IQE Regulatory News (IQE)

30 Aug 2006 07:02

IQE PLC30 August 2006 For Immediate Release 30 August 2006 IQE plc Interim Results for the Half Year Ended 30 June 2006 "Continuing Growth for 2006" IQE plc (the Group), the leading global supplier of customised wafer productsand outsourced wafer services to the semiconductor industry, is pleased toannounce its Group Interim Results for the half year ended 30 June 2006. KEY POINTS • Half year revenues of £14.591m up 30.0% compared with sales of £11.225m in H2/2005 and up 51.0% compared with sales of £9.665m in H1/2005 • Gross profit of £1.313m compared with gross loss of £0.194m in H2/2005 (gross profit of £1.543m after crediting exceptional items with no cash impact of £1.737m) and gross loss of £0.599m in H1/2005 • Operating loss of £1.450m reduced by 50.9% compared with operating loss of £2.956m in H2/2005 (operating loss of £1.219m after crediting exceptional items with no cash impact of £1.737m) and operating loss of £3.110m in H1/ 2005 • EBITDA loss of £0.768m, as calculated in the Consolidated Profit and Loss Account, reduced by 68.8% compared with EBITDA loss of £2.463m in H2/ 2005 and EBITDA loss of £ 2.043m in H1/2005 as a result of increased revenues, tight cost control, cost reduction measures and continued improvements in operational efficiencies • EBITDA improvement of £1.695m compared with H2/2005 on revenue increase of £3.366m demonstrates the high level of operational leverage of the G roup's business model • Net cash outflow from operating activities of £3.435m increased by 76.6% compared with net cash outflow from operating activities of £1.945m in H2/ 2005 and closing half year end cash at £1.193m (H2/2005: £6.245m) due mainly to working capital increases as a result of strongly increasing revenues • All markets for the Group's products showing solid, sustainable growth, with the wireless marketplace particularly strong • Won an additional two year extension of effective exclusivity to largest outsource contract • In August, the Group completed the acquisition of the Electronic Materials Division of EMCORE Inc., making it the leading outsource supplier of advanced wafers to the global semiconductor industry. The 2005 results shown above have been restated for the adoption of FRS 20 whereapplicable Commenting on the results, Dr Drew Nelson, President and CEO, said "As expected, the first half of 2006 has demonstrated continuing growth in allkey market sectors. We have continued to build on our reputation for technicalexcellence and highly cost effective outsourcing as evidenced by the two yearextension of exclusivity to our largest outsource contract. With the recentacquisition of EMD providing the Group with a complete portfolio of advancedwafer products, we will take full advantage of the strong market conditions " Contacts: IQE plc :Drew Nelson +44 (0)2920-839400Stuart Hall +44 (0)2920-839400Chris Meadows +44 (0)2920-839400Buchanan Communications :Tim Thompson/Nicola Cronk +44 (0)2074-665000Noble and Company :John Llewellyn-Lloyd + 44 (0)2077-632200Graeme Bayley + 44 (0)2077-632200 PRELIMINARY RESULTS 2006 1. INTRODUCTION The Group has earned a reputation as a world leading outsource supplier ofadvanced wafer products and wafer foundry services to the semiconductor industryand has continued to build on its leading position to secure new orders andcontracts during the last six months, including a two year extension ofeffective exclusivity with one of its largest outsource customers. Key marketdrivers for the Group's products continue to be leading-edge consumer,communication and computing applications including mobile phones, satellitenavigation devices, personal computers, telecommunication networks, LEDtechnologies, PDAs, Optical storage (CD/DVD) systems, laser based components anddevices, and a wide variety of automotive, aerospace, industrial and medicalapplications. The Group's large investment in state-of-the-art manufacturing tools andfacilities over the last few years, coupled with the recent acquisition of theEMD (IQE RF) business from EMCORE Inc, make it the only supplier worldwide ableto provide a full range of advanced epi-wafer products using all three leadingtechnology platforms (MOVPE, MBE and CVD) as well as providing a variety ofadvanced substrates. In addition, the Group offers unique and innovative tailormade outsourcing solutions to each customer, enabling considerable commercialbenefits to be realised. This makes the Group an ideal outsource partner to theindustry. Market conditions for semiconductor products improved considerably over the lasttwelve months and virtually all of the markets addressed by the Group's productsare showing considerable strength. This is particularly true of the wirelessmarketplace and shows no signs of abating with the introduction of new wirelesstechnologies such as WiFi, Wireless LAN and WiMax. 2. OVERVIEW Sales revenues increased strongly during the first half of 2006, up 30.0%sequentially and up 51.0% year on year to £14.591m (H2/2005: £11.225m, H1/2005:£9.665m). In addition to a number of contracts and qualifications that came tofruition, a major outsource deal that was secured in November 2004 was extendedby a further two years, and additional contracts have been secured for productsfrom the Group's silicon division. Several other contracts are in various stagesof negotiation. Average selling prices remained reasonably stable in each of the Group'sdivisions during the first half year. As reported in the pre-AGM trading statement, the weakening of the US dollar inthe latter part of H1/2006 has had an impact on our sales revenue, but theimpact on operating results is somewhat less than it would have been in thepast, because of the natural hedge provided by the higher percentage of the costbase now being denominated in US dollars. Notwithstanding this, we continue tocontrol our costs very rigorously and implement new cost saving measureswherever practicable. The acquisition of EMCORE'S Electronic Materials Division announced followingthe end of H1/2006 was approved by shareholders at an EGM held in Cardiff on 15August and work is well underway to integrate the new facility into the Group.The immediate impact of the acquisition is to place the Group as the leadingoutsource materials supplier to the wireless sector and further enhances itsposition as the leading supplier of advanced wafer products to the globalsemiconductor marketplace. 3. RESULTS The Group's operating results are detailed in the Consolidated Profit and LossAccount and Consolidated Cash Flow Statement. H1/2006 sales were £14.591m (H2/2005: £11.225m), which represented a 30.0%increase compared with H2/2005 and a 51.0% increase compared with H1/2005 mainlydue to increased wafer shipments. The average dollar exchange rate worsenedslightly in H1/2006 to $1.7752/£ (H2/2005: $1.7591/£). The Group achieved a gross profit in H1/2006 of £1.313m after exceptionalcredits of £0.255m (H2/2005: gross profit £1.543m after exceptional credits of£1.737m). The exceptional credit in H1/2006 related to the release of an onerouslease provision which is no longer required. The exceptional credit in H2/2005related to the write back of a trade accrual which the Directors no longerconsidered a requirement. Research and development costs in H1/2006 were £0.106m (H2/2005: £0.285m), whichrepresented 0.7% of sales (H2/2005: 2.5% of sales). All research and developmentcosts were focussed on only the most essential and cost effective programs andwere expensed in the period in line with the Group's accounting policy. Selling, general and administration costs increased by £0.181m in the period to£2.658m (H2/2005: £2.477m), which represented 18.2% of sales (H2/2005: 22.1%)due to a foreign exchange loss of £0.210m (H2/2005: gain £0.117m). EBITDA loss in H1/2006 was £0.768m (H2/2005: EBITDA loss £2.463m), whichrepresented a 68.8% improvement compared with H2/2005 and a 62.4% reductioncompared with H1/2005. In each case this was mainly due to increased revenues. Cash management continued to be a priority for the Group throughout the periodwith the focus firmly concentrated on reducing operating costs and carefullymanaging working capital, which comprises stocks, debtors and creditors.However, as a result of a 30.0% increase in revenues compared with H2/2005coupled with an inventory build up at IQE Inc to service customers' managedinventory requirements, working capital increased during the period by £2.756m(H2/2005: reduction £0.369m) as shown in the Reconciliation of Operating Loss toNet Cash Outflow from Operating Activities. This resulted in an operating cashoutflow for H1/2006 of £3.435m (H2/2005: outflow £1.945m). Capital expenditure in H1/2006 was £1.337m (H2/2005: £0.570m) and mainlycomprised the purchase of an additional reactor at IQE Inc. Net of assetdisposals, capital expenditure totalled £0.817m (H2/2005 £0.570m). Loan repayments in H1/2006 increased to £0.730m (H2/2005: £0.141m) as a resultof repayments on the fixed term loan of £3.000m which the Group borrowed fromits bankers shortly before the end of 2005. Total borrowings at the half yearend were £4.619m (H2/2005: £5.385m). Gross cash on hand at the half year end was£1.193m (H2/2005: £6.245m) and net borrowings were £3.426m (H2/2005: net funds£0.860m). As at the half year end, the Group had not drawn down any of itsoverdraft facility from its bankers of £2.000m. 4. TRADING PROSPECTS The Group entered 2006 with its largest order book for several years as a resultof strong market conditions and has continued to build on revenues, showingfurther strong growth during the first half of 2006. As previously reported, we are moving firmly into a situation in the marketwhere outsourcing is featuring more prominently in many companies' strategicconsiderations because the semiconductor industry is now becoming capacityconstrained in several areas. We see this as an advantage to the Group as ourbreadth of product range, large scale production capacity and economies of scaleare key considerations in attracting new business. We therefore look forward tocontinued strong growth as the Group's capacity utilisation continues toincrease and the industry continues to expand. The addition of the former EMD (IQE RF) of Emcore Inc adds to the Group'sportfolio of technology platforms and products and firmly establishes IQE as theglobal leader in its field. Dr Drew Nelson, OBE, FREng, D EngPresident and Chief ExecutiveIQE plc 29 August 2006 IQE GROUPINTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2006 29-Aug-06 Restated Restated RestatedCONSOLIDATED PROFIT 6 mths to 6 mths to 6 mths to 12 mths toAND LOSS ACCOUNT 30 Jun 2006 31 Dec 2005 30 Jun 2005 31 Dec 2005(All figures GBP000s) Note Unaudited Unaudited Unaudited Audited Turnover from ContinuingOperations 14,591 11,225 9,665 20,890Cost of Sales (includingexceptional items) 2 (13,279) (9,682) (10,224) (19,905) -------- -------- -------- --------Gross Profit/(Loss) 1,313 1,543 (559) 984Gross Profit/(Loss) % 9.0 13.7 (5.8) 4.7Operating Expenses : Distribution Expenses (700) (668) (870) (1,538) Administrative Expenses :Research/Development (106) (285) (215) (500)Other Administrative Expenses (1,958) (1,809) (1,466) (3,275) -------- -------- -------- --------Administrative Expenses (2,063) (2,093) (1,681) (3,774) -------- -------- -------- --------Operating Expenses (2,763) (2,761) (2,551) (5,312) -------- --------- -------- -------- -------- --------- -------- --------Operating Loss from ContinuingOperations (1,450) (1,219) (3,110) (4,328)Operating Loss % from ContinuingOperations (9.9) (10.9) (32.2) (20.7)Interest (Paid)/Received (121) (21) 57 35 -------- -------- -------- --------Loss on Ordinary Activities beforeTaxation (1,571) (1,240) (3,053) (4,293)Loss % (10.8) (11.0) (31.6) (20.6)Current Taxation 0 (0) 0 (0)Deferred Taxation 0 (0) 0 (0) -------- -------- -------- -------- Retained Loss for the Period (1,571) (1,240) (3,053) (4,293) -------- -------- -------- -------- Basic Loss Pence per Share 4 (0.50) (0.39) (0.97) (1.36)Diluted Loss Pence per Share 4 (0.50) (0.39) (0.97) (1.36) Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) have been calculated as follows : Loss for the Period (1,571) (1,240) (3,053) (4,293)Interest Paid/(Received) 121 21 (57) (35)Current and Deferred Taxation 0 0 0 0Depreciation 682 492 1,067 1,559Exceptional Items with No Cash Impact 0 (1,737) 0 (1,737) -------- -------- -------- -------- Earnings before Interest/ TaxesDepreciation and Amortisation (768) (2,463) (2,043) (4,506) -------- -------- -------- -------- IQE GROUPINTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2006 29-Aug-06 Restated Restated Restated 6 mths to 6 mths to 6 mths to 12 mths to 30 Jun 2006 31 Dec 2005 30 Jun 2005 31 Dec 2005(All figures GBP000s) Unaudited Unaudited Unaudited Audited CONSOLIDATED STATEMENT OF TOTAL RECOGNISED LOSSES Loss for the Period (1,571) (1,240) (3,053) (4,293)CurrencyTranslationDifferences onForeignCurrency NetInvestments (313) 214 134 348 -------- -------- -------- -------- Total RecognisedLosses Relating tothe Period (1,885) (1,026) (2,919) (3,945) -------- -------- -------- -------- MOVEMENT IN GROUP SHAREHOLDERS' FUNDS Brought ForwardBalance 12,322 13,136 15,891 15,891 Share Option CostsCredited toReserves 170 168 141 309Shares Issued netof Issue Costs 51 44 22 66Foreign ExchangeTranslationDifferences (313) 214 134 348Loss Attributableto Members of theGroup (1,571) (1,240) (3,053) (4,293) -------- -------- -------- --------Closing Balance 10,659 12,322 13,136 12,322 -------- -------- -------- -------- The comparatives have been restated for the adoption of FRS20 "Share BasedPayment" - see Note 3 IQE GROUPINTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2006 29-Aug-06 Restated Restated Restated As At As At As At As AtCONSOLIDATED BALANCE SHEET 30 Jun 31 Dec 30 Jun 31 Dec 2005 2006 2005 2005(All figures GBP000s) Unaudited Unaudited Unaudited Audited Fixed Assets 8,833 8,816 8,588 8,816Current Assets : Stocks 5,592 4,312 4,191 4,312 Debtors 4,973 3,404 3,388 3,404 Cash at Bank and in Hand 1,193 6,245 5,928 6,245 ------- -------- -------- -------- Total Current Assets 11,758 13,961 13,507 13,961 Creditors -AmountsFalling Duewithin OneYear (6,601) (6,355) (6,433) (6,355) ------- -------- -------- -------- Net CurrentAssets 5,157 7,606 7,074 7,606 ------- -------- -------- -------- Total Assetsless CurrentLiabilities 13,991 16,422 15,662 16,422 Creditors - Amounts Falling Due after More than One Year : Deferred Income (179) (199) (218) (199) Long Term Borrowings (3,152) (3,646) (2,042) (3,646) ------- -------- -------- -------- Total Creditors - Amounts Falling Due after More than One Year (3,331) (3,845) (2,260) (3,845)Provision forLiabilitiesand Charges 0 (255) (266) (255) ------- -------- -------- -------- Net Assets 10,660 12,322 13,136 12,322 ------- -------- -------- -------- Capital and Reserves : Called-up Share Capital 3,169 3,163 3,159 3,163 Share Premium 157,314 157,263 157,216 157,263 Shares to be Issued 202 209 216 209 Investment in Own Shares (13) (13) (13) (13) Merger Reserve (605) (605) (605) (605) Profit and Loss Account (149,165) (147,594) (146,354) (147,594) Exchange Rate Reserve (773) (460) (674) (460) Other Reserves 530 359 191 359 ------- -------- -------- --------Total EquityShareholders'Funds 10,660 12,322 13,136 12,322 ------- -------- -------- -------- Approved by the Directors of IQE plc on 29 August 2006 IQE GROUPINTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2006 29-Aug-06 6 mths to 6 mths to 6 mths to 12 mths toCONSOLIDATED CASH FLOW STATEMENT 30 Jun 31 Dec 30 Jun 31 Dec 2005 2006 2005 2005(All figures GBP000s) Unaudited Unaudited Unaudited Audited --------- --------- --------- -------- Net CashOutflow fromOperatingActivities (3,435) (1,945) (3,118) (5,062) Returns on Investment and Servicing of Finance : Interest (Paid)/Received (121) (21) 57 35Taxation : UK and US corporation taxes 0 0 0 0Capital Expenditure : Payments to Acquire Fixed Assets (1,337) (570) (289) (859) Proceeds from Sale of Fixed Assets 520 0 0 0 -------- -------- -------- --------Net CashOutflow beforeManagement ofLiquidResources andFinancing (4,373) (2,536) (3,350) (5,886) Management ofLiquidResources 4,601 70 4,137 4,207 -------- -------- -------- -------- 228 (2,466) 787 (1,679)Financing Issues of Ordinary Share Capital 51 44 22 66 Loans (Repaid)/Received (730) 2,859 (116) 2,743 Leases Repaid 0 (50) (551) (601) -------- -------- -------- -------- Net Cash (Outflow)/Inflow from Financing (679) 2,853 (645) 2,208 -------- -------- -------- --------(Decrease)/Increase in Cash (450) 387 142 529 -------- -------- -------- -------- IQE GROUPINTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2006 29-Aug-06 RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES 6 mths to Restated Restated 12 mths to 6 mths to 6 mths to 30 Jun 31 Dec 30 Jun 31 Dec 2005 2006 2005 2005(All figures GBP000s) Unaudited Unaudited Unaudited Audited Operating Loss (1,450) (1,219) (3,110) (4,328) Depreciation of Fixed Assets 682 492 1,067 1,559(Gain)/Loss on Sale of FixedAssets (62) 1 0 1Movement in Stocks (1,280) (121) (759) (880)Movement in Debtors (1,569) (16) (784) (800)Movement in Creditors 93 506 416 922Exceptional Items 0 (1,737) 0 (1,737)Government Grants Released (19) (19) (389) (409)Government Grants Received 0 0 300 300Non-Cash Share Option Costs 170 168 141 309 -------- -------- -------- --------Net Cash Outflow from OperatingActivities (3,435) (1,945) (3,118) (5,062) -------- -------- -------- -------- IQE GROUPINTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2006 29-Aug-06 6 mths to 6 mths to 6 mths to 12 mths toRECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET (DEBT)/FUNDS 30 Jun 2006 31 Dec 2005 30 Jun 2005 31 Dec 2005(All figures GBP000s) Unaudited Unaudited Unaudited Audited (Decrease)/Increase inCash (450) 387 142 530 Management of LiquidResources (4,601) (70) (4,137) (4,207)Loans Repaid 730 141 116 257Leases Repaid 0 50 551 601 -------- -------- -------- --------Change in Net FundsResulting from CashFlows (4,321) 508 (3,328) (2,819) New Loans 0 (3,000) 0 (3,000) -------- -------- -------- --------Movement in Net Funds (4,321) (2,492) (3,328) (5,819) Opening Net Funds 860 3,387 6,763 6,763Exchange Differences 36 (35) (48) (84) -------- -------- -------- --------Net (Debt)/Funds (3,426) 860 3,387 860 -------- -------- -------- -------- IQE GROUPINTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2006 29-Aug-06 As At As At As At As AtANALYSIS OF NET (DEBT)/FUNDS 30 Jun 2006 31 Dec 2005 30 Jun 31 Dec 2005 2005(All figures GBP000s) Unaudited Unaudited Unaudited Audited Cash at Bank and in Hand 1,187 1,638 1,251 1,638Cash at Bank Accessiblebetween One and Seven Days 6 4,607 4,677 4,607 ------- -------- -------- --------Total Cash at Bank and inHand 1,193 6,245 5,928 6,245 Loans Due after more thanOne Year (3,151) (3,646) (2,042) (3,646)Loans Due within One Year (1,468) (1,739) (449) (1,739)Leases Due within One Year 0 0 (50) 0 ------- -------- -------- --------Total Borrowings (4,619) (5,385) (2,541) (5,385) ------- -------- -------- -------- Net (Debt)/Funds (3,426) 860 3,387 860 ------- -------- -------- -------- NOTES TO THE INTERIM RESULTS 1 ACCOUNTING POLICIES Basis of preparation The interim financial information has been prepared on the basis of the material accounting policies set out in the 2005 Annual Report and Accounts as amended for the adoption of FRS 20 "Share Based Payment" (see Note 3 below). The interim financial information was approved by the Board of Directors and Audit Committee on 29 August 2006. The financial information set out above does not constitute statutory accounts within the meaning of the Companies Act 1985. Comparative figures in the financial statements for the year ended 31 December 2005, other than as adjusted for the adoption of FRS 20, have been taken from the Group's audited statutory accounts on which PricewaterhouseCoopers LLP expressed an unqualified opinion The results for the six months to 30 June 2006, 31 December 2005 and 30 June 2005 are unaudited. The interim results statement will be announced to all shareholders on the London Stock Exchange and published on the Group's website on 30 August 2006. Copies will be available to members of the public upon application to the Company Secretary at Pascal Close, Cypress Drive, St Mellons, Cardiff CF3 0EG. Accounting convention The financial information is prepared under the historical cost convention and in accordance with applicable UK accounting standards, which have been applied on a consistent basis during the period under review except as detailed in Note 3. Basis of consolidation The financial information consolidates the financial statements of the Company and all of its subsidiaries.The acquisition of EPI Holdings Limited and IQE Inc (formerly Quantum Epitaxial Designs Inc) by IQE plc, a new holding Company established for that purpose, on 16 May 1999 has been accounted for under merger accounting whereby the financial information is disclosed as if the companies had always been part of the Group. The acquisition of IQE (Europe) Limited (formerly Epitaxial Products International Limited) and its subsidiary Epitaxial Products Inc by EPI Holdings Limited, a new Company established for that purpose, on 27 March 1996 and the acquisition of Wafer Technology International Limited and its subsidiary Wafer Technology Limited on 22 November 2000 have been accounted for under acquisition accounting, whereby these companies became part of the Group on the date of acquisition. Turnover Turnover represents amounts receivable for goods and services provided in the normal course of business net of value added tax and other sales related taxes. Turnover is recognised on despatch of goods. Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation and provision for impairment. Cost comprises all costs that are directly attributable to bringing the asset into working condition for its intended use, as defined by Financial Reporting Standard Number 15. Depreciation has been calculated so as to write down the cost of assets to their residual values over the following estimated useful economic lives. No depreciation is provided on land or assets yet to be brought into use. Freehold buildings 25 years Short leasehold improvements 5/27 years Plant and machinery 5/15 years Fixtures and fittings 4/5 years NOTES TO THE INTERIM RESULTS (cont) StocksStocks are stated at the lower of cost and net realisable value. Research and developmentResearch and development expenditure is fully written off when incurred. Foreign currencies Transactions in foreign currencies during the period are recorded at the rates ruling at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated into sterling at the rates ruling at the balance sheet date. All exchange differences are taken to the profit and loss account. The balance sheets of IQE Inc are translated into sterling at the closing rates of exchange for the period, while the profit and loss accounts are translated into sterling at the average rates of exchange for the period. The resulting translation differences are taken directly to reserves. Pension costs The Group operates defined contribution pension schemes. Contributions are charged in the profit and loss account as they become payable in accordance with the rules of the schemes. Government grants Government grants receivable in connection with expenditure on tangible fixed assets are accounted for as deferred income, which is credited to the profit and loss account by instalments over the expected useful economic life of the related assets on a basis consistent with the depreciation policy. Revenue grants for the reimbursement of costs incurred are deducted from the costs to which they related, in the period in which the costs are incurred. Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Group's taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. NOTES TO THE INTERIM RESULTS (cont) Leases Assets held under finance leases and hire purchase contracts are capitalised at their fair value on inception of the leases and depreciated over the shorter of the period of the lease and the estimated useful economic lives of the assets. The finance charges are allocated over the period of the lease in proportion to the capital amount outstanding and are charged to the profit and loss account. Operating lease rentals are charged to the profit and loss account in equal amounts over the lease term. Provision is made at the balance sheet date for the present value of future rentals under operating leases on vacated properties. Financial instruments The only derivative instruments utilised by the Group are forward exchange contracts. The Group does not enter into speculative derivative contracts. Forward exchange contracts are used for hedging purposes to alter the risk profile of an existing underlying exposure of the Group in line with the Group's risk management policies. 6 mths to 6 mths to 6 mths to 12 mths to 30 Jun 2006 31 Dec 2005 30 Jun 2005 31 Dec 2005 2 EXCEPTIONAL ITEMS Unaudited Unaudited Unaudited Audited GBP000s GBP000s GBP000s GBP000s Exceptional items comprise : Credited in cost of sales : Trade accrual 0 (1,737) 0 (1,737) Onerous lease provisions (255) 0 0 0 --------- --------- --------- --------- Exceptional items (255) (1,737) 0 (1,737) --------- --------- --------- --------- The exceptional credit in H1/2006 of £0.255m relates to the onerous lease provision in respect of a vacant property at IQE (Europe) Limited which has been released to the profit and loss account as the Group is no longer the tenant. The exceptional credit in H2/2005 of £1.737m related to the release of a trade accrual which the Directors considered to be no longer required. 3 SHARE BASED PAYMENT The Group has adopted FRS 20 "Share Based Payment" during the current period. The adoption of this standard represents a change in accounting policy, and the comparative figures for the six months ended 31 December 2005 and 30 June 2005 and the full year ended 31 December 2005 have been restated accordingly. The adoption of FRS 20 has resulted in an increase in employee costs of £170,000 during the six months ended 30 June 2006, £168,000 during the six months ended 31 December 2005 and £141,000 during the six months ended 30 June 2005. The impact for the full year ended 31 December 2005 is an increase in employee costs of £309,000. The charges recognised under FRS 20 represent the fair value of share options awarded by the Group since 7 November 2002 over the estimated vesting periods of the respective options. The options have been valued using the Black-Scholes option-pricing model. NOTES TO THE INTERIM RESULTS (cont) Restated Restated Restated 6 mths to 6 mths to 6 mths to 12 mths to 30 Jun 2006 31 Dec 2005 30 Jun 2005 31 Dec 2005 4 LOSS PER SHARE Unaudited Unaudited Unaudited Audited Loss for the Period GBP000s (1,571) (1,240) (3,053) (4,293) --------- --------- --------- --------- Weighted Average Number of Ordinary Shares 316,526,137 315,976,014 315,813,351 315,976,014 Diluted Share Options 6,919,658 3,580,904 5,735,597 6,919,658 --------- --------- --------- --------- Adjusted Weighted Average Number of Ordinary Shares 323,445,795 319,556,918 321,548,948 322,895,672 --------- --------- --------- --------- Basic Loss Pence per Share (0.50) (0.39) (0.97) (1.36) Diluted Loss Pence per Share (0.50) (0.39) (0.97) (1.36) Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares during the period. Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all dilutive potential ordinary shares. FRS 22 requires the presentation of diluted Loss Pence per Share when a company could be called upon to issue shares that would decrease net profit or increase net loss per share. For a loss-making company with outstanding share options and warrants, net loss per share would only be increased by the exercise of the out of the money options and warrants. Since it seems inappropriate to assume that option holders would act irrationally, no adjustment has been made to diluted Loss Pence per Share for out of the money share options and warrants. 5 CONTINGENT LIABILITY The Group has received a claim for approximately £1 million in respect of national insurance contributions in relation to share options that were issued in 1999. Having sought legal opinion, the Board remains robust in its opinion that the Group has meritorious defences to this claim. Accordingly, no provision has been made in these accounts. Independent review report to IQE Plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises a summarised profit and lossaccount, a statement of total gains and losses, summarised balance sheetinformation as at 30 June 2006, a summarised cash flow statement, comparativefigures and related notes. We have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The rules of theAlternative Investment Market require that the accounting policies andpresentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out inNote 1. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany and for no other purpose. We do not, in producing this report, accept orassume responsibility for any other purpose or to any other person to whom thisreport is shown or into whose hands it may come save where expressly agreed byour prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. PricewaterhouseCoopers LLPChartered Accountants and Registered AuditorsCardiff29 August 2006 This information is provided by RNS The company news service from the London Stock Exchange