TSL.L Regulatory News (TSL)

12 Mar 2008 07:01

Tissue Science Laboratories PLC12 March 2008 12 March 2008 Audited Preliminary Results for the year ended 31 December 2007 Recommended Cash Offer Tissue Science Laboratories plc (LSE: TSL), the medical technology companyspecialising in biologic tissue replacement and repair products, today announcesits audited Preliminary Results for the year ended 31 December 2007. Post Period End • Recommended cash Offer for the entire issued and to be issued share capital of TSL by Covidien UK Holding Limited for £38.0 m at 103.5 pence per share (see separate announcement today). Highlights • Permacol(R) is now established as a significant product within the complex hernia repair market. Good growth in sales via TSL's direct sales team in the US.• Revenues increased by 15% to £12.1m (2006: £10.5m), with overall growth on a constant currency basis of 25%. - US general surgery sales increased 55% to $15.2m (2006: $9.8m); - ROW sales increased by 21% to £2.3m (2006: £1.9m); and - Partnered sales in other surgical areas of $4.3m (2006: $5.9m).• Gross margins improved to 68.5% (2006: 67.7%) despite adverse impact of exchange rate movements; on a constant currency basis, gross margins would have been 70.8% in the year.• Selling, distribution and marketing costs increased to £6.9m (2006: £5.9m) reflecting ongoing investment in TSL's direct US sales team.• Operational review and overhead reduction implemented in August 2007, achieved annualised savings of £0.7m.• Cash and cash equivalents as at 31 December 2007 were £1.6m (2006: £4.8m). Commenting on the results, Martin Hunt, CEO of TSL, said: "2007 saw continued good progress in the marketing of our core product, Permacol(R), for complex and recurrent hernias in general surgery through our direct sales team in the US. The market place for biologic materials such as Permacol(R) in general surgery, as in other markets, is evolving rapidly and further endorses the porcine-sourced material model in this field. "At the interims, we commented that the scale with which we can address themarket was limited in comparison to larger competitors. The Directors of TSL aretherefore pleased to unanimously recommend the proposed Offer for TSL byCovidien which will see our technology platform supported by Covidien'smarketing and technical resources and wide geographical reach." -Ends- Enquiries: Tissue Science Laboratories plc Tel: 01252 369 603Martin Hunt, Chief ExecutiveDavid Jennings, Finance Director Nomura Code Securities Tel: 0207 776 1200Juliet Thompson Hogarth Partnership Limited Tel: 020 7357 9477Melanie Toyne Sewell Mobile: 07767 660 040Sarah Richardson www.tissuescience.com. Nomura Code Securities Limited, which is authorised and regulated by theFinancial Services Authority in the United Kingdom, is acting exclusively forTissue Science Laboratories and no one else in relation to the Offer and willnot be responsible to anyone other than Tissue Science Laboratories forproviding the protections afforded to clients of Nomura Code Securities Limitednor for providing advice in relation to the Offer or any other matters referredto in this announcement. CHAIRMAN'S STATEMENT In September 2007, I reported on the strategic position of the Group and theproposal then being considered for separating the business into two entities,one to develop further our growing commercial business in dermal derived tissueimplants and the other to take forward our development projects for otherporcine tissues under separate financing and management via a spin-out from theGroup. Whilst considering detailed proposals to be brought forward to shareholders inthis regard, the Group received approaches from certain parties interested inthe acquisition of all or parts of the Group. The Board considered a range ofoptions for maximizing future shareholder value including a further equityrefinancing, a partial disposal of the core business and spin out of thedevelopment projects as previously indicated and an offer for the entirebusiness. The Directors have carefully considered all of the options available to thebusiness and the respective merit of each. Having been so advised by NomuraCode, the Directors of the Company consider the terms of the Offer announcedtoday ("the Offer") to be fair and reasonable and unanimously recommend it toshareholders. In providing advice to the Directors of the Company, Nomura Codehas taken into account the commercial assessment of the Directors. A summary ofthe terms of the recommended Offer and the rationale for the recommendation ofthe Board for acceptance of the offer are contained in a document to be postedto shareholders today. Patrick PaulChairman CHIEF EXECUTIVE'S REPORT Sales and Marketing General Surgery - US 2007 saw continued progress in our strategy of marketing our core product,Permacol(R), for complex and recurrent hernias in general surgery through ourdirect sales team in the US. Our focus continues to be on treatment of largerecurrent and complex hernias where our larger implant sizes and the featuresand benefits of our product offer competitive advantage and are particularlysuited to the surgeon's needs. Sales in this market increased to $15.2m in the year (2006: $9.8m) an overallincrease of 55%. It is worth noting that if the comparative period figure isadjusted for the $2.7m of sales made through previous third party distributorarrangements which ended in 2006 and for which there is no comparable amount in2007, the growth achieved by our own in-house direct team in the year was 114%.We have continued to increase both our unit sales and our average selling priceper procedure during the year. The market place for biologic materials such as Permacol(R) in general surgery,as in other markets, is evolving rapidly. The premium pricing and attractivemargins commanded by this class of product, have attracted new entrants to themarket. We welcome the market's further endorsement of the porcine model in thisfield and are wholly confident of the excellence of our products and theincreasing productivity of our sales team. General Surgery - UK/EU /ROW Sales in general surgery and in respect of our Permacol(R) Injection forurethral bulking outside of the US increased by 21% to £2.3m (2006: £1.9m).Sales through our distributors in Europe and Korea increased by 50% to £0.6m(2006: £0.4m), whilst sales in our home market in the UK increased by 13% to£1.7m. Partnered Products Although our strategy to develop our business through direct sales and marketingas opposed to working through distribution partners is now firmly established wecontinue to work with our marketing partners in the fields of urology/gynaecology, orthopaedics and head and facial surgery. Bard has worldwide marketing rights in respect of our sheet material in thefield of urology/gynaecology, marketed under the PelviColTM, PelviSoftTM, andPelviLaceTM brands. However, as previously reported, Bard has continued torefocus its marketing efforts on a broader portfolio of products in the field ofpelvic floor reconstruction and the treatment of incontinence resulting inreduced orders in respect of our products. Sales to Bard in the year were $3.9m(2006: $5.3m). Sales in orthopaedics were $0.2m (2006; $0.4m) and in head and face were $0.2m(2006: $0.2m). Operational Review and Overhead Reduction In August 2007 we undertook a detailed review of the organisation and itsoperational overheads. Our objective was to align our resources with theanticipated level of business going forward and to streamline the operationaland administrative overhead of the business. We reduced headcount inadministrative and operational functions where appropriate and the savings inoverhead achieved will amount to £0.7m annually. Clinical Studies Prophylactic parastomal reinforcement clinical studies The study continues to make progress with an increase in the number of approvedsites and increased number of patients recruited into the study. We arecontinuing to enrol new investigators and sites to build a larger base to speedpatient recruitment. Bone graft We have made further progress in the development of our porcine derived bonegraft product during the year. We are seeking to develop a biologic product withsuperior performance characteristics to currently available treatment options. As reported in September we achieved proof of principle for the bone graftproject as planned and work has continued with completion of the definitivein-vivo efficacy study which enabled submission of a 510(k) in December 2007. Ligament graft We have developed a porcine derived tendon that retains strength, postprocessing and sterilisation for cruciate ligament and other tendon/ligamentrepairs. We announced in 2007 that our in-vivo study data in a sheep model for ACLreconstruction has shown good joint stability and bio-mechanical performance andwe have achieved pre-clinical proof of principle for the ligament graft project. Vascular graft We have developed a porcine derived vascular graft intended for permanentimplantation for use initially as an arterio-venous (AV) access graft and longerterm as a coronary artery bypass graft (CABG). As reported in 2007 we achieved pre-clinical proof of principle for the vasculargraft product, ahead of plan and we have further extended our pre-clinical workand have successfully completed a pilot AV access animal study in sheep. Summary and outlook 2007 saw continued good progress in the marketing of our core product, Permacol(R), for complex and recurrent hernias in general surgery through our direct sales team in the US. The market place for biologic materials such as Permacol(R) in general surgery, as in other markets, is evolving rapidly and further endorses the porcine-sourced material model in this field. That said, the business remains constrained by a lack of resource and thefinancial strength to pursue our business objectives that would enable us todrive shareholder value growth more aggressively in the near and medium term. Inregards to the sufficiency of available cash resources, the Chairman, Mr PatrickPaul, has undertaken to provide an unsecured loan on arms length commercialterms to an amount not exceeding £1.0m as may be required. At the interims, we commented that the scale with which we can address themarket was limited in comparison to larger competitors and that as anindependent entity we are not able to deploy the sales and marketing resourcesof these larger players. The Offer will see our technology platform supported bytheir marketing and technical resources and wide geographical reach. TheDirectors, having been so advised by Nomura Code, consider the terms of theOffer to be fair and reasonable and unanimously recommend the proposed Offer. Martin HuntChief Executive Officer FINANCE DIRECTOR'S REPORT REVENUE Group reported revenues increased by 15% to £12.1m (2006: £10.5m). US dollarsales revenues were translated at an average rate of £1 = $1.99 in the year(2006: £1 = $1.82). Overall sales growth on a consistent currency basis was 25%. Strong growth in our general surgery business was partly offset by a decline inrevenues from our marketing partner in urology/gynaecology, Bard. General surgery revenues in the US grew by 55% to $15.2m (2006: $9.8m). Thisgrowth was the result of the increased investment in our direct US sales andmarketing team with Permacol(R) now established as a significant product withinthe complex hernia repair market. General surgery sales also grew strongly inEurope and in our Korean market - together increasing to £0.6m (2006: £0.4m),returning growth of 50% in the year. In the UK our general surgery business grewto £1.7m (2006: £1.5m). Sales revenues from Bard in urology/gynaecology in the year were $3.9m (2006:$5.3m). In orthopaedics, sales to Zimmer were $0.2m (2006: $0.4m) and sales toPorex our distributor in head and face were $0.2m (2006: $0.2m). GROSS MARGIN Gross margins improved to 68.5% (2006: 67.7%) despite the adverse impact ofexchange rate movements during the year. This impact was offset by the increasein our sales mix of higher margin direct sales in general surgery versuspartnered revenues principally in urology/gynaecology through Bard. Grossmargins on a constant currency basis would have been 70.8% in the year. OPERATING EXPENSES Selling, distribution and marketing costs increased to £6.9m (2006: £5.9m) whichrepresents 57% of sales (2006: 56%) reflecting the ongoing investment in ourdirect US sales team where costs amounted to £5.0m (2006: £4.1m). Other administrative expenses were £2.6m (2006: £2.8m). Investment in research and development was £2.0m (2006: £2.3m). Research andDevelopment includes clinical, regulatory and new product developmentexpenditure, principally in respect of product line extensions for Permacol(R)and the costs of progressing the bone, ligament and vascular grafts throughpre-clinical proof of principle studies. RESULTS The group made an operating loss of £3.3m (2006: £3.8m). Net interest andfinance costs were £0.1m (2006: £0.0m) and a tax credit of £0.2m (2006: £0.2m)was received in respect of the Government's research and development tax creditscheme. Net loss for the year was £3.2m (2006: £3.7m), in line with management'sexpectations and previous guidance. Basic and diluted loss per ordinary sharewas 9.1p (2006: 12.1p). FIXED ASSETS AND CAPITAL EXPENDITURE Expenditure on capital items amounted to £0.3m in the year reflecting investmentin our US infrastructure and development of our operational facilities in Leeds.There were no material capital commitments in place at the year end. WORKING CAPITAL Investment in working capital (current assets excluding cash and cashequivalents, less current liabilities) increased by £0.4m to £4.5m (2006:£4.1m). CASH Cash outflow from operating activities in the year was £2.8m (2006: £4.3m). Cashoutflow reduced principally as a result of the lower loss for the year and thesmaller increase in investment in working capital than in the prior year period. As at 31 December 2007, the Group had cash and cash equivalents of £1.6m (2006:£4.8m). TREASURY POLICY AND FINANCIAL RISK MANAGEMENT The Group operates a risk-averse policy of treasury management in order tominimise exposure to capital loss whilst securing market rates of interest oncash balances. Funds are deposited with UK clearing banks on short tomedium-term deposits, with maturity typically at three to six months, andbearing interest at prevailing rates. During the year cash balances were placedwith more than one UK clearing bank. CURRENCY RISK The Group is exposed to currency risk principally in respect of US dollarrevenues and with the translation of the revenues, expenses and net assets ofour US subsidiary into sterling on consolidation. As at 31 December 2007forward-sale hedging contracts amounting to $1.9m at a composite rate of £1 =$2.03 were outstanding and due to mature by 28th April 2008. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The financial results for the year ended 31 December 2007 are the first resultsprepared in accordance with the recognition and measurement principles ofInternational Financial Reporting Standards ("IFRS"). Prior to these results,the Group prepared its audited financial statements under UK Generally AcceptedAccounting Practices ("UK GAAP"). The results for the year ended 31 December 2006 included in these results havebeen restated in accordance with IFRS. The impact of the restatement is set outin note 2 in the financial statements. The principal adjustments relate to theadoption of IAS 32 'Financial Instruments: disclosure and presentation' and IAS39 'Financial instruments: recognition and measurement'. The effect of thetransition on the income statement for the year ended 31 December 2006 is acharge of £106,000. The effect of the transition on the opening balance sheet at1 January 2006 and the balance sheet at 31 December 2006 is £48,000 and £nilrespectively. EXTRACTION FROM AUDITED ACCOUNTS The financial information set out in this announcement does not constitute theCompany's statutory accounts for the year ended 31 December 2007 or for the yearended 31 December 2006, but is derived from the 2007 accounts. Statutoryaccounts for the year ended 31 December 2006, which were prepared under UKGenerally Accepted Accounting Practice ("UK GAAP"), have been delivered to theRegistrar of Companies Statutory accounts for the year ended 31 December 2007,prepared under International Financial Reporting Standards ("IFRS") as adoptedfor use in the EU, will be delivered in due course. The auditors have reportedon the accounts for both the year ended 31 December 2006 and the year ended 31December 2007; their reports were unqualified and did not contain statementsunder s237(2) of (3) Companies Act 1985. David JenningsFinance Director CONSOLIDATED INCOME STATEMENTYear ended 31 December 2007 Note 2007 2006 £'000 £'000CONTINUING OPERATIONSRevenue 1,3 12,132 10,522Cost of sales (3,828) (3,401) -------- --------Gross profit 3 8,304 7,121 Selling, distribution and marketing costs (6,922) (5,910)Research and development costs (2,017) (2,269)Other administrative expenses (2,636) (2,768) -------- --------Total administrative expenses (11,575) (10,947) -------- --------OPERATING LOSS 3,4 (3,271) (3,826) Finance income 88 173Finance cost 7 (138) (149) -------- --------LOSS BEFORE TAXATION (3,321) (3,802) Taxation 8 159 152 -------- --------LOSS FOR THE YEAR (3,162) (3,650) ======== ========Attributable to:Equity holders of the parent (3,162) (3,650) Basic and diluted loss per ordinary share 9 (9.1)p (12.1)p ======== ======== CONSOLIDATED STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2007 Share Share Shares to Merger Translation Profit & Total Capital Premium be issued Reserve Reserve Loss Equity Account Account £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 31 December 2005 2,946 22,075 72 545 - (14,526) 11,112Changes in equity for 2006Exchange differences ontranslation of foreign operations - - - - 112 - 112Loss for the period - - - - - (3,650) (3,650) ------- ------- ------- ------- ------- ------- -------Total recognised gains and lossfor the period - - - - 112 (3,650) (3,538) ------- ------- ------- ------- ------- ------- -------Recognition of share basedpayment charge - - 108 - - - 108Issue of share capital 514 2,172 - - - - 2,686 ------- ------- ------- ------- ------- ------- -------Balance at 31 December 2006 3,460 24,247 180 545 112 (18,176) 10,368 ------- ------- ------- ------- ------- ------- -------Changes in equity for 2007Exchange differences ontranslation of foreign operations - - - - 66 - 66Loss for the period - - - - - (3,162) (3,162) ------- ------- ------- ------- ------- ------- -------Total recognised gains and lossfor the period - - - - 66 (3,162) (3,096) ------- ------- ------- ------- ------- ------- -------Recognition of share basedpayment charge - - 52 - - - 52Issue of share capital 1 3 - - - - 4 ------- ------- ------- ------- ------- ------- -------Balance at December 2007 3,461 24,250 232 545 178 (21,338) 7,328 ------- ------- ------- ------- ------- ------- ------- COMPANY STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2007 Share Share Shares to Translation Profit & Total Capital Premium be issued Reserve Loss Equity Account Account £'000 £'000 £'000 £'000 £'000 £'000 Balance at 31 December 2005 2,946 22,075 72 - (13,981) 11,112Changes in equity for 2006Exchange differences ontranslation of foreign operations - - - 112 - 112Loss for the period - - - - (1,012) (1,012) ------- ------- ------- ------- ------- ------- Total recognised gains and lossfor the period - - - 112 (1,012) (900) ------- ------- ------- ------- ------- ------- Recognition of share basedpayment charge - - 108 - - 108Issue of share capital 514 2,172 - - - 2,686 ------- ------- ------- ------- ------- ------- Balance at 31 December 2006 3,460 24,247 180 112 (14,993) 13,006 ------- ------- ------- ------- ------- ------- Changes in equity for 2007Exchange differences ontranslation of foreign operations - - - 66 - 66Loss for the period - - - - (998) (998) ------- ------- ------- ------- ------- ------- Total recognised gains and lossfor the period - - - 66 (998) (932) ------- ------- ------- ------- ------- ------- Recognition of share basedpayment charge - - 52 - - 52Issue of share capital 1 3 - - - 4 ------- ------- ------- ------- ------- ------- Balance at December 2007 3,461 24,250 232 178 (15,991) 12,130 ------- ------- ------- ------- ------- ------- CONSOLIDATED BALANCE SHEETAs at 31 December 2007 2007 2006 Note £'000 £'000 £'000 £'000 NON-CURRENT ASSETSProperty, plant and equipment 1,12 806 2,993 ------- ------- 806 2,993 ------- -------CURRENT ASSETSInventories 1,13 4,443 3,875Trade and other receivables 14 2,388 2,422Cash and cash equivalents 1,601 4,760 ------- ------- 8,432 11,057Non-current assets held for sale 11 1,761 - ------- ------- 10,193 11,057 ------- -------TOTAL ASSETS 10,999 14,050 ------- -------CURRENT LIABILITIESTrade and other payables (992) (762)Current portion of long-term borrowings (217) (265)Other liabilities (1,131) (1,140) ------- ------- 15 (2,340) (2,167)Liabilities associated with non-currentassets held for sale 11 (1,248) - ------- ------- (3,588) (2,167)NON-CURRENT LIABILITIESLong-term borrowings 16 (83) (1,515) ------- -------TOTAL LIABILITIES (3,671) (3,682) ------- -------NET ASSETS 7,328 10,368 ======= =======EQUITYShare capital 17 3,461 3,460Share premium account 24,250 24,247Shares to be issued 232 180Merger reserve 545 545Translation reserve 178 112Profit and loss account (21,338) (18,176) ------- -------TOTAL EQUITY 7,328 10,368 ======= ======= These financial statements were approved by the Board of Directors on 11 March2008. Signed on behalf of the Board of Directors M B Hunt, Director COMPANY BALANCE SHEETAs at 31 December 2007 2007 2006 Note £'000 £'000 £'000 £'000 NON-CURRENT ASSETSInvestment in subsidiaries 10 141 -Property, plant and equipment 1,12 636 2,876 ------- ------- 777 2,876 ------- -------CURRENT ASSETSIntercompany receivables 8,439 5,119Inventories 1,13 2,421 2,282Trade and other receivables 14 1,323 1,658Cash and cash equivalents 654 4,472 ------- ------- 12,837 13,531Non-current assets held for sale 11 1,761 - ------- ------- 14,598 13,531 ------- -------TOTAL ASSETS 15,375 16,407 ------- -------CURRENT LIABILITIESTrade and other payables (946) (681)Current portion of long-term borrowings (215) (264)Other liabilities (757) (947) ------- ------- 15 (1,918) (1,892)Liabilities associated with non-currentassets held for sale 11 (1,248) - ------- ------- (3,166) (1,892)NON-CURRENT LIABILITIESLong-term borrowings 16 (79) (1,509) ------- -------TOTAL LIABILITIES (3,245) (3,401) NET ASSETS 12,130 13,006 ------- -------EQUITYShare capital 17 3,461 3,460Share premium account 24,250 24,247Shares to be issued 232 180Translation reserve 178 112Profit and loss account (15,991) (14,993) ------- -------TOTAL EQUITY 12,130 13,006 ======= ======= These financial statements were approved by the Board of Directors on 11 March2008. Signed on behalf of the Board of Directors M B Hunt, Director CONSOLIDATED CASH FLOW STATEMENTYear ended 31 December 2007 Note 2007 2006 £'000 £'000 Cash flows from operating activitiesLoss after tax (3,162) (3,650)Adjustments for:Depreciation 12 698 1,024Foreign exchange loss/(gain) 104 (8)Finance income (88) (173)Finance expense 138 149Taxation recognised in profit and loss 8 (159) (152) -------- -------- Decrease in trade and other receivables 41 286Increase in inventories (569) (1,574)Increase/(Decrease) in trade payables 218 (331)Share based payments 52 108 Interest paid (138) (148)Taxation 8 159 324 -------- --------Net cash from operating activities (2,706) (4,145) -------- -------- Cash flow from investing activitiesPurchase of property, plant and equipment 12 (289) (678)Proceeds from sale of equipment 12 3 -Interest received 90 197 -------- --------Net cash used in investing activities (196) (481) -------- --------Cash flow from financingProceeds from issue of share capital 4 2,686Proceeds from long-term borrowings 40 252Payments of finance lease liabilities (276) (348) -------- --------Net cash used in financing activities (232) 2,590 -------- --------Net decrease in cash and cash equivalents (3,134) (2,036)Cash and cash equivalents at beginning of period 4,760 6,848Effect of foreign exchange rate changes (25) (52) -------- --------Cash and cash equivalents at end of period 1,601 4,760 ======== ======== COMPANY CASH FLOW STATEMENTYear ended 31 December 2007 Note 2007 2006 £'000 £'000 Cash flows from operating activitiesLoss after tax (998) (1,012)Adjustments for:Depreciation 12 691 1,014Foreign exchange loss/(gain) (86) 261Finance income (463) (173)Finance expense 138 148Taxation recognised in profit and loss 8 (159) (152)Decrease in trade and other receivables 324 1,030Decrease/(Increase) in inventories (139) 19Increase/(Decrease) in trade payables 84 (531)Share based payments 52 108 Interest paid (139) (149)Taxation 8 159 324 -------- --------Net cash from operating activities (536) 887 -------- --------Cash flow from investing activitiesPurchase of property, plant and equipment 12 (270) (550)Proceeds from sale of equipment 12 - -Inter-company transactions (2,856) (296)Interest received 70 197 -------- --------Net cash used in investing activities (3,056) (649) -------- --------Cash flow from financingProceeds from issue of share capital 4 2,686Proceeds from long-term borrowings 40 245Payments of finance lease liabilities (270) (347) -------- --------Net cash used in financing activities (226) (2,584) -------- --------Net decrease in cash and cash equivalents (3,818) (2,346)Cash and cash equivalents at beginning of period 4,472 6,848Effect of foreign exchange rate changes - (30) -------- --------Cash and cash equivalents at end of period 654 4,472 ======== ======== NOTES TO THE ACCOUNTSYear ended 31 December 2007 1. ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) that are effective at 31 December 2007. The principal accountingpolicies are set out below. Basis of accounting These consolidated financial statements are for the year ended 31 December 2007. They have been prepared in accordance with the requirement of IFRS 1 "First-timeAdoption of International Financial Reporting Standards" because they are the Group's first IFRS financial statements. These financial statements have been prepared under the historical cost convention, except for revaluation of financial instruments. Tissue Science Laboratories plc's consolidated financial statements were prepared in accordance with the United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) until 31 December 2006. Thedate of transition to IFRS was 1 January 2006. The comparative figures in respect of 2006 have been restated to reflect changes in accounting policies as a result of adoption of IFRS. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRS are given in the reconciliation schedules, presented and explained in note 2. The accounting policies have been appliedconsistently throughout the Group for the purposes of preparation of these financial statements. The Directors have prepared these financial statements on the basis that thebusiness is a going concern. The basis for the preparation of these accounts ona going concern basis is a follows: As at 11 March 2008, the Directors have formally approved a recommended offer ('the offer') by Covidien UK Holdings Limited (the 'proposed acquiror') toacquire the entire issued and to be issued share capital of the Company. Theoffer is subject to approval by shareholders in due course. The Directors are ofthe opinion that the proposed acquiror is of sufficient financial strength suchthat it would be able to provide financial support as may be necessary for theCompany to continue its day to day operations for a period of at least one yearfrom the date of acquisition In the event that shareholders do not approve the offer the Directors would seekto undertake a fundraising for the purposes of providing additional workingcapital for the Group, in order for it to finance its day to day operations fora period of at least 12 months from the balance sheet date. The Directorsbelieve that a fundraising of up to £1.0m could be required and are confidentthat this could be completed. Pending the completion of such a fundraising, MrPatrick Paul, (the chairman) has undertaken to provide an unsecured loan on armslength commercial terms to an amount not exceeding £1.0m as may be required. Basis of consolidation The consolidated financial reports incorporate the financial statements of theCompany and the entities controlled by the Company (its subsidiaries) made up to30 June and 31 December each year. Control is achieved where the company hasthe power to govern the financial and operating policies of an investee entityso as to obtain benefits from its activities. Tissue Science Laboratories Inc., has been accounted for using acquisitionaccounting. On acquisition, the assets and liabilities were measured at theirfair values at the date of acquisition. Any excess of the cost of acquisitionover the fair values of the identifiable net assets acquired would have beenrecognised as goodwill. Any deficiency of the cost of acquisition below the fairvalues of the identifiable net assets (i.e. discount on acquisition) would havebeen credited to the income statement in the period of acquisition. The Group has elected not to apply IFRS 3 Business Combinations retrospectivelyto business combinations prior to the date of transition. As a result of theapplication of merger accounting (which treats the merged entities as if theyhad been combined throughout the current and comparative accounting periods)under the then prevailing UK GAAP, a separate merger reserve arose on theacquisition of Tissue Science Laboratories (UK) Ltd by Tissue ScienceLaboratories plc. As the amounts included in the merger reserve are notattributable to any class of equity presented, they have been disclosed as aseparate classification of equity. All intra-Group transactions, balances, income and expenditure are eliminated onconsolidation. Revenue recognition Revenue is measured by reference to the fair value of consideration received orreceivable by the Group for goods supplied, excluding VAT. Revenue from the sale of goods is recognised when all the following conditionshave been satisfied: • the group has transferred to the buyer the significant risks and rewards of ownership of the goods which is generally when delivery of the product has been accepted or, in the case of consignment stocks, on receipt of an order from the customer • the group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold which is generally when delivery of the product has been accepted or, in the case of consignment stocks, on receipt of an order from the customer • the amount of revenue can be measured reliably • it is probable that the economic benefits associated with the transaction will flow to the group, and • the costs incurred or to be incurred in respect of the transaction can be measured reliably. Royalties due from customers are recognised on an accruals basis. Inventories Inventories and work in progress are valued at the lower of cost and netrealisable value. WIP includes materials, direct labour and an attributableproportion of manufacturing overheads. Inventories are held on a FIFO basiswith provisions made for slow moving stock based on past experience of sales. Property, plant and equipment Property, plant and equipment are stated at cost less depreciation.Depreciation is provided at rates calculated to write off the cost or valuationof property, plant and equipment, less their estimated residual value, overtheir expected useful lives, which fall between the following ranges: Plant and machinery 3-5 yearsFixtures and fittings 3-5 yearsLeased assets 3-10 years (depending on the period of the lease)Motor Vehicles 3 yearsFreehold property 25 yearsFreehold improvements 25 years (in line with the property)Freehold land Not depreciated Non-current assets classified as held for sale Assets held for sale include assets that the Group intends and expects to sellwithin one year from the date of classification as held for sale. Assetsclassified as held for sale are measured at the lower of their carrying amountsimmediately prior to their classification as held for sale and their fair valueless costs to sell. Assets classified as held for sale are not subject todepreciation or amortisation. Leases In accordance with IAS 17, the economic ownership of a leased asset istransferred to the lessee if the lessee bears substantially all the risks andrewards related to the ownership of the leased asset. The related asset isrecognised at the time of inception of the lease at the fair value of the leasedasset or, if lower, the present value of the minimum lease payments plusincidental payments, if any, to be borne by the lessee. A corresponding amountis recognised as a finance leasing liability. The interest element of leasing payments represents a constant proportion of thecapital balance outstanding and is charged to the income statement over theperiod of the lease. All other leases are regarded as operating leases and the payments made underthem are charged to the income statement on a straight line basis over the termof the lease. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at thedate of the transaction. Monetary assets and liabilities denominated in foreigncurrencies at the balance sheet date are reported at the rates of exchangeprevailing at that date. The balance sheets of overseas subsidiary undertakings are translated at therate of exchange ruling at the balance sheet date. The exchange differencearising on the retranslation of opening net assets is taken directly to thetranslation reserves. All other exchange differences are taken to the profit andloss account. Derivatives policy The Group's activities expose it to the financial risks of changes in foreigncurrency exchange rates. The Group uses foreign exchange forward contracts tomitigate these exposures. The Group does not use derivative financialinstruments for speculative purposes. Changes in the fair value of derivative financial instruments are recognised inthe income statement as they arise. Taxation Current income tax assets and/or liabilities comprise those obligations to, orclaims from, fiscal authorities relating to the current or prior reportingperiod, that are unpaid at the balance sheet date. Deferred income taxes are calculated using the liability method on temporarydifferences. Deferred tax is generally provided on the difference between thecarrying amounts of assets and liabilities and their tax bases. However,deferred tax is not provided on the initial recognition of an asset or liabilityunless the related transaction affects tax or accounting profit. Deferred tax liabilities are provided in full, with no discounting. Deferredtax assets are recognised to the extent that it is probable that the underlyingdeductible temporary differences will be able to offset against future taxableincome. Current and deferred tax assets and liabilities are calculated at taxrates expected to apply to their respective period or realisation, provided theyare enacted or substantively enacted at the Balance Sheet date. Changes in deferred tax assets or liabilities are recognised as a component oftax expenses in the Income Statement, except where they relate to items that arecharged or credited directly to equity in which case the related deferred tax isalso charged or credited directly to equity. Share-based payments Employees (including senior executives) of the Group receive remuneration in theform of share-based payments such as share options. The cost of share-based payments made to employees, for awards granted after 7November 2002, is measured by reference to the fair value at the date on whichthey are granted. The fair value is determined using an appropriate pricingmodel and is expensed on a straight line basis over the vesting period. Marketrelated performance conditions are reflected in the fair value of the share.Non-market related performance conditions are allowed for using a separateassumption about the number of awards expected to vest. The transitionalarrangements on the adoption of IFRS 2 apply to options that had not vested atthe date of transition to IFRS. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, togetherwith other short-term, highly liquid investments that are readily convertibleinto known amounts of cash and which are subject to an insignificant risk ofchanges in value. Other provisions Other provisions are recognised when present obligations will probably lead toan outflow of economic resources from the Group and they can be estimatedreliably. Timing or amount of the outflow may still be uncertain. A presentobligation arises from the presence of a legal or constructive commitment thathas resulted from past events, for example, product warranties granted, legaldisputes or onerous contracts. Provisions are not recognised for futureoperating losses. Provisions are measured at the estimated expenditure requiredto settle the present obligation, based on the most reliable evidence availableat the balance sheet date, including the risks and uncertainties associated withthe present obligation. Where there are a number of similar obligations, thelikelihood that an outflow will be required in settlement is determined byconsidering the class of obligations as a whole. Pensions The Group operates a defined contribution pension scheme for its permanentemployees and the pension charge represents the amounts payable by the Group tothe fund in respect of the year. Reserves Share capital is determined using the nominal value of shares that have beenissued. Share premium account includes any premiums received on the initial issuing ofthe share capital. Any transaction costs associated with the issuing of sharesare deducted from share premium account capital, net of any related income taxbenefits. Shares to be issued represents the credits relating to share-based employeeremuneration which will be cleared once stock options are exercised or lapse. Merger reserve arose on the acquisition of Tissue Science Laboratories (UK) Ltdby Tissue Science Laboratories plc. Translation reserve includes foreign currency translation differences. Retained earnings include all current and prior period results as disclosed inthe income statement. Research and development Expenditure on research is recognised as an expense in the period in which it isincurred. Development costs incurred are capitalised when all the following conditions aresatisfied. • completion of the intangible asset is technically feasible so that it will be available for use or sale; • the Group has the ability to use or sell the intangible asset; • the intangible asset will generate future economic benefits; • the intangible asset will be completed and then either used by the Group or sold to a third party; • the Group has adequate resources to complete the development of the intangible assets; and • the development cost of the asset can be measured reliably. Development costs not meeting the above criteria for capitalisation are expensedas incurred. Standards not yet applied The following standards have not yet been adopted by the Group. The adoption ofthese standards in future periods is not expected to have any material effect onthe reported numbers. Standard Interpretation Effective in reporting periods starting on or afterIFRS 14 IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction 1 January 2008IFRIC 13 Customer loyalty programmes 1 July 2008IFRIC 12 Service Concession Arrangements 1 January 2008IFRIC 11 IFRS 2 Group and treasury share transactions 1 March 2007IAS 23 Borrowing costs (revised 2007) 1 January 2009IFRS 8 Operating segments 1 January 2009 Critical judgements and estimates Applying accounting policies requires the use of certain judgements, assumptionsand estimates. The most important of these are set out below. 1) Work in Progress valuation - Estimates are made for part completedworks based on a validated stage process operation. If these estimates do notreflect actual work in progress value then operating profits would be affected. 2) Stock Provision - A provision is made against slow moving stock basedproduct shelf life and on managements expectations of future sales volumes.Operating profits would be adversely affected if underprovided. Financial instruments Financial assets are divided into the following categories: • Loans and receivables • Financial assets at fair value through profit and loss • Available-for-sale financial assets Financial assets are assigned to the different categories on initialrecognition, depending on the characteristics of the instrument and its purpose.A financial instrument's category is relevant for the way it is measured andwhether any resulting income and expense is recognised in the profit and loss ordirectly in equity. Generally, the Group recognises all financial assets using the settlement dayaccounting. An assessment of whether a financial asset is impaired is made atleast at each reporting date. All income and expense relating to financialassets are recognised in the income statement line item "finance income" or "finance expense", respectively. Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. After initialrecognition these are measured at amortised cost using the effective interestmethod, less provision for impairment. Any change in their value is recognisedin profit and loss. The Group's trade and most other receivables fall into thiscategory of financial instruments. Discounting, however, is omitted where theeffect of discounting is immaterial. Significant receivables are considered for impairment on a case-by-case basiswhen they are past due at the balance sheet date or when objective evidence isreceived that a specific counterparty will default. All other receivables arereviewed for impairment in groups, which are determined by reference to theindustry and region of a counterparty and other available features of sharedcredit risk characteristics, if any. Financial assets at fair value through profit or loss include financial assetsthat are either classified as held for trading or are designated by the entityto be carried at fair value through profit or loss upon initial recognition. Bydefinition, all financial instruments that do not qualify for hedge accountingfall into this category. Any gain or loss arising from derivative financial instruments is based onchanges in fair value, which is determined by direct reference to active markettransactions or using a valuation technique where no active market exists. For the reporting periods under review, the Group has entered into currencycontracts to mitigate currency exchange risk arising from sales denominated inUS Dollars. For the periods under review this results in the recognition of thefair value of these financial assets and liabilities, which are presented within"Other receivables" or "Other payables", respectively. The Group's financial liabilities include borrowings, trade and other payables(including finance lease liabilities), which are measured at amortised costusing the effective interest rate method. Financial liabilities are recognised when the Group becomes a party to thecontractual agreements of the instrument. All interest-related charges and, ifapplicable, changes in an instrument's fair value that are reported in profit orloss are included in the income statement line items "finance expense" or"finance income". 2. TRANSITION TO IFRS As stated in the Basis of Preparation, these are the Group's first annualconsolidated financial statements prepared in accordance with IFRS. An explanation of how the transition from UK GAAP to IFRS has affected theGroup's financial position, financial performance and cash flow is set outbelow. Any adjustments between the balance sheet as at 31 December 2005 and the balancesheet at 1 January 2006 have been treated as a change in accounting policy. IAS 32 and 39 - Financial instruments The Group has applied IAS 32 and 39 from 1 January 2006. The Group uses forwardexchange contracts to hedge currency transaction exposure. Whilst the grouppreviously used hedge accounting when reporting income and expenditure inforeign currencies, these contracts do not qualify for hedge accounting underIFRS. The fair value movements for these derivatives have been accounted forthrough the income statement. The effect of the transition on the incomestatement for the period ended 31 December 2006 is a charge of £106,000. Theeffect of the transition on the opening balance sheet at 1 January 2006 and thebalance sheet for the year ended 31 December 2006 is £48,000 and £nilrespectively. Other Other adjustments relate to the reclassification of reserve amounts for shareoptions issued prior to 7 November 2002. This adjustment does not have anyeffect on the net assets of the group. (a.) Income StatementYear ended 31 December 2006 As previously IAS 39 As restated stated £'000 £'000 £'000 CONTINUING OPERATIONSRevenue 10,683 (161) 10,522Cost of sales (3,401) - (3,401) -------- -------- --------Gross profit 7,282 (161) 7,121 Selling, distribution and marketing costs (5,910) - (5,910)Research and development costs (2,269) - (2,269)Other administrative expenses (2,823) 55 (2,768) -------- -------- --------Total administrative expenses (11,002) 55 (10,947) -------- -------- --------OPERATING LOSS (3,720) (106) (3,826) Finance income 173 - 173Finance expense (149) - (149) -------- -------- --------LOSS BEFORE TAXATION (3,696) (106) (3,802) Taxation 152 - 152 -------- -------- -------- LOSS FOR THE YEAR (3,544) (106) (3,650) ======== ======== ========Attributable to:Equity holders of the parent (3,544) (106) (3,650) Basic and diluted loss per ordinary share (11.8)p (12.1)p ======== ======== (b.) Balance sheet As at 1 January 2006 As previously IAS 39 Other As restated stated £'000 £'000 £'000 £'000 NON-CURRENT ASSETSProperty, plant and equipment 3,340 - - 3,340 -------- -------- -------- -------- 3,340 - - 3,340 -------- -------- -------- --------CURRENT ASSETSInventories 2,301 - - 2,301Trade and other receivables 2,713 20 - 2,733Cash and cash equivalents 6,842 6 - 6,848 -------- -------- -------- -------- 11,856 26 - 11,882 -------- -------- -------- --------TOTAL ASSETS 15,196 26 - 15,222 -------- -------- -------- -------- CURRENT LIABILITIESTrade and other payables (907) (74) - (981)Current portion of long-term borrowings (322) - - (322)Short-term provisions (1,253) - - (1,253) -------- -------- -------- -------- (2,482) (74) - (2,556) NON-CURRENT LIABILITIESLong-term borrowings (1,554) - - (1,554) -------- -------- -------- --------TOTAL LIABILITIES (4,036) (74) - (4,110) NET ASSETS 11,160 (48) - 11,112 ======== ======== ======== ========EQUITYShare capital 2,946 - - 2,946Share premium account 22,075 - - 22,075Shares to be issued 239 - (167) 72Merger reserve 545 - - 545Profit and loss account (14,645) (48) 167 (14,526) -------- -------- -------- --------TOTAL EQUITY 11,160 (48) - 11,112 ======== ======== ======== ======== (b) Balance sheet (continued) As at 31 December 2006 As previously IAS 39 Other As restated stated £'000 £'000 £'000 £'000 NON-CURRENT ASSETSProperty, plant and equipment 2,994 (1) - 2,993 -------- -------- -------- -------- 2,994 (1) - 2,993 -------- -------- -------- --------CURRENT ASSETSInventories 3,875 - - 3,875Trade and other receivables 2,422 - - 2,422Cash and cash equivalents 4,762 (2) - 4,760 -------- -------- -------- -------- 11,059 (2) - 11,057 -------- -------- -------- --------TOTAL ASSETS 14,053 (3) - 14,050 -------- -------- -------- -------- CURRENT LIABILITIESTrade and other payables (765) 3 - (762)Current portion of long-term borrowings (265) - - (265)Short-term provisions (1,140) - - (1,140) -------- -------- -------- -------- (2,170) 3 - (2,167) NON-CURRENT LIABILITIESLong-term borrowings (1,515) - - (1,515) -------- -------- -------- --------TOTAL LIABILITIES (3,685) 3 - (3,682) -------- -------- -------- --------NET ASSETS 10,368 - - 10,368 ======== ======== ======== ========EQUITYShare capital 3,460 - - 3,460Share premium account 24,247 - - 24,247Shares to be issued 341 - (161) 180Merger reserve 545 - - 545Translation reserve (42) 154 112Profit and loss account (18,183) (154) 161 (18,176) -------- -------- -------- --------TOTAL EQUITY 10,368 - - 10,368 ======== ======== ======== ======== (c.) Cash flow statement There have been no changes to the content of the cash flow statement as a resultof the adoption of IFRS. All changes relate solely to the format. 3. SEGMENTAL REPORTING Business segments The business is managed according to two business segments: Direct/Distributorand Partner. These are the basis on which the Group reports its primary segmentinformation. The principal activities of each division are as follows; • The Direct/Distributor division manufactures, distributes and sells Hernia/General surgery products (Permacol(R)) via Distributors and the Group's own sales reps direct to hospitals and around the world. • The Partner division manufactures Urology, Orthopaedic and Head & Neck devices and sells via partners around the world. Year ended 31 December 2006 Direct/ Partners Unallocated Total Distributor £000s £000s £000s £000s Revenue 7,153 3,369 10,522 ------- ------- -------Gross Profit 5,470 1,651 7,121 ------- ------- ------- -------OPERATING PROFIT/(LOSS) (75) 1,567 (5,318) (3,826) Finance income 173Finance expense (149) -------LOSS BEFORE TAX (3,802) ======= Segment assets 909 786 12,355 14,050Segment liabilities - - (3,682) (3,682)Fixed Asset additions - - 676 676Depreciation - - 1,023 1,023 Year ended 31 December 2007 Direct/ Partners Unallocated Total Distributor £000s £000s £000s £000s Revenue 9,770 2,362 12,132 ------- ------- -------Gross Profit 7,338 967 8,304 ------- ------- ------- -------OPERATING PROFIT/(LOSS) 964 908 (5,143) (3,271) Finance income 88Finance expense (138) -------LOSS BEFORE TAX (3,321) =======Segment assets 1,352 319 9,328 10,999Segment liabilities - - (3,671) (3,671)Fixed Asset additions - - 288 288Depreciation - - 698 698 Geographical segments The Group's business segments operate throughout the world. In presentinginformation on the basis of geographical segments, segment revenue is based onthe geographical location of the customers and not the legal entity in which thetransaction occurred. Revenue Assets 2007 2006 2007 2006 £000s £000s £000s £000s United Kingdom 1,698 1,495 261 185Europe (excluding UK) 764 511 168 80USA 9,521 8,339 1,240 1,402Rest of World 149 177 2 28Unallocated 9,328 12,355 Total 12,132 10,522 10,999 14,050 All Fixed Assets are classified as Unallocated. 4. OPERATING LOSS 2007 2006 £'000 £'000The operating loss is stated after charging: Depreciation of tangible property, plant and equipment- owned by the Group 333 490- assets held under finance leases 380 534Fees payable to the Group's auditor for the audit of the annual financial statements 40 32Fees payable to the Group's auditor and its associates for other services - Other services relating to taxation 12 16Operating lease rentals- land and buildings 274 260- other 27 40Research and development 2,017 2,269Foreign exchange (gains)/losses (6) 22 ======== ======== 5. STAFF COSTS Group Company 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Wages and salaries 6,259 5,731 3,181 3,375Social security costs 794 652 357 308Other pension costs 167 158 113 122Employee share option scheme costs 52 108 52 108 -------- -------- -------- -------- 7,272 6,649 3,703 3,913 ======== ======== ======== ======== The pension costs shown above relate to payments into the Group's definedcontribution pension scheme. The average monthly number of employees, including executive directors butexcluding non-executive directors, during the year was as follows: Group Company 2007 2006 2007 2006Office and management 15 16 10 11Sales 55 42 9 9Research and development 18 21 14 15Production 54 58 54 58 -------- -------- -------- -------- 142 137 87 93 ======== ======== ======== ======== 6. DIRECTORS' REMUNERATION Directors' remuneration for the year (or from the date of appointment fordirectors appointed during the year): 2007 2006 £'000 £'000Aggregate emoluments 511 524Pension contributions to money purchase schemes 35 32 ------ ------ 546 556 ====== ====== During the year retirement benefits were accruing to three directors (2006:three) in respect of money purchase pension schemes. The remuneration of thehighest paid director was as follows: 2007 2006 £'000 £'000Emoluments 216 221Pension contributions to money purchase schemes 20 19 ------ ------ 236 240 ====== ====== 7. FINANCE INCOME AND FINANCE COST Finance Income 2007 2006 £'000 £'000 Bank interest 88 173 ------ ------ 88 173 ====== ====== Finance cost 2007 2006 £'000 £'000 On bank loans and overdrafts 86 89Other interest 20 18Finance leases 32 42 ------ ------ 138 149 ====== ====== 8. TAXATION 2007 2006 £'000 £'000 UK research and development tax credit 159 152 ------ ------Tax credit for current year 159 152 ====== ======The tax assessed for the period is lower than that resulting fromapplying the standard rate of corporation tax in the UK: 30%(2006: 30%). The differences are explained below:Loss on ordinary activities before tax 3,321 3,696 Tax credit at 30% thereon (996) (1,109)Expenses not deductible for tax purposes 111 121Movement in accelerated capital allowances not provided 61 90Movement in losses not provided 667 854Prior year underestimate of deferred tax asset not provided (141) (241)R&D tax credit 139 133 ------ ------Tax credit for current year (159) (152) ====== ====== The Group recognises the tax credits arising from its research and developmentactivities when they are received. The tax credit recognised above, relates to aclaim made for the tax credit for research undertaken in the year ended 31December 2006. Tax credits are given at a rate of 16% of gross losses.Consequently, the difference between the value at which potential losses aredisclosed as a deferred tax asset (30%) and the surrender value of the losses(16%) is a reconciling item in the reconciliation note. There was no provision for deferred tax during the year, as the asset is notexpected to be utilised in the next accounting period. Unprovided deferred taxon share based payments is not expected to be material. 2007 2006 £'000 £'000 Tax losses carried forward 3,075 3,002Accelerated capital allowances 478 442 ------ ------Potential deferred tax asset not provided 3,553 3,444 ====== ====== 9. LOSS PER ORDINARY SHARE The loss per ordinary share has been calculated based on the weighted-averagenumber of ordinary shares in issue during the year. 2007 2006 £'000 £'000 Loss for the financial year (3,162) (3,650) ========== ==========Weighted average number of ordinary shares 34,606,077 30,131,492 ========== ==========Basic and diluted loss per share (9.1)p (12.1)p ========== ========== 10. FIXED ASSET INVESTMENTS The Group includes a 100% wholly owned subsidiary incorporated in the US, TissueScience Laboratories, Inc. engaged in the business of importation, marketing anddistribution of surgical implants. The company was incorporated on 1 January2006 and the carrying value at 31 December 2007 was $276k. The Company also has an investment in a dormant subsidiary incorporated in theUK, Tissue Science Laboratories (UK) Limited, comprising a holding of 100% ofits issued share capital. The carrying value of this investment was £nil atboth 31 December 2006 and 31 December 2007. The Company also has an investment in a subsidiary incorporated in the UK,Regentix Limited, comprising a holding of 100% of its issued share capital. Thecarrying value of this investment was £nil at 31 December 2007. 11. TRANSFER OF ASSET TO NON-CURRENT ASSET HELD FOR SALE The freehold property purchased in 2005, along with improvements made to thesite since acquisition, have been transferred to non-current assets held forsale in the current period. The asset was transferred at carrying value at thetime and no further depreciation has been charged. The asset is not expected to sell for less than its carrying value. The mortgage relating to the asset transferred to assets held for sale has beenreclassified as a current liability as the property is expected to be soldwithin a year. 12. PROPERTY, PLANT AND EQUIPMENT Group Leasehold Freehold Plant and Motor Fixtures Total improvements land and machinery vehicles and property equipment £'000 £'000 £'000 £'000 £'000 £'000CostAt 1 January 2007 1,342 1,865 2,699 31 871 6,808Additions 124 1 94 - 70 289Disposals - - - - (22) (22)Transfer to Non-current asset - - - - - -held for sale - (1,866) - - - (1,866) -------- -------- -------- -------- -------- --------At 31 December 2007 1,466 - 2,793 31 919 5,209 -------- -------- -------- -------- -------- --------DepreciationAt 1 January 2007 956 91 2,260 18 489 3,814Charge for year 145 14 355 7 177 698Disposals - - - - (4) (4)Transfer to Non-current asset - - - - - -held for sale - (105) - - - (105) -------- -------- -------- -------- -------- --------At 31 December 2007 1,101 - 2,615 25 662 4,403 -------- -------- -------- -------- -------- --------Net book valueAt 31 December 2007 365 - 178 6 257 806 ======== ======== ======== ======== ======== ========At 31 December 2006 386 1,774 439 13 381 2,993 ======== ======== ======== ======== ======== ========Leased assets included above: Net book valueAt 31 December 2007 54 - 76 6 89 225 ======== ======== ======== ======== ======== ========At 31 December 2006 102 - 315 13 136 566 ======== ======== ======== ======== ======== ======== Group Leasehold Freehold Plant and Motor Fixtures Total improvements land and machinery vehicles and property equipment £'000 £'000 £'000 £'000 £'000 £'000Cost At 1 January 2006 1,071 1,765 2,628 31 636 6,131Additions 271 100 71 - 234 676 -------- -------- -------- -------- -------- --------At 31 December 2006 1,342 1,865 2,699 31 870 6,807 -------- -------- -------- -------- -------- --------DepreciationAt 1 January 2006 736 35 1,692 12 316 2,791Charge for year 220 56 568 6 173 1,023 -------- -------- -------- -------- -------- --------At 31 December 2006 956 91 2,260 18 489 3,814 -------- -------- -------- -------- -------- -------- Net book valueAt 31 December 2006 386 1,774 439 13 381 2,993 ======== ======== ======== ======== ======== ========At 31 December 2005 335 1,730 936 19 320 3,340 ======== ======== ======== ======== ======== ========Leased assets included above: Net book valueAt 31 December 2006 102 - 315 13 136 566 ======== ======== ======== ======== ======== ========At 31 December 2005 67 - 593 19 139 818 ======== ======== ======== ======== ======== ======== Company Leasehold Freehold Plant and Motor Fixtures Total improvements land and machinery vehicles and property equipment £'000 £'000 £'000 £'000 £'000 £'000CostAt 1 January 2007 1,342 1,865 2,699 31 744 6,681Additions 124 1 94 - 51 270Disposals - - - - (70) (70)Transfer to Non-current assetheld for sale - (1,866) - - - (1,866) -------- -------- -------- -------- -------- --------At 31 December 2007 1,466 - 2,793 31 725 5,015 -------- -------- -------- -------- -------- --------DepreciationAt 1 January 2007 956 91 2,260 18 480 3,805Charge for year 145 14 355 7 170 691Disposals - - - - (12) -Transfer to Non-current assetheld for sale (105) (105) -------- -------- -------- -------- -------- --------At 31 December 2007 1,101 - 2,615 25 638 4,379 -------- -------- -------- -------- -------- --------Net book valueAt 31 December 2007 365 - 178 6 87 636 ======== ======== ======== ======== ======== ========At 31 December 2006 386 1,774 439 13 264 2,876 ======== ======== ======== ======== ======== ========Leased assets included above: Net book valueAt 31 December 2007 54 - 76 6 89 225 ======== ======== ======== ======== ======== ======== At 31 December 2006 102 - 315 13 130 560 ======== ======== ======== ======== ======== ======== Company Leasehold Freehold Plant and Motor Fixtures Total improvements land and machinery vehicles and property equipment £'000 £'000 £'000 £'000 £'000 £'000CostAt 1 January 2006 1,071 1,765 2,628 31 636 6,131Additions 271 100 71 - 108 550 -------- -------- -------- -------- -------- --------At 31 December 2006 1,342 1,865 2,699 31 744 6,681 -------- -------- -------- -------- -------- --------DepreciationAt 1 January 2006 736 35 1,692 12 316 2,791Charge for year 220 56 568 6 164 1,014 -------- -------- -------- -------- -------- --------At 31 December 2006 956 91 2,260 18 480 3,805 -------- -------- -------- -------- -------- --------Net book valueAt 31 December 2006 386 1,774 439 13 264 2,876 ======== ======== ======== ======== ======== ========At 31 December 2005 335 1,730 936 19 320 3,340 ======== ======== ======== ======== ======== ========Leased assets included above: Net book valueAt 31 December 2006 102 - 315 13 130 560 ======== ======== ======== ======== ======== ========At 31 December 2005 67 - 593 19 139 818 ======== ======== ======== ======== ======== ======== 13. INVENTORIES Group Company 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Raw materials and packaging 278 211 278 211Work in progress 814 883 814 883Finished goods 3,351 2,781 1,329 1,188 -------- -------- -------- -------- 4,443 3,875 2,421 2,282 ======== ======== ======== ======== In the opinion of the Group's Directors, the replacement cost of stocks is notmaterially different from the value of stock shown above. Finished goods written off and charged to the Income Statement was £242k (£nil2006), which were fully provided for in the previous year. 14. TRADE AND OTHER RECEIVABLES Group Company 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Trade receivables 1,671 1,695 732 1,027Other receivables 83 82 83 82Prepayments and accrued income 634 645 518 549 -------- -------- -------- -------- 2,388 2,422 1,323 1,658 -------- -------- -------- -------- Inter-company account - - 8,439 5,119 The inter-company loan is made up of stock purchased and expenses paid on behalfof Tissue Science Laboratories Inc. The total amount of the loan is repayablewith no fixed due date. The amount outstanding is charged interest at marketdetermined rates. 15. TRADE AND OTHER PAYABLES Group Company 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Bank loans and overdrafts - 26 - 26Obligations under finance leases 217 239 215 238Trade payables 992 762 946 681Social security and other taxes 113 104 113 104Other payables 364 390 382 390Accruals and deferred income 654 646 298 453 -------- -------- -------- -------- 2,340 2,167 1,918 1,892 ======== ======== ======== ======== 16. LONG-TERM BORROWINGS Group Company 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Bank loans and overdrafts - 1,248 - 1,248Obligations under finance leases 83 267 79 261 -------- -------- -------- -------- 83 1,515 79 1,509 ======== ======== ======== ======== 17. CALLED UP SHARE CAPITAL 2007 2006 £'000 £'000Authorised:100,000,000 ordinary shares of 10p each 10,000 10,000 ========= ========= Allotted, called up and fully paid:34,609,139 (2006:34,601,639) ordinary shares of 10peach 3,461 3,460 ========= ========= During the year 7,500 shares options were exercised. SHARE OPTIONS As at 31 December 2007 there were outstanding share options granted (but not yetexercised) under the Company's executive share option plans in respect ofordinary shares of 10 pence each, as follows: Exercise Expiry Date Exercise Outstanding options as Options exercised Outstanding Price at 31 December 2006 during the year options as at 31 December 2007 10 November 2008 50.0p 60,000# 60,000#22 February 2009 75.0p 17,500# 17,500#27 February 2010 37.5p 664,474# 664,474#27 February 2010 75.0p 70,000# 70,000#28 February 2010 37.5p 120,000# 120,000#11 October 2010 37.5p 15,000# 15,000#31 December 2010 37.5p 100# 100#18 May 2011 37.5p 35,000# 35,000#24 October 2011 37.5p 191,626# (2,500) 189,126#24 October 2011 55.0p 355,000# (5,000) 350,000#31 January 2012 166.5p 50,000# 50,000#7 June 2015 170.0p 615,000* 615,000*18 December 2016 71.5p 437,500* 437,500* ___________ ___________ ___________ 2,631,200 (7,500) 2,623,700 =========== =========== =========== # The vesting of these options is subject to a three year time period from thedate of grant * The vesting of these options is subject to a three-year time period from thedate of grant and challenging performance criteria. The performance criteriarelate to the Tissue Science Laboratories share price achieving stretchingtargets Accelerated vesting of management and SAYE share options upon change of controlof the Company is permissible in accordance with the rules of the respectiveoption schemes. As at 31 December 2007 there were outstanding share options granted (but not yetexercised) under the Company's Save As You Earn (SAYE) scheme in respect ofordinary shares of 10 pence each, as follows: Exercise Expiry Date Exercise Outstanding options as Options granted/ Outstanding Price at 31 December 2006 (exercised/lapsed) options as at 31 during the year December 2007 30 November 2007 132.0p 49,438 (49,438) -31 May 2010 61.0p 250,080 (76,277) 173,803 ___________ ___________ ___________ 299,518 (125,715) 173,803 =========== =========== =========== For the adoption of IFRS 2 "Share based payment" the fair value of the optionsis estimated at the date of grant using the Black-Scholes option pricing model.Volatility is based on historical share price movement. The following tablegives the assumptions applied to the options granted in the respective periodsshown. Grant Date 18 December 2006 10 November 2006 7 June 2005 Fair value (p) 27.0 30.0 63.0Share price at grant date (p) 72.0 63.0 165.0Exercise price (p) 72.0 61.0 170.0Expected volatility 33.6% 59.2% 35.7%Option life (years) 10 3.5 10Expected life (years) 5 3.5 5Expected dividend yield - - -Risk free interest 4.5% 4.5% 4.5% Details of Directors' share options are given in the Report on Directors'Remuneration in the Group's statutory accounts. 18. OTHER COMMITMENTS At 31 December 2007 the Group had annual commitments under non-cancellableoperating leases as follows: Land and buildings Other 2007 2006 2007 2006 £'000 £'000 £'000 £'000Expiry date:Within one year 47 44 5 1Between one and five years 98 246 24 30Greater than five years 64 - - - ====== ====== ====== ====== 19. OBLIGATIONS UNDER FINANCE LEASES 2007 2006 £'000 £'000Minimum lease payments payableWithin one year 232 270Between one and five years 87 281 -------- -------- 319 551Less: Finance charges allocated to future periods (19) (45) -------- -------- 300 506 ======== ======== The obligations under finance leases are secured over the assets to which theobligations relate. 20. FINANCIAL INSTRUMENTS Group Company 2007 2006 2007 2006 £'000 £'000 £'000 £'000 CURRENT ASSETSDerivative financial instruments:• Financial assets held for trading (carried at - 9 - 9 fair value through profit or loss)Trade and other receivables:• Loans and receivables 2,388 2,422 1,323 1,658Cash and cash equivalents 1,601 4,760 654 4,472 3,989 7,182 3,075 6,754 NON CURRENT LIABILITIESBorrowings:• Financial liabilities measured at amortised cost (83) (1,515) (79) (1,509) (83) (1,515) (79) (1,509)CURRENT LIABILITIESBorrowings:• Financial liabilities measured at amortised cost (1,248) (26) (1,248) (26)Derivative financial instruments:• Financial liabilities held for trading (carried (22) - (22) - at fair value through profit or loss)Trade and other payables• Financial liabilities measured at amortised cost (1,664) (1,495) (1,634) (1,413) (2,934) (1,521) (2,904) (1,439) The carrying value of financial assets and liabilities not held at fair value isa reasonable approximation of their fair value. Most of the Group's expenses are carried out in UK Sterling. Exposures tocurrency exchange rates arise from the Group's overseas sales, which areprimarily denominated in US Dollars. To mitigate the Group's exposure to foreign currency risk, non-Sterling cashflows are monitored and forward contracts are entered in accordance with theGroup's risk management policies. The value of the financial assets and liabilities at the balance sheet daterelated to currency exchange contracts for both the Group and the Company are asfollows: 2007 2006 £'000 £'000 US Dollar forward exchange contracts, held-for-trading assets/ (22) 9(liabilities) Foreign currency denominated financial assets and liabilities, translated intoUK Sterling at the closing rate, are as follows. Group 2007 £'000 2006 £'000 US$ Euro US$ Euro Financial assets 2,525 169 2,494 144Financial liabilities (416) - (544) -Short-term exposure 2,109 169 1,950 144 Financial assets - - - -Financial liabilities (4) - (5) -Long-term exposure (4) - (5) - Company 2007 £'000 2006 £'000 US$ Euro US$ Euro Financial assets 523 169 1,446 144Financial liabilities (2) - (90) -Short-term exposure 521 169 1,356 144 Financial assets - - - -Financial liabilities - - - -Long-term exposure - - - - The Group's/Company's exposure to credit risk is limited to the carrying amountof financial assets recognised at the balance sheet date, as summarised below: Group Company 2007 2006 2007 2006Classes of financial assets - carrying amounts £'000 £'000 £'000 £'000 Cash and cash equivalents 1,601 4,760 654 4,472Trade and other receivables 2,388 2,422 1,323 1,658 ------- ------- ------- ------- 3,989 7,182 1,977 6,130 The carrying amount of the trade receivables has not been impaired. Some of thetrade receivables are past due as at the reporting date. The age of financialassets past due but not impaired is as follows: Group Company 2007 2006 2007 2006 £'000 £'000 £'000 £'000 Not more than 3 months 145 47 122 47More than 3 months but not more than 6 months - 18 - 18More than 6 months but not more than 1 year - 10 - - ------- ------- ------- ------- 145 75 122 65 The following table illustrates the sensitivity of net results for the year andequity in respect of the Group's financial assets and financial liabilities andthe US Dollar - UK Sterling exchange rate. It assumes a +/- 3.3% change of US Dollar/UK Sterling exchange rate for the yearended at 31 December 2007 (2006:4.1%). This percentage is based on averagemarket volatility in exchange rates in the previous 12 months. The sensitivityanalysis is based on the Group's/Company's foreign financial instruments held ateach balance sheet date. If the US Dollar had strengthened against the UK Sterling by 3.3% (2006:4.1%)then this would have had the following impact: Group Company 2007 2006 2007 2006 £'000s £'000s £'000s £'000s Net result for the year (48) (36) (12) (38)Equity (48) (36) (12) (38) If the US Dollar had weakened against the UK Sterling by 3.3% (2006:4.1%) thenthis would have had the following impact: Group Company 2007 2006 2007 2006 £'000s £'000s £'000s £'000s Net result for the year 51 38 13 41Equity 51 38 13 41 The Group manages its liquidity needs by carefully monitoring scheduled debtservicing payments for long-term financial liabilities as well as cash out-flowsdue in day-to-day business. Liquidity needs are monitored in various timebands, on a day-today and week-to-week basis. Long-term liquidity needs areidentified monthly. As at 31 December 2007, the Group's liabilities have contractual maturitieswhich are summarised below: Current Non-current Within 6 6 to 12 1 to 5 years Later than 5 months months years £'000s £'000's £'000s £'000s Long-term bank loans - - - -Finance lease obligations 128 104 87 -Trade payables 992 - - -Other short term liabilities 1,131 - - -Derivatives 937 - - - ------- ------ ------- ------- 3,188 104 87 - This compares to the maturity of the Group's financial liabilities in theprevious reporting period as follows: Current Non-current Within 6 6 to 12 1 to 5 years Later than 5 months months years £'000s £'000's £'000s £'000s Long-term bank loans 57 57 565 1,441Finance lease obligations 148 122 281 -Trade payables 762 - - -Other short term liabilities 1,140 - - -Derivatives 979 - - - ------- ------ ------- ------- 3,086 179 846 1,441 The above contractual maturities reflect the gross cash flows, which may differto the carrying values of the liabilities at the balance sheet date. As at 31 December 2007, the Company's liabilities have contractual maturitieswhich are summarised below: Current Non-current Within 6 6 to 12 1 to 5 years Later than 5 months months years £'000s £'000's £'000s £'000s Long-term bank loans - - - -Finance lease obligations 127 103 83 -Trade payables 946 - - -Other short term liabilities 757 - - -Derivatives 937 - - - ------- ------ ------- ------- 2,767 103 83 - This compares to the maturity of the Company's financial liabilities in theprevious reporting period as follows: Current Non-current Within 6 6 to 12 1 to 5 years Later than 5 months months years £'000s £'000's £'000s £'000s Long-term bank loans 57 57 565 1,441Finance lease obligations 147 121 275 -Trade payables 681 - - -Other short term liabilities 947 - - -Derivatives 979 - - - ------- ------ ------- ------- 2,811 178 840 1,441 The above contractual maturities reflect the gross cash flows, which may differto the carrying values of the liabilities at the balance sheet date. 21. CAPITAL COMMITMENTS At 31 December 2006 and 2007 the Group had no capital commitments. 22. RELATED PARTY TRANSACTIONS There were no related party transactions in either the current or precedingyear. This information is provided by RNS The company news service from the London Stock Exchange