Final Results

RNS Number : 8332N
Arc International PLC
25 February 2009
 




ARC International plc Announces Unaudited Preliminary Results
For the Year Ended December 31, 2008

 

Revenues and Royalties Increased Over 2007
Restructuring
 Completed Delivering Significant Cost Savings

New Integrated Solutions Generating Strong Customer Interest


SAN JOSE, Calif., and ST. ALBANS, England, February 25, 2009 - ARC International (LSE: ARK), a leading provider of consumer IP to OEM and semiconductor companies worldwide, today announced its unaudited preliminary results for the full year ended December 31, 2008.  

 
·         For the year ended December 31, 2008 revenues and royalties increased over 2007
o        Total revenue £17.0 million, up 18% (2007: £14.4 million) or $31.2 million, up 8%
(2007: $28.9 million)
o        Royalty revenue £7.9 million, up 61% (2007: £4.9 million) or $14.3 million, up 47%
(2007: $9.7 million)
o        Licensing revenue £7.3 million, flat year on year (2007: £7.4 million) or $13.4 million, down 11% (2007: $15.0 million)
 
·         Net loss was £7.3 million including the results of non-recurring expenses, charges and delayed revenues
o        Restructuring charges of £2.3 million
o        Additional expenses of £1.6 million associated with Sonic Focus acquisition
o        Two contracts delayed to 1H 2009 as previously announced
 
·         Significant actions to drive enhanced revenue opportunities
o        New executive appointments to the management team and strengthened worldwide Sales and Marketing organizations
o        New higher royalty “Sound-to-Silicon” multimedia solutions generating significant sales opportunities with OEM and chip customers throughout Asia, North America, and Europe
o        Launch of new multimedia solutions at the CES and Mobile World Congress events generated strong customer interest
o        ARC® Sonic Focus products now shipping in new PCs and laptops from “Tier 1” customers
 
·         Restructuring completed generating annual savings in excess of 25% of costs
o        Early and decisive action in response to fundamental industry shifts and worsening economic climate to ensure that restructuring benefits are fully realized in 2009
o        Development programs maintained while operating on significantly lower cost base
o        New organization enhances ability to deploy more integrated multimedia solutions

 

Commenting on the company's performance, Carl Schlachte, president and chief executive officer, said: "In 2008 ARC traded against the backdrop of an increasingly challenging economic environment that worsened in the second half of the year.  Including all non-recurring events our net loss was larger than expected.  Going forward into 2009, we remain cautious as visibility is limited and uncertainty in the semiconductor industry with lengthening sales cycles may affect the timing of new licence revenues and royalty volumes." 


Schlachte continued, "However a rapid transition to profitability and positive cash flow continues to be our overriding strategic goal, and in response to the challenging semiconductor market and global economic conditions we have taken swift and decisive action to further enhance our ability to achieve this goal within planned timescales.  To accelerate growth in our revenues and customer base, we have strengthened our product portfolio through the acquisition of Sonic Focus, transformed our ability to deploy integrated multimedia solutions, broadened our target market to include the higher royalty OEM and consumer electronics sectors, strengthened our worldwide sales and marketing organizations and made significant new appointments to the senior management team.  In addition, the company-wide restructuring announced in September 2008 has been substantially completed, and is already delivering improved operational efficiencies, a rationalized and streamlined management structure and product portfolio, and a significantly lower cost base.  We will continue to assess industry conditions throughout 2009 to ensure that the company's cost structure is aligned with revenue opportunities.


"Over the medium to long term we expect consumer demand for devices delivering increasingly higher quality multimedia content to continue to grow, driving OEM and semiconductor companies to create innovative next-generation products with better performance and lower development costs.  Feedback from ARC's worldwide customers and partners confirms our confidence that our integrated solutions and more efficient organization can continue to provide compelling value.  We remain confident in our strategy and our ability to execute."


# # #


Media Contact:                            Investor Contact:

Lee Garvin Flanagin                        Juliet Clarke

ARC International                        Financial Dynamics

+1 408 437 3433                            +44 20 7831 3113


                        

About ARC International plc
ARC International is a world leading provider of consumer IP to OEM and semiconductor companies globally. ARC's award-winning, vertically integrated audio and video solutions enable high quality multimedia content to be captured, shared, and played on a wide range of electronics devices. ARC's 150+ customers collectively ship hundreds of millions of ARC-Based chips annually in products such as PCs and laptops, digital and mobile TVs, portable media players, flash storage, digital cameras, network appliances, and medical and government systems.

ARC International maintains a worldwide presence with corporate and research and development offices in San Jose and Lake Tahoe, Calif., St. Albans, England, St. Petersburg, Russia, and Hyderabad, India. For more information visit www.ARC.com. ARC International is listed on the London Stock Exchange as ARC International plc (LSE: ARK).


ARC, ARC-Based, the ARC logo and Sonic Focus are trademarks or registered trademarks of ARC Internationawith the U.S. Patent and Trademark Office and other international trademark organizations. All other brands or product names contained herein are the property of their respective owners. This release may contain "forward-looking statements" including the development, implementation, and release of features described herein, statements concerning plans, future events or performance and underlying assumptions and other statements that are other than statements of historical fact. These are at the sole discretion of ARC International. ARC's actual results for future periods may differ materially from those expressed in any forward-looking statements made by or on behalf of ARC. The factors that could cause actual results to differ materially include, without limitation, general economic and business conditions; potential for fluctuations in and unpredictability of ARC's quarterly results; assumptions regarding ARC's future business strategy; the ability of semiconductor partners to manufacture and market microprocessors based on the ARC® architecture; the acceptance of ARC technology by systems companies; the availability of development tools, systems software and operating systems; the rapid change in technology in the semiconductor industry and ARC's ability to develop new products in a timely manner; competition from other architectures; ARC's ability to protect its intellectual property; regulatory policies adopted by governmental authorities; risks associated with ARC's international operations; management of ARC's growth; ARC's ability to attract and retain employees; and other uncertainties that are discussed in the "Investment Considerations" section of ARC's listing particulars dated September 28, 2000 filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales. 

  ARC International plc Unaudited Preliminary Results Year Ended December 31, 2008


STATEMENT FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER


Overview

In 2008, ARC was able to strengthen its competitive position due to strategic acquisitions that culminated with Sonic Focus last February. Today ARC's Sound-to-Silicon integrated solutions for OEM and chip companies are an industry firstand ARC is recognizing higher value royalties from its new class of customers - OEMs - as planned. Furthermore, ARC's historical base of semiconductor customers are taking licenses for "Sonic Focus ready" multimedia subsystems, helping stimulate new revenue opportunities in an uncertain economic climate. Additionally, ARC's royalty income benefitted from higher royalty rates as more post-2003 contracts contributed to the royalty stream.  


For the year, these positive developments helped ARC grow the top line despite a deteriorating economic climate and reduced industry confidence. Certain ARC customers were impacted by the global financial conditions, causing them to become more conservative with cash or postpone development projects. As a consequence, two contracts were delayed into the first half of 2009.


Company Restructuring Plan

In early recognition of the worsening global economy, in Q2 2008 management undertook a strategic review of the business to ensure ARC's strategy and resources were properly aligned with revenue opportunities. The strategic review also identified inefficiencies in the deployment of resources and recommended an improved product development model. The result was a company-wide restructuring announced on September 21, 2008 that created:

 

·         A new integrated worldwide sales team and field organization to accelerate engagements with OEM and semiconductor customers globally
·         An enhanced global product development organization to ensure ARC’s integrated solutions meet the needs of customers creating products for high-volume multimedia markets
·         A worldwide marketing team under new leadership with in-depth experience and understanding of the consumer electronics industry and OEM customers. These skills will assist ARC to continue its focus on delivering vertically integrated multimedia solutions
·         A centralized Chief Technology Officer function

 

The restructuring has brought visible improvements in ARC's planning and execution. These have resulted most recently in strong interest by OEM and chip customers in ARC's Sound-to-Silicon solutions at the recent CES and Mobile World Congress events.


ARC's "Sound-to-Silicon" Solutions 

ARC's strategy is to monetize the increasing trend of consumers to capture, share, and play high quality multimedia content on a variety of electronics devices. By developing and delivering integrated Sound-to-Silicon solutions to OEM and semiconductor companies globally, ARC is helping these customers create new types of devices at lower development costs that deliver a better experience to consumers.  


ARC's Sound-to-Silicon solutions are an industry first, and have been built upon the company's legacy configurable products and technology that was gained through the strategic acquisitions culminating with Sonic Focus. They address fundamental changes in the way electronics products are created by offering a complete solution that reduces the design effort of ARC's customers thus increasing their competitiveness.


Introduced at CES in Las Vegas, ARC's current Sound-to-Silicon solutions include:

  • ARC® Portable Media Device Solution
    Implemented on a portable media device, the ARC PMD solution enables consumers to enjoy music, movies, and games anywhere and anytime with a home entertainment center listening experience and extended playback time. It provides an integrated audio offering that reduces development costs for chip vendors and OEMs.  

  • ARC® Digital TV and Home Theater Solution
    The ARC Digital TV and Home Theater solution creates a compelling home entertainment center listening experience that provides for the ear what high-definition video provides for the eye. The ARC solution eliminates costly components for the OEM, such as center channel speakers and woofers. The ARC solution enables chip builders to create a differentiated device that addresses set-top box, digital TV, home theater, and home media server applications.

  • ARC® PC and Laptop Solution
    The ARC Personal Computer and Laptop audio solution provides a home entertainment center listening experience on PCs and laptops using existing speakers or headphones. The solution comprises industry-leading ARC Sonic Focus audio enrichment products that refine the sound so it resembles the original studio performance.  


Industry Adoption of ARC

Throughout 2008 a number of OEM and semiconductor companies announced they have taken licenses for, or are shipping products containing, an ARC solution:

 

·         PCs and Laptops
o        Hewlett Packard – introduced its new TouchSmart PC computer, which has been heralded as “redefining personal computing” and includes ARC’s Sonic Focus technology.
o        Lenovo – launched the x300 laptop computer running the Microsoft Vista operating system with ARC’s Sonic Focus technology.
o        N-Trig – has signed a multi-year license agreement for ARC’s processor products for use in N-trig’s DuoSense technology for PCs.
 
·         Digital Televisions
o        A leading in mobile digital TV company – signed a multiuse agreement for ARC solutions to provide high-quality digital TV reception in nearly every global geographic region.
o        Abilis – announced it is using ARC technology in the world’s smallest digital mobile TV receiver for DVB-H/T applications.
o        Abilis – in a separate announcement, announced it has standardized its mobile DTV product development on ARC technology.
o        Fujitsu – extended its long term relationship with ARC and took a new license for use in its next-generation HDTV products.
o        NexWave – has taken a license for a configurable ARC solution to be incorporated into its innovative Mobile TV receiver product.
o        ViXS – has taken a license for ARC’s multimedia solutions for use in its XCode chipset family, which enables the processing of multiple HD video streams.
 
·         Flash/Storage Applications
o        STEC – extended its existing relationship with ARC and took a new license, which enhances ARC’s position as one of the leading suppliers in the growing flash memory market.
o        TM Technology – a leader in the flash storage market, took an ARC license to create a new range of multimedia storage applications.
o        Unnamed leading flash company – took an ARC license for flash applications because of ARC’s recognized leadership in the Flash industry.
 
·         Other Electronic Market Applications
o        A top 10 Taiwan chip company – is incorporating ARC’s low power solution into cellular design that is targeting the worldwide handset market.
o        A leading smart card provider – signed a new license enabling the existing ARC customer to create new ARC-Based solutions for high volume smartcard-related devices. 
o        Coppergate – has taken an ARC license to create innovative products that will enable consumers share and play multimedia content in the home.
o        HiFN – has signed a new license for ARC technology that will be used in its successful security application products.
o        ITT – took a new license for multiple ARC products to create solutions for government, military, and aerospace applications.
o        Toshiba – extended its collaboration with ARC by taking a new license for development of leading-edge processor technology.
o        XStreamHD – has taken a license for ARC’s audio processing technology for use in its ultimate home entertainment system.
 

 

 


Current Trading and Prospects

In 2008 ARC traded against the backdrop of an increasingly challenging economic environment that worsened in the second half of the year.  Including all non-recurring events our net loss was larger than expected.  Going forward into 2009, we remain cautious as visibility is limited and uncertainty in the semiconductor industry with lengthening sales cycles may affect the timing of new licence revenues and royalty volumes. 


However a rapid transition to profitability and positive cash flow continues to be our overriding strategic goals, and in response to the challenging semiconductor market and global economic conditions we have taken swift and decisive action to further enhance our ability to achieve this goal within planned timescales.  To accelerate growth in our revenues and customer base, we have strengthened our product portfolio through the acquisition of Sonic Focus, transformed our ability to deploy integrated multimedia solutions, broadened our target market to include the higher royalty OEM and consumer electronics sectors, strengthened our worldwide sales and marketing organizations and made significant new appointments to the senior management team.  In addition, the company-wide restructuring announced in September 2008 has been substantially completed, and already is delivering improved operational efficiencies, a rationalized and streamlined management structure and product portfolio, and a significantly lower cost base. We will continue to assess industry conditions throughout 2009 to ensure that the company's cost structure is aligned with revenue opportunities.


Over the medium to long term we expect consumer demand for devices delivering increasingly higher quality multimedia content to continue to grow, driving OEM and semiconductor companies to create innovative next-generation products with better performance and lower development costs.  Feedback from ARC's worldwide customers and partners underpins our confidence that our integrated solutions and more efficient organization can continue to provide compelling value.  We remain confident in our strategy and our ability to execute.


  ARC International plc Unaudited Preliminary Results Year Ended December 31, 2008


CHIEF FINANCIAL OFFICER'S REVIEW


Strong revenue growth in 1H was offset by deteriorating confidence of certain customers in 2H. Net loss was greater than planned due to the acquisition of and incremental costs from Sonic Focus, the restructuring charges, and the delayed revenue from two licensing contracts.  Without these incremental expenses and charges, operating costs were in line with management's plan for 2008.  


Revenue

Total revenue in 2008 in U.S. dollars was up 8% to $31.2 million (2007: $28.9 million). Total revenue in sterling was £17.0 million, up 18% over the same period last year (2007: £14.4 million). License and engineering revenue in U.S. dollars was down 11% to $13.4 million (2007: $15.0 million). In sterling, license and engineering revenue was flat at £7.3 million compared to 2007 (2007: £7.4 million). Maintenance and service revenue in U.S. dollars was down 17% to $3.5 million (2007: $4.2 million). In sterling, maintenance and service revenue was down 14% at £1.8 million (2007: £2.1 million). In U.S. dollars, royalty revenue was up by 47% to $14.3 million (2007: $9.7 million). In sterling, royalty revenue increased 61% to £7.9 million (2007: £4.9 million).  Sales in Europe were 20% (2007: 20%) of total sales, North America 55% (2007: 65%) and Asia 25% (2007: 15%). 


Cost of sales and operating expenses

Cost of sales decreased 7% to £1.3 million (2007: £1.4 million). Gross margin increased to 92% (2007: 90%). Without the restructuring effects, net operating expenses increased by 25% to £22.8 million (2007: £18.3 million).


The company had 163 employees at December 31, 2008 compared with 196 at December 31, 2007. The 17% decrease in headcount was due to a company-wide restructuring to be completed in Q1 of 2009, and was offset by increase in headcount from the Sonic Focus acquisition. Excluding the effects of the restructuring, research and development costs increased 30% to £9.6 million (2007: £7.4 million). Sales and marketing cost was essentially flat at £5.5 million compared to 2007 (2007: £5.5 million). General and administration costs increased 22% to £4.5 million (2007: £3.7 million). Other expenses, comprised of depreciation and amortization, increased to £3.1 million (2007: £1.7 million) due to additional amortization of intangibles included in the acquisitions. The incremental operating expenses excluding amortization as a result of the acquisition during the year was £1.2 million in 2008. Incremental amortization expenses associated with technologies and intangible assets acquired in 2008 was £0.3 million in 2008. Restructuring costs for 2008 were £2.3 million (2007: £Nil).


Finance income

Interest income was down 40% to £0.9 million (2007: £1.5 million) due to the decrease in average cash balance and decrease in interest rates earned on investments.


Loss for the period

Net loss was £ 7.3 million (2007: £ 2.5 million).  The charge for the reorganisation of £2.3 million, and the incremental expenses from the acquisition of Sonic Focus gave rise to the increase in the net loss. Loss per share increased to 4.93p (2007: 1.69p).

Cash flow and balance sheet

The net cash outflow from operations before restructuring costs decreased to £4.8 million (2007: £5.1 million). Capital expenditure, including payments made for acquisitions and investments in associate, was £4.6 million (2007: £8.1 million). Net cash outflow in connection with the reorganisation was
£1.6 million, including the share repurchases. The movement in cash and short-term investments during the year was an outflow of £8.5 million (2007: £10.4 million). Net assets at December 31, 2008 were £21.5 million (December 31, 2007: £30.3 million), including cash and short-term investments of £12.7 million (December 31, 2007: £21.2 million).  


Dividend 

No interim dividend payment will be made for the year ended December 31, 2008 (2007: £Nil).   


Acquisitions

During the period ARC acquired Sonic Focus, Inc for a total consideration of £2.8 million. See note 9 for details.

  

Consolidated income statement

For the year ended December 31, 2008









2008

2008

2008

2007



Before






Restructuring

Restructuring

Total




 (unaudited) 

 (unaudited) 

 (unaudited) 

 (audited) 

 

Note

 £ '000 

 £ '000 

 £ '000 

 £ '000 

Revenue


17,047

  -  

17,047

  14,401 

Cost of sales

 

(1,294)

  -  

(1,294)

  (1,437)

Gross profit


15,753

  -  

15,753

  12,964 

Operating expenses

  3 

(22,791)

(2,273)

(25,064)

  (18,305)

Operating loss


(7,038)

(2,273)

(9,311)

  (5,341)

Finance income


897

  -  

897

  1,470 

Finance expense


(14)

  -  

(14)

  -  

Share of post-tax loss of associate

 

(8)

  -  

(8)

  (22)

Loss before income tax


(6,163)

(2,273)

(8,436)

  (3,893)

Tax credit

 

1,135

  -  

1,135

  1,389 

Loss for the period attributable to equity shareholders

(5,028)

(2,273)

(7,301)

  (2,504)

 Weighted average number of shares 




  147,965,359 

  148,031,270 

 Basic and diluted loss per share -pence 




  (4.93)

  (1.69)



Statement of recognized income and expense


For the year ended December 31, 2008










2008

2007



 (unaudited) 

 (audited) 

 

Note

 £ '000 

 £ '000 

Loss for the year

5

(7,301)

  (2,504)

Currency translation differences

5

(951)

  (54)

Total recognized expense for the year

 

(8,252)

  (2,558)




  

Consolidated balance sheet





As at December 31, 2008







2008


2007



(unaudited)


(audited)


Note

£'000

 

£'000

Assets





Non current assets





Intangible assets

   4

11,600 


  7,506 

Property, plant and equipment


1,970 


  1,537 

Investment in associate


443 


  414 

Trade and other receivables


442 


  417 

 

 

14,455 

 

  9,874 






Current assets





Inventory


  -  


  72 

Trade and other receivables


4,060 


  4,241 

Current corporation tax receivable


931 


  1,368 

Short term investments


8,037 


  11,145 

Cash and cash equivalents


4,631 


  10,100 

 

 

17,659 

 

  26,926 

Total assets


32,114 


  36,800 






Current liabilities





Loans and borrowings


78 


  -  

Trade and other payables


7,529 


  5,729 

Provisions for other liabilities and charges


871 


  163 

 

 

8,478 

 

  5,892 

Net current assets


9,181 


  21,034 






Non-current liabilities





Loans and borrowings


99 


  -  

Other payables


101 


  126 

Deferred income tax liabilities


1,073 


  489 

Provisions for other liabilities and charges


858 


  20 

 

 

2,131 

 

  635 

Net assets


21,505 


  30,273 






Shareholders' equity





Ordinary shares


153 


  153 

Share premium 


3,683 


  3,683 

Other reserves


61,289 


  61,037 

Cumulative translation adjustment


(1,462)


  (511)

Retained earnings


(42,158)


  (34,089)

Total Equity

5 

21,505 

 

  30,273 



(a) The year ended December 31, 2007 figures are extracted from the audited financial statements for the year ended December 31, 2007.

  

Consolidated cash flow statement




For the year ended December 31, 2008










 Year ended 

 Year ended 



 Dec 31 

 Dec 31 



2008

2007



 (unaudited) 

 (audited) 

 


£'000

£'000

Cash flows from operating activities




Net loss for the year


(7,301)

  (2,504)

Adjustments for:




Interest receivable


(883)

  (1,470)

Tax credit


(1,135)

  (1,389)

Amortization


2,268

  1,211 

Depreciation


867

  475 

Loss on disposal of property, plant and equipment

7

  20 

Asset disposal from restructuring


218

  -  

Share based award expense


252

  286 

Share loss from associate


8

  22 

Decrease in inventories


72

  153 

Increase in trade and other receivables


(678)

  (477)

Decrease in trade and other payables


(816)

  (1,224)

Increase/(decrease) in provisions


1,546

  (161)

Cash used in operations

 

(5,575)

  (5,058)





Interest received & paid


894

  1,636 

Taxes paid


(31)

  (28)

Tax credits received


1,368

  701 

Net cash used in operating activities

 

(3,344)

  (2,749)





Cash flows from investing activities




Purchase of property, plant and equipment


(1,174)

  (1,502)

Purchase of intangible assets


(688)

  (196)

Capitalization of R&D assets


(249)

  (271)

Movements on short term investments


3,108

  2,355 

Investment in associate


(37)

  (286)

Acquisition of subsidiaries, net of cash acquired


(2,472)

  (5,847)

Net cash used in investing activities

 

(1,512)

  (5,747)





Cash flows from financing activities




Purchase of shares by ESOP


(768)

  -  

Net proceeds from issue of ordinary shares


   -  

  504 

Net cash generated from financing activities

 

(768)

  504 





Effects of exchange rate changes


155

  (54)

Net decrease in cash and cash equivalents 

 

(5,469)

  (8,046)





Cash and cash equivalents at January 1


10,100

  18,146 

Cash and cash equivalents at end of period

 

4,631

  10,100 

  NOTES

 

1.   Basis of presentation

The preliminary results are unaudited and do not constitute statutory accounts within the meaning of s240 of the Companies Act 1985. The statutory accounts for the year ended 2007 have been delivered to the Registrar of Companies. The auditors' opinion on these accounts was unqualified and did not contain a statement made under s237 (2) or s237 (3) of the Companies Act 1985.


The preliminary results of ARC International plc have been prepared in accordance with the EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. These have been prepared in accordance with the Listing Rules of the Financial Services Authority. In preparing the preliminary results, management have used the principal accounting policies as set out in the Group's annual report and accounts for the year ended December 31, 2007. The preliminary results have been prepared under the historical cost convention, except in respect of certain financial instruments.


The preliminary results incorporate the accounts of the Company and each of its subsidiaries for the period to December 31, 2008. All new acquisitions are accounted for under the purchase method from the date of acquisition.


The preparation of the preliminary results in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

  

2. Segment information

Primary reporting format - geographical segments organized into three main locations.

The segment results for the year ended December 31, 2008 are as follows:








 Europe 

 North America 

 Asia 

  Elimination 

 Group 

 

£ '000

£ '000

£ '000

£ '000

£ '000

Revenue-external

 3,474

9,291

4,282

-

17,047

Revenue-internal

2,894 

258

-

(3,152)

-  

Segment result 

(5,655)

(716)

(667)

-  

(7,038)

Restructuring

(1,689)

(566)

(18)

-

(2,273)

Segment result after restructuring

(7,344)

(1,282)

(685)

-

(9,311)

Finance income

864

33

-  

-  

897

Finance expense

(10)

(4)

  -  

  -  

(14)

Share of post tax loss of associate

 -  

(8)

  -  

  -  

(8)

Loss before tax

(6,490) 

(1,261) 

(685) 

-

(8,436)

Income tax credit

942

193

  -  

  -  

1,135

Net profit/(loss) attributable to equity shareholders

(5,548)

(1,068)

(685)

-  

(7,301)

Assets

21,571

10,055

45

  -  

31,671

Associates

  -  

443

  -  

  -  

443

Total assets

21,571

10,498

45

  -  

32,114

Total liabilities

4,834

5,730

44

  -  

10,609

Other segment items






Capital expenditure

1,273

837

-

  -  

2,111

Amortization of intangible assets

1,463

804

  -  

  -  

2,268

Depreciation

671

193

3

  -  

867

Other non-cash expenses

46

203

3

  -  

252







The segment results for the year ended December 31, 2007 are as follows:










 Europe 

 North America 

 Asia 

  Elimination 

 Group 

 

£ '000

£ '000

£ '000

£ '000

£ '000

Revenue-external

  2,897 

9,353 

2,151 

-  

14,401 

Revenue-internal

3,044 

 193 

 -  

(3,237)

-  

Segment result 

(1,585)

(3,066)

(690)

  -  

(5,341)

Finance income

1,410

60

  -  

  -  

1,470

Share of post tax loss of associate

  -  

(22)

  -  

  -  

(22)

Loss before tax

(175)

(3,028)

(690)

  -  

(3,893)

Income tax credit

1,369

20

  -  

  -  

1,389

Net profit/(loss) attributable to equity shareholders

1,194

(3,008)

(690)

  -  

(2,504)

Assets

29,263

7,083

40

  -  

36,386

Associates

  -  

414

  -  

  -  

414

Total assets

29,263

7,497

40

  -  

36,800

Total liabilities

(3,154)

(3,360)

(13)

  -  

(6,527)

Other segment items






Capital expenditure

1,677

283

9

  -  

1,969

Amortization of intangible assets

1,023

188

  -  

  -  

1,211

Depreciation

357

116

2

  -  

475

Other non-cash expenses

80

199

7

  -  

286

Group only has a single business segment, and therefore, it does not have a secondary reporting format.



3. Summary of net operating expenses









2008

2007



 (unaudited) 

 (audited) 



 £ '000 

 £ '000 

 

 

 

 

Operating expenses




Research and development


(9,624)

  (7,423)

Sales and marketing


(5,539)

  (5,518)

General and administrative


(4,493)

  (3,678)

Other expenses


(3,135)

  (1,686)

Restructuring costs


(2,273)

  -  

Net operating expenses

 

(25,064)

  (18,305)



  

4. Intangible assets 








 Goodwill 

 Computer
software 

 Developed and in process technology 

 Customer relationships 

 Brand name and other 

 Intangible assets Total 

Group

 £'000s 

 £'000s 

 £'000s 

 £'000s 

 £'000s 

 £'000s 

 Cost 







 At January 1, 2007 

13,580 

6,046 

668 

78 

20,372 

 Additions 

  - 

644 

271 

915 

 Acquisition of subsidiary 

3,414 

2,963 

404 

150 

6,931 

 Exchange difference 

  17 

   

(12)

 At December 31, 2007 

17,011 

6,690 

3,890 

404 

228 

28,223 

 Additions 

  - 

2,036 

249 

2,285 

 Acquisition of subsidiary 

  2,042 

1,275 

317 

445 

4,086 

 Exchange difference 

  96 

  

(6)

90 

 At December 31, 2008 

19,149 

8,733 

5,408 

721 

673 

  34,684 

Amortization and impairment losses 






 At January 1, 2007 

  (13,580)

(5,322)

(550)

(77)

(19,529)

 Charge for the year 

  - 

(610)

(508)

(76)

(17)

(1,211)

 Exchange difference 

  - 

19 

23 

 At December 31, 2007 

  (13,580)

(5,913)

(1,054)

(76)

(94)

(20,717)

 Charge for the year 

  - 

(855)

(1,127)

(184)

(102)

(2,268)

 Exchange difference 

  - 

(8)

(90)

(1)

(99)

 At December 31, 2008 

  (13,580)

(6,776)

(2,271)

(261)

(196)

(23,084)

 Net book value 







 At January 1, 2007 

  - 

724 

118 

843 

 At December 31, 2007 

  3,431 

  777 

  2,836 

328 

134 

  7,506 

 At December 31, 2008 

  5,569 

  1,957 

  3,137 

460 

477 

  11,600 


  

5. Statement of changes in shareholders' equity















Cumulative 




Share

Share

Other

translation 

Retained 


 Group 

capital

premium

reserves

adjustment

earnings

Total

(audited)

£'000

£'000

£'000

£'000

£'000

£'000

At January 1, 2007

151

3,256

60,751

(457)

(31,660)

32,041

Shares issued

2

427

-

-

-

429

Change in value of ESOP reserve

-

-

-

-

75

75

Share based award reserve

-

-

286

-

-

286

Exchange loss

-

-

-

(54)

-

(54)

Loss for the year

-

-

-

-

(2,504)

(2,504)

At December 31, 2007 (audited)

153

3,683

61,037

(511)

(34,089)

30,273

Change in value of ESOP reserve

-

-

-

-

(768)

(768)

Share based award reserve

-

-

252

-

-

252

Exchange loss

-

-

-

(951)

-

(951)

Loss for the year

-

-

-

-

(7,301)

(7,301)

At December 31, 2008 (unaudited)

153

3,683

61,289

(1,462)

(42,158)

21,505



  

6. Provision for other liabilities and charges 








Office 




Onerous 

restoration 

Total 


Reorganisation 

leases 

costs 

provision 

Group 

£000 

£000 

£000 

£000 

At January 1, 2008 

183 

183 

Provisions made in the year 

1,131 

1,142 

60 

2,333 

Utilized 

(790) 

(12) 

(802) 

Foreign exchange 

15 

15 

At December 31, 2008 

356 

1,142 

231 

1,729 






Non-current 

778 

80 

858 

Current 

356 

364 

151 

871 

Reorganisation 





In September 2008 the group committed to a plan of restructuring of the group's organisation. Following the announcement of the plan the group recognised a provision of £2,273,000 for expected restructuring costs, including onerous leases, contract termination costs, consulting fees and employee termination benefits. Estimated costs were based on the terms of the relevant contracts. £790,000 was charged against the provision in 2008. The restructuring is expected to be completed in early 2009. 

Onerous leases 

As part of the restructuring above the group had non-cancellable leases for office space which the group had ceased to use. The lease on the office space in San Jose expires in 2011 and the lease on the office space in St Albans expires in 2012. The obligation for the discounted future payments (at a risk free rate of 4.5%), net of expected rental income, has been provided for. In both cases the company is seeking to sublet the space, but due to recent economic conditions, the expected rental income is nil. 

Office restoration costs 

The group has entered into property leases whereby the company is responsible for the restoration of the office space back to the condition in which it was let. The company vacated a property in Elstree UK in July 2007, and had made a provision for these restoration costs. There is currently uncertainty as to the timing and amount of the restoration payments. The company has established a provision to cover the restoration costs for the office space in St Albans UK and provides a set amount each year so that at the end of the lease the provision will cover the expected restoration costs. 


  

7. Business Combinations


The group purchased 100% of the voting shares of Sonic Focus, Inc. on February 11, 2008 for a total consideration of £2,829,000.

All assets and liabilities were recognized at their respective fair values. The residual excess over the net assets acquired is recognized as goodwill.

The initial accounting for the acquisition was determined provisionally. Any adjustments to the fair values of the acquired assets and liabilities will be recorded within twelve months of the acquisition date. 

From the date of acquisition to December 31, 2008, the acquisition contributed £428,000 to revenue, £1,236,000 to the operating expenses (excluding amortization), £333,000 of amortization of intangible assets, and £1,141,000 to net loss.


The results of operations, as if the acquisition had been made at the beginning of the period, would be as follows:

 


£ '000s

Revenue


17,129

Net loss


(7,310)










Carrying values


Provisional





pre acquisition


Fair values





£'000s


£'000s








 Intangible fixed assets 



22


2,037

 Property, plant and equipment 


53


53

 Trade and other receivables 


69


46

 Cash and cash equivalents 


68


68

 Trade and other payables 


(780)


(780)

 Deferred Tax 



-


(564)

 Net assets acquired 



(568)


860

 Goodwill 






1,969

 Consideration 





2,829








 Consideration satisfied by cash paid in the period 


1,794

 Deferred consideration to be satisfied by issuing shares in the future 

756

 Transaction costs 





279







2,829









Part of the cost of the Sonic Focus acquisition will be satisfied in shares. 2,728,915 shares will be issued in two equal installments: 15 months and 30 months after the date of acquisition. The fair value of these instruments is shown in the table above and has been calculated by reference to the ten-day average closing share price prior to the completion of the acquisition on February 11, 2008 and converted into U.S. dollars using the average interbank exchange rate over the same ten-day period.

Goodwill represents the value of the assembled work force and other potential future economic benefit that is anticipated will be derived from the integration of the technology offered by Sonic Focus with the existing products of the group.

The outflow of cash and cash equivalents in the period on the acquisition of Sonic Focus, Inc is calculated as follows:





£'000s

 Cash consideration 



1,794

 Transaction costs 



279

 Cash acquired 



(68)





2,005







Total cash and cash equivalents paid during the period for acquisitions include £467,000 for deferred consideration in respect to Alarity, Inc.

The intangible assets acquired as part of the acquisition of Sonic Focus, Inc can be analyzed as follows:





£'000s

 Developed and in process technology 


1,275

 Customer relationships 



317

 Brand name and other 



445





2,037










This information is provided by RNS
The company news service from the London Stock Exchange
 
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