3rd Quarter & 9 Mths Results

Arc International PLC 1 November 2001 ARC INTERNATIONAL PLC RESULTS FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2001 THIRD QUARTER RESULTS IN LINE WITH 5 OCTOBER TRADING UPDATE Elstree, UK - 1 November 2001: ARC International plc (LSE:L), a leading developer of user-customisable, high-performance 32-bit processor cores, development tools, peripherals and other intellectual property (IP), announces full details of its unaudited results for the third quarter ended 30 September 2001. Headline figures from these results were announced previously on 5 October 2001. KEY POINTS * Turnover £2.0 million (Q3 2000: £3.2 million) * Net loss before exceptional costs was £6.6 million (Q3 2000: £5.3 million) * Sun Microsystems licensed ARC's technology in Q3 for use in a new range of high-end servers * 12 design licences won in Q3 including substantial re-licensing by established customers * Costs reduced ahead of targets to conserve our cash resources * £126.7 million cash in hand at the end of September 2001 John Stockton, Interim Chief Executive Officer of ARC International said: 'Despite facing unprecedented market conditions, we concluded 12 design licences in the third quarter, including repeat usage of our technology by a number of our established customers. The addition of Sun Microsystems to our growing list of tier one licensees reflects the commercial power of our technology, particularly for blue-chip companies developing differentiated next generation products. We are building a quality customer base capable of generating a strong future revenue stream. 'Our focus is on implementing our strategic and operational plans aimed at achieving solid turnover growth and advancing our progress to profitability. We are already seeing benefits from the recent organisational and management changes and the Board has confidence in the Company's future success.' For further information, please contact: John Stockton, Interim CEO, ARC International plc 020 8236 2800 Simon Poulton, CFO, ARC International plc 020 8236 2800 Peter Aubusson, Investor Relations Manager, ARC International plc 020 8236 2800 Sue Pemberton, Citigate Dewe Rogerson 020 7638 9571 ARC's management will be available on 020 7638 9571 on 1 November. Chief Executive's Review Against a background of unprecedented market conditions, the Board took decisive action during the third quarter to create a solid platform for the next stage of the Company's development. An extensive cost reduction programme established an appropriate cost base for the changed market environment, senior management changes were implemented and new strategic and operational plans were developed to drive the Company forward in its next growth phase. Licensee Development Our pipeline of prospective licensees remained healthy but market uncertainty resulted in some customers continuing to delay decisions on concluding licences. Nevertheless, we concluded 12 new licences and won two new customers during the third quarter, bringing the total to 99 licences from 58 customers. One of our new customers in the third quarter was Sun Microsystems (Nasdaq: SUNW), who licensed our technology for a new range of high-end servers. Additionally, a number of our established customers re-licensed our technology, demonstrating their satisfaction with its commercial benefits. We recently announced that Internet Machines Corp., who licensed ARC's technology in the fourth quarter of 2000, is using a large number of ARC processors in a new high-speed network processor. Product Development Our product development effort is focused on enhancing the solutions we offer for our target vertical markets: wireless, wired networking and consumer electronics. In late October, we announced that Tality Corporation, a subsidiary of Cadence Design Systems (NYSE:CDN), has become a design services and development partner of ARC. The agreement between the two companies gives Tality access to the ARCtangentTM processor, technology, software and development tools, enabling the generation of new designs and licences for products based on ARC's technology. Tality and ARC will also jointly develop application-specific IP for the ARCtangent processor, offering platform solutions in the wireless, network gateway and communications market sectors. We facilitated the connection of third party and existing IP to our processor by introducing three new interfaces, thus reducing system designers' development time. We now support the new USB 2.0 device controller specification so that developers can use the ARChitectTM processor configuration tool to add either USB 1.1 or USB 2.0 to the ARCtangentTM-A4 processor. We also introduced industry-standard BVCI and AMBATM interfaces for the core, making it the first soft IP processor core to support both standards. Cost Reduction Programme On 1 August the Company announced a cost reduction programme to improve productivity and conserve our substantial cash resources. The measures taken included a reduction in the size of our workforce and reductions in occupancy costs by rationalising facilities and removing surplus property capacity. This programme was successfully implemented and has lowered costs ahead of our targets. Exceptional costs of £4.6 million were incurred during the third quarter in connection with this programme. Outlook Against the continuing background of difficult market conditions, our focus is on implementing our strategic and operational plans aimed at achieving solid turnover growth and advancing our progress to profitability. We are already seeing benefits from the recent organisational and management changes and the Board has confidence in the Company's future success. Senior Management Changes On 13 September the Board announced that it had reached agreement with Bob Terwilliger that he would stand down as Chief Executive Officer with immediate effect. John Stockton, previously non-executive Chairman of ARC international, was appointed Interim Chief Executive Officer while a search for a new CEO is undertaken. Jan Tufvesson, who was previously a non-executive director of the Company was appointed non-executive Chairman. Financial Review Third Quarter ended 30th September 2001 Total turnover for the second quarter was £2.0 million compared with £3.2 million in the third quarter of 2000 and £3.5 million in the second quarter of 2001. Licence income was £1.3 million (Q2 2001: £2.9 million) and maintenance and service income was £0.5 million (Q2: £0.5 million). The number of end designs being shipped by our customers increased during the quarter to 11 (Q2: nine) and total royalties increased to £0.2 million (Q2: £0.1 million). Cost of sales was slightly lower at £0.4 million (Q2: £0.5 million) but, due to the low level of turnover in the quarter, gross margin fell to 79% (Q2: 85%). As a result of the decisive action taken to reduce the size of the workforce and cut other costs, total operating expenses including cost of sales but excluding the provision for exceptional costs and National Insurance contributions, depreciation and amortisation of goodwill were 13% lower than in the previous quarter at £8.6 million (Q2: £9.9 million). Total employees in the business at 30 September 2001 was 230 compared with 292 at 30 June 2001. Research and development costs were 3% lower at £3.2 million (Q2: £3.3 million), sales and marketing costs were 23% lower at £3.4 million (Q2: £4.4 million) and general and administration costs were 6% lower at £1.7 million (Q2: £1.8 million). Exceptional costs were £4.6 million (Q2: £3.3 million) of which £1.1 million related to staff reductions and £3.5 million to provisions for onerous property lease obligations. The provision for National Insurance contributions on the exercise of share options has been reduced, principally due to the lower level of the share price, and this has resulted in a credit of £0.2 million (Q2: a credit of £0.1 million) to the profit and loss account. Interest income was slightly lower at £1.6 million (Q2: £1.7 million), principally as a result of the lower cash balance and the fall in average interest rates. The net loss before exceptional costs was £6.6 million (Q2: £6.1 million). The net loss including exceptional costs was £11.2 million (Q2: 9.4 million). Net cash outflow from operations was £6.0 million (Q2: an outflow of £8.3 million). Capital expenditure was £1.2 million (Q2: £2.1 million). The movement in net funds during the quarter was an outflow of £5.4 million (Q2: £ 8.5 million). Net assets at 30 September 2001 were £140.7 million (30 June 2001:£151.8 million), including net cash of £126.7 million (30 June 2001: £ 132.1 million). Nine months ended 30 September 2001 Total turnover increased by 30% to £9.2 million (2000: £7.1 million). Licence income was £7.2 million (2000: £5.5 million), maintenance and service income was £1.6 million (2000: £1.2 million) and royalties were £0.4 million (2000: £ 0.4 million). Cost of sales was £1.3 million (2000: £0.6 million), resulting in a gross margin of 86% (2000: 92%). Total operating expenses including cost of sales but excluding exceptional costs, the NI provision, amortisation of goodwill and depreciation increased to £28.0 million (2000: £15.3 million) due to the acquisitions of Precise Software Technologies and VAutomation in March 2000 and the development of the resources of the business to drive future growth. Total employees in the business at 30 September 2001 was 230 compared with 268 at 30 September 2000. Research and development costs were £9.9 million (2000: £5.7 million), sales and marketing costs were £11.4 million (2000: £6.3 million) and general and administration costs were £5.3 million (2000: £2.7 million). Exceptional costs, relating to staff reductions in June and August 2001 and onerous property lease obligations, amounted to £7.9 million (2000: £nil). The provision for National Insurance contributions on the exercise of share options has been reduced, principally as a result of the lower level of the share price, and this has resulted in a credit of £1.1 million (2000: a charge of £1.3 million) to the profit and loss account. Interest income was £5.3 million (2000: £0.7 million). The increase was related to the Company's increased cash balances, principally resulting from the funds raised at the IPO in September 2000. The net loss before exceptional costs was £17.1 million (2000: £11.7 million). The net loss including exceptional costs was £25.0 million. The net cash outflow from operations was £20.2 million (2000: £7.7 million). Capital expenditure was £4.9 million (2000: £2.0 million). The movement in net funds during the nine months was a £19.2 million outflow compared with an inflow of £146.4 million in the first nine months of 2000 resulting from the proceeds of the IPO and a private placement. Net assets at 30 September 2001 were £140.7 million (30 September 2000: £169.4 million), including net cash of £126.7 million (2000: £152.2 million). ARC International plc Consolidated profit and loss account for the quarter ended 30 September 2001 3 months 3 months 9 months 9 months Year ended ended ended ended ended 30 Sep 2001 30 Sep 2000 30 Sep 2001 30 Sep 2000 31 Dec 2000 (unaudited) (unaudited) (unaudited) (unaudited) (audited) £'000 £'000 £'000 £'000 £'000 Turnover 2,016 3,195 9,178 7,058 10,564 Operating costs Goodwill (1,019) (1,019) (3,058) (2,359) (3,379) amortisation Exceptional (4,619) (7,909) costs Other (9,162) (7,848) (28,486) (17,021) (26,550) operating costs (14,800) (8,867) (39,463) (19,380) (29,929) Total operating loss Loss before (12,784) (5,672) (30,285) (12,322) (19,365) interest and tax Interest 1,581 418 5,302 679 3,008 receivable and similar income --------- ---------- -------- -------- ------- Interest - (4) - (15) (18) payable and similar charges Loss on (11,203) (5,258) (24,983) (11,658) (16,375) ordinary activities before tax Tax on loss (1) - (4) - - on ordinary activities --------- ---------- -------- -------- ------- Retained (11,204) (5,258) (24,987) (11,658) (16,375) loss for the period --------- ---------- -------- -------- ------- Loss per share (7.72)p Diluted loss per share (7.72)p Summary of operating expenses Operating costs Cost of sales (415) (274) (1,306) (571) (862) Research and (3,171) (2,552) (9,945) (5,729) (9,298) development Sales and (3,360) (2,667) (11,403) (6,328) (10,218) marketing General and (1,694) (941) (5,326) (2,690) (4,351) administration Exceptional (4,619) - (7,909) - - costs NIC on share 192 (1,225) 1,092 (1,269) (1,116) options Depreciation (714) (189) (1,608) (434) (705) of fixed assets Amortisation (1,019) (1,019) (3,058) (2,359) (3,379) of goodwill --------- ---------- -------- -------- ------- Total (14,800) (8,867) (39,463) (19,380) (29,929) operating expenses --------- ---------- -------- -------- ------- ARC International plc Consolidated statement of total recognised gains and losses for the Quarter ended 30 September 2001 3 months 3 months 9 months 9 months Year ended ended ended ended ended 30 Sep 2001 30 Sep 2000 30 Sep 2001 30 Sep 2000 31 Dec 2000 (unaudited) (unaudited) (unaudited) (unaudited) (audited) £'000 £'000 £'000 £'000 £'000 Loss for (11,204) (5,258) (24,987) (11,658) (16,375) the period Currency (58) (115) 189 (264) (381) translation difference --------------- ----------- ----------- --------- ------------ Total loss (11,262) (5,373) (24,798) (11,922) (16,756) for the period --------------- ----------- ----------- --------- ------------ ARC International plc Consolidated balance sheet as at 30 September 2001 As at As at As at 30 Sept 2001 30 Sept 2000 31 December 2000 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Fixed Assets Intangible 13,296 17,374 16,355 assets Tangible 7,403 2,520 4,060 assets ------------------ ------------------- ------------------ 20,699 19,894 20,415 ------------------ ----------------- ------------------- Current Assets Stock 451 - - Debtors 5,589 5,071 6,561 Cash at bank 1,759 130,829 2,569 and in hand Investments - 124,892 21,417 143,289 bank deposits ------------------- ------------------- ------------------- 132,691 157,317 152,419 Creditors - (12,732) (7,840) (8,180) amounts within one year ------------------- ------------------ -------------------- Net current 119,959 149,477 144,239 assets Total assets 140,658 169,371 164,654 less current liabilities Creditors - - (17) Amounts after one year ------------------- ------------------- ------------------- Net Assets 140,658 169,371 164,637 -------------------- -------------------- --------------------- Capital and reserves Called up 278 270 273 share capital Share premium 149,850 149,013 149,061 account Exchangeable 5,025 5,025 5,025 shares Merger 107 107 107 reserve Profit and (39,290) (9,658) (14,492) loss account Other 24,688 24,614 24,663 reserves ---------------------- --------------------- -------------------- Total 140,658 169,371 164,637 shareholders' funds ---------------------- -------------------- --------------------- ARC International plc Consolidated cash flow statement for the Quarter ended 30 September 2001 3 months 3 months 9 months 9 months Year ended ended ended ended ended 30 Sept 30 Sept 30 Sept 30 Sept 31 Dec 2001 2000 2001 2000 2000 note (unaudited) (unaudited)(unaudited)(unaudited) (audited) £'000 £'000 £'000 £'000 £'000 Net cash 1 (5,996) (235) (20,182) (7,661) (14,299) outflow from operating activities Returns on investments and servicing of finance Interest 1,737 414 5,037 664 2,869 received Bank interest - - - - (13) paid Interest - - - - (5) element on finance lease rentals -------- --------- --------- -------- --------- 1,737 414 5,037 664 2,851 -------- --------- --------- -------- --------- Net cash 1,737 414 5,037 664 2,851 inflow from returns on investments and servicing of finance Capital expenditure and financial investment Purchase of (1,246) (876) (4,891) (1,994) (3,820) tangible fixed assets Sale of 0 - - - - tangible fixed assets -------- --------- --------- -------- --------- (1,246) (876) (4,891) (1,994) (3,820) -------- --------- --------- -------- --------- Acquisitions Purchase of - - - (3,167) (3,167) subsidiary undertakings Net cash - - - 186 186 acquired -------- --------- --------- -------- --------- - - - (2,981) (2,981) -------- --------- --------- -------- --------- Net cash (5,505) (697) (20,036) (11,972) (18,249) outflow before management of liquid resources and financing -------- --------- --------- -------- --------- Management of liquid resources Movement on 5,997 - 18,396 (18,382) (137,959) term deposits -------- --------- --------- -------- --------- Financing Financing - 159 96,190 795 126,331 126,355 issue of ordinary share capital - IPO and options Financing - - 31,989 - 31,989 31,971 issue of ordinary share capital - Private placings Capital (5) (2) (19) (4) (8) element of finance lease rentals Decrease in 1 (7) (17) (14) (21) borrowings -------- --------- --------- -------- --------- Net cash 155 128,170 759 158,302 158,297 inflow from financing -------- --------- --------- -------- --------- (Decrease)/ 647 127,473 (881) 127,948 2,089 Increase in cash during the period -------- --------- --------- -------- --------- 1. Reconciliation of operating profit to net cash flow from operating activities 3 months 3 months 9 months 9 months Year ended ended ended ended ended 30 Sept 30 Sept 30 Sept 30 Sept 31 Dec 2001 2000 2001 2000 2000 (unaudited) (unaudited) (unaudited) (unaudited) (audited) £'000 £'000 £'000 £'000 £'000 Operating (12,784) (5,672) (30,285) (12,322) (19,365) profit Depreciation 714 189 1,608 434 705 Amortisation 1,019 1019 3,058 2,359 3,379 of goodwill Share 10 40 26 137 230 option grant credit (Increase) (72) - (455) - - in stocks (Increase)/ 2,334 1,216 1,102 (2,226) (4,189) decrease in debtors Increase/ 2,783 2,973 4,764 3,957 4,941 (decrease) in creditors --------- ------------ ---------- ------------ ----------- Net cash (5,996) (235) (20,182) (7,661) (14,299) flow from operating activities --------- ------------ ---------- ------------ ----------- 2. Analysis of net funds (unaudited) Cash at Bank loans Investments Finance Total bank leases £000 £000 £000 £000 £000 At 31 2,569 (15) 143,289 (27) 145,816 December 2000 Exchange 71 (2) (1) - 68 Cash (881) 17 (18,396) 19 (19,241) flow ---------- ----------- ------------- ----------- ------------- At 30 1,759 (0) 124,892 (8) 126,643 September 2001 ---------- ----------- ------------- ----------- ------------- 3. Reconciliation of net cash flow to movement in net funds Quarter Quarter 9 months 9 months Year ended ended ended ended ended 30 Sept 30 Sept 30 Sept 30 Sept 31 Dec 2001 2000 2001 2000 2000 (unaudited) (unaudited) (unaudited) (unaudited) (audited) £000 £000 £000 £000 £000 Increase in (5,351) 127,473 (6,879) 127,948 2,089 cash in the period Cash - - (12,399) 18,382 137,959 (inflow)/outflow from increase in liquid resources --------- ---------- ---------- ----------- ---------- (5,351) 127,473 (19,278) 146,330 140,048 Investments/ - - - (56) (56) (borrowings) acquired with subsidiaries Movement in 4 9 36 18 29 borrowings Exchange (82) 23 69 85 (20) movements --------- ---------- ---------- ----------- ---------- Movement in (5,429) 127,505 (19,173) 146,377 140,001 funds Net funds at 132,072 24,687 145,816 5,815 5,815 beginning of period --------- ---------- ---------- ----------- ---------- Net funds at 126,643 152,192 126,643 152,192 145,816 end of period --------- ---------- ---------- ----------- ---------- About ARC International ARC International plc is a leading developer of user-customisable, high-performance 32-bit processor cores (including ARCtangentTM), development tools, peripherals and other intellectual property (IP), enabling reduced time to market for system-on-chip products. ARC's 58 customers include Conexant Systems, Cypress Semiconductor, Fujitsu Microelectronics, IBM, Infineon Technologies, QLogic, SanDisk and Sun Microsystems. Products based on ARC's technology include digital still cameras, set-top boxes, and network processors. MetaWare Incorporated, Precise Software Technologies Inc., and VAutomation Inc. are wholly owned subsidiaries of ARC International, providing software development tools, hardware and software intellectual property and real-time operating systems for an integrated approach to system-on-chip development. ARC's third-party partners include Cadence, Flextronics, Intrinsix, Synopsys, TSMC, UMC, Wind River, and Xilinx. ARC International plc employs 230 people at its headquarters in Elstree, England, and in research and development, sales, and marketing offices across North America, Europe, and Israel. ARC International plc is listed on the London Stock Exchange (LSE:ARK). The company's web site is at www.arccores.com. Statements made in this press release that are not historical facts include forward-looking statements that involve risks and uncertainties. Important factors that could cause actual results to differ from those indicated by such forward-looking statements include, among others, market acceptance of the ARC technology; fluctuations in and unpredictability of the Company's quarterly results; general economic and business conditions; regulatory policies adopted by governmental authorities; assumptions regarding the Company's future business strategy; changes in technology; competition; ability to attract and retain qualified personnel; risks associated with the Company's international operations; and other uncertainties that are discussed in the 'Investment Considerations' section of the Company's listing particulars dated 28 September 2000 filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales. ARC International (UK) Ltd. and ARC Cores Inc., both of which are wholly owned subsidiaries of ARC International plc, trade under the name of ARC Cores. ARC Cores is a trademark of ARC International (UK) Limited. All other brands or product names are the property of their respective holders.

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