Final Results

Surface Transforms PLC 02 August 2005 RNS Release 2 August 2005 Preliminary results for the year ended 31 May 2005 Surface Transforms plc, manufacturers of carbon fibre reinforced ceramic (CFRC) materials, announces its preliminary results for the year ended 31 May 2005. Financial and business highlights: •Turnover of £258,336 (2004: £428,608) •Losses before taxation of £675,185 (2004: £249,209) •Strong cash position of £2,728,052 (2004: £2,707,839) •Agreed two-year supply programme to Roxel, Europe's largest manufacturer of rocket and missile propulsion systems •Awarded a new US-based ceramic aircraft brake development programme in January 2005 •Enhanced the management and engineering teams, and invested in next generation CFRC technology •Commenced development test programmes with two British high-performance car manufacturers using the SystemST ceramic brake Kevin D'Silva, Chairman of Surface Transforms plc, said: 'Despite the weaker sales and financial performance in the year ending May 2005, considerable change has been implemented within the business. The May 2004 fundraising allowed changes to be made to reduce the business risk and to improve the Company's capability of successfully implementing its business strategy. 'The new and larger team at Surface Transforms is capable of driving success in its chosen markets. Experienced new managers have joined to work alongside the original directors and managers and the results are an accelerated penetration of both aircraft and automotive brake markets, investment in and improvement of the technological platform and an improved operational base.' For enquiries, please contact: Surface Transforms plc Gresham PR Ltd. Kevin Johnson 0151 373 7130 Neil Boom/Rosemary Acfield 020 7404 9000 Julio Faria 01928 735 498 Kevin D'Silva 07802 306956 Details of the Company's business and financial performance and its share price can be found on www.armshare.com which is accessed from the Armshare icon on www.surface-transforms.com. Armshare has provided a webcast of these results and this is available on www.surface-transforms.com under the Investor Relations icon. Chairman's Statement In the year under review, following the raising of £2.7 million net of expenses in May 2004, we were able to accelerate the investment in Surface Transforms' operating facilities; the proprietary ceramic transformation processes; management and staffing, as we pursued the faster commercialisation of our unique carbon fibre reinforced ceramics (CFRCs) technology. Despite the unexpected, short-term revenue reduction in the second half, after the loss of the wide-bodied aircraft brake contract, the board remains confident that there are excellent market opportunities to exploit our world-class technology by creating commercial applications for the global automotive, aircraft and rocket motor components industries. The management team has been strengthened over the past 12 months and we have recruited additional senior technicians and engineers. Since January 2005, under the leadership of non-executive director Peter Holland, we have begun the integration of a new, more experienced management team. The management team has been set challenging new operating targets in aircraft and automotive brake development. It has also been tasked with developing additional intellectual property, including the next generation of carbon ceramics technology. Financial Review Despite the progress made by the Company in automotive brake development and the award of a second, US-based aircraft brake development programme in mid January 2005, revenues for the year ending 31 May 2005 were less than the prior year at £258,336 (2004: £428,608). This reflects the impact of the loss of the aircraft brake contract associated with Dunlop Aerospace announced on 13 January 2005. The loss of this contract, combined with the strategic decision to increase development costs and strengthen management, resulted in the Company delivering a pre tax loss of £675,185 (2004: £249,209). Losses after tax were higher at £616,623 (2004: £129,524). Capital expenditure for the year amounted to £63,775 and these levels are scheduled to increase materially next year as a result of investment in the Company's processes and technologies. The Company's cash and working capital position remain healthy demonstrating the strong financial structures within the Company. At 31 May 2005, the Company held cash and deposits amounting to £2,728,052 (2004: £2,707,839) representing approximately 20 pence per share. Surface Transforms continues to have no bank borrowings. Management Dr. Kevin Johnson BSc, PhD, MBA was appointed Managing Director on 1 August 2005. Kevin is a chemist and has been Operations Director since joining the Company in July last year. This strengthening of the management team allows Julio Faria, who jointly founded the business in 1992, to bring his considerable focus to all aspects of the technical platform of the Company. Continuous development of the Company's proprietary technology is viewed as one of the key drivers for the improvement of shareholder value and Julio's experience and knowledge will be instrumental in ensuring that this is achieved. We would like to thank him for the years of valuable work he has already contributed to the Company as MD. He takes up his new appointment as Technical Director with immediate effect. We wish Kevin Johnson and his management team every success in the coming months. His promotion reflects the board's intent to promote outstanding executives with energy and talent, irrespective of age. We recognise that creating a successful market-driven business is very dependent on the energy and drive of its employees. Science & Technology Group Good progress has been made by the Science & Technology Group headed by Julio Faria. The first design phase of the new carbon siliconisation plant (ST-Tech 2) was completed within budget in June 2005. The next two phases comprising plant assembly and commissioning are scheduled for completion in early 2006. This next generation ST-Tech 2 plant is a key part of delivering the Company's business model. Once brake applications have been developed and commercialised, the business model incorporates the sale and commissioning of Surface Transforms' technology at the client's production site. Surface Transforms will then base its licence fee on the number of each brake unit produced. When completed, the new plant should cost less than half the capital cost of the current technology and it is expected to reduce the current unit cost of an automotive ceramic brake disc significantly. Patent applications for ST-Tech 2 have been filed during July 2005. Further patent applications are being processed and these cover most of the chemical processes relating to the manufacture of a carbon ceramic brake disc. The Company's goal is to ensure that it has a robust platform of proprietary intellectual property that can produce revenues either under licence or as separate joint venture contracts. Automotive Braking Systems The high-performance road car market is one of the Company's two main markets for the commercial use of carbon ceramic brake discs and pads. The main product is SystemST, a carbon ceramic brake disc and pad which can be used on a variety of high-performance cars. The principal advantages of SystemST are: • it is 70 per cent lighter than the equivalent steel disc. This weight reduction leads to improved handling and better fuel efficiency • enhanced braking characteristics, reducing stopping distances and providing constant and responsive performance in all weather conditions • the wear rate is approximately 50 per cent better than the equivalent steel disc. It can withstand high temperatures and does not rust In 2004, the number of high-performance cars sold in the EU was 150,000 and the total number of such cars on the road is approximately 1,000,000. The board estimates that within five years the majority of high-performance car manufacturers will provide carbon ceramic brakes as an alternative option to steel brake discs. This represents substantial market potential and at an estimated five to 10 per cent market penetration on new cars, the European market could account for approximately 50,000-100,000 ceramic brake discs annually. The Company's market entry strategy is threefold: • sale of ceramic brake systems to the automotive Original Equipment Manufacturer (OEM) market for high volume performance cars • sale of ceramic brake systems to the automotive OEM market for low volume performance cars • sale of ceramic brake systems into the automotive after market for high-performance cars Our operation at Ince, Cheshire has capacity to produce around 3,000 automotive brake discs per annum, representing approximately £2 million of annual revenues. The Company's business model allows the production of brake discs and pads to supply small OEM automotive companies while larger volumes, when approvals are achieved, will be supplied under licence contracts whereby the customer acquires the plant and other equipment. Both the low volume, high-performance OEM car brake market and the equivalent brake after market are attractive to Surface Transforms and represent the best opportunity for early sales. We are pleased to report that a number of British car manufacturers are testing the SystemST brake system and shareholders will be updated once material progress has been made. In parallel, the Company is now able to offer an after market SystemST ceramic brake system on a number of specialist, high-performance cars in the UK. Car owners can contact Surface Transforms to purchase SystemST and enquiries will be directed to our specialist contract-brake fitting partners. Cars suitable for these brakes currently include the Ferrari F48, the BMW M3 and the Jaguar C Class. Aircraft Brake Systems The Company maintains two separate brake development programmes for UK-based Dunlop Aeropace and a US-based, global aircraft brake system supplier. Preliminary development work with a third global supplier commenced in May 2005. Dunlop's Master Licence Agreement was signed in November 2003 and is still in operation. Currently, new disc evaluation protocols have been agreed and testing is underway. At present the board understands that Dunlop has no further aircraft brake contracts onto which it could introduce carbon ceramic brake systems. The US aircraft brake manufacturer development contract was signed in January 2005. This client is seeking to substantially improve brake wear characteristics from carbon ceramic brake discs. Improved aircraft brake wear reduces time lost on the ground to maintenance and increases the financial and operating efficiency of the aircraft owner. The positive revenue impact from this new aircraft development project will be seen in 2005/6. The intention in 2006, if the initial two phases of the development programme are completed successfully, is to enter into a third phase programme to qualify the carbon ceramic discs for selected new and existing aircraft models. Aerospace Components The Company recently announced a two-year supply programme to deliver rocket motor components to Roxel (UK Rocket Motors) Ltd., Europe's largest manufacturer of rocket and missile propulsion systems. Previously, Surface Transforms supplied Roxel with finished components for its thrust modulation research programme on a select-supplier commercial basis. This technology has now matured to the extent that it is being used on motor demonstrator programmes, including live motor firings. Separate work is also well underway at both companies to generate specific engineering design data for Surface Transforms' material for use in rocket motors and related components. The combined total value of the Roxel collaborations is expected to be in the region of £100,000. Should the new project be successful, and once quality and commercial aspects have been validated, the CFRC materials are a potential candidate for future production of rocket motor nozzle components, gas valve systems, and other components. Outlook Despite the weaker sales and financial performance in the year ending May 2005, considerable change has been implemented within the business. The May 2004 fundraising allowed changes to be made to reduce the business risk and to improve the Company's capability of successfully implementing its business strategy. The new and larger team at Surface Transforms is capable of driving success in its chosen markets. Experienced new managers have joined to work alongside the original directors and managers and the results are an accelerated penetration of both aircraft and automotive brake markets, investment in and improvement of the technological platform and an improved operational base. During this 2005/6 financial year, the board expects to demonstrate the success of its business development activities in the automotive brake market and build upon its existing development and supply programmes in aircraft braking and rocket engine components. The cost base of the Company was systematically increased last year but remains under tight financial control with the ultimate target of achieving break even and positive cash generation once there is success in the supply of high-performance automotive brake discs. Finally, we are optimistic about the progress we will make over the next five years. This growth necessitates the selection and training of an innovative and entrepreneurial management team. All employees require an environment of trust, recognition and professional growth. If we can maintain this, we will continue to attract and retain talented people to create a dynamic growth company. Kevin D'Silva Chairman 2 August 2005 SURFACE TRANSFORMS PLC PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 MAY 2005 Note 2005 2004 £ £ Turnover 258,336 428,608 Cost of sales (93,846) (117,461) ----------- ----------- Gross profit 164,490 311,147 Distribution costs (1,348) (1,261) Administrative expenses: Before development costs (500,574) (473,479) Development costs (472,978) (123,349) ----------- ----------- Total administrative expenses (973,552) (596,828) ----------- ----------- Other operating income 4,980 29,970 ----------- ----------- Operating loss (805,430) (256,972) Interest receivable 131,480 7,763 Interest payable (1,235) - ----------- ----------- Loss on ordinary activities before taxation (675,185) (249,209) Tax on loss on ordinary activities 58,562 119,685 ----------- ----------- Loss on ordinary activities after taxation and retained for the financial year (616,623) (129,524) =========== =========== Loss per ordinary share Basic and diluted 3 (4.47p) (1.36p) =========== =========== All amounts relate to continuing activities. SURFACE TRANSFORMS PLC BALANCE SHEET AS AT 31 MAY 2005 2005 2004 £ £ £ £ Fixed assets Intangible assets 6,322 8,540 Tangible assets 73,877 56,037 -------- --------- 80,199 64,577 Current assets Stocks 67,522 88,683 Debtors 80,991 506,011 Cash at bank and in hand 2,728,052 2,707,839 --------- --------- 2,876,565 3,302,533 Creditors: amounts falling due within one year (147,789) (97,075) --------- --------- Net current assets 2,728,776 3,205,458 -------- --------- Net assets 2,808,975 3,270,035 ======== ========= Capital and reserves Called up share capital 140,308 132,158 Share capital to be issued - 4,750 Share premium account 4,902,715 4,750,552 Other reserves 463,885 520,399 Profit and loss account (2,697,933) (2,137,824) -------- --------- Equity shareholders' funds 2,808,975 3,270,035 ======== ========= SURFACE TRANSFORMS PLC CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MAY 2005 2005 2004 £ £ Reconciliation of operating loss to net cash flow from operating activities Operating loss (805,430) (256,972) Depreciation charge 45,935 42,674 Amortisation charge 2,218 2,218 Decrease/(increase) in stocks 21,161 (18,615) Decrease/(increase) in debtors 103,847 (37,974) Increase in creditors 50,714 19,467 ---------- ----------- Net cash outflow from operating activities (581,555) (249,202) ========== =========== 2005 2004 £ £ Cash flow statement Cash flow from operating activities (581,555) (249,202) Return on investments and servicing of finance 118,918 7,763 Taxation 58,562 278,535 Capital expenditure (63,775) (818) ----------- ----------- Cash (outflow)/inflow before management of liquid resources and financing (467,850) 36,278 Management of liquid resources 3,000 (2,635,000) Financing 488,063 2,493,386 ----------- ----------- Increase/(decrease) in cash in the year 23,213 (105,336) =========== =========== 2005 2004 £ £ Reconciliation of net cash flow to movement in net funds Increase/(decrease) in cash in the year 23,213 (105,336) Cash (outflow)/inflow from liquid resources (3,000) 2,635,000 ----------- ----------- Movement in net funds in the year 20,213 2,529,664 Net funds at the start of the year 2,707,839 178,175 ----------- ----------- Net funds at the end of the year 2,728,052 2,707,839 =========== =========== SURFACE TRANSFORMS PLC STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 MAY 2005 2005 2004 £ £ Loss for the financial year (616,623) (129,524) Unrealised gain on the lapse of warrants 56,514 - ----------- ---------- Total recognised gains and losses relating to the financial year (560,109) (129,524) =========== ========== RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR THE YEAR ENDED 31 MAY 2005 2005 2004 £ £ Loss for the financial year (616,623) (129,524) New share capital subscribed (net of issue costs) 155,563 2,825,886 ----------- ---------- Net (reduction in)/addition to shareholders' funds (461,060) 2,696,362 Opening shareholders' funds 3,270,035 573,673 ----------- ---------- Closing shareholders' funds 2,808,975 3,270,035 =========== ========== SURFACE TRANSFORMS PLC NOTES 1. Nature of Financial Information The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 May 2005 or 2004. The financial information for 2004 is derived from the statutory accounts for 2004 which have been delivered to the registrar of companies. The auditors have reported on the 2004 accounts: their report was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2005 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies following the Company's annual general meeting. 2. Basis of preparation The accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company's financial statements. The financial statements have been prepared in accordance with applicable accounting standards and in accordance with the historical cost convention. 3. Loss per share The calculation of basic loss per ordinary share is based on the loss for the financial year divided by the weighted average number of shares in issue during the year. Losses and number of shares used in the calculations of loss per ordinary share are set out below: Basic 2005 2004 £ £ Loss after tax (616,623) (129,524) Weighted average number of shares 13,805,406 9,506,297 Loss per share 4.47p 1.36p ========== ========== The calculation of diluted loss per ordinary share is identical to that used for the basic loss per ordinary share. This is because the exercise of warrants and options would have the effect of reducing the loss per ordinary share and is therefore not dilutative under the terms of Financial Reporting Standard 14. 4. Report and Financial Statements Copies of the Report and Financial Statements will be posted to shareholders shortly and will be available from the Company's registered office at April House, Tarvin Road, Frodsham, Cheshire WA6 6XN. This information is provided by RNS The company news service from the London Stock Exchange

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