Preliminary Announcement Annual report & accounts

For immediate release Wednesday 5 March 2008 Evolutec Group plc ("Evolutec" or "the Company") Preliminary Results for the year ended 31 December 2007 Actively seeking a single investment opportunity Evolutec Group plc (AIM: EVC), announces Preliminary Results for the year ended 31 December 2007. HIGHLIGHTS * The loss for the year was £1.76 million (2006, loss £11.83 million) * The Company made a small pre-tax profit of £0.17 million in the second half of 2007 reflecting the fact that interest payments on its cash deposits were sufficient to cover its cost base * Net cash and cash equivalents on 31 December were £5.8 million (2006, £8.7 million) * Based on 25.9 million issued ordinary shares, Evolutec had a cash value of 23.0p per share (2006, 33.6p per share) at the year end * The Company has out-licensed its intellectual property in the biopharmaceutical area to third parties * The Company is now classified as an investment company under the AIM rules. * The Company is actively looking for a single investment opportunity David Bloxham, Chairman of Evolutec, said: "The Company is actively seeking a single investment opportunity that has the potential to deliver value to all its shareholders in the next twelve months. During this period all steps will be taken to conserve cash and cash equivalents in the Company." Enquiries: Dr David P Bloxham, Chairman 07771 525 875 Mr Michael Meade, Numis Securities 0207 260 1000 Mr Oliver Cardigan, Numis Securities 0207 260 1000 Notes for Editors: About Evolutec Evolutec is listed on the AIM market of the London Stock Exchange and developed therapeutics originally isolated from the saliva of ticks. Following the unsuccessful outcome of Phase II clinical trials on its lead clinical trail candidate, the Company licensed its intellectual property to third parties and is now focussing all its activities on the identification of a single investment opportunity. This will take advantage of Evolutec's AIM listing and its cash and cash equivalent reserve, Safe Harbour statement: this news release may contain forward-looking statements that reflect the current expectations of the Company regarding future events. Forward-looking statements involve risks and uncertainties. Actual events could differ materially from those projected herein and depend on a number of factors including the success of the Company's strategy, the successful integration of completed mergers and acquisitions and achievement of expected synergies from such transactions, and the ability of the Company to identify and consummate suitable strategic and business combination transactions. CHAIRMAN'S REVIEW Following the disappointing clinical results with rEV131 at the end of 2006 and the subsequent collapse of the Company's share price, the Company undertook a review of its strategic options in the first quarter of 2007. It was clear that there was no shareholder appetite for the risk involved in continuing the Company as an independent entity engaged in biopharmaceutical research and development and it was decided to look for alternative solutions. Numis Securities was appointed to assist the Company with the review of its strategic options, merging with another company being the most obvious. After an exhaustive search and the identification of a potential merger partner, these discussions did not yield a recommendable offer. The Company was then left with a very difficult decision to make. After further consultation with major institutional shareholders it was felt that the majority opinion was in favour of a return of cash by way of a Member's Voluntary Liquidation (MVL). The Board felt that the proposed distribution of net cash by way of liquidation provided shareholders with certainty as to quantum and timing. Appropriate steps were taken to begin this process and on the 6th June the Company sent out a Circular convening an Extraordinary General Meeting (EGM) to approve the MVL for 6th July 2007. During this period the Company took all steps to reduce its expenditure to the minimum and to settle all its outstanding debts. This involved ending the contracts of all employees and terminating the lease on the Company's premises in Reading. Effectively the Company became a cash shell with a listing on the Alternative Investment Market (AIM). After sending the Circular, the Board received written confirmation from Gartmore Investment Limited (Gartmore) that they had increased their holding in Evolutec through market purchases and that at that time they held 23.9 per cent of the issued share capital of Evolutec. Furthermore, Gartmore advised the Board that they would not vote in favour of the Resolutions proposed in the Circular. As the Resolutions were special, AIM rules required the approval of three-quarters of those shareholders voting in person or by proxy. As another institutional shareholder indicated that it too would vote against the Resolutions, the Board was of the view that the Resolutions would not be passed. This proved to be the case when the EGM was held and the resolutions were not passed. Following the EGM, Nicholas Badman, Dr Mark Carnegie Brown, John Burke and Malcolm Darvell resigned as Directors of the Company. Following these structural changes, the cost base of the Company was considerably reduced. It took all necessary steps to reduce cash outflow to the minimum consistent with maintaining its AIM listing. Assuming that interest rates remain broadly similar to current values then the Company anticipates that it should be able to continue to preserve its cash reserve. The loss for the financial year was reduced to £1.76 million (2006, loss £11.83 million) and the Company had cash and cash equivalents of £5.80 million at the end of the year (2006, £8.68 million). The Company made a small operating profit of £0.17 million for the second half of 2007 reflecting the changes described above. Most of the loss in the first half of the year was explained by the costs of closing the activities of the Company and terminating service contracts. Graeme Hart and I have continued as Directors and in addition Gartmore proposed that Gordon Hall and Mark Hawtin should join the Board to assist the Company with its future. These appointments were subsequently confirmed and it is a pleasure to welcome Gordon and Mark to the Board. They have considerable experience in the healthcare and fund management fields respectively, and have been of considerable benefit to the Company already in reviewing future opportunities. The regulatory team at AIM have confirmed that Evolutec will be classed as an investment company under the AIM Rules pending any further transaction. The Board intend that the investment policy of Evolutec will be to seek a single investment, most probably in a UK or European business, in the technology, healthcare or service related sectors. It is expected that the investee company will be an actively trading and profitable entity. The Board believes that it will have the necessary experience to evaluate any potential acquisitions. Any proposed acquisition by the Board will be subject to shareholder approval. During the second half of the financial year, all the intellectual properties of the Company were licensed to third parties. The intellectual property related to the potential vaccine technology was assigned to Merial Limited for a single payment covering the license fee and costs. The remaining assets were licensed to Varleigh Limited, a collaborator of Evolutec in the development of rEV131. In this case the Company received a single payment covering license fees and costs as well as a future royalty in the event that there are commercial revenues. The Company judged that the licensees would have a better opportunity to evaluate whether the technology worked in a clinical setting. The Company has retained a commercial interest in its intellectual property in the event that it proves successful via its royalty position. The Company does not intend to research or develop new products in the biopharmaceutical area. During the last six months the Company has reviewed a number of investment opportunities which have met the investment criteria without being able to agree valuations. During this period, market conditions have worsened considerably and it is not clear when conditions will either stabilise or improve. The valuations of smaller companies with market capitalisations below £50 million have been particularly impacted and this is the area where Evolutec expects to identify a suitable investment. This has made valuing companies very difficult, particularly in terms of satisfying expectations of shareholders on both sides of the transaction. Nevertheless, the Board believes that it remains in the interests of Evolutec shareholders for the Company to continue to pursue this investment route and therefore the Board has proposed a resolution that the Company should continue as an investment company until the next Annual General Meeting to be convened in 2009. In the past year the Company has endeavoured to simplify its operations in order to facilitate any investment process that might occur. It would be normal at the time of the Annual General Meeting to seek the authority to allocate shares to cover the ordinary or special activities of the Company. Given the expressed intention of the Company to seek a single investment and to put this to shareholders for approval, the Directors felt that on this occasion it was inappropriate to seek any authorisation to allocate additional shares. The major shareholder in Evolutec at 31 December 2007 is Gartmore with 25.8% of the issued equity. More than 50% of the issued equity is held by five investors. They have continued to acquire shares in the market during the past six months and the Board has solicited their opinion on a number of occasions in determining its future strategy. It remains a key objective of the Board to find an investment opportunity that delivers value to all its shareholders over the next twelve months. David P Bloxham Chairman 4 March 2008 Consolidated income statement For the year ended 31 December 2007 +-------------------------------------------------------------------+ | | | Year ended 31 | Year ended | | | | December 2007 | 31 December | | | | | 2006 | | | | | | |-------------------------------+---+---------------+---------------| | Continuing operations | | £000 | £000 | |-------------------------------+---+---------------+---------------| | Revenue | | 82 | 14 | |-------------------------------+---+---------------+---------------| | Cost of sales | | (1) | (1) | |-------------------------------+---+---------------+---------------| | Gross Profit | | 81 | 13 | |-------------------------------+---+---------------+---------------| | | | | | | Selling and marketing costs | | (160) | (189) | |-------------------------------+---+---------------+---------------| | Research and development | | (1,050) | (10,509) | | expenditure | | | | |-------------------------------+---+---------------+---------------| | Administrative expenses | | (1,159) | (2,172) | |-------------------------------+---+---------------+---------------| | Operating loss | | (2,288) | (12,857) | |-------------------------------+---+---------------+---------------| | | | | | | Finance income | | 375 | 749 | |-------------------------------+---+---------------+---------------| | Finance costs | | (12) | (364) | |-------------------------------+---+---------------+---------------| | Loss before tax | | (1,925) | (12,472) | |-------------------------------+---+---------------+---------------| | | | | | | Taxation | | 162 | 645 | |-------------------------------+---+---------------+---------------| | Loss for the period | | (1,763) | (11,827) | |-----------------------------------+---------------+---------------| | | | | | |------------------------------+----+---------------+---------------| | Basic and diluted loss per | | | | | ordinary share from | | (6.8)p | (49.3)p | | continuing activities | | | | +-------------------------------------------------------------------+ Balance sheets As at 31 December 2007 Group Group Company Company 31 31 31 31 December December December December 2007 2006 2007 2006 ASSETS Note £000 £000 £000 £000 Non-current assets Property, plant and - 140 equipment Equity accounted Investments - - 5,791 3,853 - 140 5,791 3,853 Current assets Research and development tax - - credits 162 645 Trade and other receivables 28 203 - - Held-to-maturity investments - - - - Cash and cash equivalents 5,797 8,682 - 3,147 5,987 9,530 - 3,147 Total assets 5,987 9,670 5,791 7,000 EQUITY Share capital 2 27,037 27,037 27,037 27,037 Other reserves 3 8,518 9,083 4,784 5,349 Retained deficit (29,602) (27,839) (26,030) (25,386) Equity shareholders' funds 5,953 8,281 5,791 7,000 LIABILITIES Non current liabilities - 34 - - - 34 - - Current liabilities Trade and other payables 34 1,355 - - Total liabilities 34 1,389 - - Total equity and liabilities 5,987 9,670 5,791 7,000 Consolidated statements of changes in shareholders' equity Share Share Other Retained capital Premium reserves deficit Total Group £000 £000 £000 £000 £000 Balance at 1 January 2006 2,359 22,043 8,793 (16,012) 17,183 Net income recognised directly in equity Loss for the year - - - (11,827) (11,827) Total recognised income - - - (11,827) (11,827) and expense for the period Share-based payments - - 290 - 290 charge Issue of ordinary shares 236 2,399 - - 2,635 Balance at 31 December 2,595 24,442 9,083 (27,839) 8,281 2006 Net income recognised directly in equity Loss for the year - - - (1,763) (1,763) Total recognised income - - - (1,763) (1,763) and expense for the period Share-based payments - - (565) - (565) charge / (credit) Balance at 31 December 2,595 24,442 8,518 (29,602) 5,953 2007 Company Balance at 1 January 2006 2,359 22,043 4,784 - 29,186 Net income recognised directly in equity Impairment charge - - - (25,386) (25,386) Total recognised income - - - (25,386) (25,386) and expense for the period Share-based payments - - 565 - 565 charge Issue of ordinary shares 236 2,399 - - 2,635 Balance at 31 December 2,595 24,442 5,349 (25,386) 7,000 2006 Net income recognised directly in equity Impairment charge - - - (644) (644) Total recognised income - - - (644) (644) and expense for the period Share-based payments - - (565) - (565) charge/(credit) Balance at 31 December 24,442 4,784 (26,030) 5,791 2007 2,595 Cash flow statements Group Group Year Company Company for the year ended 31 Year ended ended 31 Year ended Year December 2006 31 December 31 December ended 31 December 2006 2007 December 2007 2006 £000 £000 £000 £000 Cash flows from operating activities Loss for the period (1,763) (11,827) (644) (25,386) Taxation (162) (645) - - Depreciation 140 87 - - Interest received (375) (595) - - Fair value adjustment on - - 644 25,386 investment in subsidiary Unrealised foreign - 81 - - exchange losses Share options - value of (565) 290 - - employee services Decrease in trade and 174 616 - - other receivables Decrease in trade and (1,354) (526) - - other payables Cash used by operations (3,905) (12,519) - - Taxation received 645 502 - - Net cash outflow from (3,260) (12,017) - - operating activities Cash flows from investing activities Purchase of property, - (66) - - plant and equipment (Increase)/decrease in - - (3,147) 512 investment in subsidiary Interest received 375 595 - - Decrease/(increase) in - 15,877 - - held-to-maturity investments Net cash generated from (applied to) investing 375 16,406 (3,147) 512 activities Cash flows from financing activities Proceeds from issuance - 2,635 - 2,635 of shares Net cash generated from - 2,635 - 2,635 financing activities Net (decrease)/increase in cash and cash equivalents (2,885) 7,024 (3,147) 3,147 Cash and cash 8,682 1,739 3,147 - equivalents at the start of the period Exchange gains/(losses) - (81) - - on cash and bank overdrafts Cash and cash 5,797 8,682 - 3,147 equivalents at the end of the period Preliminary results for the year ended 31 December 2007 1. Accounting policies and basis of preparation Following the cessation of its research and development-based pharmaceutical business, Evolutec has been classified as an investment company in the terms of the rules of the Alternative Investment Market of the London Stock Exchange (AIM). The Directors believe that the Group has sufficient funds available to continue for the foreseeable future; therefore the financial statements have been prepared on the going concern basis. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations endorsed by the EU and with those parts of the Companies Act, 1985 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. IFRS7 Financial Instruments: Disclosures A new standard has become mandatory for reporting periods beginning 1 January 2007 or later. This standard which replaces rules previously set out in IAS32, Financial Instruments: Presentation and Disclosures, has been applied by the group in its 2007 consolidated financial statements. All disclosures relating to financial instruments including all comparative information have been updated to reflect the new requirement. The first time application of IFRS7 has not resulted in any prior period adjustments of cash flows, net income or balance sheet line items. Company income statement In accordance with the provisions of Section 230 of the Companies Act 1985, no separate income statement has been presented for the Evolutec Group plc. The results for the Company are also presented under IFRS. Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. Basis of consolidation The consolidated financial statements of the Group include the accounts of Evolutec Group plc and all its subsidiary undertakings (together, the "Group"), made up to 31 December 2007. Inter-company transactions are eliminated on consolidation. The identifiable assets and liabilities of subsidiary undertakings accounted for under acquisition accounting principles are included in the consolidated balance sheet at their fair values at the date of acquisition. The results and cash flows of such subsidiaries are brought into the Group accounts only from the date of acquisition. The combination of Evolutec Group plc and Evolutec Limited in 2004 was accounted for under merger accounting principles. Revenue The Group generates revenue by licensing its technologies. The recognition of such revenue, including up front and milestone payments, is dependent on the terms of the related arrangement, having regard to the ongoing risks and rewards of the arrangement, and the existence of any performance or repayment obligations with any third party. Non-refundable access fees, options fees and milestone payments receivable for participation by a third party in development and commercialisation of a product development candidate are recognised when they become contractually binding, provided there are no related commitments of the Group. Where there are related commitments, revenue is recognised on a percentage-of-completion basis in line with the actual levels of expenditure incurred in fulfilling these commitments. All other licence income and contract research fees are recognised over the accounting period to which the relevant services relate. Revenues derived from grants received are recognised in line with the related expenditure. Royalty income is recognised in relation to sales to which the royalty relates. Operating leases Costs in respect of operating leases are charged to the income statement on a straight-line basis over the terms of the leases. Share-based payments The Group makes equity-settled share-based payments to its employees and Directors. Equity-settled share-based payments are measured at fair value at the date of grant and expensed on a straight-line basis over the vesting period of the award. At each balance sheet date, Evolutec revises its estimate of the number of options that are expected to become exercisable. The value of any shares or options granted is charged to the income statement over the period the shares vest, with a corresponding credit to reserves. When share options are exercised, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) and share premium. The principal assumptions used to calculate the value of options issued are: Share price volatility 45% Risk free rate of return 4.5% Date of exercise Normally assumed to be the first possible exercise date Employee benefits All employee benefit costs, notably holiday pay and contributions to personal defined contribution pension plans, are charged to the income statement on an accruals basis. The Group does not offer any other post-retirement benefits. Taxation Current tax, including UK corporation tax and research and development tax credits, is provided (or shown) at amounts expected to be paid (or recovered) using the tax rates or laws that have been enacted, or substantially enacted, by the balance sheet date. Credit is taken in the accounting period for research and development tax credits, which will be claimed from HM Revenue and Customs in respect of qualifying research and development costs incurred in the same accounting period. Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date. Temporary differences are differences between the carrying amount of the Group's assets and liabilities and their tax base. A deferred tax asset is recognised only when, on the basis of all the available evidence, it can be regarded as probable that there will be suitable taxable profits, within the same jurisdiction, in the foreseeable future against which the deductible temporary difference can be utilised. Deferred tax is provided on temporary differences arising in subsidiaries, except where the timing of reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Measurement of deferred tax liabilities and assets reflects the tax consequence expected to follow from the manner in which the asset or liability is recovered or settled. Property, plant and equipment Property, plant and equipment are stated at historic cost less depreciation and any provision for impairment. Historic cost comprises the purchase price together with any incidental costs of acquisition. Depreciation is calculated to write off the cost, less residual value, of tangible fixed assets in equal annual instalments over their estimated useful lives as follows: Plant and machinery 3-5 years Fixtures and fittings 3 years The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that carrying value may not be recoverable. The assets residual values and useful lives are reviewed and adjusted, if appropriate, at each financial year end. Internally-generated intangible assets - product research and development Development expenditure on new or substantially improved products is capitalised as an intangible asset and amortised through cost of sales over the expected useful life of the product concerned. Capitalisation commences from the point at which the technical feasibility and commercial viability of the product can be demonstrated and the Group is satisfied that it is probable that future economic benefit will result from the product once completed. This is usually at the point of regulatory filing in a major market and approval is highly probable. Capitalisation ceases when the product is ready for launch. Where assets are acquired or constructed in order to provide facilities for research and development over a number of years, they are capitalised and depreciated over their useful lives. Expenditure relating to clinical trials is accrued on a percentage-of-completion basis with reference to fee estimates with third parties. Expenditure on research and development activities which do not meet the above criteria is charged to the income statement as incurred. Financial instruments The Group's financial instruments comprise cash and cash equivalents, held-to-maturity financial assets and various receivables and payables, such as trade receivables and trade and other payables, which arise directly from its operations. The Group does not enter into derivative transactions or other forms of hedging arrangements. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. Assets in this category are held at amortised cost. Held-to-maturity investments include short-term investments with original maturities of more than 3 months. Cash and cash equivalents Cash and cash equivalents include cash in hand, bank deposits repayable on demand and other short-term highly liquid investments with original maturities of 3 months or less. Foreign currencies Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the transaction date. Monetary assets and liabilities in foreign currencies are retranslated into sterling at the rates of exchange ruling at the balance sheet date. Differences arising due to exchange rate fluctuations are taken to the income statement in the period in which they arise. 2. Share Capital Number of ordinary Share Share Total shares capital premium £000 £000 £000 At 1 January 2006 23,590,906 2,359 22,043 24,402 Proceeds from shares 2,359,090 236 2,399 2,635 issued At 31 December 2006 25,949,996 2,595 24,442 27,037 At 31 December 2007 25,949,996 2,595 24,442 27,037 The authorised share capital of the Company at 31 December 2007 was £7,700,000 divided into 77,000,000 ordinary shares of 10p each (2006: 77,000,000). All issued shares are fully paid. The rights and restrictions attaching to the ordinary shares are set out in the Articles of Association. Capital management objectives and policies Evolutec Group Plc's capital management objectives are: to ensure the Group's ability to continue as a going concern to provide an adequate return to shareholders by seeking a single investment opportunity in the technology, healthcare or service related sectors. The Group monitors capital on the basis of the carrying value of the amount of equity. 3. Other reserves Share-based Capital Merger Own Total payments redemption reserve shares reserve reserve held by £000 £000 £000 Employee £000 Benefit Trust £000 Group Balance at 1 January 275 4,804 3,734 (20) 8,793 2006 Share-based payments 290 - - - 290 charge Balance at 31 December 565 4,804 3,734 (20) 9,083 2006 Share-based payments charge/(credit) (565) - - - (565) Balance at 31 December - 4,804 3,734 (20) 8,518 2007 Company Balance at 1 January - 4,804 - (20) 4,784 2006 Share-based payments 565 - - - 565 charge Balance at 31 December 565 4,804 - (20) 5,349 2006 Share-based payments charge/(credit) (565) - - - (565) Balance at 31 December - 4,804 - (20) 4,784 2007 The share-based payments reserve arose from the value of share-based payments to employees which were recognised over the vesting period. The merger reserve arose as a difference on consolidation under merger accounting principles and is solely in respect of the merger of Evolutec Group plc and Evolutec Limited in a prior period. The reserve represents the difference between the nominal value of shares issued by Evolutec Group plc in consideration for Evolutec Limited shares and the nominal value and share premium and other capital reserves of Evolutec Limited shares at the date of the merger. The capital redemption reserve arises from the the off-market purchase of deferred shares on 4 May 2005 and their subsequent cancellation. 4. Publication of non-statutory accounts The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The balance sheets at 31 December 2007 and the consolidated income statement, statements of changes in shareholders' equity, cash flow statements and associated notes for the year then ended have been extracted from the Group's 2007 statutory financial statements upon which the auditor's opinion is unqualified and does not include any statement under section 237 of the Companies Act 1985. These financial statements have not yet been delivered to the Registrar of Companies. ---END OF MESSAGE---