Last checked at 25 Feb 2009 07:00
ARC International plc Announces Unaudited Preliminary ResultsFor 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.
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 plcARC 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 International with 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 first, and 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:
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 SolutionImplemented 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 SolutionThe 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 SolutionThe 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:
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) | - | - | 5 |
| 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 | 7 | 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 | 4 | - | - | 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 | - | 1 | 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 | ||||