[Avecia logo]
Avecia Group plc
PO Box 42 Hexagon House
Blackley Manchester M9 8ZS
Tel : +44 (0)161 740 1460
Fax : +44 (0)161 795 6005
www.avecia.com
Mr Rufus Decker
Accounting Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0303
Our Ref: Direct Line: Direct Fax: E-mail: Date:
0161 721 2396 0161 721 5220 derrick.nicholson@avecia.com 3 August 2005
Dear Mr Decker
Avecia Group plc
Form 20-F for the fiscal year ended December 31, 2004 (File No. 333-11268)
--------------------------------------------------------------------------
We refer to the Staff's comment letter dated July 5, 2005, relating to
the Form 20-F for the fiscal year ended December 31, 2004 (the "Form 20-F") of
Avecia Group plc ("Avecia"). Set forth below in detail are the responses to the
Staff's comments, which have been provided in each case following the text of
the comment in the Staff's letter of July 5, 2005.
All references to page numbers in this letter refer to the page numbers
of the Form 20-F as filed with the Commission on May 18, 2005.
Form 20-F for the fiscal year ended December 31, 2004
- -----------------------------------------------------
General
- -------
1. Where a comment below requests additional disclosures or other revisions,
please show us in your response what the revisions will look like. These
revisions may be included in your future filings. Some of our comments
refer to US GAAP literature. If your accounting under IFRS differs from
your accounting under US GAAP, please also show us the additional
disclosures that will be included in your US GAAP reconciliation note.
Response
Avecia appreciates the Staff's comment and will include the revisions set
forth in this letter in future filings.
Item 5 - Operating and Financial Review and Prospects, page 24
- --------------------------------------------------------------
Financial Results, page 25
- --------------------------
2. You discuss the business reasons for changes between periods in your
financial statement line items. However, where there is more than one
business reason identified as contributing to a change, you should quantify
the incremental impact of each individual business reason discussed if
practicable. Please also discuss business reasons for
Avecia Group plc. Registered in England No 3768265.
Registered Office: PO Box 42, Hexagon House, Blackley, Manchester M9 8ZS.
2 3 August 2005
changes in your other financial statement line items such as operating
costs, exceptional operating costs, and other operating income.
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex A to this letter (additional disclosure underlined).
Aggregate Contractual Arrangements, page 35
- -------------------------------------------
3. Please revise your table of contractual cash obligations to include
estimated interest payments on your debt, planned funding of pension
benefit obligations and estimated payments under your interest rate swaps
and caps and foreign currency contracts. Because the table is aimed at
increasing transparency of cash flow, we believe these payments should be
included in the table. Please also disclose any assumptions you made to
derive these amounts. Please refer to note 46 of SEC Release 33-8350.
Response
For future filings, Avecia will amend its table of contractual cash
obligations in the manner set forth in Annex B to this letter (additional
disclosure underlined).
Item 9 - The Offer and Listing, page 40
- ---------------------------------------
4. Please disclose the annual high and low market prices for the five most
recent full financial years pursuant to Item 9A 4(a) of Form 20-F.
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex C to this letter (additional disclosure underlined).
Item 15 - Controls and Procedures, page 54
- ------------------------------------------
5. You indicate that your Chief Executive Officer and Chief Financial Officer
concluded that your disclosure controls and procedures were effective in
timely identifying material information potentially required to be included
in your SEC filings. Please revise your disclosure to state your conclusion
while providing the complete definition of disclosure controls and
procedures, or alternatively, state that your disclosure controls and
procedures are effective, or not effective, without providing any part of
the definition of disclosure controls and procedures that is included in
Exchange Act Rule 13a-15(e).
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex D to this letter (additional disclosure underlined).
Financial Statements
- --------------------
Note 2 - Accounting Policies, page 65
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Investments, page 65
- --------------------
3 3 August 2005
6. Please provide us with the significance tests required by Rule 3-09 of
Regulation S-X for Image Polymers Europe and Image Polymers Company,
individually and in combination with other 50% or less owned entities, for
each period presented.
Response
Please find the relevant significance test below.
Test 1 - % of investment to total assets
2004 % of Total 2003 % of Total 2002 % of Total
GBPM Assets GBPM Assets GBPM Assets
Value of Investments
Image Polymers Europe 5.133 0.8% 5.783 0.7% 5.984 0.6%
Image Polymers Company 2.810 0.4% 15.764 1.9% 15.748 1.6%
---------------------------------------------------------------------------
Combined 7.943 1.2% 21.547 2.6% 21.732 2.1%
===========================================================================
Total assets per US GAAP 666.70 838.30 1,016.00
Test 2 - Proportionate share of total assets
--------------------------------------------
Not required
Test 3 - Equity in income from continuing operations
----------------------------------------------------
2004 % of Income 2003 % of Income 2002 % of Income
GBPM GBPM GBPM
Income
Image Polymers Europe 0.427 1.0% 0.996 -0.7% 0.867 -1.5%
Image Polymers Company 0.687 1.6% 1.681 -1.1% 2.367 -4.1%
---------------------------------------------------------------------------
Combined 1.114 2.6% 2.677 -1.8% 3.234 -5.7%
===========================================================================
Income from continuing operations 42.40 -147.700 -54.000
Adjusted income from continuing operations -150.377 -57.234
Note - Figures in bold are ones used for test
Note 4 - Group Operating profit, page 78
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7. Although your restructuring costs are unallocated, these restructuring
activities relate to specific segments. SFAS 146 requires that you
disclose, for each reportable segment, the total amount of costs
expected to be incurred in connection with the activity, the amount
incurred in the period, and the cumulative amount incurred to date, net
of any adjustments to the liability. Please provide the required
disclosures in a tabular format supplemented with explanation for any
adjustments to related liabilities. Please refer to paragraph 20(d) of
SFAS 146.
4 3 August 2005
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex E to this letter (additional disclosure underlined).
Note 24 - Contingent Liabilities and Contingent Assets, page 114
- ----------------------------------------------------------------
Environmental, page 114
- -----------------------
8. You indicate that the ultimate requirement for remediation work and its
costs are difficult to estimate. Please disclose the impact of SFAS 143 and
any significant differences between UK GAAP and US GAAP.
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex F to this letter (additional disclosure underlined).
9. You state that you believe the outcome of environmental matters will not
have a material effect on your financial position. Please revise your
disclosure to clarify whether you believe outstanding environmental matters
will have a material effect on cash flows or results of operations. Please
also similarly revise your discussion of litigation and other claims.
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex F to this letter (additional disclosure underlined).
10. If true, please confirm that additional losses related to environmental
matters, in total and for each site individually, are not reasonably
possible. If not, please revise your discussion to include each of the
disclosures required by paragraph 10 of SFAS 5 and question 2 in SAB Topic
5:Y.
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex F to this letter (additional disclosure underlined).
Note 26 - Pension Scheme, page 117
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11. Please provide the disclosures required by paragraph 5 of SFAS 132(R),
including a description of your investment strategy and target allocations
for each scheme and benefits expected to be paid in the next five fiscal
years and in the aggregate for the five years thereafter. Please refer to
paragraph 5 subparts (d)2 and (e)-(f) of SFAS 132(R).
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex G to this letter (additional disclosure underlined).
5 3 August 2005
Note 33 - Difference Between UK and US Accounting Principles, page 131
- ----------------------------------------------------------------------
Purchase Accounting Adjustments (Goodwill and Intangibles), page 132
- --------------------------------------------------------------------
12. Note 3 does not allocate goodwill to reportable segments. Please disclose
US GAAP goodwill in total and for each reportable segment and disclose any
significant changes in the allocation of goodwill by reportable segment. If
any portion of goodwill has not yet been allocated to a reporting unit,
please disclose the unallocated amount and the reasons that amount has not
been allocated. See paragraph 45 of SFAS 142.
Response
For future filings, Avecia will amend its disclosure in the manner set
forth in Annex H to this letter. There is no amount of goodwill that
remains unallocated and there have been no significant changes in the
allocation of goodwill by reportable segment in the periods shown.
13. Please provide us with additional information to help us understand your
conclusion that goodwill related to the biotechnology and chemicals
segments is not impaired in light of their recent operating losses.
Response
The estimated fair values of our reporting units are measured by reference
to the discounted future net cash flows expected to be generated by them.
For our Biotechnology segment the discounted future cash flows expected
from this segment exceeded the net carrying value of assets, including
goodwill. This reflects our current expectations that this segment will
generate positive cash flows in the future, compared to their recent
operating losses. There is currently no goodwill relating to the Chemicals
segment, due to the fact that previous impairment tests have resulted in a
write-off of the original goodwill balance.
Note 34 - Condensed Financial Statements, page 139
- --------------------------------------------------
14. If true, please confirm to us and revise your disclosures to clarify that
your guarantor subsidiaries are 100% owned as defined by Rule 3-10(h)(1) of
Regulation S-X. Please note that this definition is different than the term
wholly-owned, as defined by Rule 1-02(aa) of Regulation S-X.
Response
We can confirm that our guarantor subsidiary is 100% owned as defined under
Rule 3-10 (h)(l) of Regulation S-X. For future filings, Avecia will amend
its disclosure in the manner set forth in Annex I to this letter
(additional disclosure underlined).
* * * * *
6 3 August 2005
Should the Staff have any questions or require any additional
information, please do not hesitate to contact me.
Very truly yours,
Derrick A. Nicholson
Chief Financial Officer
cc: Ernest Greene, Staff Accountant
Scott Watkinson, Staff Accountant
- United States Securities and Exchange Commission, Washington D.C
Duncan McLellan
Andrew Cree
- Avecia Group plc, Manchester, England
David Bills
Chris Martin
- KPMG Audit Plc, Manchester, England
David Beveridge
Peter Young
- Shearman & Sterling (London) LLP, London
Annex A
Year ended December 31, 2004 compared to the year ended December 31, 2003
The following table sets forth turnover for each of 2004 and 2003.
Year ended Year ended
December 31, December 31, Actual %
2004 2003 change
-----------------------------------------------------
(pound) million (pound) million
Businesses
Continuing operations:
Biotechnology 55.7 30.5 82.6
Chemicals 77.8 92.0 (15.4)
Electronic Materials 61.5 63.0 (2.4)
Central 5.1 0.1 n/a
Turnover from continuing operations 200.1 185.6 7.8
Discontinued operations: 207.1 299.6 (30.9)
Total historical turnover 407.2 485.2 (16.1)
The following table sets forth operating (loss)/ profit for each of 2004 and
2003:
Year ended Year ended Change in Change in
December 31, 2004 December 31, Operating Depreciation
2003 Profit & Amortization
-------------------------------------------------------------------------
(pound) million (pound) million (pound) million (pound) million
Businesses
Continuing operations:
Biotechnology (9.6) (17.2) 7.6 (2.6)
Chemicals (31.3) (70.1) 38.8 41.9
Electronic Materials 5.8 3.8 2.0 1.7
Other including unallocated cost (31.0) (46.4) 15.4 19.4
Restructuring and site closure costs (17.6) - (17.6) -
Operating (loss)/profit from continuing (83.7) (129.9) 46.2 60.4
operations
Discontinued operations 33.3 48.8 (15.5) 2.1
Total operating (loss)/profit (50.4) (81.1) 30.7 62.5
In Biotechnology sales were significantly improved in 2004 in DNA medicines by
(pound)15.5 million through manufacture and supply for a customer's phase III
clinical trial and potential launch program, whereas in 2003 an extensive
validation program had precluded manufacture and supply to that customer. Sales
in Biologics also improved by (pound)9.7 million as more customer manufacturing
programs were completed in 2004 in our small-scale Biologics manufacturing
facility than in 2003.
These increased sales helped to significantly reduce the operating losses in the
Biotechnology business, despite a significant increase in operating costs of
approximately (pound)8.0 million in Biologics as resource was increased to
operate the new large scale manufacturing plant, which commenced operating in
2004.
In Chemicals, sales in 2004 were reduced by (pound)12.9 million through the
impact of the disposal of the Intermediates and Stabilizers business in July
2003. Increased sales of Agrochemical Intermediates of (pound)5.3 million due to
increased customer demand in 2004 was offset by reduced customer demand in
Pharmaceutical Intermediates in 2004 amounting to a net reduction of (pound)4.4
million, primarily due to cessation of supply to one major customer during 2003.
Annex A
Operating losses in Chemicals were significantly lower by (pound)38.8 millionin
2004 due to the reduced impairment changes taken against assets ((pound)22.3
million in 2004 compared with (pound)55.9 million in 2003), and the consequent
reduction in annual depreciation charges of (pound)8.3 million in 2004. Reduced
margins arising from the reductions in sales described above of (pound)5.3
million were offset by reductions in fixed costs of (pound)2.2 million arising
from restructuring initiatives commenced in mid 2004.
Reductions in sales in Electronic Materials in 2004 were primarily attributable
to the effect of the significant weakening of the US Dollar against (pound)
Sterling during 2004 amounting to (pound)4.6 million, offset by increased
customer demand for new Electronic Materials products totaling (pound)3.1
million.
At operating profit level, the improvements in margins of (pound)0.9 million
arising from the increased sales described above and reductions in fixed costs
from efficiency improvements and restructuring totaling (pound)2.1 million
outweighed the adverse impacts of foreign currency changes of (pound)2.7
million.
Sales arising from our discontinued operations were reduced in 2004 by
(pound)97.7 milliondue to the impacts of the disposal of the Specialty Products
business early in 2004. These disposals had a similar impact on operating
profits of (pound)17.0 million. Within this group of businesses, NeoResins
managed to increase its sales by 3% ((pound)4.7 million) despite adverse
currency impacts of (pound)7.4 million due to increased demand for its products
from coatings and graphic arts customers totaling (pound)12.1 million. This
improvement in sales translated into improved operating profits of (pound)1.5
million for the NeoResins business despite adverse price pressure on raw
materials of (pound)0.9 million.
In total Operating Costs decreased by (pound)74.3 million in the twelve months
to the end of 2004. Of this reduction (pound)78.3 million was caused by the
impact of divesting businesses, and (pound)11.5 million of the reduction through
reduced depreciation and amortization of goodwill arising from the cumulative
impact of impairment adjustments taken in 2003 and 2004. The underlying increase
in operating costs of ongoing businesses of (pound)15.5 million is primarily
attributable to the investment in resource and other increased operating costs
of the new large scale manufacturing operations in the Biologics business.
Exceptional operating cost reduced from (pound)69.3 million in 2003 to
(pound)39.9 million in 2004. Impairment charges of Goodwill and Tangible Assets
reduced by (pound)47.0 million, while charges were taken in 2004 for
restructuring ((pound) 15.9 million) and provisions taken for the costs of
onerous contracts ((pound)1.7 million).
Other operating income increased from (pound)4.1 million in 2003 to (pound)9.1
million in 2004 due to new licensing contracts agreed with customers
(approximately (pound)2 million) and profits arising on the sale of assets
(approximately (pound)3 million).
Annex B
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 1-3 years 3-5 years More than 5
year years
Long term debt obligations 353.8 75.0 - 278.8 -
Fixed Interest obligations 73.8 13.5 27.0 27.0 6.3
Pension Obligations 49.7 5.0 10.4 10.9 23.4
Capital lease obligations 4.3 0.7 1.2 1.4 1.0
Operating lease 2.7 0.7 0.8 0.8 0.4
obligations
Purchase obligations 5.3 5.3 - - -
Hedging Payments 24.8 24.8
Total 514.4 125.0 39.4 318.9 31.1
Purchase obligations represent purchase commitments in respect of capital
expenditure. Pension Obligations represents additional funding agreed with the
UK Scheme Actuary to reduce the current deficit of the UK Scheme over the next
nine years. This level of contributions may vary depending on the investment
performance of the Fund. In addition the Group is likely to contribute
approximately (pound)9 million per annum to its UK and US pension schemes to
cover each year's service cost, assuming that the active membership of these
Schemes continues as at present. These outflows are not included in the above
table. Liabilities relating to pensions and post-retirement benefits are set out
in Note 26 to the financial statements. Hedging Payments represents obligations
under outstanding foreign currency contracts. In addition the group has
(pound)3.5 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.
Annex C
Item 9 The offer and listing
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, 2004 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, 2000 103.25 93.50
Year ending December 31, 2001 105.75 93.25
Year ending December 31, 2002 104.0 79.4
Year ending December 31, 2003 93.0 79.4
Year ending December 31, 2004 102.6 70.3
Quarterly high and low market prices
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
Quarter ending June 30, 2004 87.8 70.3
Quarter ending September 30, 2004 86.9 72.6
Quarter ending December 31, 2004 102.6 87.4
Quarter ending March 31, 2005 105.4 101.9
Monthly high and low market prices
October 2004 94.5 87.4
November 2004 94.4 92.6
December 2004 102.6 93.1
January 2005 105.4 101.9
February 2005 105.4 104.1
March 2005 105.1 103.0
Annex D
Item 15 Controls and Procedures
Disclosure Controls and Procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
As of the end of the period covered by this Form 20-F, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in United States Securities Exchange Act of 1934, as
amended, Rule 13a-15(e)). Based on the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our 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, 2004 that have materially affected, or are reasonably likely to
materially affect, the Group's internal control over financial reporting.
Annex E
Exceptional Operating Costs
Restructuring and Site Closure Costs
----------------------------------------------------------------------------------------------------
Chemicals Biotech Electronic Discontinued Other Total
-nology Materials Operations
----------------------------------------------------------------------------------------------------
(pound) million (pound) million (pound) million (pound) million (pound) million (pound) million
2002
Charge 7.3 1.1 0.7 - 2.0 11.1
Utilisation - (0.1) - - - (0.1)
----- ----- ----- ----- ----- ------
End of period 7.3 1.0 0.7 - 2.0 11.0
===== ===== ===== ===== ===== ======
2003
Beginning of period 7.3 1.0 0.7 - 2.0 11.0
Charge - - - - - -
Utilisation (7.3) (0.9) (0.7) - (2.0) (10.9)
----- ----- ----- ----- ----- ------
End of period - 0.1 - - - 0.1
===== ===== ===== ===== ===== ======
2004
Beginning of period - 0.1 - - - 0.1
Charge 9.1 0.1 0.9 - 5.8 15.9
Utilisation (3.5) (0.2) (0.4) - (2.5) (6.6)
----- ----- ----- ----- ----- ------
End of period 5.6 - 0.5 - 3.3 9.4
===== ===== ===== ===== ===== ======
Unallocated restructuring costs represent the costs related to severance and
other charges arising from headcount reductions in Headquarters and Central
Functional departments.
Annex F
24 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, cash flows, or results of operations as shown in these
consolidated financial statements.
The ultimate requirement for remediation work and its cost are difficult to
estimate, due to such factors as the unknown extent and nature of possible
contamination, the timing and extent of any corrective actions required which
might be required in respect of such contamination, the determination of the
Group's liability in proportion to other responsible third parties, the extent
to which any costs are recoverable under insurance or from third parties,
changing governmental regulations and legal standards regarding liability, and
evolving technologies for handling site remediation and restoration. 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
reasonably estimable, provision has been made in the financial statements.
In August 2001 the FASB issued Statement of Financial Accounting Standard no.
143 "Accounting For Asset Retirement Obligations" (SFAS 143). SFAS143 addresses
the financial reporting and obligations associated with the retirement of
tangible long-term assets and associated retirement costs. Adoption of SFAS 143
has had no material impact on the Group's 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
Annex F
readily foreseen, the directors believe that they will be disposed of without
material effect on the financial position, cash flows, or results of operations
as shown in these consolidated financial statements.
Annex G
26 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.
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 (pound)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 (pound)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. The target allocation of
investments for the scheme is 75% equities, of which 35% are US equities, and
25% fixed interest securities.
The benefits expected to be paid under the scheme are as follows:
- ----------------------------------------------------
(pound) million
- ----------------------------------------------------
In one year 2.5
- ----------------------------------------------------
Between one and two years 2.5
- ----------------------------------------------------
Between two and three years 2.8
- ----------------------------------------------------
Between three and four years 3.0
- ----------------------------------------------------
Between four and five years 3.4
- ----------------------------------------------------
Between five and ten years 37.3
- ----------------------------------------------------
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.
Annex G
During the year $3.5 million was funded into the plan's trust. It is anticipated
that amounts will also be funded in 2005. Employer contributions are based on
the minimum funding requirements of ERISA.
Avecia's policy for the US pension scheme is to achieve a long term return
greater than actuarial assumptions, taking account of the risks and return
expectations of each asset class appropriate to the plan, while diversifying
between asset classes to optimise investment performance and reduce risk. The
target allocation of investments for the scheme is 60% equities, of which 50%
are US equities, and 40% fixed interest securities.
The benefits expected to be paid under the scheme are as follows:
- ----------------------------------------------------
US$ million
- ----------------------------------------------------
In one year 0.4
- ----------------------------------------------------
Between one and two years 0.5
- ----------------------------------------------------
Between two and three years 0.6
- ----------------------------------------------------
Between three and four years 0.7
- ----------------------------------------------------
Between four and five years 0.7
- ----------------------------------------------------
Between five and ten years 4.6
- ----------------------------------------------------
Annex H
US GAAP Goodwill
As at As at
December 31, 2004 December 31, 2003
GBPM GBPM
Chemicals - -
Biotechnology 42.0 42.8
Electronic Materials 33.6 44.9
Discontinued Operations 196.5 283.9
Total 272.1 371.6
Changes between years arise through impairment charges, and disposal of
operations
Annex I
34 Condensed financial statements
Avecia Corporation Limited is a 100% 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.