of redemption.
Credit risk and market risk |
The above financial instruments are subject to credit and market risk. Avecia contains credit risk by ongoing review procedures. All financial instruments are transacted with commercial banks. The notional principal values of balance sheet financial instruments do not represent amounts exchanged by the parties and are not a measure of the credit risk to the group of these instruments. The credit risk of these instruments is limited to the positive fair values of such contracts.
Market risk is the sensitivity of the value of financial instruments to changes in related currency and interest rates. The group is not exposed to material market risk because gains and losses on the derivative financial instruments are largely offset by gains and losses on the underlying assets, liabilities and transactions subject to hedge.
Borrowing facilities |
The group has various borrowing facilities available to it. The undrawn committed facilities available at December 31, 2003 were as follows:
December 31, 2003 | December 31, 2002 | ||||||
£ million | £ million | ||||||
| Expiring in one year or less | — | — | |||||
| Expiring in more than one year but not more than two years | — | — | |||||
| Expiring in more than two years | 31.0 | 98.0 | |||||
| Total | 31.0 | 98.0 | |||||
Registered number: 3768265 | 115 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
Terms |
The facility was set up under normal banking conditions.
Fees paid |
The arrangement fees incurred on setting up the facilities are being amortized over the terms of the loans. Commitment fees of 0.5 per cent are charged on the undrawn facility.
Conditions under which commitments may be withdrawn |
Default under the conditions of the facility may cause the commitments to be withdrawn. This includes any default on the covenants in place.
Fair values of financial assets and financial liabilities |
Set out below is a comparison by category of book values and fair values of all the group’s financial assets and financial liabilities as at December 31, 2003.
Book value | Fair value | ||||||
£ million | £ million | ||||||
Primary financial instruments held or issued to finance the group’s operations: | |||||||
| Short term borrowings and current portion of long term borrowings | (26.0 | ) | (26.0 | ) | |||
| Long term borrowings | (431.0 | ) | (402.7 | ) | |||
| Finance lease and other | (57.9 | ) | (79.1 | ) | |||
| Other financial assets | 2.0 | 2.0 | |||||
| Cash at bank and in hand | 8.0 | 5.6 | |||||
Derivative financial instruments held to manage the interest rate: | |||||||
| Interest rate swaps and similar instruments – gains | — | — | |||||
| Interest rate swaps and similar instruments – losses | — | (0.9 | ) | ||||
| Interest rate caps and collars – gains | 0.3 | — | |||||
| Interest rate caps and collars – losses | — | — | |||||
Derivative financial instruments held or issued to hedge the currency exposure on expected future net cash flow: | |||||||
| Forward foreign currency contracts – gains | — | 4.9 | |||||
| Forward foreign currency contracts – losses | — | (0.4 | ) | ||||
| (504.6 | ) | (496.6 | ) | ||||
Registered number: 3768265 | 116 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 19 | Borrowings, financial instruments and risk management (continued) |
Set out below is a comparison by category of book values and fair values of all the group’s financial assets and financial liabilities as at December 31, 2002.
Book value | Fair value | ||||||
£ million | £ million | ||||||
Primary financial instruments held or issued to finance the group’s operations: | |||||||
| Short term borrowings and current portion of long term borrowings | (26.4 | ) | (26.4 | ) | |||
| Long term borrowings | (534.8 | ) | (470.9 | ) | |||
| Finance lease and other | (58.8 | ) | (84.2 | ) | |||
| Other financial assets | 2.8 | 2.8 | |||||
| Cash at bank and in hand | 16.2 | 16.2 | |||||
Derivative financial instruments held to manage the interest rate: | |||||||
| Interest rate swaps and similar instruments – gains | — | — | |||||
| Interest rate swaps and similar instruments – losses | — | (2.7 | ) | ||||
| Interest rate caps and collars – gains | 0.9 | — | |||||
| Interest rate caps and collars – losses | — | — | |||||
Derivative financial instruments held or issued to hedge the currency exposure on expected future net cash flow: | |||||||
| Forward foreign currency contracts – gains | — | 2.8 | |||||
| Forward foreign currency contracts – losses | — | (0.8 | ) | ||||
| (600.1 | ) | (563.2 | ) | ||||
Market values have been used to determine the fair value of forward foreign currency contracts and all listed debt issued. The fair values of all other items have been calculated by discounting expected future cash flows at prevailing interest rates.
Fair value judgments and changes in market conditions and assumptions could significantly affect these estimates. The disclosed values are those which are representative of fair values at the dates indicated. No financial instruments were held for the purposes of dealing or other financial instrument trading activities.
Hedges |
As explained in the introduction, the group’s policy is to hedge the following exposures:
| • | Interest rate risk, using interest swaps and caps contracts; |
| • | Net cash flow, using forward foreign currency contracts. |
Gains and losses on instruments used for hedging are not recognized until the exposure that is being hedged is itself recognized. Unrecognized gains and losses on instruments used for hedging, and the movements therein are as follows:
2003 Gains | 2003 Losses | 2003 Total net gains/(losses) | ||||||||
£ million | £ million | £ million | ||||||||
| Gains/(losses) arising in 2003 that were not recognized in 2003 | 4.6 | (1.3 | ) | 3.3 | ||||||
| Of which: | ||||||||||
| Gains/(losses) expected to be recognized in 2004 | 4.6 | (1.3 | ) | 3.3 | ||||||
Registered number: 3768265 | 117 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 20 | Provisions for liabilities and charges |
Pensions and similar obligations | Deferred taxation | Environmental provisions | Reorganization and other provisions | Total | ||||||||||||
£ million | £ million | £ million | £ million | £ million | ||||||||||||
| At January 1, 2002 | 22.8 | 4.3 | 0.7 | 4.0 | 31.8 | |||||||||||
| Acquisition | (1.6 | ) | — | — | — | (1.6 | ) | |||||||||
| Utilized during year | 2.6 | 4.4 | — | 10.7 | 17.7 | |||||||||||
| Charge for the year | (6.0 | ) | (4.0 | ) | (0.2 | ) | (2.7 | ) | (12.9 | ) | ||||||
| Exchange | (1.4 | ) | — | — | — | (1.4 | ) | |||||||||
| At December 31, 2002 | 16.4 | 4.7 | 0.5 | 12.0 | 33.6 | |||||||||||
| Impact of adopting FRS17 | (15.3 | ) | — | — | — | (15.3 | ) | |||||||||
| December 31, 2002 restated and | ||||||||||||||||
| January 1, 2003 | 1.1 | 4.7 | 0.5 | 12.0 | 18.3 | |||||||||||
| Utilized during year | 0.1 | — | (0.2 | ) | (11.1 | ) | (11.2 | ) | ||||||||
| Charge for the year | 0.1 | 0.1 | 0.1 | (0.1 | ) | 0.2 | ||||||||||
| Other movements | (0.1 | ) | — | — | (0.3 | ) | (0.4 | ) | ||||||||
| Exchange | — | 0.4 | 0.1 | 0.1 | 0.6 | |||||||||||
| At December 31, 2003 | 1.2 | 5.2 | 0.5 | 0.6 | 7.5 | |||||||||||
Included in the provision for pensions and similar obligations at December 31, 2003 is an amount of £nil million (2002: £9.5 million) in respect of provisions for post-retirement benefits other than pensions. The reorganization and other provisions primarily relate to severance costs.
Registered number: 3768265 | 118 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 20 | Provision for liabilities and charges (continued) |
The amounts of deferred taxation accounted for in the Group balance sheet and the full potential amounts of deferred taxation comprised the following deferred tax liabilities and assets at December 31, 2003:
| Avecia Group plc Consolidated | ||||||||||
| December 31, 2003 | ||||||||||
Provision for deferred tax | Not accounted for deferred tax | Full provision for deferred tax | ||||||||
£ million | £ million | £ million | ||||||||
Deferred tax liabilities | ||||||||||
| Difference between accumulated depreciation and amortization and capital allowances | 2.3 | — | 2.3 | |||||||
| Other timing differences | 2.9 | — | 2.9 | |||||||
| 5.2 | — | 5.2 | ||||||||
Deferred tax asset | ||||||||||
| Tax losses for future utilization | — | 81.0 | 81.0 | |||||||
| Net deferred tax (liability)/asset | (5.2 | ) | 81.0 | 75.8 | ||||||
| Avecia Group plc Consolidated | ||||||||||
| December 31, 2002 | ||||||||||
Provision for deferred tax | Not accounted for deferred tax | Full provision for deferred tax | ||||||||
£ million | £ million | £ million | ||||||||
Deferred tax liabilities | ||||||||||
| Difference between accumulated depreciation and amortization and capital allowances | 2.1 | — | 2.1 | |||||||
| Other timing differences | 2.6 | — | 2.6 | |||||||
| 4.7 | — | 4.7 | ||||||||
Deferred tax asset | ||||||||||
| Tax losses for future utilization | — | 71.3 | 71.3 | |||||||
| Net deferred tax (liability)/asset | (4.7 | ) | 71.3 | �� | 66.6 | |||||
Deferred tax assets which are not accounted for represent deferred tax assets (principally net operating losses) for which an off setting valuation allowance has been made in full.
Registered number: 3768265 | 119 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 20 | Provision for liabilities and charges (continued) |
| Avecia Group plc Consolidated | |||||||
| December 31, 2003 | December 31, 2002 | ||||||
| £ million | £ million | ||||||
| Deferred taxation provision movement | |||||||
| At beginning of period | 4.7 | 1.5 | |||||
| Profit and loss account | 0.2 | 4.4 | |||||
| Elimination of Stahl units | — | (1.2 | ) | ||||
| Exchange Differences | 0.3 | — | |||||
| At end of period | 5.2 | 4.7 | |||||
No deferred tax provision has been made in respect of UK corporation tax and foreign withholding tax on £64.1 million of accumulated undistributed reserves in foreign subsidiaries as at December 31, 2003. The reserves are considered to be permanently invested in the businesses, no binding agreements have been entered into in respect of the distribution of the reserves, and the reserves would not be subject to UK corporation tax and foreign withholding tax until distributed. If the reserves were not considered to be permanently invested then provision would be required under US GAAP for approximately £0.4 million of foreign withholding tax.
| 21 | Acquisitions |
In 2003 the group made a deferred payment of £1.9 million for the acquisition of the remaining 85 per cent of Covion Organic Semiconductors Gmbh which took place on December 31, 2001.
There were no other material acquisitions during the year.
Registered number: 3768265 | 120 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 22 | Called up share capital |
| Avecia Group plc Consolidated | |||||||||||||
| December 31, 2003 | December 31, 2002 | ||||||||||||
| Number of shares | Nominal value of shares | Number of shares | Nominal value of shares | ||||||||||
| £000 | £000 | ||||||||||||
Authorized | |||||||||||||
| Equity: Ordinary shares of £1.00 each | 400,000,000 | 400,000 | 400,000,000 | 400,000 | |||||||||
| Non-equity Pay-in-kind (PIK) 16% cumulative redeemable preference shares of $1.00 each | 3,500,000 | 2,222 | 3,500,000 | 2,222 | |||||||||
| 403,500,000 | 402,222 | 403,500,000 | 402,222 | ||||||||||
Allotted, called up and fully paid | |||||||||||||
| Equity: Ordinary shares of £1.00 each | 329,100,001 | 329,100 | 329,100,001 | 329,100 | |||||||||
| Non-equity Pay-in-kind (PIK) 16% cumulative redeemable preference shares of $1.00 each | 2,591,298 | 1,470 | 2,221,621 | 1,386 | |||||||||
| 331,691,298 | 330,570 | 331,321,622 | 330,486 | ||||||||||
Redeemable preference shares |
The redemption of preference shares is mandatory on July 1, 2010 but may be redeemed at the option of the Company on or after January 1, 2005 or earlier on certain public equity offerings at a redemption value equal to the liquidation preference value plus all accumulated and unpaid dividends to the date of redemption. On a winding up they would rank in priority to ordinary shares. Up to July 1, 2004 the company may issue further PIK preference shares instead of a cash dividend (based on the liquidated preference amount of $25 per share). Subsequent to July 1, 2004 the dividend must be paid in cash. The PIK preference shares have no voting rights at meetings of the ordinary shareholders and attract a dividend of 16 per cent. The carrying value of the preferred shares is being increased from the date of issue to the mandatory redemption date, by the interest method, such that the carrying value at the mandatory redemption date will equal the redemption value of $25 per share. The accretion for 2003 was £0.2 million (2002 £0.3 million).
Registered number: 3768265 | 121 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
23 Share premium and reserves |
| Avecia Group plc — Consolidated for the year ended December 31, 2003 | |||||||||||||||||||
| Equity share capital | Non-equity share capital | Shares to be issued | Share premium account | Profit and loss account | Total | ||||||||||||||
| £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
| At 1 January 2002 as previously stated | 329.1 | 1.3 | 2.7 | 16.4 | (77.1 | ) | 272.4 | ||||||||||||
| Prior Year Adjustment (FRS 17) | — | — | — | — | (38.3 | ) | (38.3 | ) | |||||||||||
| At 1 January 2002 restated | 329.1 | 1.3 | 2.7 | 16.4 | (115.4 | ) | 234.1 | ||||||||||||
| Loss for year | — | — | — | — | (43.0 | ) | (43.0 | ) | |||||||||||
| Appropriation | — | — | — | — | (6.0 | ) | (6.0 | ) | |||||||||||
| Foreign exchange | — | (0.1 | ) | (0.1 | ) | (0.9 | ) | (9.0 | ) | (10.1 | ) | ||||||||
| Amortization of share issue costs | — | — | — | 0.4 | — | 0.4 | |||||||||||||
| Non-equity dividend | — | — | 5.7 | — | — | 5.7 | |||||||||||||
| Reserve reclassification | — | — | — | (6.0 | ) | 6.0 | — | ||||||||||||
| Shares issued in period | — | 0.2 | (5.5 | ) | 5.3 | — | — | ||||||||||||
| Gains/(losses) recognized in pension scheme | — | — | — | — | (42.6 | ) | (42.6 | ) | |||||||||||
| At 31 December 2002 restated | 329.1 | 1.4 | 2.8 | 15.2 | (210.0 | ) | 138.5 | ||||||||||||
| At 31 December 2002 as previously stated | 329.1 | 1.4 | 2.8 | 15.2 | (129.1 | ) | 219.4 | ||||||||||||
| Impact of adopting FRS17 | — | — | — | — | (80.9 | ) | (80.9 | ) | |||||||||||
| At 31December 2002 restated and | |||||||||||||||||||
| 1 January 2003 | 329.1 | 1.4 | 2.8 | 15.2 | (210.0 | ) | 138.5 | ||||||||||||
| Loss for year | — | — | — | — | (94.5 | ) | (94.5 | ) | |||||||||||
| Appropriation | — | — | — | — | (6.4 | ) | (6.4 | ) | |||||||||||
| Foreign exchange | — | (0.1 | ) | (0.1 | ) | (1.6 | ) | 1.6 | (0.2 | ) | |||||||||
| Amortization of share issue costs | — | — | — | 0.3 | — | 0.3 | |||||||||||||
| Non-equity dividend | — | — | 6.1 | — | — | 6.1 | |||||||||||||
| Reserve reclassification | — | — | — | (6.1 | ) | 6.1 | — | ||||||||||||
| Shares issued in period | — | 0.2 | (5.8 | ) | 5.6 | — | — | ||||||||||||
| Gains/(losses) recognized in pension scheme | — | — | — | — | (25.1 | ) | (25.1 | ) | |||||||||||
| At 31 December 2003 | 329.1 | 1.5 | 3.0 | 13.4 | (328.3 | ) | 18.7 | ||||||||||||
| 24 | Minority interests |
| Avecia Group plc – Consolidated | For the year ended December 31, 2003 | For the year ended December 31, 2002 | |||||
| £ million | £ million | ||||||
| At beginning of year | — | 1.1 | |||||
| Disposal of interest | — | (1.1 | ) | ||||
| At end of year | — | — | |||||
Registered number: 3768265 | 122 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 25 | Contingent liabilities and contingent assets |
Environmental |
The group has environmental liabilities at some of its current or former sites and is subject to contingencies pursuant to laws and regulations which in the future may require it to take action to correct the effects on the environment of the prior disposal, release or escape of chemical substances. Sites which were formerly part of the specialty chemicals business of the AstraZeneca group but which were not in operation at the date of the group’s acquisition of the business in June 1999 were not transferred to the group.
An Environmental Deed of Covenant entered into by companies in the AstraZeneca group, notably Zeneca Limited (as a principal seller of the business to the group) and AstraZeneca plc (as guarantor), on the group’s acquisition of AstraZeneca’s specialty chemicals business, provides certain indemnities to and by group companies for environmental liabilities and costs arising from events or circumstances existing prior to the acquisition. These include liabilities relating to or arising out of pre-acquisition contamination at sites which were transferred to group companies in 1999 but which have subsequently been disposed of, notably at the St. Clair du Rhone site, France and the Mount Pleasant site, Tennessee. These also include historic liabilities arising on any sites previously owned by companies acquired by the group in the course of the acquisition transaction but where the sites in question were not themselves part of the acquisition transaction. The liability of the AstraZeneca group to indemnify group companies in respect of these matters is, subject to certain exceptions, subject to maximum caps of liability, de minimis levels of liability, time limits for claims to be made and/ or contributions by group companies. Where time limits or caps on liability apply, on the expiry of the relevant time limit or if the environmental liabilities and costs exceed the relevant cap, the environmental liabilities and costs, or excess thereof, would be the responsibility of group companies. On the disposal of relevant businesses out of the group, where purchasers have assumed liabilities which may be subject to indemnity from the AstraZeneca group under the Environmental Deed or which may otherwise be the responsibility of group companies under the deed, the benefits and obligations under the Environmental Deed have, insofar as they relate to the sold businesses or sites, been assigned to the purchasers subject to appropriate limitations on the maximum amounts which the purchasers may claim under the Environmental Deed.
While the outcome of some of these matters cannot be readily foreseen, the directors believe that they will be disposed of without material effect on the financial position as shown in these consolidated financial statements.
The ultimate requirement for remediation work and its cost are difficult to estimate. However, where such costs are not within the scope of the indemnities provided by the deed of covenant referred to above, and where such costs are deemed probable and identifiable, provision has been made in the financial statements.
Litigation and other claims |
Various companies in the group are parties to legal actions and claims by third parties, regulatory and fiscal authorities. While the outcome of some of these matters cannot be readily foreseen, the directors believe that they will be disposed of without material effect on the financial position as shown in these consolidated financial statements.
Excise Duties Inspection, Spain |
During 2003, the Spanish tax authority carried out a tax inspection of the quantity of alcohol used by Avecia Spain exempt from excise duties, compared with its authorization. The period covered was 1999 to 2002. The tax inspector came to the view that the Company had exceeded its authority limit for each year and issued an assessment for the excise duty arising from that excess. The final amount of the assessment is €4.2 million. The Company has appealed against the assessment and in support of the appeal has arranged a bank guarantee for the amount of the assessment. The Company has been advised that there are good grounds for pursuing this appeal firstly to the Tax Court and if the decision there is unfavourable, to the Judicial Courts. This process is expected to take many months.
Registered number: 3768265 | 123 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 25 | Contingent liabilities and contingent assets (continued) |
A provisional claim has been made to AstraZeneca under the provisions of the Iliad Tax Deed for the period prior to June 30, 1999 covered by the assessment.
| 26 | Commitments |
| (a) | Capital commitments of the group at the end of the financial period, for which no provision has been made, are as follows: |
| Avecia Group plc Consolidated | |||||||
| December 31, 2003 | December 31, 2002 | ||||||
| £ million | £ million | ||||||
| Contracted capital commitments | 4.3 | 5.8 | |||||
| (b) | Annual commitments under non-cancellable operating leases are as follows: |
| Avecia Group plc Consolidated | |||||||||||||
| December 31, 2003 | December 31, 2002 | ||||||||||||
| Land and buildings | Other | Land and buildings | Other | ||||||||||
| £ million | £ million | £ million | £ million | ||||||||||
| Operating leases which expire: | |||||||||||||
| Within one year | — | — | 0.9 | — | |||||||||
| In the second to fifth years inclusive | 0.9 | 0.2 | 1.2 | — | |||||||||
| After five years | 3.0 | — | — | — | |||||||||
| 3.9 | 0.2 | 2.1 | — | ||||||||||
The future minimum lease payments under operating and finance leases, including finance charges, were as follows:
| Operating leases | Finance leases | ||||||||||||
| Avecia Group plc Consolidated | Avecia Group plc Consolidated | ||||||||||||
| December 31, 2003 | December 31, 2002 | December 31, 2003 | December 31, 2002 | ||||||||||
| £ million | £ million | £ million | £ million | ||||||||||
| Due in one year or less | 0.8 | 0.9 | 0.9 | 1.1 | |||||||||
| Due between one and two years | 0.8 | 0.7 | 0.8 | 1.0 | |||||||||
| Due between two and three years | 0.5 | 0.5 | 0.6 | 0.8 | |||||||||
| Due between three and four years | 0.5 | — | 0.6 | 0.7 | |||||||||
| Due between four and five years | 0.5 | — | 0.7 | 0.6 | |||||||||
| Due in five years or more | 1.1 | — | 1.8 | 2.1 | |||||||||
| 4.2 | 2.1 | 5.4 | 6.3 | ||||||||||
There were no commitments (2002: £nil) under finance leases at the balance sheet date that were due to commence thereafter.
Registered number: 3768265 | 124 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension scheme |
The Avecia group participates in retirement plans, which cover the majority of its employees. These plans are either defined contribution, where the level of company contribution is fixed at a set level or percentage of employees pay, or defined benefit, where benefits are based on employees’ years of service and average final remunerations. In general all plans are funded through separate trustee-administered funds. The pension cost for the main defined benefit plans is established in accordance with the advice of independent qualified actuaries based on valuations undertaken on varying dates. There are material plans in the UK, the US and the Netherlands.
The Company has adopted FRS17 in full for the first time in the financial statements for the year ended December 31, 2003. In accordance with the Standard, gains and losses arising on the initial recognition of items in the Primary Statements have been dealt with as Prior Period Adjustments in accordance with FRS3.
UK |
An actuarial valuation was carried out as at March 31, 2003 using a market-led approach. The assets are taken at market value with the liabilities valued using financial assumptions derived from market yields on Government Fixed Interest and Index Linked gilts at the valuation date. The significant assumptions used in this valuation were UK price inflation of 2.5 per cent pa, investment returns of 6.5 per cent pa (pre-retirement) and 5.0 per cent pa (post-retirement), salary increases of 3.5 per cent pa and pension increases of 2.5 per cent pa. The market value of the fund’s assets was £109.6 million and represented 64 per cent of the accrued liabilities at that date allowing for projected future salary increases. The next valuation will be as at March 2006.
The contribution rate currently payable by the employer is 14.5 per cent of pensionable salaries plus special contributions of £480,000 per month. Employees pay varying levels of contribution in accordance with the rules and the current average is 3.6 per cent of pensionable salaries.
Avecia’s investment policy for the UK pension scheme is to consider a full range of asset classes, the risks and rewards of alternative asset allocation strategies, the suitability of each asset class in the planned asset allocation strategy, and the need for appropriate diversification. It is the trustee’s policy to delegate all day-to-day decisions about the investments that fall within each investment option to the fund manager.
US |
In the US an actuarial valuation was carried out as at January 1, 2003. The significant assumptions used in this valuation were that the rate of return on investment would be 8.0 per cent pa, the rate of salary increases would be 5.0 per cent and pension increases 0 per cent pa. The market value of the plans’ assets at that date was $31.0 million. The primary reason for the decrease in market value of plans’ assets from $41.5 million as at January 1, 2002 was the transfer out of $8.4 million of trust assets in 2002 coincidental with the sale of Stahl. The January 1, 2003 market value of the plans’ assets represented 64 per cent of the accrued liabilities as at that date, based on salaries projected to the date of retirement or assumed earlier death or leaving service. There is a deficiency of $11.4 million on this funding level basis and the basis of the actuarial value of assets that is used in the US to determine employer contributions.
During the year $2.6 million was funded into the plan’s trust. It is anticipated that amounts will also be funded in 2004. Employer contributions are based on the minimum funding requirements of ERISA.
Netherlands |
In the Netherlands an actuarial valuation was carried out as at December 31, 2003. The value of assets was € 42.265 million, which represents 107.4 per cent of the plan liabilities at that date. Total contributions in 2003 were payable at a rate of 23.2 per cent of pensionable salaries less the state pension offset of € 15,973. In 2003 this was approximately equivalent to 14.5 per cent of members’ pensionable salaries. Contributions are currently payable by the employee at the rate of 2 per cent between earnings limits of € 23,960 and € 43,065 and 7.5 per cent of earnings above the € 43,065 limit. In 2003 this was equivalent to approximately 1.8 per cent of gross pensionable salaries. Employer’s contribution is approximately 12.7 per cent.
Registered number: 3768265 | 125 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension Scheme (continued) |
Further additional payments have been made by Avecia in 2003 for a total amount of € 1.48 million to close the gap between liabilities and assets because of a negative return on assets in 2001 and 2002. At the end of 2002 Stahl left the Avecia Pension fund and transferring liabilities for an amount of € 23.5 million to the Stahl Pension fund. Per January 1, 2004 we changed, after reached agreement with the stakeholders, the pension plan from a final pay into an average weighted system and furthermore increased the contribution from the employees to a higher level.
Major Assumptions |
| 2003 % | 2002 % | 2001 % | ||||||||||||||||||||||||||
| UK | US | Netherlands | UK | US | Netherlands | UK | US | Netherlands | ||||||||||||||||||||
| Rate of general increase in salaries | 3.80 | 4.25 | 3.00 | 3.80 | 4.25 | 3.00 | 4.00 | 5.50 | 3.00 | |||||||||||||||||||
| Rate of increase to pensions in payment | 2.70 | — | 2.00 | 2.40 | — | 2.00 | 2.50 | — | 2.00 | |||||||||||||||||||
| Discount rate for scheme liabilities | 5.40 | 6.25 | 5.45 | 5.50 | 6.75 | 5.60 | 5.80 | 6.00 | 5.40 | |||||||||||||||||||
| Inflation | 2.80 | 3.25 | 2.00 | 2.30 | 4.00 | 2.00 | 2.80 | 4.00 | 2.00 | |||||||||||||||||||
The assets in the schemes and the expected rate of return were:
| Long term rate of return expected 31 December 2003 | Value as at 31 December 2003 | Long term rate of return expected 31 December 2003 | Value as at 31 December 2003 | Long term rate of return expected 31 December 2003 | Value as at 31 December 2003 | ||||||||||||||
| UK | UK | USA | USA | Netherlands | Netherlands | ||||||||||||||
| % pa | £ million | % pa | £ million | % pa | £ million | ||||||||||||||
| Equities | 7.8 | 122.5 | 10.5 | 8.9 | 8.3 | 11.3 | |||||||||||||
| Bonds | 4.8 | 18.3 | 7.0 | 4.6 | 4.3 | 17.7 | |||||||||||||
| Cash | 4.5 | 2.1 | — | — | — | 0.2 | |||||||||||||
| Market value of assets | 142.9 | 13.5 | 29.2 | ||||||||||||||||
| Present value of scheme liabilities | (222.2 | ) | (25.2 | ) | (41.2 | ) | |||||||||||||
| Deficit | (79.3 | ) | (11.7 | ) | (12.0 | ) | |||||||||||||
| Deferred tax | — | — | (3.4 | ) | |||||||||||||||
The Investment return is calculated using the expected rate of return for each asset class, taking into account assumptions on inflation and fund diversification. The return for each asset class is set with reference to current market yields and making assumptions regarding the expected return on equities in the long term.
Registered number: 3768265 | 126 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension Scheme (continued) |
| Long term rate of return expected 31 December 2002 | Value as at 31 December 2002 | Long term rate of return expected 31 December 2002 | Value as at 31 December 2002 | Long term rate of return expected 31 December 2002 | Value as at 31 December 2002 | ||||||||||||||
| UK | UK | USA | USA | Netherlands | Netherlands | ||||||||||||||
| % pa | £m | % pa | £m | % pa | £m | ||||||||||||||
| Equities | 7.5 | 92.5 | 11.0 | 11.0 | 8.5 | 7.1 | |||||||||||||
| Bonds | 4.5 | 15.6 | 5.7 | 6.7 | 4.5 | 15.0 | |||||||||||||
| Cash | 4.2 | 1.4 | — | — | 0.0 | 0.7 | |||||||||||||
| Market value of assets | 109.5 | 17.7 | 22.8 | ||||||||||||||||
| Present value of scheme liabilities | (159.4 | ) | (36.0 | ) | (34.6 | ) | |||||||||||||
| Deficit | (49.9 | ) | (18.3 | ) | (11.8 | ) | |||||||||||||
| Deferred tax | — | — | (3.6 | ) | |||||||||||||||
| Long term rate of return expected 31 December 2002 | Value as at 31 December 2002 | Long term rate of return expected 31 December 2002 | Value as at 31 December 2002 | Long term rate of return expected 31 December 2002 | Value as at 31 December 2002 | ||||||||||||||
| UK | UK | USA | USA | Netherlands | Netherlands | ||||||||||||||
| % pa | £m | % pa | £m | % pa | £m | ||||||||||||||
| Equities | 7.9 | 104.4 | 10.0 | 17.7 | 8.5 | 14.6 | |||||||||||||
| Bonds | 4.9 | 15.6 | 7.3 | 10.9 | 5.0 | 15.9 | |||||||||||||
| Cash | 4.9 | 4.1 | — | — | — | — | |||||||||||||
There were no assets relating to Other Post Retirement Benefits.
Movement in deficit during the year
| Year ended 31 December 2003 | Year ended 31 December 2002 | ||||||||||||||||||||||||
| UK | USA | Netherlands | Other PRB | UK | USA | Netherlands | Other PRB | ||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
| Deficit at start of year | (49.9 | ) | (18.3 | ) | (11.8 | ) | (13.9 | ) | (13.2 | ) | (13.5 | ) | (19.5 | ) | (14.0 | ) | |||||||||
| Current service cost | (9.8 | ) | (1.3 | ) | (2.0 | ) | (0.5 | ) | (8.9 | ) | (1.5 | ) | (1.6 | ) | (0.5 | ) | |||||||||
| Past service cost | (1.8 | ) | — | — | — | (0.5 | ) | — | — | — | |||||||||||||||
| Company contributions | 10.2 | 1.9 | 2.8 | 0.1 | 7.7 | 1.2 | 5.7 | 0.1 | |||||||||||||||||
| Other financing (charge)/credit | (0.9 | ) | (0.4 | ) | (0.7 | ) | (0.7 | ) | 1.5 | (0.2 | ) | (0.6 | ) | (0.7 | ) | ||||||||||
| Actuarial gain/(loss) | (27.1 | ) | (1.4 | ) | 0.7 | (3.0 | ) | (36.5 | ) | (7.3 | ) | (3.3 | ) | (1.9 | ) | ||||||||||
| Exchange gain/(loss) | — | 1.3 | (1.0 | ) | 0.9 | — | 1.6 | (0.5 | ) | 1.1 | |||||||||||||||
| Gain/loss due to settlement/curtailment | — | 6.5 | — | 6.9 | — | 1.4 | 8.0 | 2.0 | |||||||||||||||||
| Deficit at end of year | (79.3 | ) | (11.7 | ) | (12.0 | ) | (10.2 | ) | (49.9 | ) | (18.3 | ) | (11.8 | ) | (13.9 | ) | |||||||||
Registered number: 3768265 | 127 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension Scheme (continued) |
Analysis of the amounts charged to operating profit :
| Year ended 31 December 2003 | Year ended 31 December 2002 | ||||||||||||||||||||||||
| UK | USA | Netherlands | Other PRBS | UK | USA | Netherlands | Other PRB | ||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
| Current service cost | (9.8 | ) | (1.3 | ) | (2.0 | ) | (0.5 | ) | (8.9 | ) | (1.5 | ) | (1.6 | ) | (0.5 | ) | |||||||||
| Past service cost | (1.8 | ) | — | — | — | (0.5 | ) | — | — | — | |||||||||||||||
| (11.6 | ) | (1.3 | ) | (2.0 | ) | (0.5 | ) | (9.4 | ) | (1.5 | ) | (1.6 | ) | (0.5 | ) | ||||||||||
Analysis of amounts included in Other Financing (charge)/credit :
| Year ended 31 December 2003 | Year ended 31 December 2002 | ||||||||||||||||||||||||
| UK | USA | Netherlands | Other PRB | UK | USA | Netherlands | Other PRB | ||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
| Interest cost | (8.7 | ) | (2.0 | ) | (2.2 | ) | (0.7 | ) | (8.0 | ) | (2.4 | ) | (2.0 | ) | (0.7 | ) | |||||||||
| Expected return on assets | 7.8 | 1.7 | 1.5 | — | 9.5 | 2.2 | 1.4 | — | |||||||||||||||||
| (0.9 | ) | (0.3 | ) | (0.7 | ) | (0.7 | ) | 1.5 | (0.2 | ) | (0.6 | ) | (0.7 | ) | |||||||||||
Analysis of the amount recognised in statement of total recognised gains and losses :
Year ended 31 December 2003
| UK | USA | Netherlands | Other PRB | ||||||||||||||||||||||
| £m | % of scheme assets/(liabilities) | £m | % of scheme assets/(liabilities) | £m | % of scheme assets/(liabilities) | £m | % of scheme assets/(liabilities) | ||||||||||||||||||
| Difference between Actual and Expected return on assets | 14.2 | 10% | 1.3 | 10% | — | 0% | — | 0% | |||||||||||||||||
| Experience gains and losses | (9.4 | ) | (4% | ) | (3.7 | ) | (15% | ) | (1.5 | ) | (4% | ) | (3.2 | ) | (31% | ) | |||||||||
| Effects of changes in assumptions on value of scheme liabilities | (31.9 | ) | (14% | ) | 2.3 | 9% | 1.2 | 3% | 1.1 | 15% | |||||||||||||||
| (27.1 | ) | (12% | ) | (0.1 | ) | 0% | (0.3 | ) | (1% | ) | (2.1 | ) | (21% | ) | |||||||||||
Registered number: 3768265 | 128 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension Scheme (continued) |
Year ended 31 December 2002 |
| UK | USA | Netherlands | Other PRB | ||||||||||||||||||||||
| £m | % of scheme assets/ (liabilities) | £m | % of scheme assets/ (liabilities) | £m | % of scheme assets/ (liabilities) | £m | % of scheme assets/ (liabilities) | ||||||||||||||||||
| Difference between Actual and Expected return on assets | (34.8 | ) | (32% | ) | (4.5 | ) | (25% | ) | (2.8 | ) | (12% | ) | — | 0% | |||||||||||
| Experience gains and losses | 4.2 | 3% | 1.6 | 4% | 0.9 | 6% | |||||||||||||||||||
| Effects of changes in assumptions on value of scheme liabilities | (5.9 | ) | (4% | ) | (2.8 | ) | (8%) | (1.0 | ) | (3% | ) | (1.7 | ) | (15% | ) | ||||||||||
| (36.5 | ) | (23% | ) | (5.7 | ) | (16% | ) | (3.8 | ) | (11% | ) | (0.8 | ) | (6% | ) | ||||||||||
History of Experience Gains and Losses |
| 2003 | 2002 | |||||||||
| Difference between the expected and actual return on scheme assets | (£million) | 15.3 | (42.1 | ) | ||||||
| Percentage of scheme assets | 8% | (28% | ) | |||||||
| Experience gains and losses on scheme liabilities | (£million) | (17.8 | ) | 6.7 | ||||||
| Percentage of the present value of scheme liabilities | (6% | ) | 3% | |||||||
| Changes in assumptions re value of liabilities | (£million) | (27.3 | ) | (11.4 | ) | |||||
| As a percentage of scheme liabilities | (9% | ) | (5% | ) | ||||||
| Total amount recognised in statement of total recognised gains and losses | (£million) | (29.6 | ) | (46.8 | ) | |||||
| As a percentage of scheme liabilities | (10% | ) | (19% | ) | ||||||
Registered number: 3768265 | 129 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension Scheme (continued) |
For purposes of US GAAP, the pension costs of all significant plans have been restated in the following tables in accordance with the requirements of SFAS No 132 — ‘Employers’ Disclosures about Pensions and Other Post-retirement Benefits’.
The changes in projected benefit obligations and plan assets and details of the funded status of these retirement plans, together with the changes in the accumulated other post-retirement benefit obligations, under SFAS No 132 are as follows:
| Pension benefits | Other post-retirement benefits | ||||||||||||
| Avecia Group plc Consolidated | Avecia Group plc Consolidated | ||||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| £ million | £ million | £ million | £ million | ||||||||||
| Change in projected benefit obligation | 62 | — | (4 | ) | (1 | ) | |||||||
| Projected benefit obligation at beginning of period | 230 | 230 | 14 | 14 | |||||||||
| Service cost | 15 | 12 | — | — | |||||||||
| Interest cost | 13 | 13 | 1 | 1 | |||||||||
| Participant contributions | 2 | 2 | — | — | |||||||||
| Plan amendments | 2 | — | — | — | |||||||||
| Actuarial (gain)/loss | 46 | 3 | 3 | 1 | |||||||||
| Benefits paid | (4 | ) | (2 | ) | — | — | |||||||
| Settlements / curtailments | (13 | ) | (28 | ) | — | — | |||||||
| Other movements including exchange | 1 | — | (8 | ) | (2 | ) | |||||||
| Projected benefit obligation at end of period | 292 | 230 | 10 | 14 | |||||||||
Registered number: 3768265 | 130 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension Scheme (continued) |
| Pension Benefits | Other post retirement benefits | ||||||||||||
| Avecia Group plc Consolidated | Avecia Group plc Consolidated | ||||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| £ million | £ million | £ million | £ million | ||||||||||
| Change in plan assets | 36 | (33 | ) | — | — | ||||||||
| Fair value at beginning of period acquisition | 150 | 183 | — | — | |||||||||
| Actual return on plan assets | 27 | (29 | ) | — | — | ||||||||
| Group contribution | 15 | 15 | — | — | |||||||||
| Participant contributions | 2 | 2 | — | — | |||||||||
| Benefits paid | (3 | ) | (2 | ) | — | — | |||||||
| Disposition | (7 | ) | (19 | ) | — | — | |||||||
| Other movements including exchange | 2 | (1 | ) | — | — | ||||||||
| Fair value of plan assets at end of period | 186 | 150 | — | — | |||||||||
| Funded status of plans | (106 | ) | (80 | ) | (10 | ) | (14 | ) | |||||
| Unrecognized net loss/(gain) | 84 | 70 | 2 | 2 | |||||||||
| Prior service cost not recognized | 2 | 1 | — | — | |||||||||
| Unrecognized net obligation on implementation | — | — | — | — | |||||||||
| (20 | ) | (9 | ) | (8 | ) | (12 | ) | ||||||
| Adjustments to recognize minimum liability | — | — | |||||||||||
| Intangible assets | (2 | ) | (1 | ) | — | — | |||||||
| Other Comprehensive Income | 58 | 33 | |||||||||||
| (56 | ) | (32 | ) | — | — | ||||||||
| Accrued benefit liability | (76 | ) | (41 | ) | (8 | ) | (12 | ) | |||||
The Accumulated Benefit Obligation is £198m for the UK plan and $38m for the US plan.
There were no plan assets in respect of other post-retirement benefits.
Registered number: 3768265 | 131 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 27 | Pension Scheme (continued) |
Assumed discount rates and rates of increase in remuneration used in calculating the projected benefit obligations, together with long-term rates of return on plan assets, vary according to the economic conditions of the country in which the retirement plans are situated. The weighted average rates used for calculation of year end benefit obligations and forecast benefit cost in the main retirement plans and other benefit obligations for SFAS No 132 purposes were as follows:
| Pension benefits | Other post-retirement benefits | ||||||||||||||||||
| 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||
| % | % | % | % | % | % | ||||||||||||||
| Discount rate | 5.5 | 5.8 | 6.0 | 6.25 | 6.75 | 7.25 | |||||||||||||
| Long-term rate of increase in remuneration | 3.7 | 3.8 | 3.8 | 4.25 | 4.25 | 4.25 | |||||||||||||
| Expected long-term return on assets | 6.7 | 6.7 | 7.0 | 9.0 | n/a | n/a | |||||||||||||
Avecia has assumed a long-term rate of increase in healthcare costs of 8% (2002: 9%).
| Pension benefits | Other post-retirement benefits | ||||||||||||||||||
| Avecia Group plc Consolidated | Avecia Group plc Consolidated | ||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||||||||
| 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||
| £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
Net periodic cost | |||||||||||||||||||
| Service cost – present value of benefits accruing during the period | 13 | 12 | 13 | — | — | — | |||||||||||||
| Interest cost on projected benefit obligations | 13 | 12 | 13 | 1 | 1 | 1 | |||||||||||||
| Expected (return)/loss on assets | (11 | ) | (12 | ) | (13 | ) | — | — | — | ||||||||||
| Net amortization and deferral | 5 | 3 | — | — | — | — | |||||||||||||
| Settlements & curtailments | (2 | ) | — | — | (5 | ) | — | — | |||||||||||
| Net periodic cost for the period | 18 | 15 | 13 | (4 | ) | 1 | 1 | ||||||||||||
It is estimated that a 1 percentage point change in the weighted average healthcare costs trend would have the following effects on the accumulated benefit obligation and net periodic cost at December 31, 2003 and December 31, 2002.
| 1 percentage point | |||||||||||||
| At December 31, 2003 | At December 31, 2002 | ||||||||||||
| Increase | Decrease | Increase | Decrease | ||||||||||
| £ million | £ million | £ million | £ million | ||||||||||
| Accumulated benefit obligation | 0.56 | (0.53 | ) | 1.04 | (0.94 | ) | |||||||
| Net periodic cost | 0.10 | (0.09 | ) | 0.11 | (0.10 | ) | |||||||
Registered number: 3768265 | 132 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 28 | Net cash inflow from operating activities |
| Avecia Group plc Consolidated | ||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||
| 2003 | 2002 Restated | 2001 Restated | ||||||||
| £ million | £ million | £ million | ||||||||
| Operating (loss)/profit | (81.1 | ) | (17.2 | ) | 48.4 | |||||
| Non cash items | (1.7 | ) | 3.6 | (3.8 | ) | |||||
| Depreciation, amortization and impairment charges | 135.2 | 101.8 | 87.5 | |||||||
| Increase in provision for pensions and similar obligations | 0.2 | 1.3 | 3.1 | |||||||
| Decrease in environmental provision | (0.1 | ) | — | (1.2 | ) | |||||
| Increase in other provisions | (11.1 | ) | 10.7 | 1.9 | ||||||
| (Profit)/loss on sale of fixed assets | (0.2 | ) | (0.7 | ) | (0.2 | ) | ||||
| (Increase)/decrease in stocks | (3.7 | ) | 8.7 | (0.9 | ) | |||||
| Decrease in debtors | 9.4 | 1.1 | 16.5 | |||||||
| (Decrease)/increase in creditors | 0.4 | (1.5 | ) | (30.8 | ) | |||||
| Net cash inflow from operating activities | 47.3 | 107.8 | 120.5 | |||||||
Registered number: 3768265 | 133 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 29 | Analysis of cash flows |
| Avecia Group plc Consolidated | |||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31 | |||||||||||||||||
| 2003 | 2003 | 2002 | 2002 | 2001 | 2001 | ||||||||||||||
| £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
Dividends from joint ventures and associates | |||||||||||||||||||
| Joint ventures | 3.0 | 5.5 | 2.9 | ||||||||||||||||
| 3.0 | 5.5 | 2.9 | |||||||||||||||||
Returns on investment and servicing of finance | |||||||||||||||||||
| Interest received | 1.0 | 1.9 | 3.3 | ||||||||||||||||
| Interest paid | (47.6 | ) | (58.4 | ) | (76.2 | ) | |||||||||||||
| Interest element of finance lease rental payments | (0.4 | ) | (0.4 | ) | (0.4 | ) | |||||||||||||
| (47.0 | ) | (56.9 | ) | (73.3 | ) | ||||||||||||||
Capital expenditure and financial investment | |||||||||||||||||||
| Purchase of tangible fixed assets | (49.9 | ) | (42.9 | ) | (59.9 | ) | |||||||||||||
| Purchase of intangible fixed assets | (0.3 | ) | (0.3 | ) | (2.7 | ) | |||||||||||||
| Sale of tangible fixed assets | 0.6 | 0.1 | 0.5 | ||||||||||||||||
| (49.6 | ) | (43.1 | ) | (62.1 | ) | ||||||||||||||
Registered number: 3768265 | 134 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
29 Analysis of cashflows (continued) |
| Avecia Group plc Consolidated | ||||||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||||
2003 | 2003 | 2002 | 2002 | 2001 | 2001 | |||||||||||||||||
Note | £ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||||
Acquisitions and disposals | ||||||||||||||||||||||
| Purchase of subsidiary undertaking | 21 | (1.9 | ) | (3.4 | ) | (2.6 | ) | |||||||||||||||
| Net cash acquired/(disposed) with subsidiary | (0.1 | ) | (3.7 | ) | 0.5 | |||||||||||||||||
| Purchase of interest in joint ventures and other investments | — | — | — | |||||||||||||||||||
| Disposal of subsidiary undertaking | 78.6 | 203.3 | 33.2 | |||||||||||||||||||
| 76.6 | 196.2 | 31.1 | ||||||||||||||||||||
Financing | ||||||||||||||||||||||
| Loans to related parties | 0.1 | 0.1 | (0.1 | ) | ||||||||||||||||||
| Loans repaid by related parties | — | — | — | |||||||||||||||||||
| Debt due within one year: | ||||||||||||||||||||||
| New loan repayable in current year | 64.0 | 39.0 | 63.0 | |||||||||||||||||||
| Loan repayments | (103.7 | ) | (239.4 | ) | (82.6) | |||||||||||||||||
| Capital element of finance lease rental payments | (1.0 | ) | (0.9 | ) | (0.6 | ) | ||||||||||||||||
| (40.6 | ) | (201.2 | ) | (20.3 | ) | |||||||||||||||||
Transfers of cash by certain subsidiary undertakings are restricted to specific purposes under the terms of certain financing agreements.
Registered number: 3768265 | 135 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 29 | Analysis of cash flows (continued) |
Restatement of cash flows in accordance with US GAAP |
| Avecia Group plc Consolidated | ||||||||||
For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | ||||||||
£ million | £ million | £ million | ||||||||
| Cash inflow from operating activities | 3.2 | 52.3 | 42.4 | |||||||
| Cash outflow from investing activities | 27.0 | 153.1 | (31.0 | ) | ||||||
| Cash (outflow) from financing activities | (40.6 | ) | (201.2 | ) | (20.3 | ) | ||||
| Increase/(Decrease) in cash in the period | (10.4 | ) | 4.2 | (8.9 | ) | |||||
| 30 | Analysis of net debt |
| Avecia Group plc – Consolidated for the year ended December 31, 2003 | |||||||||||||||||||
At beginning of period | Acquired | Cash flow | Other non cash changes | Exchange movement | At end of Period | ||||||||||||||
£ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
| Cash at bank and in hand | 16.2 | — | (10.4 | ) | — | 2.2 | 8.0 | ||||||||||||
| Revolver facility | — | — | (44.0 | ) | — | — | (44.0 | ) | |||||||||||
| Debt due after one year | (534.8 | ) | — | 81.3 | (4.1 | ) | 26.5 | (431.1 | ) | ||||||||||
| Debt due within one year | (26.4 | ) | — | 2.4 | — | (2.0 | ) | (26.0 | ) | ||||||||||
| Finance leases | (6.3 | ) | — | 1.0 | — | — | (5.3 | ) | |||||||||||
| Total | (551.3 | ) | — | 30.3 | (4.1 | ) | 26.7 | (498.4 | ) | ||||||||||
| Avecia Group plc – Consolidated for the year ended December 31, 2002 | |||||||||||||||||||
At beginning of period | Acquired | Cash flow | Other non cash changes | Exchange movement | At end of Period | ||||||||||||||
£ million | £ million | £ million | £ million | £ million | £ million | ||||||||||||||
| Cash at bank and in hand | 12.6 | — | 4.2 | — | (0.6 | ) | 16.2 | ||||||||||||
| Debt due after one year | (776.7 | ) | — | 172.9 | 23.8 | 45.2 | (534.8 | ) | |||||||||||
| Debt due within one year | (22.2 | ) | — | 27.5 | (28.3 | ) | (3.4 | ) | (26.4 | ) | |||||||||
| Finance leases | (6.6 | ) | — | 0.9 | (0.6 | ) | — | (6.3 | ) | ||||||||||
| Total | (792.9 | ) | — | 205.5 | (5.1 | ) | 41.2 | (551.3 | ) | ||||||||||
Registered number: 3768265 | 136 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 30 | Analysis of net debt (continued) |
The sale of the Stahl business in January 2002 resulted in the repayment of £5.4 million Term Debt from the deferred consideration received in January, as required by the bank facilities agreement of which £3.1 million was repaid during the year. The sale of the Metal Extraction Products and Intermediates and Stabilizers businesses in July resulted in the repayment of £52.3 million Term Debt, as required by the bank facilities agreement, of which £1.7 million was repaid during the year. The prepayments are applied across the future repayment schedule as follows:
Stahl | Metal Extraction Products and Intermediates and Stabilizers | ||||||
Prepayment | Prepayment | ||||||
2003 | 2003 | ||||||
£ million | £ million | ||||||
| Reducing repayments falling due: | |||||||
| In one year or less, or on demand | — | �� | 6.9 | ||||
| Between one and two years | — | 10.8 | |||||
| Between two and five years | 2.3 | 32.9 | |||||
| In five years or more | — | — | |||||
| 2.3 | 50.6 | ||||||
| 31 | Post balance sheet events |
On January 31, 2004 Avecia completed the sale of the Additives business to The Lubrizol Corporation for a consideration of £71.0 million. The business’ principle manufacturing asset at Huddersfield, UK is included in the sale. Other manufacturing facilities at Grangemouth, Scotland will continue to be operated by Avecia under a long-term supply agreement. Approximately 110 employees transferred to Lubrizol upon completion.
In March 2004 Avecia signed a definitive agreement to sell its Biocides business to Arch Chemicals Inc for approximately US$215 million. The disposal was completed on April 2, 2004. Dedicated manufacturing assets at Huddersfield, Grangemouth and Seals Sands in the UK, and Mount Pleasant in the USA, transferred to Arch as part of the sale. Arch also acquired a technical service laboratory and commercial offices in various locations. Approximately 290 employees worldwide have been transferred to Arch.
On 14 May 2004, the group secured amended committed bank financing by way of term debt of £100 million, repayable at 31 December 2005, together with a Revolving Credit Facility of £50 million. See Note 1 Basis of Preparation for more details.
| 32 | Related Party disclosures |
In June 1999, Cinven and Investcorp S.A. jointly directed the formation of Avecia, and its acquisition of the Zeneca Specialties business. Cinven and Investcorp S.A. continue to provide consulting services to the Group, for which they may receive payments of up to £400,000 per annum. In January 2002 Avecia completed the sale of its Stahl business to Luxembourg 101 S.A. and its affiliates. The purchase of Stahl from Avecia was managed by Investcorp S.A. on behalf of Luxembourg 101 SA and its affiliates, which under the terms of the Bond Indenture means that Luxembourg 101 SA is considered a related party. The sale of the Stahl business was therefore conducted under the terms of the bond indenture relating to related party transactions.
While the group was part of AstraZeneca, sales to businesses of AstraZeneca amounted to £1.7 million in 1999.
Registered number: 3768265 | 137 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 32 | Related party disclosures (continued) |
Raw material purchases from the rest of the AstraZeneca group were minimal. Prior to July 1, 1999 Zeneca Specialties received services from various parts of AstraZeneca, which were run on a corporate basis. These services included the running of two major UK manufacturing sites, provision of IT network and mainframe services, together with various administrative support services such as payroll in the UK and USA, and general support in some smaller shared units overseas. All of these services were charged to Zeneca Specialties on a basis, which was intended to reflect its share of these activities and which was consistent with the basis of charging to other AstraZeneca businesses. In addition, certain other charges relating to corporate costs were allocated to each business.
Since July 1, 1999, AstraZeneca is no longer a related party, although there are a number of service level agreements and other arrangements between the two parties that relate to the separation of Avecia from the AstraZeneca group. These arrangements are on an arms length basis at commercial rates.
At December 31, 2003 debtors include £17.2 million (2002: £17.3 million) owed to companies within the group by the parent companies of Avecia Group plc, Avecia Holdings plc and Avecia Finance plc of which £15.3 million relates to acquisition fees and £1.9 million relates to other costs paid by group companies on behalf of Avecia Holdings plc and Avecia Finance plc. These amounts are interest free.
| 33 | Ultimate parent company |
The ultimate parent company is Avecia (Jersey) Limited, a company registered and incorporated in Jersey. The registered number is 74318. The external address of the ultimate parent company is:
Avecia (Jersey) Limited
Mourant du Feu & Jeune
22 Grenville Street
St. Helier
Jersey
JE4 8PX.
| 34 | Difference between UK and US accounting principles |
These consolidated financial statements are prepared in accordance with UK GAAP. Significant differences between UK GAAP and US GAAP which affect the net income and net assets of Avecia and Zeneca Specialties are set out below.
Reclassification of parent company debtors |
Since the acquisition of the Specialty Chemicals business of AstraZeneca in 1999, certain amounts have been due from Avecia Holdings plc and Avecia Finance plc, the parent companies of Avecia Group plc on a long term basis (see note 16). Under US GAAP, such amounts are reflected as a reduction of shareholders’ funds. Net assets in accordance with US GAAP have been reduced by £17.2 million to reflect this reclassification at December 31, 2003 (December 31, 2002: £17.3 million).
Capitalization of interest |
There is no mandatory accounting standard in the United Kingdom regarding the capitalization of interest and, accordingly, the business does not capitalize interest as part of the cost of fixed assets in financial statements prepared under UK GAAP. US GAAP requires interest incurred and associated with the cost of constructing fixed assets to be capitalized and amortized over the life of the asset.
Registered number: 3768265 | 138 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 34 | Difference between UK and US accounting principles (continued) |
Revenue recognition |
The company recognizes revenues on individual elements of multiple-element sales arrangements when sums are contractually due for work performed or services rendered during the year. Under US GAAP, such sums are deferred unless they are in exchange for products delivered or services performed which represent the culmination of a separate earnings process. Certain revenues recognized under UK GAAP on a multiple-element sales arrangement may not be recognized under US GAAP until the terms of additional elements of the arrangement have been completed or fulfilled and all contingencies resolved.
Deferred taxation |
Following the implementation of FRS 19 ‘Deferred tax’ both US GAAP and UK GAAP now provide for deferred taxation on a full liability basis. US GAAP, however, requires provision for revaluation gains, fair value adjustments similar to revaluations arising on the acquisition of a business, latent rolled over gains and the retained earnings of foreign subsidiaries that are not permanently reinvested. These are not normally provided for under UK GAAP.
Pension Expense |
There are various differences between UK GAAP and US GAAP in accounting for pension costs:
| • | US GAAP requires measurement of plan assets and obligations to be made as at the date of the financial statements or a date not more than three months prior to that date. Under UK GAAP, calculations are made at the date of the financial statements; |
| • | under US GAAP, a negative pension cost may arise where a significant unrecognized net asset or gain exists at the time of implementation. This is required to be amortized on a straight-line basis over the average remaining service period of employees. In accordance with UK GAAP, Avecia policy is not to recognize pension credits in its financial statements unless a refund of, or reduction in, contributions is likely. |
| • | under US GAAP, a minimum pension liability is recognized through other comprehensive income in certain circumstances when there is a deficit of plan assets relative to the accumulated benefits obligation. Under UK GAAP, there is no such requirement. |
| • | Under US GAAP, pension prepayments and liabilities accrued are included in the balance sheet within debtors, creditors or provisions as appropriate. Under UK GAAP (FRS17), the whole net pensions asset or liability is recognized as a single item on the balance sheet. |
Purchase accounting adjustments (goodwill and intangibles) |
In the consolidated financial statements, goodwill arising on acquisitions made prior to January 1998 accounted for under the purchase method has been eliminated against shareholders’ equity, in accordance with UK GAAP. Under the requirements of UK Financial Reporting Standard 10 ‘Goodwill and intangible assets’, goodwill on acquisitions made after January 1, 1998 is capitalized and amortized over its estimated useful life, which is generally presumed not to exceed 20 years. UK GAAP requires that on subsequent disposal or termination of a previously acquired business, any goodwill previously taken directly to shareholders’ equity is charged in the income statement against the profit or loss on disposal or termination.
Under UK GAAP goodwill created outside the Avecia Group plc group of companies is not reported in the financial statements of Avecia Group plc. Under US GAAP this goodwill is pushed down into the net assets of the group as it is deemed to be attached to assets held by the Avecia Group plc group of companies.
Minority interests |
Under UK GAAP, minority interests are included as part of ‘shareholders’ funds and minority interests’. Under US GAAP minority interests are classified outside of shareholders’ equity.
Registered number: 3768265 | 139 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 34 | Difference between UK and US accounting principles (continued) |
Pay-in-kind preference shares |
Under UK GAAP, the pay-in-kind preference shares issued by the company form part of shareholders’ funds. Under US GAAP, due to the mandatory redemption requirements in place, this class of shares is classified as debt.
Disposal of Business |
Under UK and US GAAP foreign exchange differences arising on the consolidation of overseas equity investments are taken to reserves. Under US GAAP, the accumulated translation component of equity attributable to investments that have been disposed of should be recognized in measuring the gain or loss on sale, under UK GAAP these exchange differences remain in reserves.
Restructuring Costs |
Under UK GAAP provisions for restructuring costs should be made when an entity has; a present obligation as a result of a past event; when it is probable that the transfer of economic benefit will be required to settle the obligation; and a reliable estimate can be made of the amount. Under SFAS 146 costs associated with exit or disposal activities should only be recognized a liability has been incurred.
Investments |
Investments in entities over which Avecia do not exercise control, but exercise significant influence (associates and joint ventures), are accounted for by the equity method.
UK GAAP requires the consolidated financial statements to show separately the proportion of operating profit or loss, exceptional items, inventory holding gains or losses, interest expense and taxation of associated undertakings and joint ventures. In addition, the turnover of joint ventures should be disclosed.
For US GAAP, the after tax profits or losses (i.e. operating results after exceptional items, inventory holding gains or losses, interest expense and taxation) is included in the income statement as a single line item.
UK GAAP requires the group’s share of the gross assets and gross liabilities of joint ventures to be shown on the face of the balance sheet, whereas under US GAAP the net investment is included as a single line item.
Assets and liabilities |
Under US GAAP fixed asset impairments have been calculated in accordance with SFAS 144; this approach differs from FRS11 in the determination of relevant asset groups and also in the determination of which asset groups are subject to an impairment calculation. This has resulted in an additional write-off of £23.1 million. Current assets under UK GAAP include amounts which fall due after more than one year. Under US GAAP such assets would be reclassified as non-current assets. In addition, under UK GAAP unamortized debt issuance costs are netted against the associated debt, whereas under US GAAP such unamortized costs are included in other assets. Provisions for liabilities and charges under UK GAAP include amounts due, or estimated to become payable, within one year which would be reclassified to current liabilities under US GAAP. In addition, under US GAAP, provisions not due or expected to be payable within one year would be shown as part of amounts payable and accrued liabilities due after one year.
Statement of cash flows: Basis of preparation |
The statements of group cash flow for Avecia and Zeneca Specialties are prepared in accordance with UK Financial Reporting Standard 1 ‘FRS 1 (Revised 1996)’, whose objective and principles are similar to those set out in SFAS No 95, ‘Statement of cash flows’. The principal differences between the standards relate to classification. Under FRS 1 (Revised 1996), Avecia and Zeneca Specialties present cash flows for (a) operating activities; (b) dividends received from joint ventures and associates; (c) returns on investments and servicing of finance; (d) tax paid; (e) capital expenditure and financial investment; (f) acquisitions and disposals; (g) dividends paid to shareholders; (h) management of liquid resources; and (i) financing. SFAS No 95 requires only three categories of cash flow activity being (a) operating; (b) investing; and (c) financing.
Registered number: 3768265 | 140 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 34 | Difference between UK and US accounting principles (continued) |
Cash flows from taxation, returns on investments and servicing of finance and dividends received from joint ventures and associates under FRS 1 (Revised 1996) would be included as operating activities under SFAS No 95; capital expenditure and financial investment and acquisitions and disposals would be included as investing activities; and distributions or dividends would be included as a financing activity under SFAS No 95. Under FRS 1 (Revised 1996) cash comprises cash in hand and deposits repayable on demand, less overdrafts repayable on demand; and liquid resources comprise current asset investments held as readily disposable stores of value. Under SFAS No 95 cash equivalents, comprising short-term highly liquid investments, generally with original maturities of three months or less, are grouped together with cash; short-term borrowings repayable on demand would not be included within cash and cash equivalents and movements on those borrowings would be included in financing activities.
Derivative Instruments |
Effective from January 1, 2001, the company adopted SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’, as amended by SFAS 137 and 138. SFAS 133 requires that all derivative instruments are recognized as assets or liabilities on the balance sheet and measured at fair value, regardless of the purpose or intent for holding them. Changes in the fair value of derivative instruments are recognized periodically either in earnings or stockholders’ equity (as a component of other comprehensive income), depending on whether the derivative is designated as a hedge of changes in fair value or cash flows. For derivatives designated as fair value hedges, changes in fair value of the hedged item and the derivative are recognized currently in earnings. For derivatives designated as cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income on the balance sheet until the hedged item is recognized in earnings.
The ineffective portion of the fair value changes are recognized in earnings immediately. SFAS 133 also requires that certain derivative instruments embedded in host contracts be accounted for separately as derivatives.
Prior to the adoption of SFAS 133, derivative instruments which were not designated as hedges of specific assets, liabilities, or firm commitments were marked to market and any resulting unrealized gains or losses recognized in earnings. If there was a direct connection between a derivative instrument and an underlying transaction and a derivative was so designated, a valuation unit was formed. Once allocated, gains and losses from these valuation units, which were used to manage interest rate, equity price and currency risks of identifiable assets, liabilities, or firm commitments, did not affect earnings until the underlying transaction was realized. Gains or losses on these hedging instruments were deferred off-balance sheet until the underlying transaction was realized (the “deferral method”).
If a derivative instrument is not designated as a hedge, movements in the fair value of the instrument are recognized in earnings. The types of derivative that the company has identified are described in note 19.
The company has not elected to designate any derivative instruments as a hedge of exposures as at January 1, 2001. In accordance with SFAS 133, the derivative instruments are measured at fair value with future changes in the fair values of those contacts recorded through earnings.
Share Options |
On December 31, 1999 certain employees of Avecia Group plc were given the opportunity to invest in the preference shares of Avecia Holdings plc, the parent company of Avecia Group plc. Attached to these preference shares were options to purchase 10.7 million ordinary shares in Avecia Holdings plc.
The preference shares were purchased at a price of £1.234 per share and, upon a change in control or public listing (‘Exit Event’), the preference shares will be redeemed at a price equal to or less than £1.234 per share. No dividends are payable in respect of these shares.
The share options, were granted with an exercise price of £0.02518 per ordinary share, and were only exercisable if an Exit Event occurs and expire 10 years from the date of grant.
Registered number: 3768265 | 141 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 34 | Difference between UK and US accounting principles (continued) |
During 2001, certain provisions relating to the share options were modified, and employees exchanged their options for 10.7 million restricted ordinary shares in Avecia Holdings plc. These shares are restricted because they are legally owned by an Employee Benefit Trust and, under the terms of the arrangement, employees can only realize their beneficial interest (i.e. transfer ownership of the shares) upon the occurrence of an Exit Event. In connection with this modification, Avecia Holdings plc redeemed a sufficient number of preference shares at a price of £1.234 per preference share to fund the acquisition of the ordinary shares at the original exercise price of £0.02518 per share.
No compensation expense has been recorded in the consolidated financial statements of Avecia Group plc during the periods presented herein because the number of shares, if any, that will ultimately vest with the employees is contingent upon the company achieving an Exit Event. Under US GAAP, in the period in which an Exit Event does occur, the company will record a compensation expense and a capital contribution, based on the intrinsic value of these awards at the date of the Exit Event.
Reporting comprehensive income |
SFAS No 130 — ‘Reporting comprehensive income’ established requirements for the reporting and display of income and its components, including the reclassification of financial statements for earlier periods for comparative purposes. The information set out in the Statement of Total Recognized Gains and Losses, and below, is consistent with the requirements of SFAS No 130.
Goodwill |
Under US GAAP, it is required to ascribe fair values to net assets acquired, including identifiable intangibles, and for goodwill to be capitalized in the balance sheet. Prior to January 1, 2002 goodwill was amortized through the income statement over the estimated useful life of 15 years. SFAS No. 142 ‘Goodwill and Other Intangible Assets’ was adopted during the year ended December 31, 2002. The impairment loss identified on adoption of £34.8 million has been classified as a cumulative effect of a change in accounting principle in accordance with the standard. The effect of nonamortization of goodwill in accordance with the standard on income statements of prior periods would be for the year ended December 31, 2001, to increase net income by £49.9 million, giving a net result in accordance with US GAAP of £10.2 million income. Goodwill is now tested annually for impairment in lieu of amortization.
Cumulative exchange gains and losses |
The total recognized gains and losses of Avecia differ from the net income for the year (as set out in the consolidated profit and loss account) in respect of foreign currency translation adjustments amounting to an aggregate gain of £1.6 million for the year ended December 31, 2003 (year ended December 31, 2002 £9.0 million loss, year ended December 31, 2000 £3.4 million loss). The foreign currency adjustments are set out in the Statement of total recognized gains and losses.
The cumulative exchange gains and losses on the translation of foreign currency financial statements into sterling under UK GAAP are set out in the following note.
| Avecia Group plc Consolidated | ||||||||||
For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||
2003 | 2002 | 2001 | ||||||||
£ million | £ million | £ million | ||||||||
| Balance at beginning of period | (12.6 | ) | (3.6 | ) | (0.2 | ) | ||||
| Movement in period | 1.6 | (9.0 | ) | (3.4 | ) | |||||
| Balance at end of period – (loss)/gain | (11.0 | ) | (12.6 | ) | (3.6 | ) | ||||
Registered number: 3768265 | 142 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 34 | Difference between UK and US accounting principles (continued) |
Classification differences between UK and US GAAP: |
| Debt issuance costs |
Issue costs of £20.4 million have been offset against the carrying amount of the debt under UK GAAP. Under US GAAP, the issue costs would be similarly deferred in the balance sheet but presented as other assets.
| Discontinued operations |
Under UK GAAP discontinued operations are presented within the financial statements by analyzing the relevant line items. US GAAP requires that net income/loss, net of tax, for a discontinued operation be presented on a single line in the income statement. Under US GAAP, discontinued operations include the gain on disposal of business of £15.4 million (2002 : £9.4 million, 2001 : £4.0 million) and an allocation of the tax charge of £nil million (2002 £0.4 million, 2001 £4.7 million).
| Exceptional Items |
Under UK GAAP certain amounts are separately identified on the face of the income statement as exceptional. These amounts relate primarily to impairments and restructuring costs. Under US GAAP these amounts would not be separately identified and would be included as part of operating costs.
Registered number: 3768265 | 143 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
34 Difference between UK and US accounting principles (continued) |
The following is a summary of the material adjustments to net profit/(loss) and net assets/(liabilities) which would have been required if US GAAP had been applied instead of UK GAAP.
| Avecia Group plc Consolidated | ||||||||||
For the year ended December 31, 2003 | For the year ended December 31, 2002 | For the year ended December 31, 2001 | ||||||||
Restated | Restated | |||||||||
£ million | £ million | £ million | ||||||||
Net (loss)/profit for the financial period under UK GAAP restated (1) | (94.5 | ) | (43.0 | ) | (38.3 | ) | ||||
Adjustments to conform to US GAAP | ||||||||||
| Capitalization of interest, less disposals and amortization | 2.5 | 0.3 | 2.9 | |||||||
| Software costs capitalized under US GAAP | 0.2 | — | — | |||||||
| Income recognition deferral | — | 1.2 | 7.1 | |||||||
| Pension expense | (1.5 | ) | (5.2 | ) | (3.6 | ) | ||||
| Post-retirement benefits (2) | 4.8 | (0.5 | ) | 0.6 | ||||||
| Differences on profit on disposal of business (3): | (7.0 | ) | (4.8 | ) | (2.2 | ) | ||||
| Goodwill amortization | 29.6 | 30.7 | (8.1 | ) | ||||||
| Goodwill additional impairment under UK GAAP | — | 21.5 | — | |||||||
| Goodwill additional impairment under US GAAP | (11.7 | ) | — | — | ||||||
| Fixed asset additional impairment under UK GAAP | — | 4.1 | — | |||||||
| Fixed asset additional impairment under US GAAP | (23.1 | ) | — | — | ||||||
| Deferred tax asset recognized under US GAAP | — | — | (5.3 | ) | ||||||
| Foreign exchange on PIK preference shares reclassified as debt | — | — | (0.3 | ) | ||||||
| Restructuring costs not recognized under SFAS 146 | (7.4 | ) | 7.4 | — | ||||||
| SFAS 133: Derivative instruments | 5.5 | 2.1 | (4.6 | ) | ||||||
| Deferred taxation on adjustments to conform to US GAAP | (0.7 | ) | 0.6 | (0.1 | ) | |||||
Net (loss)/income before cumulative effects of change in accounting policy | (103.4 | ) | 14.4 | (51.9 | ) | |||||
| Cumulative effect of change in accounting policy | ||||||||||
| – on adoption of SFAS 142 | — | (34.8 | ) | — | ||||||
| – on adoption of SFAS 133 | — | — | (1.9 | ) | ||||||
Net (loss)/income in accordance with US GAAP | (103.4 | ) | (20.4 | ) | (53.8 | ) | ||||
| Preference share dividend | (6.4 | ) | (6.0 | ) | (5.4 | ) | ||||
Net (loss)/income available to common shareholders in accordance with US GAAP | (109.7 | ) | (26.4 | ) | (59.2 | ) | ||||
| Loss before taxation in accordance with US GAAP from: | ||||||||||
| – continuing operations | (96.7 | ) | 17.5 | (44.8 | ) | |||||
| – discontinued operations | (5.8 | ) | (32.0 | ) | 1.9 | |||||
| Taxation in accordance with US GAAP on: | ||||||||||
| – continuing operations | (0.9 | ) | (5.6 | ) | (5.8 | ) | ||||
| – discontinued operations | — | (0.3 | ) | (5.1 | ) | |||||
| Net loss in accordance with US GAAP from: | ||||||||||
| – continuing operations | (97.7 | ) | 11.9 | (50.6 | ) | |||||
| – discontinued operations | (5.8 | ) | (32.3 | ) | (3.2 | ) | ||||
Registered number: 3768265 | 144 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
34 Difference between UK and US accounting principles (continued) |
(1) Prior years have been restated to reflect the adoption of FRS17.
(2) Under US GAAP, the amount charged to the profit and loss account for Post Retirement Benefits is the total net periodic benefit cost. Under UK GAAP only the service cost plus interest cost is charged.
(3) Under US GAAP, the elements of the purchase accounting adjustments, which related to the Metal Extraction Products and Intermediates and Stabilizers businesses are charged directly against the profit in the period on the disposal of the business; this accounts for £7.0 million loss of the GAAP difference shown. The impact of exchange losses previously taken to reserves was nil.
(4) Under US GAAP, when proceeds of a disposal are required to be used to prepay existing debt, the interest attached to that amount is disclosed within discontinued operations. Therefore interest has been calculated on the proceeds of the businesses disclosed as discontinued.
Registered number: 3768265 | 145 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 34 | Difference between UK and US accounting principles (continued) |
| Avecia Group plc Consolidated | |||||||
As at December 31, 2003 | As at December 31, 2002 | ||||||
Restated | |||||||
£ million | £ million | ||||||
UK GAAP | |||||||
| Net assets under UK GAAP as originally stated | 219.8 | ||||||
| Impact of adopting FRS 17 | (81.3 | ) | |||||
Total net assets restated | 18.7 | 138.5 | |||||
Adjustments to conform to US GAAP | |||||||
| Reclassification of parent company debtors | (17.2 | ) | (17.3 | ) | |||
| Capitalization, less disposals and amortization of interest | 10.6 | 8.1 | |||||
| Software costs capitalized under US GAAP | 0.2 | — | |||||
| Income recognition deferral | (4.8 | ) | (4.8 | ) | |||
| Pension liability | 83.2 | 73.8 | |||||
| Post-retirement benefits/plan amendment | 2.4 | (0.5 | ) | ||||
| Additional minimum liability | (56.0 | ) | (31.7 | ) | |||
| Purchase accounting adjustments | 86.0 | 93.0 | |||||
| Additional Goodwill impairment under US GAAP | (25.0 | ) | (13.3 | ) | |||
| Removal of goodwill amortization under UK GAAP | 60.3 | 30.7 | |||||
| Additional fixed asset impairment under UK GAAP | — | 4.1 | |||||
| Additional fixed asset impairment | (19.0 | ) | — | ||||
| Pay-in-kind preference shares reclassified as debt | (37.7 | ) | (35.0 | ) | |||
| Tax on adjustments to conform to US GAAP | (0.2 | ) | 0.5 | ||||
| Derivative Instruments | 3.3 | (1.6 | ) | ||||
| Restructuring costs not recognized under SFAS 146 | — | 7.4 | |||||
| Net assets in accordance with US GAAP | 104.8 | 251.9 | |||||
Prior year has been restated to reflect the adoption of FRS17.
Registered number: 3768265 | 146 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 35 | Condensed financial statements |
Avecia Corporation Limited is a wholly-owned subsidiary of Avecia Group plc. Avecia Corporation Limited has guaranteed the US $540 million 11% notes issued by Avecia Group plc on an unconditional basis. Avecia Corporation Limited is itself a holding company with no operations or assets, other than shares of Avecia Investments Limited and loans to Avecia Investments Limited and from Avecia Group plc.
For the purposes of Securities Act 1933, guarantees of securities are themselves securities. As a result, the Securities Act requires both the issuer of the debt and guarantor to be either registered or exempt from registration. However, Rule 3-10 of Regulation S-X has restated the general rule that all issuers or guarantors must include separate financial statements. Paragraph (e) of Rule 3-10 provides that a subsidiary guarantor need not include separate financial statements if no other subsidiary of the company guarantees the securities, the guarantee is full and unconditional, the parent company’s financial statements are filed for the required periods and a note to the parent company’s financial statments includes condensed consolidating financial information for the same periods.
Profit and loss account
| For the year ended December 31, 2003 | ||||||||||||||||
Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
£ million | £ million | £ million | £ million | £ million | ||||||||||||
| Turnover | — | — | 485.2 | — | 485.2 | |||||||||||
| Net operating costs | — | — | (566.3 | ) | — | (566.3 | ) | |||||||||
| Share of operating profit of joint venture | — | — | 1.7 | — | 1.7 | |||||||||||
| Profit on disposal of business | — | — | 15.4 | — | 15.4 | |||||||||||
| Profit on ordinary activities before interest and taxation | — | — | (64.0 | ) | — | (64.0 | ) | |||||||||
| Other interest receivable and similar income | 41.3 | 37.8 | 34.3 | (79.1 | ) | 34.3 | ||||||||||
| Interest payable and similar charges | (37.6 | ) | (37.8 | ) | (67.6 | ) | 79.1 | (63.9 | ) | |||||||
| Profit on ordinary activities before taxation | 3.7 | — | (97.3 | ) | — | (93.6 | ) | |||||||||
| Taxation on profit on ordinary activities | — | — | (0.9 | ) | — | (0.9 | ) | |||||||||
| Net income/(loss) for the financial period | 3.7 | — | (98.2 | ) | — | (94.5 | ) | |||||||||
| US GAAP adjustments | — | — | (8.9 | ) | — | (8.9 | ) | |||||||||
| US GAAP net income/(loss) | 3.7 | — | (107.1 | ) | — | (103.4 | ) | |||||||||
Financial Reporting Statement 17 ‘Retirement Benefits’ was adopted for the year ending 31 December 2003. The financial information for 2002 has been adjusted retrospectively.
Registered number: 3768265 | 147 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 35 | Condensed financial statements (continued) |
Profit and loss account (continued)
| For the year ended December 31, 2002 (Restated) | ||||||||||||||||
Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
£ million | £ million | £ million | £ million | £ million | ||||||||||||
| Turnover | — | — | 575.7 | — | 575.7 | |||||||||||
| Net operating costs | — | — | (592.9 | ) | — | (592.9 | ) | |||||||||
| Share of operating profit of joint venture | — | — | 2.2 | — | 2.2 | |||||||||||
| Profit on disposal of business | (0.2 | ) | — | 9.6 | — | 9.4 | ||||||||||
| Profit on ordinary activities before interest and taxation | (0.2 | ) | — | (5.4 | ) | — | (5.6 | ) | ||||||||
| Other interest receivable and similar income | 44.2 | 41.8 | 34.5 | (86.0 | ) | 34.5 | ||||||||||
| Interest payable and similar charges | (40.7 | ) | (41.8 | ) | (68.9 | ) | 86.0 | (65.4 | ) | |||||||
| Profit on ordinary activities before taxation | 3.3 | — | (39.8 | ) | — | (36.5 | ) | |||||||||
| Taxation on profit on ordinary activities | — | — | (6.5 | ) | — | (6.5 | ) | |||||||||
| Net income/(loss) for the financial period | 3.3 | — | (46.3 | ) | — | (43.0 | ) | |||||||||
| US GAAP adjustments | — | — | 22.6 | — | 22.6 | |||||||||||
| US GAAP net income/(loss) | 3.3 | — | (23.7 | ) | — | (20.4 | ) | |||||||||
Financial Reporting Statement 17 ‘Retirement Benefits’ was adopted for the year ending 31 December 2003.
The financial information for 2002 has been adjusted retrospectively.
Registered number: 3768265 | 148 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 35 | Condensed financial statements (continued) |
Profit and loss account (continued) |
| For the year ended December 31, 2001 Restated | ||||||||||||||||
Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
£ million | £ million | £ million | £ million | £ million | ||||||||||||
| Turnover | — | — | 803.6 | — | 803.6 | |||||||||||
| Net operating costs | — | — | (755.2 | ) | — | (755.2 | ) | |||||||||
| Share of operating profit of joint venture | — | — | 1.4 | — | 1.4 | |||||||||||
| Profit on disposal of business | — | — | 4.0 | — | 4.0 | |||||||||||
| Profit on ordinary activities before interest and taxation | — | — | 53.8 | — | 53.8 | |||||||||||
| Other interest receivable and similar income | 44.5 | 44.5 | 2.6 | (89.0 | ) | 2.6 | ||||||||||
| Interest payable and similar charges | (43.3 | ) | (44.5 | ) | (90.1 | ) | 89.0 | (88.9 | ) | |||||||
| Profit on ordinary activities before taxation | 1.2 | — | (33.7 | ) | — | (32.5 | ) | |||||||||
| Taxation on profit on ordinary activities | — | — | (5.8 | ) | — | (5.8 | ) | |||||||||
| Net income/(loss) for the financial period | 1.2 | — | (39.5 | ) | — | (38.3 | ) | |||||||||
| US GAAP adjustments | (0.3 | ) | — | (15.2 | ) | — | (15.5 | ) | ||||||||
| US GAAP net income/(loss) | 0.9 | — | (54.7 | ) | — | (53.8 | ) | |||||||||
The other notes to these financial statements provide additional information relevant to this note.
Registered number: 3768265 | 149 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 35 | Condensed financial statements (continued) |
Balance sheet |
| As at December 31, 2003 | ||||||||||||||||
| Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
| £ million | £ million | £ million | £ million | £ million | ||||||||||||
| Fixed assets | 328.6 | 326.8 | 569.8 | (655.4 | ) | 569.8 | ||||||||||
| Current assets | 342.3 | 312.9 | 178.7 | (658.2 | ) | 175.7 | ||||||||||
| Creditors: amounts falling due within one year | (15.2 | ) | — | (180.0 | ) | 29.7 | (165.5 | ) | ||||||||
| Creditors: amounts falling due after more than one year | (302.1 | ) | (312.9 | ) | (454.1 | ) | 628.5 | (440.6 | ) | |||||||
| Provisions for liabilities and charges including pension liability | — | — | (120.7 | ) | — | (120.7 | ) | |||||||||
| Net assets | 353.6 | 326.8 | (6.3 | ) | (655.4 | ) | 18.7 | |||||||||
Share capital and reserves | ||||||||||||||||
| Share capital (including non-equity) | 330.6 | 326.8 | 326.8 | (653.6 | ) | 330.6 | ||||||||||
| Reserves | 23.0 | — | (333.1 | ) | (1.8 | ) | (311.9 | ) | ||||||||
| Minority interests | — | — | — | — | — | |||||||||||
| 353.6 | 326.8 | (6.3 | ) | (655.4 | ) | 18.7 | ||||||||||
| US GAAP adjustments | (37.7 | ) | — | 123.8 | — | 86.1 | ||||||||||
| US GAAP net assets | 315.9 | 326.8 | 117.5 | (655.4 | ) | 104.8 | ||||||||||
Financial Reporting Statement 17 ‘Retirement Benefits’ was adopted for the year ending 31 December 2003. The financial information for 2002 has been adjusted retrospectively.
Registered number: 3768265 | 150 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 35 | Condensed financial statements (continued) |
Balance sheet (continued) |
| As at December 31, 2002 (Restated) | ||||||||||||||||
| Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
| £ million | £ million | £ million | £ million | £ million | ||||||||||||
| Fixed assets | 328.6 | 326.8 | 687.9 | (655.4 | ) | 687.9 | ||||||||||
| Current assets | 371.9 | 344.1 | 235.6 | (719.1 | ) | 232.5 | ||||||||||
| Creditors: amounts falling due within one year | (18.5 | ) | — | (135.8 | ) | 28.3 | (126.0 | ) | ||||||||
| Creditors: amounts falling due after more than one year | (328.4 | ) | (344.1 | ) | (562.0 | ) | 690.8 | (543.7 | ) | |||||||
| Provisions for liabilities and charges including pension liability | — | — | (112.2 | ) | — | (112.2 | ) | |||||||||
| Net assets | 353.6 | 326.8 | 113.5 | (655.4 | ) | 138.5 | ||||||||||
Share capital and reserves | ||||||||||||||||
| Share capital (including non-equity) | 330.5 | 326.8 | 326.8 | (653.6 | ) | 330.5 | ||||||||||
| Reserves | 23.1 | — | (212.3 | ) | (1.8 | ) | (191.0 | ) | ||||||||
| Minority interests | — | — | — | — | — | |||||||||||
| 353.6 | 326.8 | 113.5 | (655.4 | ) | 138.5 | |||||||||||
| US GAAP adjustments | (35.0 | ) | — | 148.4 | — | 113.4 | ||||||||||
| US GAAP net assets | 318.6 | 326.8 | 261.9 | (655.4 | ) | 251.9 | ||||||||||
Financial Reporting Statement 17 ‘Retirement Benefits’ was adopted for the year ending 31December 2003. The financial information for 2002 has been adjusted retrospectively.
Registered number: 3768265 | 151 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 35 | Condensed financial statements (continued) |
Cash flow statement |
| For the year ended December 31, 2003 | ||||||||||||||||
| Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
| £ million | £ million | £ million | £ million | £ million | ||||||||||||
| Cash inflow from operating activities | — | — | 47.3 | — | 47.3 | |||||||||||
| Dividends from joint ventures | — | — | 3.0 | — | 3.0 | |||||||||||
| Returns on investments and servicing of finance | — | — | (47.0 | ) | — | (47.0 | ) | |||||||||
| Taxation | — | — | (0.1 | ) | — | (0.1 | ) | |||||||||
| Capital expenditure and financial investment | — | — | (49.6 | ) | — | (49.6 | ) | |||||||||
| Acquisitions and disposals | — | — | 76.6 | — | 76.6 | |||||||||||
| Cash inflow before financing | — | — | 30.2 | — | 30.2 | |||||||||||
| Financing | — | — | (40.6 | ) | — | (40.6 | ) | |||||||||
| Increase in cash in the period | — | — | (10.4 | ) | — | (10.4 | ) | |||||||||
| US GAAP adjustments | — | — | — | — | — | |||||||||||
| US GAAP increase in cash in the period | — | — | (10.4 | ) | — | (10.4 | ) | |||||||||
| For the year ended December 31, 2002 | ||||||||||||||||
| Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
| £ million | £ million | £ million | £ million | £ million | ||||||||||||
| Cash inflow from operating activities | 0.2 | — | 107.6 | — | 107.8 | |||||||||||
| Dividends from joint ventures | — | — | 5.5 | — | 5.5 | |||||||||||
| Returns on investments and servicing of finance | — | — | (56.9 | ) | — | (56.9 | ) | |||||||||
| Taxation | — | — | (4.1 | ) | — | (4.1 | ) | |||||||||
| Capital expenditure and financial investment | — | — | (43.1 | ) | — | (43.1 | ) | |||||||||
| Acquisitions and disposals | (0.2 | ) | — | 196.4 | — | 196.2 | ||||||||||
| Cash inflow before financing | — | — | 205.4 | — | 205.4 | |||||||||||
| Financing | — | — | (201.2 | ) | — | (201.2 | ) | |||||||||
| Increase in cash in the period | — | — | 4.2 | — | 4.2 | |||||||||||
| US GAAP adjustments | — | — | — | — | — | |||||||||||
| US GAAP increase in cash in the period | — | — | 4.2 | — | 4.2 | |||||||||||
Registered number: 3768265 | 152 |
Avecia Group plc
20-F
Year ended December 31, 2003
Notes to the consolidated financial statements (continued)
| 35 | Condensed Financial Statements (continued) |
Cash flow statement (continued) |
| For the year ended December 31, 2001 | ||||||||||||||||
| Avecia Group plc | Avecia Corporation Limited | Other subsidiaries | Consolidation adjustments | Total | ||||||||||||
| Cash inflow from operating activities | — | — | 120.5 | — | 120.5 | |||||||||||
| Dividends from joint ventures | — | — | 2.9 | — | 2.9 | |||||||||||
| Returns on investments and servicing of finance | — | — | (73.3 | ) | — | (73.3 | ) | |||||||||
| Taxation | — | — | (7.7 | ) | — | (7.7 | ) | |||||||||
| Capital expenditure and financial investment | — | — | (62.1 | ) | — | (62.1 | ) | |||||||||
| Acquisitions and disposals | — | — | 31.1 | — | 31.1 | |||||||||||
| Cash outflow before financing | — | — | 11.4 | — | 11.4 | |||||||||||
| Financing | — | — | (20.3 | ) | — | (20.3 | ) | |||||||||
| Decrease) in cash in the period | — | — | (8.9 | ) | — | (8.9 | ) | |||||||||
| US GAAP adjustments | — | — | — | — | — | |||||||||||
| US GAAP (decrease) in cash in the period | — | — | (8.9 | ) | — | (8.9 | ) | |||||||||
The other notes to these financial statements provide additional information relevant to this note.
Registered number: 3768265 | 153 |
Avecia Group plc
20-F
Year ended December 31, 2003
Exhibit Index |
Registered number: 3768265 | 154 |
