Torotrak PLC Regulatory News (TRK)

28 Nov 2005 07:02

Torotrak PLC28 November 2005 Torotrak plc Interim results for the six months ended 30 September 2005 Torotrak plc announces its interim results for the six months ended 30 September2005. Highlights • Revenue at record levels: £1.1 million for the first half compared to £0.1 million in 2004 and £0.5 million for the full year 2005. • Infinitrak joint venture formed and operational. High volume production of IVT planned in outdoor power equipment market for 2006. • Torotrak to provide Infinitrak with approximately $2 million per annum in engineering services for the next three years. • Sale of freehold land and buildings completed in November 2005, cash proceeds of £3.5 million received after period end. • Significant reduction in operating costs implemented; strong ongoing cash position. Commenting on the results, Dick Elsy, Chief Executive, said: "The formation of Infinitrak is an exciting strategic development for Torotrak.We are partnered with a major global manufacturer and together we have shownthat IVT is capable of high-volume commercial exploitation. The work withinTorotrak to open up new markets has secured a product and market portfolio whichsupports the short, medium and long-term future of the business. This isreflected in our half-year results, with revenue at record levels." Enquiries: Dick Elsy, CEO, Torotrak plc ) on the day: 020 7307 5330Rebecca Joyce Finance director, Torotrak plc ) thereafter: 01772 900900 Media enquiries Steffan Williams/Mary Clark/Peter Curtain, Capital MSL 020 7307 5330 CHAIRMAN'S REVIEW In my first review as Chairman, I'm pleased to report a number of positivedevelopments for Torotrak. We announced earlier this month the formation of a new joint venture companywith MTD Holdings of Cleveland, Ohio ("MTD"). I can confirm that the company,Infinitrak LLC ("Infinitrak") is now operational. Torotrak has licensed thejoint venture to manufacture infinitely variable InfinitrakTM transmissions forthe outdoor power equipment ("OPE") market, which covers a wide range ofproducts from ride-on lawnmowers to compact tractors. This first commitment tolarge-scale manufacture establishes Torotrak's Infinitely Variable Transmission("IVT") as a high-volume production technology. Torotrak's breakthrough into this new global market reflects the continued drivethat we outlined in 2004 to broaden applications of IVT into a more diversecustomer base. The OPE market complements our existing strategic markets ofautomotive and off-highway. These three markets will deliver short, medium andlong-term revenues. In the short term, we will earn revenue from engineeringservices in all of our markets; in the medium term, from a share of the profitsof Infinitrak and the start of off-highway royalties; and, in the longer term,through our plans for high volume returns from automotive and growth inoff-highway and OPE. Commitment to production is the most important milestone for a technology andlicensing business and I am pleased that the structure and skills that we put inplace at board level have moved the business from one focused on the developmentof innovative technology to one firmly centred on commercial exploitation. Torotrak will continue to innovate to meet the evolving needs of its productioncustomers, but the principal task of proving IVT technology to these customershas been achieved. With this phase of development complete David Price, ourChief Technical Officer, feels that he has fulfilled his original objectives. Hehas decided to stand down from the board at the end of this year to look for newtechnical challenges. David will leave Torotrak with our best wishes and ourthanks for the great personal contribution he has made to the success of thetechnology and his outstanding leadership of the engineering team. It was also in response to the reduction in engineering development workloadthat we have considered the appropriate structure of the business for thefuture. We announced earlier this month that we would reduce the number ofpersonnel involved in areas such as prototype build, component design, workshopand administration with around 40 employees expected to be affected. All ofthese individuals have made important contributions to Torotrak's developmentand future success. We thank them and wish them well. The results this half-year validate our strategy to broaden our product andmarket portfolio. Record revenues include contributions from all three majormarkets. This, combined with the reduction in the company's cost base and astrong cash position, give the board clear visibility of the achievement of oneof our primary objectives, a cash neutral business. John GrantChairman28 November 2005 CHIEF EXECUTIVE'S REVIEW Outdoor Power Equipment ("OPE") The formation of Infinitrak has established Torotrak in the OPE market. Torotrakhas vested in this new joint venture exclusive global rights to IVT technologyfor the OPE market in the 0-25kw power range together with exclusive NorthAmerican rights in the 25-45kw power range, for compact tractors. These manufacturing and sales rights, valued at $5 million, are matched by cashand other contributions from MTD to fund initial investment and working capital. Infinitrak will build IVT transmissions and initially sell these directly to MTDfor inclusion in OPE products they manufacture. Production, planned to start in2006, is expected to exceed 100,000 units in the first full year. The robustbusiness plan starts with exclusive sales to MTD, giving the security of aguaranteed customer for Infinitrak's products. Sales of Infinitrak products tothird parties in the OPE market are planned from 2008. Torotrak and MTD have been working together for some months and we are alreadywell advanced with the engineering of Infinitrak's first products. Through ourwork together it became clear that we needed to pool our joint know-how toachieve profitable high volume manufacture of IVTs suitable for the OPE market.The combination of MTD's world class manufacturing expertise with Torotrak'sengineering skills has created a transmission technology ideally suited for theOPE market and we have learned how to optimise IVT for other low costapplications. The Infinitrak joint venture also: • demonstrates that traction drive IVT is a technology capable of cost-effective mass production; • proves the versatility of Torotrak's technology and the market coverage we are achieving. We are working on product applications ranging from ride-on lawnmowers through to 40 tonne haulage trucks; • provides evidence that IVT can be both a niche and a commodity technology with tremendous breadth of application, and scale; • provides consultancy income. Infinitrak has contracted with Torotrak to provide engineering services to a value of approximately $2 million per year. In the short time since the announcement of Infinitrak, we have seen a marked,positive impact on confidence in our technology in all our target markets; thisis already creating a "pull" effect where we are being actively approached forpotential new applications. Off-Highway The business relationship with our new transmission manufacturing licensee,announced in May 2005, continues to strengthen. This company is one of the threeleading transmission manufacturers for the global off-highway market. We arecurrently transferring our technology and know-how to this new licensee and inthis process they are fielding their best engineers. These engineers have beenquick to quantify the benefits of IVT to their business and the competitiveadvantage of IVT to their sector of the agricultural market. Once again I amdelighted to see Torotrak's engineers working very effectively with their peersin world-class transmission companies. The programme of work with this new licensee is progressing in line with theagreed plan, which seeks to exploit our licensee's significant investment in IVTtechnology and licensing rights in the shortest possible timescale. Our licensee's confidence in Torotrak's technology has enabled them to startactive marketing of IVT to their customers, the off-highway vehiclemanufacturers and demonstrates that our "push-pull" marketing approach isworking well. Off-highway vehicle manufacturers, both customers and prospects, are reassuredin the knowledge that one of the leading transmission manufacturers has fullyembraced IVT technology. As many of these manufacturers also build vehicles forthe OPE market, they have recognised the significance of the production plans ofInfinitrak and MTD. We are active in a number of other programmes, looking at a range ofapplications in off-highway from tractors through to combine harvester drives.We are confident that some of these will, in time, lead to formal prototypeprogrammes. To broaden further our range of product applications in off-highway, we havebeen developing a low-cost hydromechanical control mechanism which allows usaccess to the high volume commodity tractor market in the 50-110kw power range.The new hydromechanical system allows the variator to be controlled throughhydraulic actuation alone with no electronics. Customers in this broader marketare happy with the benefits of hydromechanical control as their tractors do notneed the full-range capability offered by electronic control. One such customer,new to Torotrak, is having a prototype vehicle built to this specification forevaluation at the end of this year. Automotive Automotive remains a key target market for Torotrak and whilst the industry,with its numerous business challenges, continues to be conservative in outlookand approach, we are making progress with several customers. The three-way project to develop a production representative transmission withEquos and Koyo is now focused on the calibration of the compact IVT in thetarget customer's vehicle. In this context we are working closely with theparent company of Equos which has appointed a senior business leader to takeresponsibility for the programme. The calibration process is crucial to gettingthe best out of the transmission in the eyes of their customer, one of theworld's foremost car companies. This involves a comprehensive optimisation ofengine and transmission, to achieve the optimum combination of fuel economy,performance and driving feel. This is a normal but critical development processfor any new transmission. The continued extensive evaluation of IVT by another global car company has ledto a programme of work to understand the performance of IVT in a specificvehicle which they manufacture. This vehicle, which features a large dieselengine, already enjoys good fuel economy but we have been able to demonstratethat a further improvement of 9.5% is possible with the IVT design consideredfor this application. The competitive bidding process started last year by a further car company hasreached the point where that company has informed the bidders that it wishes toconsider working with another car company using the same transmissionmanufacturer to build IVTs. Torotrak is assisting in this process to bringtogether interested parties to realise this goal. This shared investmentapproach is common in the car industry, particularly in the field oftransmissions, and is a reflection of pragmatism between rival car companieswhen it comes to managing investment costs for new technology. Cost continues to be a constant focus for all the major car companies and theindustry's challenge is always to respond to downward cost pressures. Throughour continued research activity around the development of a low-cost variatorcontrol mechanism, we have been able to give the car companies and thetransmission manufacturers further significant cost reductions for IVT. This new simplified mechanism, known as Epicycloidal Roller Control (ERC) hasbeen very well received by our industry partners. The new mechanism provides asubstantial reduction in parts count and further improves transmissionefficiency. Although novel and newly patented, the ERC variator usesconventional, proven disc and roller technology which means that it can beincorporated into IVT designs without significant additional engineering effort.ERC is an important technical breakthrough for Torotrak and provides a highlycredible engineering response to the demands for continuous cost reduction. Similarly, our credentials in the hybrid vehicle field have been reinforced bythe results from our programme to develop a parallel hybrid IVT. Thiscollaborative programme with Cranfield University is based on ourwell-researched Ford Expedition, a typical vehicle in the North American Truckand Sport Utility market. The study has generated data that we have been able toshare with our automotive customers. Torotrak's early modelling results showthat we can achieve a greater than 35% improvement in fuel economy with theparallel hybrid IVT compared to the standard 4-speed automatic, which is stillthe dominant transmission in this sector of the North American market. This level of fuel economy improvement compares favourably with some of the morecomplex and expensive hybrid architectures that are currently under evaluationby the automotive industry. We are able to offer a 20% fuel economy improvementfrom the fitment of IVT to a conventional vehicle growing to more than 35%improvement with the parallel hybrid IVT derivative. Our results also show thatthe hybrid IVT is capable of producing very significant fuel economy gainswhilst the vehicle is cruising at speed - an area where many current generationhybrid vehicles perform relatively poorly. These results bode well for "real-world" fuel economy improvement. Business restructure The creation of Infinitrak, coupled with Torotrak's substantial engagement withits existing customer base in both the automotive and off-highway vehicle marketsectors, means that much of the next stage of Torotrak's IVT development andcommercialisation strategy will be focused on working in partnership withcustomers to adapt our proven technology to specific target vehicles andproducts. To reflect this progressive change, Torotrak is restructuring its operations inthe UK and is currently in the process of reducing the number of employeesinvolved in internal activities. Torotrak will retain all of the specialist engineering, commercial and businessdevelopment skills necessary to continue the development of its IVT technologyand to support new and existing customers. Correspondingly, a reduction in thenumber of employees engaged on tasks that have now been completed successfully,mainly in the areas of build, detailed component design, workshop andadministration, is planned. We are still in the process of in-depth consultationbut with a number of employees leaving the business voluntarily, we expect lessthan ten compulsory redundancies. On completion of this exercise, Torotrak will have the right skills with theright cost structure to provide a robust and sustainable business platform forthe future. Dick ElsyChief Executive28 November 2005 FINANCE DIRECTOR'S REVIEW Revenue In the 2005 annual report and accounts I reported that I expected the increasein revenues which started in 2003, to continue. I am pleased to report thatrevenue for the first half of this year has increased significantly to £1,119kcompared to £118k in 2004. Revenue for the half-year includes the first of the licence and exclusivitypayments due in this and the following financial year under the agreementsannounced on 3 May 2005. Total payments due under these agreements exceed £800kover the next two years. Revenue this half-year also includes contract income. The majority of thisincome arose from the transmission project with Equos and work undertaken inanticipation of the formation of the Infinitrak joint venture. Torotrak willalso receive approximately $2 million per annum for the next three years fromInfinitrak for further engineering services in support of the product launchprogramme. In its first year of operation Infinitrak will incur start up-costsand in the medium term it expects to re-invest its profits in its new products.As a result, I do not expect Infinitrak to distribute any of its excess cashflow until after sales to third parties have commenced in 2008. Sale of property On 10 November 2005 we announced that the sale of the freehold land andbuildings, reported in the 2005 report and accounts, had been completed and theproceeds of £3.5 million had been received. A one-off impairment charge of £1.3million has been charged to the profit and loss account. At the same time as thesale, we entered into a 20-year lease for at an open market rental of £280k perannum. This increase in costs will be offset by other savings and I do notexpect any overall increase in costs as a result. Loss and taxation Development expenses at £2,770k (2004: £2,771k) include the cost of technicalstaff, hardware for technology development and the protection of ourintellectual property. Hardware and prototyping costs continue to be met by ourcustomers Administration costs of £914k (2004: £1,034k) remain tightly controlled andinclude a charge of £317k (2004: £329k) relating to the award of shares toemployees by the Employee Share Trust (EST). There is no cash outflowassociated with this transaction. As a result of the one-off impairment charge on the sale of the building, lossbefore taxation widened to £3.7 million (2004: £3.4 million) leading to a lossper share of 2.93 pence compared to 2.65 pence in 2004. Research and Development (R&D) Tax Credit of £310k has been recognised in theprofit and loss account (2004: £390k). The credit for this half-year isincluded in debtors. The R&D claim for the year ended 31 March 2005, ofapproximately £760k, is expected to be received in the second half of the year. Share capital 2,375,079 shares were allotted during the first half-year to satisfy optionsexercised by 68 employees following the maturity of the 2002 Sharesave scheme on1 September 2005. The Company received £499k in respect of these allotments ofshares. Cash flow The cash outflow (movement in net funds) was £2.2 million for the half-yearcompared to £2.8 million in 2004. As a result of the receipt from the proceedsof the sale of the freehold land and buildings of £3.5 million and the increasedrevenue, the cash flow for the second half of the year is expected to bepositive. Cash and deposit balances at the period end, which excludes the proceeds fromthe sale of the freehold land and buildings received in November, amounted to£5.0 million. These balances continue to be managed on the money markets atvarious maturity dates. Adoption of International Reporting Standards ('IFRS') The results presented in this announcement have been prepared under IFRS for thefirst time. The results previously reported for the six months ended 30September 2004 and for the financial year to 31 March 2005 have been restatedfollowing adoption of IFRS in place of the UK Generally Accepted AccountingPractices (UK GAAP) used previously. The principal effects on the historicaccounts arise from the difference in the treatment of share-based incentiveschemes. These are explained in more detail on pages 15 to 20. As previouslyreported in the annual report and accounts in May this year, I do not anticipatethat the earnings for the current year, as prepared under IFRS, will bematerially different from those we would have reported under UK GAAP. Rebecca JoyceFinance Director28 November 2005 Independent review report to Torotrak plc Introduction We have been engaged by the company to review the financial information set outon pages 9 to 14 and we have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility to anyone other than the companyfor our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note x to the financial information, the next annual financialstatements of the group will be prepared in accordance with IFRSs adopted foruse in the European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the directors currently intend to usein the next annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs adopted for use by the European Union. This isbecause, as disclosed in note 1, the directors have anticipated that certainstandards, which have yet to be formally adopted for use in the EU, will be soadopted in time to be applicable to the next annual financial statements. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review is substantially lessin scope than an audit performed in accordance with Auditing Standards andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. 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 September 2005. KPMG Audit PlcChartered AccountantsPreston 28 November 2005 Consolidated income statementfor the six months ended 30 September 2005 Unaudited Notes Unaudited Unaudited twelve months six months six months to 31/03/05 to 30/09/05 to 30/09/04 £000 £000 £000 534 Revenue 1,119 118 (5,201) Development expenses (2,770) (2,771) (1,808) Administrative expenses (914) (1,034) (6,475) Operating loss (2,565) (3,687) - Impairment charge 2 (1,295) - 418 Net financial income 143 234 (6,057) Loss before taxation (3,717) (3,453) 786 Taxation 3 310 390 (5,271) Loss after taxation retained for financial period (3,407) (3,063) (4.56) Loss per share 4 (2.93) (2.65) (4.56) Diluted loss per share 4 (2.93) (2.65) Group statement of recognised income and expense The Group has no recognised gains or losses during the current or previousperiod other than the results reported above. Consolidated balance sheetas at 30 September 2005 Unaudited Notes Unaudited Unaudited Group Group Groupat 31/03/05 at 30/09/05 at 30/09/04 £000 £000 £000 ASSETS NON CURRENT ASSETS 989 Intangible assets 1,041 930 5,731 Property, plant and equipment 867 5,865 6,720 Total non current assets 1,908 6,795 CURRENT ASSETS 1,159 Trade and other receivables 2,077 1,677 Prepayments 7,318 Cash and cash equivalents 5,070 8,937 8,477 Total Current Assets 7,147 10,614 - NON CURRENT ASSETS HELD FOR SALE 2 3,435 - 15,197 Total Assets 12,490 17,409 EQUITY AND LIABILITIES CAPITAL AND RESERVES 11,729 Issued Share Capital 11,966 11,728 48,009 Share Premium 48,271 48,010 (2,705) Other Reserves (1,654) (2,736) (42,473) Retained earnings (46,540) (40,297) 14,560 Total Capital and Reserves 12,043 16,705 CURRENT LIABILITIES 637 Trade and other payables 447 704 637 Total current liabilities 447 704 15,197 Total equity and liabilities 12,490 17,409 Consolidated cashflow statementfor the six months ended 30 September 2005 Unaudited Unaudited Unauditedtwelve months six months six months to 31/03/05 to 30/09/05 to 30/09/04 £000 £000 £000 Cash flows from operating activities (5,271) Net Loss (3,407) (3,063) Adjustments for: 372 Depreciation 154 212 86 Amortisation 49 42 (418) Net Financial income (143) (234) 23 Loss on disposal of plant and equipment - 23 (786) Research tax credit (310) (390) - Impairment loss 1,295 - (89) Increase in trade and other receivables (627) (95) 112 Decrease in trade and other payables (91) 176 450 Increase in employee benefits 392 386 876 Research tax credit received - - (4,645) Cash flows from operating activities (2,688) (2,943) Cash flows from investing activities (56) Acquisition of property, plant and equipment (126) (49) (220) Acquisition of patents (100) (117) 487 Interest received 167 294 211 Net cash used in investing activities (59) 128 Cash flows from financing activities 23 Proceeds from the issue of share capital 499 23 (4,411) Net decrease in cash and cash equivalents (2,248) (2,792) 11,729 Cash and cash equivalents at start of period 7,318 11,729 7,318 Cash and cash equivalents at end of period 5,070 8,937 Consolidated statement of changes in equityas at 30 September 2005 Share Share Other Accumulated Total capital premium reserves profit £000 £000 £000 £000 £000At 1 April 2005 11,729 48,009 (2,705) (42,473) 14,560 Loss for the period (3,332) (3,332) Share based payments - - 1,051 (735) 316 Issue of share capital 237 262 - - 499Balance 237 262 1,051 (4,067) (2,517)At 30 September 2005 11,966 48,271 (1,654) (46,540) 12,043 Notes to the interim financial information 1. European Union ('EU') law requires that the next annual consolidatedfinancial statements of Torotrak plc ('The Group), those for the year ending 31March 2006, are prepared in accordance with International Financial ReportingStandards ('IFRS') adopted for use in the EU. The Group has adopted IFRS with effect from 1 April 2005. The transition date is1 April 2004, being the start date of the earliest period for which fullcomparative information in the 2006 Annual Report and Accounts will bepresented. The financial information presented in this interim / IFRS conversion statementwhich is unaudited has been prepared on the basis of the recognition andmeasurement requirements of IFRS in issue that either are endorsed by the EU andeffective (or available for early adoption) at 31 March 2006, the Group's firstannual reporting date at which it is required to use endorsed IFRS. Based uponthese endorsed IFRS, the directors have made assumptions about accountingpolicies expected to be applied when the first annual IFRS financial statementsare prepared for the year ending 31 March 2006. Furthermore, the adopted IFRS that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 31 March 2006are still subject to change and additional interpretations and therefore cannotbe determined with certainty. Accordingly, the accounting policies for thatannual period will be determined finally only when the annual financial areprepared for the year ending 31 March 2006. The comparative figures for the year ended 31 March 2005 do not constitute theGroup's statutory accounts for that period. Those accounts, which were preparedunder UK GAAP, have been reported on by the Group's auditor and delivered to theRegistrar of Companies. The report of the auditors was unqualified and did notcontain statements under section 237 (2) or (3) of the Companies Act 1985. The interim financial information for the six months ended 30 September 2005 andthe six months ended 30 September 2004 have not been audited. In relation tothe financial statements for the year ended 31 March 2005, this has beenextracted from a restatement of the financial information taken from the Group'sStatutory accounts for that financial year. The interim financial reports are not prepared in accordance with the EUendorsed standard IAS34 'Interim Financial Reporting' as permitted by thelisting rules. The financial statements are presented in pounds sterling, rounded to thenearest thousand. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based uponhistorical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis ofmaking the judgements about carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current andfuture periods. The accounting policies set out below have been applied consistently to allperiods presented in this consolidated financial report and in preparing anopening IFRS balance sheet at 1 April 2004 for the purposes of the transition toIFRS. The accounting policies have been applied consistently by all Group entities. 2. The freehold property at 1 Aston Way, Leyland, was subject to a sale andleaseback agreement that was completed in November 2005. The asset has beenvalued at selling price less costs to sell. The impairment charge of £1,295,000is shown separately on the income statement. 3. The credit for taxation is based on the estimated effective rate for theyear as a whole, adjusted for taxation losses brought forward. 4. The loss per share is based upon losses after tax of £3,407,000 (2004:£3,063,000) to 116.3 million ordinary shares (2004: 115.8 million) being theweighted average number of shares in issue during the period. The fully dilutedloss per share is based on losses after tax of £3,407,000 (2004: £3,063,000) to£116.3 million ordinary shares (2004: £115.8 million). 5. Copies of this report are being sent to all shareholders on the registeron 28 November 2005 and are available from the company at 1 Aston Way, Leyland,Lancashire, PR26 7UX. Adoption of International Reporting Standards Contents a) Introduction b) Explanation of adjustments under IFRS c) Restated IFRS Consolidated Financial Information i) Group statement of recognised income and expense for the six months to 30 September 2004 and year to 31 March 2005 ii) Consolidated Balance Sheet as at 30 September 2004 and as at 31 March 2005 d) IFRS Accounting policies a) Introduction For all periods up to and including 31 March 2005, Torotrak plc has prepared itsfinancial statements in accordance with UK Generally Accepted AccountingPractice (UK GAAP). For the year to 31 March 2006, Torotrak plc is required toprepare consolidated financial statements in accordance with InternationalFinancial Reporting Standards (IFRS) as endorsed by the European Commission. The Group's transition date to IFRS is 1 April 2004. This has been determined inaccordance with IFRS 1 'First Time Adoption of International ReportingStandards', being the start of the earliest period of comparative information. To explain the transition to IFRS, the unaudited financial performance andposition of the Group has been converted from UK GAAP to IFRS for the year to 31March 2005. An explanation of the principle adjustments required by Torotrak plcon conversion to IFRS is set out in section 2, with summary financialinformation set out in section 3. The financial information presented includes: • Group statement of recognised income and expense for the year to 31 March 2005 and for the six months to 30 September 2004. • The Group's Consolidated Balance sheet at 31 March 2005 and 30 September 2004 This document explains all material policy changes from the accounting policiesadopted in the UK GAAP financial statements for the year to 31 March 2005. Afull set of IFRS accounting policies is included in section d). The financial information presented in this document is unaudited. Transitional Arrangements in IFRS 1 ('First Time Adoption of InternationalReporting Standards') In Implementing the transition to IFRS, the Group has followed the requirementsof IFRS 1, which in general requires IFRS accounting policies to be appliedfully retrospectively in deriving the opening balance sheet at the date oftransition (1 April 2004). First time adoption of International Financial Reporting Standards, permitsthose companies adopting IFRS for the first time to take certain exemptions fromthe full requirements of IFRS in the transition period. The first time adoptionchoice made by the Group is: • Share based payments: The Group has elected to apply IFRS 2 Share Based Payments only to relevant share based payment transactions granted after 7 November 2002 as permitted under IFRS 1. b) Explanation of adjustments under IFRS The format of the IFRS financial information contained within this document isprepared in accordance with IAS 1 'Presentation of Financial Statements' whichdiffers from the UK GAAP format. The IFRS changes set out below have no effect on cash flows. The only adjustment between UK GAAP and IFRS that affects the Group is asfollows: IFRS 2 'Share-based Payment' The share option programme allows Group employees to acquire shares of theCompany. The fair value of share options granted is recognised as an employeeexpense with a corresponding increase in equity. The fair value is measured atgrant date, using appropriate pricing model taking into account the terms andconditions upon which the options were granted, and is spread over the periodduring which the employees become unconditionally entitled to the options. Theamount recognised as an expense is adjusted to reflect the actual number ofshare options that vest except where forfeiture is only due to share prices notachieving the threshold for vesting. For options granted before 7 November 2002 the recognition and measurementprinciples of IFRS 2 have not been applied in accordance with the transitionalprovisions of IFRS 1. c) (i) Consolidated income statement Six months ended 30/9/2004 Year ended 31/3/2005 UK GAAP Share- based £000 Share- IFRS UK GAAP payment IFRS based £000 £000 £000 payment £000 £000Revenue 118 - 118 534 - 534Development expenses (2,718) (53) (2,771) (5,096) (105) (5,201) (1,029) (5) (1,034) (1,798) (10) (1,808) Administrative expensesOperating loss (3,629) (58) (3,687) (6,360) (115) (6,475)Net Financial income 234 - 234 418 - 418Loss before taxation (3,395) (58) (3,453) (5,942) (115) (6,057)Taxation 390 - 390 786 - 786Loss after taxation retained for (3,005) (58) (3,063) (5,156) (115) (5,271)financial periodLoss per share (2.60) (2.65) (4.46) (4.56)Diluted loss per share (2.60) (2.65) (4.46) (4.56) c) (ii) Consolidated Balance Sheet As at 01/04/2004 As at 30/9/2004 As at 31/3/2005 UK IFRS UK IFRS UK GAAP IFRS GAAP £000 GAAP £000 £000 £000 £000 £000ASSETSNON CURRENT ASSETSIntangible assets 877 877 930 930 989 989Property, plant and 6,044 6,044 5,865 5,865 5,731 5,731equipmentTotal non current assets 6,921 6,921 6,795 6,795 6,720 6,720 CURRENT ASSETSTrade and other 1,251 1,251 1,677 1,677 1,159 1,159receivablesCash and cash equivalents 11,729 11,729 8,937 8,937 7,318 7,318Total Current Assets 12,980 12,980 10,614 10,614 8,477 8,477 Total Assets 19,901 19,901 17,409 17,409 15,197 15,197 EQUITY AND LIABILITIESCAPITAL AND RESERVESIssued Share Capital 11,718 11,718 11,728 11,728 11,729 11,729Share Premium 47,997 47,997 48,010 48,010 48,009 48,009Other Reserves (3,807) (3,807) (2,736) (2,736) (2,705) (2,705)Retained earnings (36,550) (36,550) (40,297) (40,297) (42,473) (42,473)Total Capital and 19,358 19,358 16,705 16,705 14,560 14,560Reserves CURRENT LIABILITIESTrade and other payables 543 543 704 704 637 637Total current liabilities 543 543 704 704 637 637 Total equity and 19,901 19,901 17,409 17,409 15,197 15,197liabilities d) IFRS Accounting policies Basis of Consolidation 1. Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when theCompany has the power, directly or indirectly, to govern the financial andoperating policies of an entity so as to obtain benefits from its activities.The financial statements of subsidiaries are included in the consolidatedfinancial statements from the date that control commences until the date thatcontrol ceases. 2. Transactions eliminated on consolidation. Intragroup balances and any unrealised gains and losses or income and expensesarising from intragroup transactions, are eliminated in preparing theconsolidated financial statements. Property, Plant and Equipment 1. Owned assets Items of property, plant and equipment are stated at cost or deemed cost lessaccumulated depreciation and impairment losses. 2. Depreciation Depreciation is charged to the Consolidated Income Statement over the estimateduseful lives of each part of an item of property, plant and equipment. Theestimated useful lives are as follows: % Plant, machinery and equipment 25 Straight line Cars 25 Reducing balance Computer hardware 331/3 Straight line Computer software 331/3 Straight line Office furniture and fittings 20 Straight line Test vehicles 50 Reducing balance Intangible assets Patent and other intellectual property rights Patents are stated at cost less amortisation. Cost includes the cost of patentprotection for intellectual property rights (IPR) on technologies arising frominventive ideas. Research and development Research expenditure is charged to the income statement in the year in which itis incurred. Internal development expenditure is charged to the income statement in the yearin which it is incurred, unless it meets the recognition criteria of 'IAS 38intangible assets'. Where such criteria are met expenditure is capitalised andamortised over the useful economic life. Intangible assets relating to products in development (both internally generatedand externally acquired) are subject to impairment testing at the balance sheetdate or earlier upon indication of impairment. Any impairment losses areimmediately written off to the income statement. Non-current assets held for sale Non current assets held for sale are measured at the lower of its carryingamount and fair value less costs to sell Trade and other receivables Trade and other receivables are recognised initially at their nominal value. Aprovision for the impairment of trade receivables is established when there isobjective evidence that the Group will not be able to collect all amounts dueaccording to the original terms. The movement in the provision is recognised inthe Consolidate Income Statement. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with anoriginal maturity of three months or less. Trade and other payables Trade and other payables are stated at cost. A provision is recognised in thebalance sheet when the Group has a present legal or constructive obligation as aresult of a past event and it is probable that an outflow of economic benefitswill be required to settle the obligation. Revenue Income from external development contracts is recognised as revenue by referenceto the stage of completion of the contract. Fees and royalties paid for the use of the Company's assets are recognised inaccordance with the substance of the agreement. When a licence gives the rightto use Company technology over a period of time then income is recognised on astraight line basis over the life of the agreement. Financial income. Financial income comprises interest receivable on funds invested. Impairment The carrying amount of the Groups assets are reviewed annually to determinewhether there is any indication of impairment. If impairment exists the asset'srecoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an assetexceeds its recoverable amount. Impairment losses are recognised in theConsolidated Income Statement. An impairment loss is reversed if there has beena change in the estimates used to determine the recoverable amount. Animpairment loss is reversed only to the extent that the asset's carrying amountdoes not exceed the carrying amount that would have been determined, net ofdepreciation, if no impairment loss had been recognised. Expenses Payments under operating leases are recognised in the income and expenditureaccount on a straight line basis over the term of the lease. Foreign Currency Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assts and liabilitiesdenominated in foreign currencies at the balance sheet date are translated atthe foreign exchange rate ruling at that date. Non-monetary assets andliabilities that are measured in terms of historical cost in a foreign currencyare translated using the exchange rate at the date of the transaction. Foreignexchange differences arising on translation are recognised in the incomestatement. Employee Benefits a) Defined contribution schemes The Group only operates defined contribution pension schemes, the assets ofwhich are held separately from those of the Group in independently administeredfunds. Obligations for contributions to the defined contribution schemes arerecognised as an expense in the Consolidated Income Statement as incurred. b) Share based payment The share option programme allows Group employees to acquire shares of theCompany. The fair value of share options granted is recognised as an employeeexpense with a corresponding increase in equity. The fair value is measured atgrant date, using appropriate pricing model taking into account the terms andconditions upon which the options were granted, and is spread over the periodduring which the employees become unconditionally entitled to the options. Theamount recognised as an expense is adjusted to reflect the actual number ofshare options that vest except where forfeiture is only due to share prices notachieving the threshold for vesting. For options granted before 7 November 2002 the recognition and measurementprinciples of IFRS 2 have not been applied in accordance with the transitionalprovisions of IFRS 1. Income tax Income tax on the profit or loss for the period comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date, andany tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Theamount of deferred tax provided is based upon the expected manner of realisationor settlement of the carrying amounts of assets and liabilities, using tax ratesenacted or substantially enacted at the balance sheet date A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is probable thatthe related deferred tax benefit will be realised. 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