3rd Quarter & 9 Mths Results

Zen Research PLC 15 November 2001 15 November 2001 Zen Research plc Report for the third quarter ended 30 September 2001 REVIEW OF BUSINESS ACTIVITIES MultibeamTM As a result of the continued decline in the world-wide PC market and the associated price pressures, Zen is reducing its workforce in its MultibeamTM division by more than 65%. Zen was in discussions with a number of its licensees and potential partners about developing MultibeamTM products where the customer would participate in a substantial portion of the overall development costs. Zen believes that due to the current market conditions, none of these discussions resulted in a definitive development agreement. Accordingly, Zen has postponed indefinitely its development of MultibeamTM based products. Fourteen engineers will remain within the MultibeamTM division primarily to preserve the MultibeamTM technology and advance Zen's intellectual property rights. The remaining ten engineers will carry out Zen's project with its video player licensee. Zen currently has no active projects in MultibeamTM and at this stage has no revenue expectations from previous Multibeam TM projects. New Silicon Value When the current world-wide market conditions for new application specific integrated circuit ('ASIC') designs improve, Zen believes that system manufacturers will look to produce ASICs that are both more efficient and cost effective. Accordingly, Zen believes that continued opportunities exist for New Silicon Value. Zen continues to increase its investment in New Silicon Value and is in the process of adding and training new design teams. Zen expects its additional investment in 2002 to be approximately $9 million. Production shipments continued to Avaya during the third quarter. New Silicon Value recently entered into one additional design and manufacturing contract, and one design contract with existing customers. These contracts provide for the payment to New Silicon Value of engineering fees for designing ASICs. If an ASIC is successfully designed by Silicon Value and incorporated into a saleable product and if the customer begins volume shipments of that product, New Silicon Value could earn revenue in the future from the manufacture and sale of the ASIC. Industry experience has been that a significant proportion of ASIC designs are either not incorporated into saleable products or do not result in volume shipments by customers. FINANCIAL COMMENTARY Turnover Unaudited Unaudited Three months Nine months ended ended 30 September 30 September US$ '000 US$ '000 2001 2000 Change 2001 2000 Change Group Turnover Continuing 139 41 98 526 161 365 Acquisitions 1,693 - 1,693 2,804 - 2,804 1,832 41 1,791 3,330 161 3,169 ==== ==== ==== ==== ==== ==== Turnover for the three and nine months ended 30 September 2001 increased compared to the comparable periods ended 30 September 2000. This increase was mainly due to the turnover generated by New Silicon Value, which was acquired in April 2001, although turnover from continuing operations also increased in the period. Turnover from continuing operations was generated from engineering fees for development work during fiscal 2001, whereas the turnover during the comparable three and nine month period was generated from royalties. Sequential turnover from continuing operations decreased from US$205,000 to US$139,000 at 30 September 2001 due to the timing of billable milestones for a certain development project during the period. Turnover from acquisitions were generated from shipments of ASIC's and engineering fees for development work. Research and development Unaudited Unaudited Three months Nine months ended ended 30 September 30 September US$ '000 US$ '000 2001 2000 Change 2001 2000 Change Research and development Continuing 2,257 2,077 180 8,267 5,654 2,613 Acquisitions 1,780 - 1,780 3,169 - 3,169 4,037 2,077 1,960 11,436 5,654 5,782 ==== ==== ==== ===== ==== ==== Research and development expenses increased during the three and nine-month periods ended 30 September 2001 compared to the corresponding periods. For continuing operations, this increase reflects the increase in headcount and related expenses, expenditures on outside engineering services to develop and enhance Zen's intellectual property and increased facilities expenses. Sequential expenditures from continuing operations decreased during the three months ended 30 September 2001 due to a reduction in salary and related expenses, as a result of the restructuring taken during the prior quarter, third party engineering services and other expenses. Expenditures for research and development for New Silicon Value represent costs related to the ongoing development of software tools and technologies. Other operating expenses Unaudited Unaudited Three months Nine months ended ended 30 September 30 September US$ '000 US$ '000 2001 2000 Change 2001 2000 Change Other operating expenses Continuing 1,595 1,301 294 5,711 3,274 2,437 Acquisitions 3,885 - 3,885 7,481 - 7,481 5,480 1,301 4,179 13,192 3,274 9,918 ==== ==== ==== ===== ==== ==== Other operating expenses incurred by continuing operations for the three and nine month periods ended 30 September 2001 increased mainly due to increased headcount and related expenses, professional fees, insurance, marketing programs and other costs arising from Zen's growth and status as a listed company. Sequential expenditures from continuing operations decreased during the three months ended 30 September 2001, due mainly to a reduction in salary and related expenses. Other operating expenses related to New Silicon Value consists mainly of payroll and related costs and marketing programs. Also included is goodwill amortization of US$3.0 and US$6.1 million for the three and nine months ended 30 September 2001. Goodwill on the acquisition of New Silicon Value amounted to US$18.6 million and is being amortized over 18 months. Restructuring costs In relation to the postponement of development of MultibeamTM products, the Company took a charge of US$800,000 during the three months ended 30 September 2001 related to the write-off of certain intellectual property assets. The Company also expects to incur an additional charge of approximately US$700,000 in the fourth quarter of 2001 related to headcount reductions. The Company had taken a charge of US$1.6 million in the second quarter of 2001 related to a prior restructuring of the Company based on current market conditions. Consolidated Balance Sheet Cash on hand and short-term investments decreased at 30 September 2001 to US$63.3 million compared to US$66.6 million at 30 June 2001. This decrease was mainly due to cash used for the funding of the current operations. See Consolidated cash flow statement for further details. The increase in creditors compared to 31 December 2000 was mainly due to the liabilities acquired as the result of the acquisition of New Silicon Value, and the re-structuring accrual booked during the quarter ended 30 June 2001. ENQUIRIES: Zen Research plc Tel: +44 (0) 207 382 0470 Mark Way, Vice President Investor Relations http://www.zenresearch.com/ INDEPENDENT REVIEW REPORT TO ZEN RESEARCH PLC Introduction We have been instructed by the company to review the financial information which comprises the Consolidated Profit and Loss Statement, Consolidated Balance Sheet Consolidated Cash Flow Statement and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the nine months ended 30 September 2001. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 14 November 2001 Notes: (a) The maintenance and integrity of the Zen Research plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. Zen Research plc Results for the quarter and year ended 30 September 2001 Consolidated profit and loss accounts Unaudited Unaudited Audited Three months Nine months ended ended Year ended 30 September 30 September 31 December US$ '000 US$ '000 US$ '000 2001 2000 2001 2000 2000 Group Turnover Continuing 139 41 526 161 271 Acquisitions 1,693 - 2,804 - - 1,832 41 3,330 161 271 Cost of sales (1,212) - (2,096) - - Gross profit 620 41 1,234 161 271 Research and (4,037) (2,077) (11,436) (5,654) (8,295) development Other operating (5,480) (1,301) (13,192) (3,274) (4,968) expenses excluding exceptional items Exceptional items: - (5,806) - (5,806) (5,806) Costs in connection with initial public offering Restructuring costs (800) - (2,390) - - Total other (6,280) (7,107) (15,582) (9,080) (10,774) operating expenses Total operating (10,317) (9,184) (27,018) (14,734) (19,069) expenses Operating loss Continuing (4,513) (9,143) (15,842) (14,573) (18,798) Acquisitions (5,184) - (9,942) - - (9,697) (9,143) (25,784) (14,573) (18,798) Net interest 691 1,195 2,495 609 1,647 receivable Loss on ordinary (9,006) (7,948) (23,289) (13,964) (17,151) activities before taxation Taxation on (84) (384) (335) (459) (354) ordinary activities Loss on ordinary (9,090) (8,332) (23,624) (14,423) (17,505) activities after taxation Basic loss per share (US dollars) (0.05) (0.05) (0.13) (0.10) (0.11) Fully diluted loss per share (US dollars) (0.05) (0.04) (0.13) (0.09) (0.11) Weighted Average 181,050,295 175,403,592 180,537,194 143,643,210 152,730,242 Ordinary Shares The Company has no recognised gains and losses in any of the periods shown above other than the loss for the period shown in the relevant profit and loss account. Accordingly, no separate statement of total recognised gains and losses has been presented. Zen Research plc Consolidated balance sheet Unaudited Audited Unaudited 30 31 30 September December September 2001 2000 2000 US$ '000 US$ '000 US$ '000 Fixed assets Intangible assets 12,436 1,147 285 Tangible assets 5,741 1,745 1,348 18,177 2,892 1,633 Current assets Stock 603 - - Debtors - due after more 987 1,503 1,572 than one year Debtors - due within one year 2,116 583 581 3,103 2,086 2,153 Short-term investments 44,316 42,726 - Cash at bank and in hand 18,935 54,192 100,507 66,957 99,004 102,660 Creditors - Amounts falling (9,762) (4,958) (4,432) due within one year Net current assets 57,195 94,046 98,228 Total assets less current liabilities 75,372 96,938 99,861 Creditors - Amounts falling due after more than one year (5,301) (4,050) (3,962) Net assets 70,071 92,888 95,899 Capital and reserves Called up share capital 13,709 13,562 13,397 Share premium 101,105 100,529 110,628 Other reserves 37,832 37,832 27,827 Profit and loss account (82,575) (59,035) (55,953) Total equity shareholders' funds 70,071 92,888 95,899 Zen Research plc Consolidated cash flow statement Unaudited Unaudited Audited Three months Nine months Year ended ended ended 30 September 30 September 31 December US$ '000 US$ '000 US$ '000 2001 2000 2001 2000 2000 Net cash outflow from (2,008) (12,277) (17,007) (18,244) (18,858) operating activities Returns on investments and servicing of finance Interest received 891 1,603 3,308 1,660 3,195 Interest paid - (65) - (323) (635) Net inflows/(outflows) from returns 891 1,538 3,308 1,337 2,560 on investments and servicing of finance Taxation - - - - (116) Capital expenditure Purchase of intangible fixed - - - - (1,000) assets Purchase of fixed assets (418) (96) (998) (385) (1,299) Sale of tangible fixed assets - - - 115 119 Net cash outflow for capital expenditure (418) (96) (998) (270) (2,180) Acquisitions and disposals Purchase of New Silicon Value (1,873) - (19,873) - - (Increase) decrease in management 8,408 (43,431) (1,590) (43,431) (42,726) of liquid resources Financing Repayment of borrowings - - - - (1,800) Proceeds from advances in respect of royalties - - - 3,000 3,000 Proceeds from initial public - 114,364 - 114,364 114,364 offering Issue costs in respect of initial - (10,066) - (10,066) (10,066) public offering Proceeds from issuance of 36 - 723 9,366 9,418 Common, ordinary and preferred stock Repayment of loan notes due - 3,693 180 4,197 3,773 from shareholders Net cash inflow from financing 36 107,991 903 120,861 118,689 Increase/(decrease) in cash 5,036 53,725 (35,257) 60,253 57,369 Notes to the Preliminary Announcement of Zen Research plc 1. Basis of preparation The financial information for the quarter ended 30 September 2001 has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 31 December 2000, under the historical cost convention and in accordance with accounting standards applicable in the United Kingdom. 2. Loss per share Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. Diluted loss per share is adjusted for the effect of potential ordinary shares, such as share options and warrants. 3. Reconciliation of movements in shareholders funds/(deficit) Nine months ended 30 September US$'000 2001 2000 Loss for the period (23,624) (14,423) Cost on reissuance of warrants 84 - Proceeds of issue of ordinary shares 723 114,364 Expenses of share issue charged to share premium - (10,066) account Proceeds of shares by Zen Research NV - 12,337 Net reduction in shareholders' (22,817) 102,212 funds / (deficit) Opening shareholders' funds / (deficit) 92,888 (6,313) Closing shareholders' funds / (deficit) 70,071 95,899 ======= ======= 4. Notes to cash outflow from operating activities Nine months ended 30 September US$'000 2001 2000 Operating loss (24,984) (14,573) Depreciation of tangible fixed assets 1,396 648 Amortisation of intangible fixed assets 419 174 Amortisation of goodwill 6,119 - (Increase)/decrease in stock 152 - (Increase)/decrease in debtors (644) 857 Increase (Decrease) in creditors 535 (5,350) (17,007) (18,244) ======= ======= 5. Reconciliation of net cash flow to movements in net funds / (debt) Nine months ended 30 September US$'000 2001 2000 (Decrease) / increase in cash (35,257) 102,217 Movement in liquid resources 1,590 - Borrowings - 3,267 Movement in net funds / (debt) (33,667) 105,484 Net funds / (debt) 1 January 96,918 (4,977) Net funds 30 September 63,251 100,507 ======= ======= 6. Profit and loss account reconciliation Nine months ended 30 September US$'000 2001 2000 Beginning balance (59,035) (41,530) Loss for the period (23,624) (14,423) Reissuance of warrants 84 - Ending balance (82,575) (55,953) ======= ======= 7. Acquisition of New Silicon Value Ltd. In April 2001, Zen acquired most of the assets of Jerusalem-based Silicon Value (S.V.) Ltd. ('Silicon Value'), a subsidiary of the NASDAQ-listed Tioga Technologies, for a total of US$22.25 million in cash and debt assumption. The assets were acquired by a wholly owned subsidiary of Zen Research plc, New Silicon Value Ltd. 8. Subsequent events In November 2001, management decided to reduce the headcount in its Multibeam TM division by over 65%. The remaining engineers within the MultibeamTM division will preserve the MultibeamTM technology, advance Zen's intellectual property rights and carry out specific engineering projects. As a result of this decision, Zen has incurred a charge of US$800,000 in the third quarter 2001 related to the write down of certain assets. Zen expects to incur a charge of approximately US$700,000 in the fourth quarter 2001 related to the headcount reduction. The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The Company was incorporated on 30 December 1999, and the financial statements for the year ended 31 December 2000 have been delivered to the Registrar of Companies. The auditors' report was unqualified and did not contain a statement either under Section 237(2) or Section 237 (3) of the Companies Act 1985. This press release contains forward-looking statements regarding among other things the future success of ZenO technology and New Silicon Value technology. These forward looking statements are based on current expectations and are subject to risks and uncertainties. Actual events and results may differ materially from those described in these forward-looking statements, as a result of several factors, including the successful implementation of Zen technology, the successful integration of New Silicon Value into Zen, the ability of Zen and New Silicon Value to successfully market and sell their products under current market conditions, and other risk factors as set forth in the Zen Offering Circular dated June 26, 2000.

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