Surgical Innovations Group plc
AIM : SUN

Surgical Innovations Group plc

April 10, 2006 02:03 ET

Surgical Innovations Group plc: Preliminary Results

LONDON, UNITED KINGDOM--(CCNMatthews - April 10, 2006) - Surgical Innovations Group plc (AIM:SUN), the designer and manufacturer of innovative surgical devices, today announces its Preliminary Results for the year ended 31 December 2005.

Highlights

- Turnover increased by 33% to Pounds Sterling 4.02m (2004: Pounds Sterling 3.03m)

- Operating profit increased by 66% from Pounds Sterling 401,000 (2004: Pounds Sterling 242,000)

- Pre-tax profits doubled to Pounds Sterling 352,000 (2004: Pounds Sterling 174,000)

- Record order book of Pounds Sterling 745,000

- Net cash inflow from operating activities increased to Pounds Sterling 279,000 (2004: Pounds Sterling 130,000)

- Earnings per share doubled to 0.16p (2004: 0.08p)

- Ten-year licensing agreement with Rolls-Royce plc worth up to Pounds Sterling 800,000

- Pounds Sterling 535,000 in industrial design project fees generated by Product Development division

- Business restructured into two new divisions: Instruments and Product Development

Commenting on the results, Doug Liversidge, Non-executive Chairman, said: "We have made substantial progress during the year. With the restructuring of the company and the growth plans in place for both divisions, we are well placed to achieve our objectives of once again delivering improved profitability and enhanced shareholder value."



For further information:

Surgical Innovations Group plc
Doug Liversidge CBE, Chairman Tel: +44 (0) 779 889 2918
Graham Bowland, Finance Director Tel: +44 (0) 771 561 2063
graham.bowland@surginno.co.uk www.sigroupplc.com

Westhouse Securities
Tim Feather Tel: +44 (0) 161 838 9140
tim.feather@westhousesecurities.com www.westhousesecurities.com

Media enquiries:

Abchurch
Sarah Hollins / Justin Heath Tel: +44 (0) 113 203 1341
sarah.hollins@abchurch-group.com www.abchurch-group.com


Chairman's Statement

Financial and Operational Review

I am delighted to report yet another year of increased sales and profit growth - the seventh in succession.

Group turnover increased to Pounds Sterling 4.02 million in 2005 (2004: Pounds Sterling 3.03 million), an increase of 33% which resulted in a doubling of pre-tax profit to Pounds Sterling 352,000, compared with Pounds Sterling 174,000 in the previous year.

Within the turnover figure there are product development fees of Pounds Sterling 535,000 (2004: Pounds Sterling nil). These reflect our entry into an exciting new area of industrial design, where we have already applied our advanced surgical device technology to the aero engine maintenance field through a relationship with Rolls-Royce plc. We are very proud of this relationship where our design expertise has been recognised through a ten-year licensing agreement. Over the period of the agreement we will receive up to Pounds Sterling 800,000 for licensing fees and access to technology, of which Pounds Sterling 200,000 was received in the year. This is in addition to any ongoing product development fees that may arise through this collaboration. We have also written-off the total costs of negotiating and implementing the licensing arrangement which were Pounds Sterling 103,000.

The Group has increased its product development capability through the recruitment of highly talented young graduates. We have invested in leading edge technology, enabling the team to respond efficiently and effectively to future design projects.

Royalties from the licensing of EndoFlex to Cardinal Health improved to Pounds Sterling 281,000 from Pounds Sterling 231,000 in the previous year. This is a testament to the uniqueness of the design, with EndoFlex still widely regarded as the world's leading retraction and tissue mobilisation device.

We continue to invest in the development of new devices for Minimally Invasive Surgery (MIS) - our core competency. This has contributed to overall MIS sales of Pounds Sterling 2,677,000 and we are confident that we can build upon this performance at a substantially increased rate. Our investment in developing relationships with our strategic partners and international distributors provides a solid foundation for future growth in this area.

Our laparoscopic port access system, YelloPort, continues to gain acceptance with leading international surgeons. We firmly believe that our continuous product development programme will further increase our market share. In the current year our efforts to develop the US market for YelloPort have resulted in direct distribution to hospitals, in addition to increased sales through Equipment Managed Service companies.

Sales of our laparoscopic scissors have increased considerably over the past year and continue to do so. The quality of the product coupled with its innovative design is enabling us, through our relationships with Aesculap and Teleflex Medical, to make substantial inroads into this lucrative market.

Cash generation of Pounds Sterling 279,000 from all operating activities has enabled us to repay Pounds Sterling 68,000 of the 6.5% convertible loan notes and reduce our finance lease debt. However, based on our anticipated growth for 2006, our record order book of Pounds Sterling 745,000, and an increased leasing facility from our bankers, the Board has entered into a significant capital expenditure programme. This should result in improved production efficiencies and increased margins.

Outlook

We have made substantial progress during the year and are optimistic that the growth in sales and profitability will continue. We are determined to achieve full recognition of Surgical Innovations within the investment community and a valuation that genuinely reflects the development of the Group.

Finally I wish to thank, on your behalf, my Board colleagues and all employees for their dedication and commitment during a year in which we doubled the Group's pre-tax profits.

Doug Liversidge CBE

7 April 2006

Executive Review

2005 was our seventh consecutive year of growth in both turnover and operating profit. Importantly, it included our initial venture into the arena of industrial design with the signing of a ten-year agreement with Rolls-Royce plc. The Group continues to benefit from the strength of our medical devices and our design capabilities.

Business Restructuring

We have restructured the business to create two divisions: Instruments and Product Development, allowing us to deliver our energy and drive in a focused manner and providing a clear measure of profitability in the respective areas. The new structure is already yielding benefits, such as increased instrument sales and the rapid delivery of new products. We firmly believe that we have established a structure for growth that will result in enhanced profitability for the Group.

In 2005 we focused on improving the efficiency of our manufacturing facilities, analysing the flow of products around the site and eliminating waste from the production processes. This reorganisation has already delivered significant improvements in efficiency and in our overall manufacturing capacity.

Capital Investment Programme

This manufacturing review has been coupled with a substantial investment programme. At Surgical Innovations, we firmly believe that the quality of our products is paramount: our investment programme is designed to ensure that our products maintain their respective positions in the market while continuing to be supplied at competitive prices.

A new clean room, associated packaging equipment, and the Pounds Sterling 140,000 year-end commitment to cutting-edge Computer Numerically Controlled (CNC) machine tools are part of this exciting capital investment programme. We have also increased our manufacturing floor space by using an off-site storage facility.

Furthermore, we have taken the opportunity to upgrade our IT systems by installing a new business management system, server, and the latest version of our industry-leading three-dimensional Computer Aided Design (CAD) system.

Instrument Division

Sales of our devices for Minimally Invasive Surgery (MIS), at Pounds Sterling 2,677,000, firmly establish MIS as our core business activity.

The second half of 2005 produced strong growth with sales in MIS of Pounds Sterling 1,684,000, a significant improvement on first half sales of Pounds Sterling 993,000. This sharp increase provides high expectations for 2006, as we anticipate added benefits from the continual investment in our product portfolio and international distributor network.

Sales of YelloPort totalled Pounds Sterling 572,000. Importantly, Rest of World sales increased by 45%. This is a creditable performance and we are delighted with our success in developing a new positioning of the product in the market. YelloPort is now promoted as a 'resposable' system: a mixture of both reusable and disposable items which offers a quality, innovative and cost effective solution - ideal for the surgeon and hospital finance administrator alike.

YelloPort continues to gain popularity amongst leading, influential laparoscopic surgeons. This is an important phase in the development of the product amongst the surgical community: to achieve increased market share, it is vital that YelloPort gains credibility within this community as an equal against equivalent products from the dominant US medical device companies.

We are therefore delighted that we have been able to enter the US market in the current year through a combination of direct sales, distribution, and equipment managed service business. The latter is based upon a business model whereby major healthcare companies provide hospitals with fully-serviced procedure trays on a charge-by-use basis, which significantly reduces hospital overhead costs. YelloPort in its 'resposable' format is ideally suited to this marketing concept.

Within our Logic range of instrumentation, sales of single use scissors increased by 3% to Pounds Sterling 1,219,000 despite an increasing number of low-cost alternatives in the market. This performance can be attributed to our ever-strengthening relationships with our main strategic partners, Aesculap and Teleflex Medical. Our investment in design, tooling and machinery has enabled us to maintain our exceptionally high standards at a competitive price, ensuring that in the current year, like-for-like sales of single use scissors are significantly higher than in 2005.

It is particularly satisfying to report that we have opened up new markets for our laparoscopic scissors in Australia, Iran and Israel following visits to these countries.

During 2005 we saw initial sales of our fully disposable Quick range of instruments. In the laparoscopic market, it is always difficult to gain acceptance of a product line within a short period of time and so we are encouraged by the initial level of business and positive feedback received to date. Our intention is to focus our efforts on the UK market through direct sales, and elsewhere through our existing collaboration with Aesculap. We continue to review the product and have a planned strategy of improvement and broadening of the range during 2006 and 2007.

Our main brands of YelloPort and Logic are now well-established and continue to attract critical acclaim. Building upon this, we are embarking on a major development initiative with YelloPort to strengthen the product's suitability for surgeons moving away from single use port access systems. This is extremely important if we are to make significant inroads into the US market, which annually undertakes in excess of 700,000 laparoscopic gall bladder procedures, worth approximately Pounds Sterling 100million in predominately single use laparoscopic ports.

The US is naturally an important area for Surgical Innovations; however, our strategy is to also develop our presence in markets such as India and China where laparoscopic surgery is undertaken routinely. There is an opportunity for our instrumentation to be used in obesity surgery in these markets: in China, a quarter of all adults are obese and half of all new obesity-related diabetes cases result from India and China.

The demand for laparoscopic surgery is escalating with the majority of countries now undertaking this type of surgery on a routine basis. More and more procedures, previously confined to complex open surgery, are being performed laparoscopically in such areas as colorectal cancer surgery, urology - including kidney transplants - and paediatric surgery, where the benefits of minimally invasive techniques on children are self-evident.

With this continual rise in the annual number of performed cases and with Surgical Innovations at the forefront of instrumentation development, we are well placed to meet future demands.

Product Development Division

2005 was an excellent year for the Group's product development team. Finalising the collaboration agreement with Rolls-Royce plc was a major success. We will receive up to Pounds Sterling 800,000 over the ten-year period of the agreement for licensing fees and access to technology. During the year we received the first tranche of these fees, totalling Pounds Sterling 200,000, as well as successfully completing a number of development projects that generated design and manufacturing fees of Pounds Sterling 535,000. Completing the agreement and securing the subsequent business with Rolls-Royce plc required a substantial investment in management time and Pounds Sterling 103,000 of costs were attributed to this activity.

The adaptation of our world-class 'keyhole' surgical instrument technology, EndoFlex, to meet the demands of aero engine inspection was an exciting challenge. Based upon the experience gained in this area, we have established a new product offering, EndoFlex Industrial, which provides the user with Paths to Precision: a unique technology which helps to access challenging, complex spaces with the minimum of downtime. We are now rolling out this business model and are targeting the industrial gearbox, oil and gas, aerospace and nuclear industries.

Ever cognisant of the need to increase our presence in these competitive markets, we are honing our marketing strategies; for example, we are exhibiting at a number of highly focused trade congresses.

The technology transfer into these new markets has been profitable and exciting, but this has not been at the expense of our core business: MIS instrumentation. The team has developed a number of new products plus several significant improvements to our existing product ranges. In the current year we have mapped out an ambitious product development programme, including the development of a second-generation YelloPort port access system. This new product range is aimed at the lucrative US market, where our competitors primarily supply high performance, single use devices.

The new divisional structure has brought a new degree of focus which is now allowing us to look further ahead. We are examining longer term development projects with much larger sales potential and, in order to fund such development activities, we are fully exploring the research and development funding opportunities available to us through our Regional Development Agency, Yorkshire Forward.

During this current year we will see developments in a number of new markets as well as significant additions to our MIS portfolio. The Group's Product Development division is poised for successful growth.

Licensing

Royalty income from sales of EndoFlex amounted to Pounds Sterling 281,000. Cardinal Health, which acquired the licence in April 2004, has taken an aggressive view on defending its licensed intellectual property and together we were successful in an action against an infringement of the EndoFlex patent, at a cost of Pounds Sterling 53,000. We continue to develop our relationship with Cardinal Health and are confident that this will lead to further product development and international market opportunities.

Autologous Blood Transfusion

We have continued to concentrate our efforts on the UK post-operative market. We continue to see gains in our market share with a 55% increase in turnover to Pounds Sterling 172,000. The opportunities for growth will be further enhanced as we begin to experience planned cost savings in the manufacturing process of the product.

People

The progress of Surgical Innovations has been outstanding and could not have been achieved without the total involvement and dedication of our work colleagues. In 2005 and the current year we have made significant investments in ensuring that the creativity of our staff is harnessed, that they are well trained, and that the culture of the business is appropriate to meet our growth expectations, leading to this year's improved performance. We remain committed to this focus on training and personal development as part of our strategy for success.

Summary

The trading year was a remarkable one for Surgical Innovations, with an operating profit increase of 66%.

With the restructuring of the company and the growth plans in place for both divisions, we believe we are well placed to achieve our objectives of once again delivering improved profitability and enhanced shareholder value.



Consolidated Profit and Loss Account
For the year ended 31 December 2005

2005 2004

Pounds Pounds
Sterling Sterling
Notes '000 '000

Turnover 4,018 3,032
Cost of sales (2,295) (1,432)
---------------------------------------------------------------------
Gross profit 1,723 1,600

---------------------------------------------------------------------

Administrative expenses (1,322) (1,358)
---------------------------------------------------------------------
Operating profit 401 242
---------------------------------------------------------------------

Interest payable (49) (68)

---------------------------------------------------------------------
Profit on ordinary activities before
taxation 352 174
---------------------------------------------------------------------

Tax on profit on ordinary activities 50 38
---------------------------------------------------------------------
Retained profit 402 212

---------------------------------------------------------------------

---------------------------------------------------------------------
Earnings per ordinary share 2 0.16p 0.08p
---------------------------------------------------------------------



Consolidated Balance Sheet
As at 31 December 2005

2005 2004

Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
Fixed assets

Tangible assets 668 811

Current assets

Stocks 852 881
Debtors 1,605 1,215
Cash at bank 25 1
------------------------------------------------------------------------
2,482 2,097

Creditors: amounts falling due
within one year (940) (1,043)
------------------------------------------------------------------------
Net current assets 1,542 1,054

------------------------------------------------------------------------

Total assets less current
liabilities 2,210 1,865

Creditors: amounts falling due
after more than one year (116) (215)

------------------------------------------------------------------------

Net assets 2,094 1,650
------------------------------------------------------------------------

Capital and reserves

Called up share capital 2,591 2,580
Share premium account 16,101 16,070
Capital reserve 329 329
Accumulated losses (16,927) (17,329)
(497) (930)
------------------------------------------------------------------------

Shareholders' funds 2,094 1,650
------------------------------------------------------------------------



Consolidated Cash Flow Statement
For the year ended 31 December 2005

2005 2004

Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
Notes '000 '000 '000 '000

Net cash inflow from
operating activities 3 279 130

Returns on investments
and servicing of finance
Interest payable on
finance leases (22) (29)
Interest payable on
bank overdrafts (24) (32)
Interest payable on
convertible loan notes (3) (7)
------------------------------------------------------------------------
Net cash outflow from
returns on investments
and servicing of finance (49) (68)

Taxation - 18

Capital Expenditure:
purchases of tangible
fixed assets (64) (21)

------------------------------------------------------------------------
Net cash inflow before
financing 166 59
------------------------------------------------------------------------

Financing
Issue of share capital - 21
Receipts from borrowings - 22
Capital repayments under
bank loans (9) (7)
Capital repayments under
finance leases (109) (96)

Redemption repayments of
convertible loan notes (68) -

Net cash outflow from
financing (186) (60)

------------------------------------------------------------------------
Decrease in cash 4 (20) (1)
------------------------------------------------------------------------


Notes

For the year ended 31 December 2005

1. Accounting policies

The principal accounting policies which remain unchanged from the previous year, are as follows:

a) Basis of accounting

The financial statements have been prepared under the historical cost basis of accounting and under United Kingdom Generally Accepted Accounting Practice.

b) Basis of consolidation

The Group financial statements consolidate those of the Company and of its subsidiary undertakings drawn up to 31 December 2005. The results of subsidiaries accounted for under the acquisition accounting method are included in the consolidated profit and loss account from the date of their acquisition. The results of subsidiaries, accounted for under the merger accounting method, are included in the consolidated profit and loss account as if they had always been part of the Group. Intra-Group sales and results are eliminated on consolidation and all sales and results relate to external transactions only.

2. Earnings per ordinary share

The earnings per ordinary share has been calculated by dividing the profit attributable to ordinary shareholders for the year ended 31 December 2005 of Pounds Sterling 402,000 (2004 : Pounds Sterling 212,000) by the weighted average number of ordinary shares in issue during the year of 258,612,616 (2004 : 256,955,941) and amounted to 0.16p per share (2004 : 0.08p per share).

The Group has one category of dilutive potential ordinary shares, those share options granted where the exercise price is less than the average price of the Company's ordinary shares during the year. The dilution has no effect on basic earnings per share.

3. Reconciliation of operating profit to net cash inflow from operating activities



2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Operating profit 401 242
Depreciation of tangible fixed assets 216 203
Decrease/(increase) in stocks 29 (160)
(Increase)/decrease in debtors (340) 50
Decrease in creditors (27) (205)
------------------------------------------------------------------------
Net cash inflow from operating activities 279 130
------------------------------------------------------------------------


4. Reconciliation of net cash flow to movement in net debt

2005 2004
Pounds Pounds
Sterling Sterling
'000 '000

Decrease in cash in the year (20) (1)
Cash outflow from finance leases and loans 118 103
Cash outflow from loan note redemption 68 -
------------------------------------------------------------------------
Change in net debt resulting from cash flows 166 102
New finance leases and loans (9) (101)
Issue of shares on conversion of loan notes 42 -
------------------------------------------------------------------------
Movement in net debt 199 1
Net debt at beginning of year (639) (640)
------------------------------------------------------------------------
Net debt at end of year (440) (639)
------------------------------------------------------------------------


5. Analysis of changes in net debt

At At
1 January Cash Non-cash 31 December
2005 flow changes 2005

Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000

Cash at bank and in hand 1 24 - 25
Bank overdrafts (175) (44) - (219)
---------
(20)
---------

Bank loan (20) 9 - (11)
Finance leases (335) 109 (9) (235)
---------
118
---------

Convertible loan notes (110) 68 42 -
---------------------------------------------
(639) 166 33 (440)
---------------------------------------------


6. The Annual General Meeting of the Company will be held at the Weetwood Hall Hotel and Conference Centre, Otley Road, Far Headingley, Leeds LS16 5PS at 1.00pm on 27 June 2006.

7. The foregoing statements do not constitute the Group's statutory accounts. The Group's statutory accounts, on which the Group's auditors, Grant Thornton UK LLP, have given an unqualified opinion in accordance with Section 235 of the Companies Act 1985, are to be delivered to the Registrar of Companies and will be posted to shareholders shortly. Additional copies of the annual report and of this announcement will be available at the Company's registered office: Clayton Park, Clayton Wood Rise, Leeds, LS16 6RF.

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