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INVERESK PLC

('Inveresk' or the 'Company')

Preliminary Results for 12 months ended 31 December 2007

Highlights 2007

• Profits attributable to shareholders of £1.741M compared to losses of £3.016M for the 12 months to 31 December 2006.

• During the year land, buildings and related equipment at Carrongrove were sold for a consideration exceeding £11.0M.

• Operating losses of £2.357M were recorded as compared to £2.596M in 2006. Margins remained under pressure throughout the period notwithstanding a volume increase of 8% in respect of tonnage sold.

• Shareholders' funds increased to £10.611M as compared to £7.760M as at 31 December 2006. These figures are stated before recognition of any surplus which may arise from the future disposal of the Company's land assets.

• Net debt has fallen by 54% to £5.873M compared to £12.753M as at 31 December 2006.

• R&D has resulted in two new product lines being prepared for market commercialisation both of which are the subject of world-wide patent applications.

• Successful penetration of the Asian markets for our internationally renowned artist papers brands with sales into new markets including China and Korea, and revitalised markets in Japan, India, Hong Kong and Singapore.

• Continued investigation of options available so as to realign our paper making activities with our chosen alternative strategy of enhancing shareholder value through the development of our land portfolio.

Post Balance Sheet Events

• On 1 July 2008 the closure of PM1 at St Cuthberts was announced, to stem operating losses, in favour of a potential Joint Venture with Chinese paper manufacturers.

• Successful renegotiation of banking facilities with HBOS following the recapitalisation of the bank together with support from a number of existing shareholders.

• Independent valuations carried out in April and October 2008 over the Company's freehold brownfield sites in the range of £22M to £25M subject to receipt of appropriate planning consents.

Alan Walker, Chief Executive, commented:

'This has been a most difficult period in which to close out our loss making PIP activities in order to exploit the development potential of our land assets. The Company has realisable assets of approximately £30M funded by bank and shareholders loans of £9M and it remains our prime focus to harvest these assets to not only achieve debt free status but also generate cash resources for the ultimate benefit of our shareholders.'

For further information contact:

Alan Walker        Chief Executive Officer        01353 725856 (Mobile: 07800 951151)

Oliver Scott         KBC Peel Hunt,                   0207 418 8900

Nominated Adviser and Broker        

    

 

CHAIRMAN'S STATEMENT

Overview

The financial year to 31 December 2007 again has seen a continuation of the theme to which I have referred in my last three annual reports, namely, a European paper industry facing considerable challenges with pressure on profit margins and steeply rising costs. In all sectors of the paper industry, whether in the UK or Continental Europe, the principal talking points concern retention of market share through margin erosion, increases in raw material costs and the massive impact of spiraling energy costs in an industry where continuous production is so heavily dependent upon the use of gas, water, electricity and transportation.

Whilst no one could have anticipated the extent to which energy costs have soared during 2007 and most of 2008, shareholders will recognise that your Board understood back in June 2005 that the prospects for the industry as a whole were not good and that rather than follow our competitors into large scale investment programmes we realised the need for consolidation within the industry by selling our highly respected international brand 'Gemini', formerly produced at the Carrongrove Mill in Stirlingshire, together with the plant, equipment, land and buildings for a little under £25M, most of which was used to significantly reduce bank indebtedness. In addition to this we retain a carried interest in the future development prospects at Carrongrove, as well as additional consideration which is now long overdue to be paid by Tullis Russell Papermakers Ltd who acquired the Gemini brand and which is the subject of Court proceedings to which I refer below.  

Our paper activities at the end of 2007 were confined to the core specialist operations at St Cuthberts Mill in Somerset where we produced pre-impregnated foil based papers (PIP) for the furniture and décor markets, as well as our respected international brands of artist and inkjet papers to which we refer in our Operating and Financial Review. Over many years this mill has suffered from a lack of financial investment on new plant and equipment whilst those with whom we compete have invested heavily. Ironically and most disturbingly as greater capacity has emerged in Europe demand has fallen sharply and margins on PIP have declined by up to 50% over a three year period. Whereas traditionally this highly technical niche sector within the paper industry has justified high and sustainable margins for many years we were increasingly finding that orders were the subject of 'spot' market tenders as prices became commoditised and product differentiation went unrewarded.

Your Board had chosen not to invest in such a tightly configured specialised niche market where further consolidation is inevitable and where increasingly it is not possible to obtain satisfactory levels of return on capital. As an alternative strategy your Board had chosen to engage in widespread discussion with potential international partners who had under-utilised plant and equipment as well as ambition to grow their presence in this market where product innovation as well as technical expertise is sought after by discerning customers. I refer further to the outcome of these discussions under Notes 1 and 4 of 'Post Balance Sheet Events'.

As all shareholders know we are living in very unusual and difficult times which have resulted in your Board taking decisive action in a number of areas which I refer to later in my statement under 'Post Balance Sheet Events'.

Results

For the first time our annual results are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU ('adopted IFRSs'). The date of transition to the adopted IFRSs is 1 January 2006 and accordingly comparative figures for the year ended 31 December 2006 have been restated under adopted IFRSs. Explanations of the effects of the transition are included in the accompanying notes to the Financial Statements.

The operating results for the year ended 31 December 2007 continue to disappoint with turnover of £12.951M (2006 - £13.304M), a decline of 2.7% notwithstanding an increase of 8.0% in the number of tonnes sold in the year. Operating losses were £2.357M compared to losses of £2.596M in 2006.

As a result of the realisations arising from the sale of land, buildings, plant and equipment at Carrongrove, profits from discontinued operations of £4.054M were recorded (2006 - loss £1.296M) resulting in a profit after discontinued operations and income tax for the year of £1.741M attributable to shareholders compared to a loss of £3.016M in 2006.

The Consolidated Balance Sheet shows improved shareholders' funds of £10.611M compared to £7.760M in 2006 before recognising any surplus which may arise from the disposal of the Company's land portfolio which it is anticipated will be developed at some stage in the future.

Net debt has fallen by 54% to £5.873M as compared to £12.753M as at 31 December 2006. It remains one of your Board's foremost business objectives to eliminate all debt from the Group's balance sheet.

 

 Asset Realisation Programme

All plant and equipment at the Carrongrove site has been sold to a range of buyers. As regards the Company's other plant and equipment, there are a number of strategic options under consideration which would allow certain products to be produced in lower cost countries now that operating costs in the United Kingdom have risen to an all time high thereby having a negative effect on the Company's ability to be competitive.

Land for Future Development

Inverkeithing

Shareholders have been aware for some considerable time that we have chosen to opt for an alternative strategy which exploits the intrinsic value of our brownfield sites in preference to remaining as a long term player in the manufacture of paper. The 18 acre site on the edge of the River Forth at Inverkeithing opposite Edinburgh offers development potential on a large scale. The formation of a new Government following the elections in Scotland has served to delay Fife Council's ambitious plans for the regeneration of the entire area surrounding Inverkeithing Bay. Together with our advisers we continue to investigate alternative uses for this land including commercial and residential opportunities which will progress to detailed planning applications in due course. We continue to work with Fife Council in the expectation that our land will play a pivotal role in the anticipated transformation of the entrance to the Kingdom of Fife with consequential improvements to the local community and environment. I refer below under Note 2 of 'Post Balance Sheet Events' to the underlying value of both this and our St Cuthberts Mill site.

St Cuthberts, Wells

This site extends to approximately 40 acres and is located only a few short miles to the south of the charming City of Wells in Somerset. As in the case of Inverkeithing our advisers have been investigating with the Local Authority ways and means of developing alternative uses for much of the land which is surplus to our every day requirements. 

Notwithstanding the recent sharp decline in the UK housing market and the hopefully short-term problems facing house builders there appears to be a shortage of quality mixed use development in the area and as in the case with Falkirk District, in which our Carrongrove site was located, positive dialogue has been entered into with Mendip Council in Somerset regarding the medium to longer term development of this land as and when it becomes available and we cease paper manufacture on the site. Creative schemes are under critical review and will be studied in parallel with our commercial discussions as to the short term future of our two manufacturing businesses.

Additional Consideration

Shareholders will recall that the sale of the Gemini brand back in 2005 together with the provision of services for £13M entitled your Company to additional consideration over the subsequent 12 month period commencing on 8 November 2005 in respect of the amount of tonnage of Gemini ordered, produced and sold by Tullis Russell Papermakers Ltd as acquirers of the brand. Regrettably having certified the final tonnage figures given by them to Inveresk over each of the twelve months, Tullis Russell defaulted when required to make payment of the consideration which fell due and this matter has been referred to the Court of Session in Edinburgh for resolution. On 15 February 2008 the Court ruled strongly in favour of Inveresk which decision Tullis Russell declined to accept. On 3 June 2008 the matter reached the Court of Appeal where Tullis Russell complained that the Judge had gone too far in his judgement and as a consequence the case was referred by the Appeal Court for a second time to the Lower Court before another senior commercial Judge whose judgement was handed down on 29 August 2008 in similar robust terms as the first Judge, again awarding the case strongly to Inveresk. On appeal again by Tullis Russell, this matter was referred back to the Court of Appeal on 18/19 November 2008, the outcome of which remains unknown at this time. The amount of consideration due including interest and costs will exceed £1M and has not been taken to income at this time pending a successful outcome in the Court of Appeal. Your Board of Directors together with their legal advisers remain confident that this matter will be resolved in Inveresk's favour in due course.  

R & D and the Environment

Research and Development has always been one of the cornerstones of our past success at St Cuthberts and notwithstanding the lack of physical investment in plant and equipment we have continued to invest in technical innovation. For us, R&D is not only about solving challenges referred to us by customers but also the development of new products which set us aside from others engaged in our industry through our technical ability to innovate for which we enjoy an enviable reputation. In this regard we have at this time two new specific product lines which in their own way could make a significant impact on the future printing techniques required to manufacture end products on a global scale. Inveresk has chosen to patent each of these products where targeted market success is likely to produce long term commercial benefits to both our valued customers and ourselves through the provision of licence and royalty agreements.

  

So far as the environment is concerned we strive to fulfil local regulatory requirements which have become increasingly onerous and which ultimately affect our competitiveness in the market. We continue to:-

• replace any hazardous substances or chemicals in products as far as is technically feasible and financially viable.

• minimise any environmental impact in the manufacturing process.

• minimise the volume of waste and waste products by whatever means.

• work consistently and conscientiously in-house with feasible levels of training, information and discussion in order to stimulate the development of expertise in environmental matters as well as health and safety issues.

Pensions

During the year under review both our pension schemes performed well in a market which was dominated by volatility in global stock and financial markets worldwide. We continue to work with actuarial experts in an effort to maximise investment returns whilst also seeking ways and means of reducing our schemes' long term liabilities. The pensions industry appears to remain in disarray and is severely hampered by Government interference and accounting rules which are designed to confuse even those with particular expertise in the subject.

Prospects at St Cuthberts

Sales of our artist and inkjet papers are performing to expectation given the state of the market and the economic downturn which currently prevails. This resilient business has seen good stability in terms of sales prices and volumes are increasing mainly in the Far East. The North American market remains depressed. Our widely respected brands are now sold in Japan, China, India, Korea, Hong Kong and Singapore in addition to the USA and UK justifying our decision to support a sales and marketing initiative bespoke to the region.  

Clearly the downturn in most economies gives cause for concern. We are continuing to explore all possible avenues which will allow us to pursue our alternative strategy which lies in the development of our real estate portfolio and which represents best value to shareholders.

Dividend

Your Board is unable to recommend the payment of a dividend given present market conditions. At the same time given the dramatic effects of the worldwide credit crunch and financial crisis we intend to concentrate on the elimination of debt as a prime business objective.

Post Balance Sheet Events.

A number of events have taken place after the balance sheet date to which I would draw shareholders' attention:

 

 

The Directors are very aware that the current economic climate is difficult and uncertain. While we have several options for the realisation of assets within our business we have looked very closely at future cash flows and their sensitivities. We have always managed our cash resources tightly and we recognise the critical need to do so in the current economic climate to ensure that the Company lives within what we believe to be adequate financial resources going forward.

Employees

The Company is heavily dependent upon its employees to maintain the integrity of its manufacturing capability and to the achievement of commercial targets as set by the Board. We are greatly indebted to our loyal employees who continue to operate in the business in less than ideal circumstances and who face differing challenges on a day to day basis. Change is never easy to implement and the Board would like to express its gratitude to all employees whose efforts are much appreciated. Without their dedication and commitment it would be most difficult to operate in the current business environment.

Jan Bernander

Chairman

19 December 2008

 

  CONSOLIDATED INCOME STATEMENT     

For the year ended 31 December 2007     

		2007	2006
	Note	£'000	£'000
Continuing operations
Revenue	2	12,951	13,304
Cost of sales		(12,474)	(12,925)
Gross profit		477	379
Distribution expenses		(787)	(856)
Administrative expenses - before restructuring costs		(1,924)	(1,525)
Administrative expenses - restructuring costs		(123)	(594)
Total administrative expenses		(2,047)	(2,119)
Loss from operating activities		(2,357)	(2,596)
Finance income		2,067	1,657
Finance expenses		(1,893)	(1,550)
Net finance income		174	107
Loss before income tax		(2,183)	(2,489)
Income tax (charge)/credit	6	(130)	769
Loss from continuing operations		(2,313)	(1,720)
Discontinued operations
Profit/(loss) from discontinued operations, net of income tax	3	4,054	(1,296)
Profit/(loss) for the year		1,741	(3,016)
Attributable to:
Equity holders of the company		1,741	(3,016)
From continuing and discontinued operations
Basic earnings/(loss) per share	5	1.3p	(2.2)p
Diluted earnings/(loss) per share	5	1.3p	(2.2)p
From continuing operations
Basic loss per share	5	(1.7)p	(1.3)p
Diluted loss per share	5	(1.7)p	(1.3)p

  CONSOLIDATED BALANCE SHEET    

As at 31 December    

		2007	2006
	Note	£'000	£'000
Assets
Property, plant and equipment		7,069	7,583
Deferred tax asset		-	367
Total non-current assets		7,069	7,950
Inventories		3,355	2,619
Trade and other receivables		2,566	3,231
Employee benefits - assets		846	1,410
Cash and cash equivalents		1	4
Assets classified as held for sale	4	5,990	12,130
Total current assets		12,758	19,394
Total assets		19,827	27,344
Equity
Share capital		1,438	1,438
Retained earnings		9,173	6,322
Total equity attributable to equity holders of the company		10,611	7,760
Liabilities
Loans and borrowings		3,077	4,308
Employee benefits - obligations		-	2,791
Deferred tax liabilities		-	367
Total non-current liabilities		3,077	7,466
Bank overdraft		1,566	7,218
Loans and borrowings		1,231	1,231
Trade and other payables		3,075	3,229
Provisions		267	440
Total current liabilities		6,139	12,118
Total liabilities		9,216	19,584
Total equity and liabilities		19,827	27,344

  CONSOLIDATED STATEMENT OF CASH FLOWS    

For the year ended 31 December 2007    

		2007	2006
		£'000	£'000
Cash flows from operating activities
Profit/(loss) for the year		1,741	(3,016)
Adjustment for:
Depreciation		536	715
Net finance expense		457	644
Gain on sale of assets		(5,047)	(100)
Equity settled share based payment transactions		-	23
Amortisation of government grants		-	(2)
Income tax credit		(237)	(1,147)
Pension service charge net of contributions		(578)	(569)
Change in inventories		(736)	370
Change in trade and other receivables		665	2,231
Change in trade and other payables		(81)	(1,693)
Change in provisions		(173)	(135)
Interest paid		(845)	(726)
Interest received		13	10
Net cash used in operating activities		(4,285)	(3,395)
Cash flows from investing activities
Proceeds from sale of assets		11,225	126
Acquisition of property, plant and equipment		(60)	(39)
Net cash from investing activities		11,165	87
Cash flows from financing activities
Repayment of borrowings		(1,231)	(1,230)
Net cash used in financing activities		(1,231)	(1,230)
Net increase/(decrease) in cash and cash equivalents		5,649	(4,538)
Cash and cash equivalents at 1 January		(7,214)	(2,676)
Cash and cash equivalents at 31 December		(1,565)	(7,214)

Reconciliation of cash and cash equivalents

		2007	2006
		£,000	£,000
Cash and cash equivalents at 31 December		(1,565)	(7,214)
Less, bank overdraft at 31 December		1,566	7,218
Cash and cash equivalents in the balance sheet at 31 December		1	4

 

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE     

For the year ended 31 December 2007    

		2007	2006
		£'000	£'000
Foreign exchange translation differences for foreign operations		-	(1)
Retirement benefit schemes actuarial gains/(losses)		1,347	(449)
Deferred tax on retirement benefit schemes		(237)	-
Net income and expense recognised directly in equity		1,110	(450)
Profit/(loss) for the year		1,741	(3,016)
Total recognised income and expense for the year		2,851	(3,466)
Attributable to:
Equity holders of the company		2,851	(3,466)

  NOTES 

1.        FINANCIAL INFORMATION

This preliminary announcement contains the financial information of Inveresk PLC (the 'Company') and its subsidiaries (together referred to as the 'Group') for the year ended 31 December 2007.

This financial information is extracted from the consolidated financial statements of the Group prepared under International Financial Reporting Standards as adopted by the EU ('adopted IFRSs') for the first time and therefore IFRS 1 'First-time adoption of International Financial Reporting Standards' has been applied. An explanation of the transition to adopted IFRS is provided in note 7 below. The Group's transition date to IFRS is 1 January 2006 and the Group prepared its opening balance sheet at that date in accordance with IFRSs effective at 31 December 2007. In preparing the financial statements the Group applied mandatory exceptions and certain of the optional exemptions available in IFRS 1 from the full retrospective application.

This preliminary announcement was authorised by the Board on 19 December 2008.

The financial information set out in this announcement for the years ended 31 December 2007 and 2006 does not constitute the Group's statutory accounts for these years within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for 2006, which were prepared under UK GAAP, have been delivered to the Registrar of Companies, and those for 2007, prepared under adopted IFRSs will be delivered in due course. The auditors have reported on those financial statements. The auditors' reports were (i) unqualified; (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports; and (iii) did not contain statements under section 237(2) or (3) of the Companies Act 1985.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and the Operating and Financial Review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Chairman's Statement. In addition note 19 to the financial statements includes the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

The Group meets its day to day working capital requirements through a combination of bank overdraft and term loan facilities and shareholders' loans. Following recent negotiations with its bankers and shareholders these facilities are in place until 31 December 2009, with further term loan facilities at a reduced level to 31 December 2010. The Directors are confident that facilities will be in place at a level sufficient to meet the Company's and Group's on-going requirements for the foreseeable future.

The Directors have prepared cash flow forecasts for the Group and Company for a period in excess of 12 months from the date of authorisation of these financial statements. The Group's cash flow forecasts and projections ('forecasts') reflect the Directors' plans for the coming year, including cash flows relating to the ongoing trading performance of its Artists Paper business, the closure of its Furniture Paper business including the recovery of related working capital balances, the ongoing realisation of property and other assets and claims. The forecasts completed on this basis show that the Group should be able to operate within the level of its current facilities.  

The Directors recognise that the current economic climate creates uncertainty over the timing and amount of these cash flows, in particular in respect of the sale of certain assets and the timing of claims settlements. However after making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

The Annual Report and Accounts for the year ended 31 December 2007 will be posted to shareholders shortly and will be available to the public, free of charge, at the Company's registered office: Steuart Road, Bridge of Allan, Stirlingshire FK9 4JX, and from the Company's website at www.inveresk.co.uk.

 2.    SEGMENT REPORTING 

Primary reporting segment - business segments

Following the sale of the 'Gemini' paperboard business in June 2005 there is only one business segment in the Group represented by the sole operational papermill, St Cuthberts, which together with the associated head office functions represent the continuing operations of the Group. Therefore the accounts' disclosures in total, excluding those disclosed separately as representing discontinued operations, reflect the sole primary business segment of the Group.

	Continuing operations -  St Cuthberts Mill
	2007	2006
	£'000	£'000
Segment Revenue	12,951	13,304

	Continuing operations		Consolidated
	2007	2006	2007	2006
	£'000	£'000	£'000	£'000
Segment results	(1,484)	(2,313)	(1,484)	(2,313)
Unallocated corporate expense			(873)	(283)
Loss from operating activities			(2,357)	(2,596)
Net finance income			174	107
Loss before income tax - continuing operations			(2,183)	(2,489)
Income tax (charge)/credit (note 6)			(130)	769
Gain/(loss) on sale of discontinued operations, net of income tax (note 3)			4,054	(1,296)
Profit/(loss) after tax and discontinued operations			1,741	(3,016)

 

3.    DISCONTINUED OPERATIONS

In October 2002 and June 2005 the Group sold its fine paper division and the 'Gemini' paperboard business respectively, each representing a separate business segment. Both of these segments were subsequently reported as discontinued businesses under UK GAAP and continue to be presented as discontinued operations at the date of transition to adopted IFRSs and for all subsequent reporting periods under adopted IFRSs.

Revenue

The revenue for each of the two discontinued business segments was £nil for the year ended 31 December 2007 (year ended 31 December 2006: £nil).

	2007	2006
Results	£'000	£'000
Other gains/(losses)
- restructuring costs	(729)	(924)
- reversal of provisions	-	159
- impairment of assets	-	(258)
- gain on sale of assets	5,047	100
	4,318	(923)
Net finance costs	(631)	(751)
	3,687	(1,674)
Income tax credit (note 6)	367	378
Profit/(loss) from discontinued operations, net of income tax	4,054	(1,296)

 

 4.    ASSETS CLASSIFIED AS HELD FOR SALE

The following assets are held for sale and relate entirely to the discontinued operations of the two businesses, the fine papers division and the 'Gemini' paperboard business, which were both closed prior to 1 January 2006.

		Plant
	Land and	machinery and
	buildings	equipment	Total
	£'000	£'000	£'000
At 1 January 2006	10,005	2,125	12,130
Disposals	-	-	-
At 1 January 2007	10,005	2,125	12,130
Disposals	(4,015)	(2,125)	(6,140)
At 31 December 2007	5,990	-	5,990

During 2007 assets relating to the discontinued operations were sold for the net amount of £11,225,000 resulting in a net gain to the income statement of £5,085,000.

During 2006 assets held for sale were sold resulting in a net gain of £100,000.

5.    EARNINGS/(LOSS) PER SHARE

	2007	2006	2007	2006
	Earnings/(loss) £'000	Earnings/(loss) £'000	Earnings/(loss) pence per share	Earnings/(loss) pence per share
Basic - continuing operations (note 2)	(2,313)	(1,720)	(1.7)	(1.3)
Basic - discontinued operations (note 3)	4,054	(1,296)	3.0	(0.9)
Basic - Total	1,741	(3,016)	1.3	(2.2)
Diluted - continuing operations (note 2)	(2,313)	(1,720)	(1.7)	(1.3)
Diluted - discontinued operations (note 3)	4,054	(1,296)	3.0	(0.9)
Diluted - Total	1,741	(3,016)	1.3	(2.2)

Earnings per share are calculated for the issued shares excluding those registered in the name of The Inveresk ESOP Trustee Company Limited and those held as Treasury shares.

The weighted average number of shares used in each calculation is as follows:

	2007	2006
	Number of Shares	Number of  Shares
	(000s)	(000s)
Average of shares in issue during the financial year	135,055	135,055
Adjustment for the dilutive effect of employee and director share options	-	1,660
Average of shares in issue during the financial year diluted	135,055	136,715

 

 6.    INCOME TAX EXPENSE

The major components of tax expense/(income) are analysed as:

	2007	2006
	£'000	£'000
Current tax income	-	(1,147)
Deferred tax expense:
origination and reversal of temporary differences	(254)	-
reduction in tax rate	17	-
Tax credit	(237)	(1,147)

Presented as follows in the income statement:

	2007	2006
	£'000	£'000
Income tax charge/(credit) - continuing operations	130	(769)
Income tax credit - discontinued operations	(367)	(378)
Tax credit	(237)	(1,147)

7.    EXPLANATION OF TRANSITION TO ADOPTED IFRSs

This is the Group's first IFRS annual consolidated financial information prepared in accordance with adopted IFRSs.

In preparing its opening IFRS balance sheet and financial information for the year ended 31 December 2006 the Group has adjusted amounts reported previously in financial statements prepared in accordance with previous GAAP.

IFRS 1 allows first time adopters certain exemptions from the general requirements to retrospectively apply IFRS as effective for the 31 December 2005 year end. The optional exemptions taken by the Group are as follows:

Fixed Asset revaluation as deemed cost

Revaluation of property under previous UK GAAP has been used as deemed cost on transition to IFRS.

Employee benefits

The Group has elected to recognise all cumulative actuarial gains and losses from employee benefit schemes at the date of transition.

Business Combinations

The Group has elected not to apply IFRS 3 'Business Combinations' retrospectively to transactions that took place prior to the transition date.

Foreign currency translation

Cumulative translation differences in respect of foreign operations have been deemed to be nil at the date of transition.

An explanation of how the transition from previous GAAP to adopted IFRSs has affected the Group's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

  Reconciliation of equity at 1 January 2006 and 31 December 2006

		GAAP	Effect of transition to IFRSs		IFRS		GAAP	Effect of transition to IFRSs		IFRS
			1 January 2006					31 December 2006
	Note	£'000	£'000		£'000		£'000	£'000		£'000
Assets
Property, plant and  equipment	a	10,410	(2,326)		8,084		9,708	(2,125)		7,583
Deferred tax asset	d	-	367		367		-	367		367
Total non-current assets		10,410	(1,959)		8,451		9,708	(1,758)		7,950
Inventories		2,989	-		2,989		2,619	-		2,619
Trade and other  receivables		5,462	-		5,462		3,231	-		3,231
Retirement benefit assets	c	2,173	931		3,104		987	423		1,410
Cash and cash equivalents		16	-		16		4	-		4
Assets classified as held  for sale	a	10,005	2,326		12,331		10,005	2,125		12,130
Total current assets		20,645	3,257		23,902		16,846	2,548		19,394
Total assets		31,055	1,298		32,353		26,554	790		27,344
Equity
Share Capital		1,438	-		1,438		1,438	-		1,438
Reserves	b	11,220	(11,220)		-		11,170	(11,170)		-
Retained earnings	b	(1,455)	11,220		9,765		(4,848)	11,170		6,322
Total equity		11,203	-		11,203		7,760	-		7,760
Liabilities
Interest bearing loans and  borrowings		5,538	-		5,538		4,308	-		4,308
Retired benefit obligations	c	3,768	931		4,699		2,368	423		2,791
Deferred tax liabilities	d	-	367		367		-	367		367
Total non-current liabilities		9,306	1,298		10,604		6,676	790		7,466
Bank overdraft		2,692	-		2,692		7,218	-		7,218
Interest bearing loans and borrowings		1,231	-		1,231		1,231	-		1,231
Trade and other payables		6,048	-		6,048		3,229	-		3,229
Provisions		575	-		575		440	-		440
Total current  liabilities		10,546	-		10,546		12,118	-		12,118
Total liabilities		19,852	1,298		21,150		18,794	790		19,584
Total equity and  liabilities		31,055	1,298		32,353		26,554	790		27,344

Notes to the reconciliation of equity

(a)    Plant, machinery and equipment associated with the discontinued operations of the fine papers division and the 'Gemini' paperboard business have been reclassified as 'assets held for sale'.

(b)    The revaluation reserve containing the increases and decreases in revaluations prior to 1 January 2006 under UK GAAP, has been transferred to equity following the option to record assets at the transition date on the basis of deemed cost.

(c)    Deferred tax previously netted off within retirement benefit schemes within assets and liabilities is now excluded from the retirement benefit scheme assets and liabilities and is included within deferred tax assets and deferred tax liabilities as appropriate.

(d)    Deferred tax assets and liabilities are recognised on adoption of IAS 12 'Income taxes' on all temporary differences and certain deferred tax assets and liabilities have been offset.

  Reconciliation of profit for the year ended 31 December 2006

		UK GAAP	Effect of   transition to IFRSs		IFRS
			For the year ended
			31 December 2006
	Note	£'000	£'000		£'000
Continuing operations
Revenue		13,304	-		13,304
Cost of Sales		(12,925)	-		(12,925)
Gross Profit		379	-		379
Distribution expenses		(856)	-		(856)
Administrative expenses		(1,525)	-		(1,525)
Administrative expenses - restructuring costs		(594)	-		(594)
Results from operating activities		(2,596)	-		(2,596)
Finance income	a	127	1,530		1,657
Finance expenses	a	(119)	(1,431)		(1,550)
Net finance income		8	99		107
Loss before income tax		(2,588)	99		(2,489)
Income tax credit		769	-		769
Loss from continuing operations		(1,819)	99		(1,720)
Discontinued operations
Loss from discontinued operations, net of income tax	a	(1,311)	15		(1,296)
Loss for the year		(3,130)	114		(3,016)

 

 

There are no material adjustments to the cash flow statement arising from the transition to, and adoption of, International Financial Reporting Standards.

8.    EVENTS AFTER THE BALANCE SHEET DATE

The Group has also signed a Letter of Intent to enter into a Joint Venture agreement with a Chinese paper-making company to manufacture PIP in China. This will involve the relocation of the PM1 machine at St Cuthberts on which PIP was manufactured, and this machine together with the Group's technical expertise and customer base will represent the value of the Group's equity investment in the Joint Venture.

ENDFR UKRVRWORUAAA