Interim Results

RNS Number : 7159A

Arc International PLC

06 August 2008

 



Media Contact:                                                                                                                                          Investor Contact:

Lee Garvin Flanagin                                                                                                                                  Juliet Clarke/Matt Dixon

ARC International                                                                                                                                     Financial Dynamics

[phone]                                                                                                                                          [phone]

ARC International plc Announces Unaudited Interim Results
For the Six Months Ended June 30, 2008

SAN JOSE, Calif., and ST. ALBANS, England, August 6, 2008 - ARC International (LSE: ARK), a leading provider of consumer intellectual property (IP) to manufacturers of electronics devices (OEMs) and semiconductor companies, today announced its unaudited interim results for the six months ended June 30, 2008.  

Highlights from the Six Months Ended June 30, 2008 (Compared to 1H 2007)

	$	£	% Increase 1
Total Revenue	$18.3 million	£9.3 million	32%
Licensing Revenue	$8.4 million	£4.3 million	33%
Royalty Revenue	$8.3 million	£4.2 million	53%
Bookings	$18.5 million	£9.3 million	(30)%
Total Backlog	$17.2 million	£8.6 million	(17)%

1 On a constant dollar basis

·         Solid growth in licensing and royalty revenues despite increasingly challenging market conditions

 

·         16 customer contracts completed, including two agreements delayed from the fourth quarter of 2007

 

·         Net loss without Sonic Focus acquisition remained flat at £1.5 million.  Net loss with acquisition at £2.0 million

 

·         Closing cash and short term investment position at £16.6 million (December 31, 2007: £21.2 million) following the acquisition of Sonic Focus in February

 

·         Bookings and backlog remain healthy despite a year-on-year decrease that reflects a large agreement completed in the first half of 2007

 

·         Revenue from ARC’s multimedia subsystems continues to grow; in 1H 2008 ASPs were approximately twice that of ARC’s processor products

 

·         Completed strategic acquisition of Sonic Focus

o        Sonic Focus adds a new, complementary class of customer and revenue channel through licensing its audio enhancement software directly to OEMs

o        Strong industry interest in integrated ARC^® and Sonic Focus multimedia solutions

o        Hewlett Packard is first customer to ship Sonic Focus-ready products
post acquisition

 

·         While the company performed well in the first half and we currently expect results for the full year to be in line with management’s expectations, we expect economic conditions to continue providing a level of uncertainty in the market

Commenting on the company's performance, Carl Schlachte, president and chief executive officer, said, "ARC delivered solid results in the first half of 2008. Against a weakening economic environment and fundamental shifts in the semiconductor market, ARC's performance highlights its ability to meet evolving requirements of electronic companies creating devices that enhance consumers' multimedia experiences. ARC acquired Sonic Focus in February to bolster ARC's multimedia subsystems with a new and complementary base of customers and technologies. Moving forward management will look for ways to enhance its strategic focus on the multimedia market while accelerating profitability."

Commenting on the financial results, Victor Young, chief financial officer, said, "Despite difficult global economic conditions, 16 licensing contracts were finalized and ARC's worldwide customer base now stands at 148 companies.  With the completion of the Sonic Focus acquisition, HP is our first customer to ship higher value royalty-bearing products with Sonic Focus post-processing technologies.  We expect new Sonic Focus customer agreements to be completed in the next six months.  In the second half, we anticipate additional cost-effective ways of capitalizing on the synergies presented by our acquisitions and changes in the marketplace."

Statement from the President and Chief Executive Officer

Addressing Fundamental Market Changes 

OEM and semiconductor companies increasingly offer consumers unique products that address the needs of their "digital lifestyle." A key tenet of these customers' strategies is enabling multimedia content to be captured and shared, then played back anytime, anywhere on any device. Consumers worldwide continue to adopt these devices in increasing numbers, helping double unit volumes for semiconductor companies in the past decade. However, chip average selling prices (ASPs) have declined by close to 30 percent in the same period and the Semiconductor IP (SIP) industry also is being impacted by price compression.  

One cause of this downward ASP trend is the inability of standalone products to differentiate consumer electronic devices in a cost-effective manner. OEM and chip companies now require technologies that are uniquely tailored to the needs of specific applications, such as portable media players, music phones, digital TVs, and entertainment PCs. This is a fundamental shift in the way consumer electronic products are designed, and these companies are increasingly adopting differentiated solutions in order to provide a competitive advantage for their multimedia products.

These trends have been growing over the last few years and have formed the basis for ARC's current strategic direction.  By identifying these trends early, ARC posted a solid financial performance in the first half despite the changing market and challenging economic conditions.  ARC's vertically integrated subsystems solve a greater portion of customers' chip design challenges and offer differentiated solutions. Bolstered by recent strategic acquisitions, ARC's multimedia solutions command higher value compared to its standalone legacy processors.  

Management expects these market trends to continue throughout the second half of 2008 and into next year. Moving forward, ARC will look for opportunities to increase its focus on offering integrated multimedia subsystems and post-processing technologies to continue the company's growth and accelerate profitability.

Acquisition and Integration of Sonic Focus

In February ARC acquired Sonic Focus, a privately held company based in Northern California that provides award-winning audio enhancement software. Sonic Focus products enable studio quality sound to be heard from digitally compressed audio, bringing the consumer closer to the artist's original performance. Sonic Focus post-processing technology is a key differentiator that has been incorporated into millions of consumer electronic devices shipping to market by OEM companies annually.

Sonic Focus enables ARC to target a new class of customers and add new sources of revenue. By obtaining royalties directly from the OEM rather than semiconductor suppliers, Sonic Focus products can command a higher per unit royalty revenue than SIP companies normally obtain. Furthermore, the acquisition provides additional leverage for ARC's subsystem licensing business with chip designers. By having an OEM select Sonic Focus audio software to semiconductor firms, those semiconductor suppliers looking to win business with that OEM are more motivated to adopt an ARC subsystem solution for their chip design.

Since announcing the Sonic Focus acquisition, ARC introduced its first Sonic Focus-ready audio subsystem that sets new standards for sound fidelity and power efficiency. New Sonic Focus products are in development and ARC expects to introduce them starting in the second half of 2008. Key Sonic Focus highlights in the first half of 2008 included:

• Hewlett Packard's new line of TouchSmart all-in-one personal computers use Sonic Focus technology to enhance consumers' listening experience

• Sonic Focus hailed in award-winning PC motherboard design

• First ARC Sound Subsystem is introduced that is Sonic Focus-ready

• New ARC Media Subsystem is launched, and is Sonic Focus-ready

New Customer Agreements 

In the first half of 2008 ARC announced a number of new licensing agreements with companies in North America, Asia, and Europe, and a series of design wins between ARC customers and major electronic companies:

Mobile and HD TV Applications

• Abilis Systems introduces the world's smallest DVB-H/T receiver

• NextWave Wireless adopts ARC to deliver ubiquitous video access for mobile TV receivers

• Unnamed leading Mobile DTV company uses ARC to deliver high quality TV reception in nearly every geographical region

• ViXS announces partnership with ARC for HD TV applications

Flash Applications

• STEC enables rapid storage of HD multimedia content with ARC-Based™ solution

• TM Technology adopts ARC for multimedia storage applications

• Unnamed company adopts ARC for Flash market

Multimedia and Security Applications

• CopperGate uses ARC for home networking products

• Fujitsu adopts ARC for HD set-top boxes

• ITT builds secure communications devices using ARC

• NTrig honored for its ARC-Based DuoSense technology

• Sanyo ARC-Based digital camera wins "Editors Choice" award in MacLife Magazine

• Toshiba extends collaboration with ARC

• Unnamed leading smart card company adopts ARC for high security applications

New Product Introductions and Innovations

During the financial period ARC introduced a number of new solutions that will enable consumers to capture, share, and play high quality multimedia content on a variety of electronic devices. These complement the aforementioned ARC Sound and ARC Media Subsystems which were introduced during the trading period and are Sonic Focus-ready:

• ARC Video Subsystem family supports the popular RealVideo format

• New Energy PRO core family slashes power consumption by up to 75 percent

• Annual library subscription model is introduced for multimedia codecs

International Electronics Industry Recognizes ARC

• ARC Video 417V Video Subsystem wins Portable Design Magazine's "Editor's Choice" award

• ARC VRaptor Multimedia Architecture is a finalist at the Elektra European Electronics awards

• ARC Video Subsystem is a finalist at the DesignVision award event

• ARC's CEO is a finalist in the prestigious ACE Awards event, in the "Innovator of the Year" category

Appointment of KPMG as Auditors to the Company

ARC has appointed KPMG Audit Plc (KPMG) as the company's audit, tax and accounting advisory firm replacing PricewaterhouseCoopers LLP (PWC). The company thanks PWC for its twelve years of service, and looks forward to working with KPMG to serve ARC's needs as a high-growth international company. 

Outlook    

Management expects the market challenges identified in the first half of 2008 to continue into the second half and 2009.  We will continue to look for opportunities to strengthen ARC's ability to deliver higher value multimedia solutions to OEM and semiconductor companies globally, and to do so more cost effectively.  

While the company performed well in the first half and we currently expect results for the full year to be in line with management's expectations, we expect economic conditions to continue providing a level of uncertainty in the market.  In order to take best advantage of current conditions, management will evaluate ways in which synergies between acquisitions can be rationalized, revenue growth can be extended, and profitability accelerated.

CHIEF FINANCIAL OFFICER'S REVIEW

For the six months ended June 30, 2008

Revenue

Total revenue in 1H 2008 in U.S. dollars was up 32% to $18.3 million (1H 2007: $13.9 million). Total revenue in sterling was £9.3 million, up 32% over the same period last year (1H 2007: £7.0 million). License and engineering revenue in U.S. dollars was up 33% to $8.4 million (1H 2007: $6.4 million). In sterling, license and engineering revenue was up 33% at £4.3 million (1H 2007: £3.2 million). Maintenance and service revenue in U.S. dollars was down 24% to $1.6 million (1H 2007: $2.0 million). In sterling, maintenance and service revenue was down 26% at £0.8 million (1H 2007: £1.0 million). In U.S. dollars, royalty revenue was up by 53% to $8.3 million (1H 2007: $5.4 million). In sterling, royalty revenue increased 52% to £4.2 million (1H 2007: £2.8 million). (Royalty income in 1H 2008 includes advance non-refundable payments which represented 55% of the total royalties for the period).

Sales in Europe were 16% (1H 2007: 14%) of total sales, North America 51% (1H 2007: 71%) and Asia 33% (1H 2007: 15%). 

Cost of sales and operating expenses

Cost of sales decreased 6% to £0.7 million (1H 2007: £0.7 million). Gross margin increased to 92% (1H 2007: 90%). Net operating expenses increased by 31% to £11.4 million (1H 2007: £8.7 million).

The company had 209 employees at June 30, 2008 compared with 149 at June 30, 2007. The 40% growth in headcount was due to the two acquisitions. Research and development costs increased 33% to £4.5 million (1H 2007: £3.4 million). Sales and marketing increased 12% to £3.1 million (1H 2007: £2.7 million). General and administration costs increased 25% to £2.3 million (1H 2007: £1.8 million). Other expenses, comprised of depreciation and amortization, increased to £1.6 million (1H 2007: £0.8 million) due to additional amortization of intangibles purchased from the acquisitions. The incremental operating expenses excluding amortization as a result of the acquisition during the year was £0.4 million in 2008. Incremental amortization expenses associated with acquired technologies and intangible assets was £0.1 million in 2008.

Finance income

Interest income was down 35% to £0.5 million (1H 2007: £0.8 million) due to the decrease in average cash balance which was offset by an increase in interest rates earned on investments.

Loss for the period

Net loss was £2.0 million (1H 2007: £1.5 million). Loss per share increased to 1.35p (1H 2007: 1.05p).  

Cash flow and balance sheet

The net cash outflow from operations increased to £3.0 million (1H 2007: £2.9 million). Capital expenditure, including payments made for acquisitions and investments in associate, was £3.5 million (1H 2007: £4.6 million). The movement in cash and short-term investments during the six months was an outflow of £4.7 million (1H 2007: £5.6 million). Net assets at June 30, 2008 were £28.3 million (December 31, 2007: £30.3 million), including cash and short-term investments of £16.6 million (December 31, 2007: £21.2 million).  

Dividend 

No interim dividend payment will be made for the six months ended June 30, 2008 (1H 2007: £Nil).   

Acquisitions

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

  Responsibility statement of the directors in respect of the interim financial report

We confirm that to the best of our knowledge:

• The condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

• The interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Carl Schlachte, President, CEO, and Director

August 5, 2008

Condensed consolidated income statement
For the six months ended June 30, 2008
		Six months ended	Six months ended
		June 30	June 30
		2008	2007
		(unaudited)	(unaudited)
	Note	£ '000	£ '000
Revenue		9,251	7,029
Cost of sales		(694)	(738)
Gross profit		8,557	6,291
Operating expenses	3	(11,419)	(8,684)
Operating loss		(2,862)	(2,393)
Finance income		485	751
Share of post-tax loss of associate		(8)	-
Loss before income tax		(2,385)	(1,642)
Tax credit		373	99
Loss for the period attributable to equity shareholders		(2,012)	(1,543)
Basic and diluted loss per share (pence)		(1.35)	(1.05)

Condensed consolidated statement of recognized income and expense
For the six months ended June 30, 2008
		Six months ended	Six months ended
		June 30	June 30
		2008	2007
		(unaudited)	(unaudited)
	Notes	£'000	£'000
Loss for the period		(2,012)	(1,543)
Currency translation difference	7	(147)	(54)
Proceeds from the sale of shares held in ESOP	7	-	76
Total recognized expense for the period attributable to equity shareholders		(2,159)	(1,521)

Condensed consolidated balance sheet
As at June 30, 2008
		June 30		December 31
		2008		2007
		(unaudited)		(a)
	Note	£'000		£'000
Assets
Non current assets
Intangible assets	6	11,294		7,506
Property, plant and equipment		1,830		1,537
Investment in associate		406		414
Other receivables		369		417
		13,899		9,874
Current assets
Inventory		2		72
Trade and other receivables		5,781		4,241
Current corporation tax receivable		300		1,368
Short term investments		10,695		11,145
Cash and cash equivalents		5,865		,100
		22,643		26,926
Total assets		36,542		36,800
Current liabilities
Trade and other payables		6,853		5,729
Provisions for other liabilities and charges		163		163
		7,016		5,892
Net current assets		15,627		21,034
Non-current liabilities
Other payables		265		126
Deferred income tax liabilities		930		489
Provisions for other liabilities and charges		50		20
		1,245		635
Net assets		28,281		30,273
Shareholders' equity
Ordinary shares		153		153
Share premium		3,683		3,683
Other reserves		61,204		61,037
Cumulative translation adjustment		(658)		(511)
Retained earnings		(36,101)		(34,089)
Total Equity	7	28,281		30,273

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

Condensed consolidated cash flow statement
For the six months ended June 30, 2008
		Six months ended	Six months ended
		June 30	June 30
		2008	2007
		(unaudited)	(unaudited)
	Note	£'000	£'000
Cash flows from operating activities
Cash used in operations	4	(2,951)	(2,872)
Interest received & paid		497	856
Taxes paid		(27)	(1)
Tax credits received		1,368	701
Net cash used in operating activities		(1,113)	(1,316)
Cash flows from investing activities
Purchase of property, plant and equipment		(680)	(901)
Purchase of intangible assets		(775)	(309)
Disposal of tangible fixed assets		7	-
Movements on short term investments		450	(5,984)
Investment of Associate		(3)	-
Acquisition of Sonic Focus	9	(1,943)	-
Acquisition of Alarity		(85)	-
Acquisition of Tenison		-	(997)
Acquisition of Teja assets		-	(2,389)
Net cash used in investing activities		(3,029)	(10,580)
Cash flows from financing activities
Net proceeds from issue of ordinary shares		-	359
Net cash generated from financing activities		-	359
Effects of exchange rate changes		(93)	(54)
Net decrease in cash and cash equivalents		(4,235)	(11,591)
Cash and cash equivalents at January 1		10,100	18,146
Cash and cash equivalents at end of period		5,865	6,555

  NOTES

• Basis of presentation

These condensed consolidated interim financial statements have been prepared in accordance with the accounting policies set out in the Annual Report of ARC International plc for the year ended December 31, 2007. The prior year comparatives are derived from audited financial information for ARC International plc as set out in the Annual Report for the year ended December 31, 2007 and the unaudited financial information in the condensed consolidated interim financial statements for the six months ended June 30, 2007. These condensed consolidated interim financial statements have been prepared under the historical cost convention, except in respect to certain financial instruments. This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Services Authority, the condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended December 31, 2007. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended December 31, 2007.

The consolidated accounts incorporate the accounts of the Company and of each of its subsidiaries for the period to June 30, 2008. All new acquisitions are accounted for under the purchase method from the date of acquisition.

The preparation of financial statements 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.

The condensed consolidated interim financial statements for the six months ended June 30, 2008 are unaudited but have been reviewed by the auditors. The condensed consolidated interim financial statements for the six months ended June 30, 2008 were approved by the directors on August 5, 2008.

The comparative figures for the financial year ended December 31, 2007 are not the company's statutory accounts for that financial year. Those accounts have been reported on by the company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985.

2. Segment information
Primary reporting format - geographical segments organized into three main locations.
The segment results for the six months ended June 30, 2008 are as follows:
	Europe	North America	Asia	Elimination	Group
	£ '000	£ '000	£ '000	£ '000	£ '000
Revenue-external	1,508	4,681	3,062	-	9,251
Revenue-internal	1,375	157	-	(1,532)	-
Segment result	(345)	(2,156)	(361)	-	(2,862)
Finance income	481	4	-	-	485
Share of post tax loss of associate	-	(8)	-	-	(8)
Loss before tax	136	(2,160)	(361)	-	(2,385)
Income tax credit	298	75	-	-	373
Net profit/(loss) attributable to equity shareholders	434	(2,085)	(361)	-	(2,012)
Assets	24,275	11,805	56	-	36,136
Associates	-	406	-	-	406
Total assets	24,275	12,211	56	-	36,542
Total liabilities	(3,539)	(4,662)	(60)	-	(8,261)
Other segment items
Capital expenditure	1,286	171	(2)	-	1,455
Amortization of intangible assets	661	346	-	-	1,007
Depreciation	294	180	2	-	476
Other non-cash expenses	34	129	4	-	167

The segment results for the six months ended June 30, 2007 are as follows:

	Europe	North America	Asia	Elimination	Group
	£ '000	£ '000	£ '000	£ '000	£ '000
Revenue-external	984	4,991	1,054	-	7,029
Revenue-internal	1,276	587	-	(1,863)	-
Segment result	(975)	(1,083)	(335)	-	(2,393)
Interest income	719	32	-	-	751
Loss before tax	(256)	(1,051)	(335)	-	(1,642)
Income tax credit	95	4	-	-	99
Net loss attributable to equity shareholders	(161)	(1,047)	(335)	-	(1,543)
Total assets	29,809	5,530	32	-	35,371
Total liabilities	(2,593)	(1,816)	(46)	-	(4,455)
Other segment items
Capital expenditure	1,160	50	-	-	1,210
Amortization of intangible assets	445	47	-	-	492
Depreciation	121	29	-	-	150
Other non-cash expenses	26	83	4	-	113
Group only has a single business segment, and therefore, it does not have a secondary reporting format.

3. Summary of net operating expenses
		Six months ended	Six months ended
		June 30	June 30
		2008	2007
		(unaudited)	(unaudited)
		£ '000	£ '000
Operating expenses
Research and development		(4,506)	(3,380)
Sales and marketing		(3,053)	(2,717)
General and administrative		(2,283)	(1,832)
Other expenses		(1,577)	(755)
Net operating expenses		(11,419)	(8,684)

4. Reconciliation of net loss for the period to net cash outflow from operating activities
		Six months ended	Six months ended
		June 30	June 30
		2008	2007
		(unaudited)	(unaudited)
		£ '000	£ '000
Net loss for the year		(2,012)	(1,543)
Adjustments for:
Gain on foreign exchange		(54)	-
Interest receivable		(485)	(751)
Tax credit		(373)	(99)
Amortization		1,007	492
Depreciation		476	150
Loss on disposal of property, plant and equipment		7	17
Share based award expense		167	113
Share loss from associate		8	-
Decrease in inventories		70	3
Increase in trade and other receivables		(1,586)	(261)
Decrease in trade and other payables		(206)	(865)
Increase/(decrease) in provisions		30	(128)
Cash used in operations		(2,951)	(2,872)

5. Key management compensation
		Six months	Six months
		ended	ended
		June 30	June 30
		2008	2007
		(unaudited)	(unaudited)
		£'000	£'000
Salaries and short-term employee benefits		660	689
Post-employmene benefits		24	22
Share-based payments		56	14
		740	725

Key management comprise of executive and non-executive directors and certain managers.

6. Intangible assets
	Goodwill	Intangible arising on acquisition	Capitalized R&D	Domain name	Computer software	Intangible assets Total
Group	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Cost
At January 1, 2007	13,580	-	668	78	6,046	20,372
Additions	-	-	271	-	644	915
Acquisition of subsidiary	3,414	3,517	-	-	-	6,931
Exchange difference	17	(12)	-	-	-	5
At December 31, 2007	17,011	3,505	939	78	6,690	28,223
Additions	-	-	-	-	775	775
Acquisition of subsidiary	1,903	2,027	-	15	-	3,945
Exchange difference	94	(16)	-	-	-	78
At June 30, 2008	19,008	5,516	939	93	7,465	33,021
Amortization and impairment losses
At 1 January 2007	(13,580)	-	(550)	(77)	(5,322)	(19,529)
Charge for the year	-	(491)	(101)	(1)	(618)	(1,211)
Exchange difference	-	(4)	-	-	27	23
At December 31, 2007	(13,580)	(495)	(651)	(78)	(5,913)	(20,717)
Charge for the year	-	(587)	(61)	-	(359)	(1,007)
Exchange difference	-	2	-	-	(5)	(3)
At June 30, 2008	(13,580)	(1,080)	(712)	(78)	(6,277)	(21,727)
Net book value
At January 1, 2007	-	-	118	1	724	843
At December 31, 2007	3,431	3,010	288	-	777	7,506
At June 30, 2008	5,428	4,436	227	15	1,188	11,294

7. Statement of changes in shareholders' equity
				Cumulative
	Share	Share	Other	translation	Retained
	capital	premium	reserves	adjustment	earnings	Total
(unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At January 1, 2007	151	3,256	60,751	(457)	(31,660)	32,041
Shares issued	1	282	-	-	-	283
Proceeds from the sale of shares  held in ESOP	-	-	-	-	76	76
Share based payments	-	-	113	-	-	113
Exchange loss	-	-	-	(54)	-	(54)
Loss for the year	-	-	-	-	(1,543)	(1,543)
At June 30, 2007	152	3,538	60,864	(511)	(33,127)	30,916
Shares issued	1	145	-	-	-	146
Share based payments	-	-	173	-	-	173
Loss for the year	-	-	-	-	(962)	(962)
At December 31, 2007	153	3,683	61,037	(511)	(34,089)	30,273
Share based payments	-	-	167	-	-	167
Exchange loss	-	-	-	(147)	-	(147)
Loss for the year	-	-	-	-	(2,012)	(2,012)
At June 30, 2008	153	3,683	61,204	(658)	(36,101)	28,281

8. Contingent liabilities

In September 2005, an ARC licensee informed the company that an ARC competitor had made enquiries about a possible patent infringement in respect of one of the licensee's designs based on an ARC core. The company assisted the licensee in responding to these enquiries and no complaint or allegation was made against the company.

In November 2006, an ARC licensee informed the company that a third party may believe that two patents among a group of patents known as the Moore Microprocessors apply to products incorporating at least some ARC processors. This licensee requested assistance and indemnification. The company has reviewed the patents in question and provided assistance to the licensee.

The directors are of the opinion and have been so advised that the risk to the company in relation to these matters is remote and no provision has been made in the accounts.

  9. Business Combinations

The group purchased 100% of the voting shares of Sonic Focus Inc. on February 11, 2008 for a total consideration of £2,813,000.

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

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 June 30, 2008, the acquisition contributed £38,000 to revenue, £371,000 to the operating expenses (excluding amortization), £138,000 of amortization of intangible assets, and £471,000 to net loss. Sonic Focus revenues in the first half do not reflect a deferral of approximately £212,000 into 2H 2008 from existing contracts.

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

		£ '000s
Revenue		9,333
Net loss		(2,021)

				Carrying values		Provisional
				pre acquisition		Fair values
				£'000s		£'000s
Intangible fixed assets				22		2,042
Property, plant and equipment				53		53
Trade and other receivables				69		69
Cash and cash equivalents				68		68
Trade and other payables				(780)		(780)
Deferred Tax				-		(542)
Net assets acquired				(568)		910
Goodwill						1,903
Consideration						2,813
Consideration satisfied by cash paid in the period						1,748
Deferred consideration satisfied by cash to be paid in the future						46
Deferred consideration to be satisfied by issuing shares in the future						756
Transaction costs						263
						2,813

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 US 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				1,748
Transaction costs				263
Cash acquired				(68)
				1,943

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

				£'000s
Developed core technology				1,194
Customer relationships				317
Trade name				423
In process technology				86
Other				22
				2,042

10. Statement of Principal Risks and Uncertainties

Pursuant to the requirements of the new Disclosure and Transparency Rules, ARC provides the following information on its principal risks and uncertainties: The principal risks and uncertainties facing the company over the next six months are broadly unchanged from those described in the Annual Report for the year ended December 31, 2007. These are set out in the Directors' Report beginning on page 18, together with commentary on the Board's approach to mitigating the risks and uncertainties, under the following headings: 

• The ability to produce new products that satisfy the target markets.

• Competitive pressures; ARC's competitors include major corporations that have a larger base of systems software and much larger installed customer base.

• Factors outside ARC's control such as a downturn in the semiconductor industry and adverse economic conditions.

• Safeguarding and enforcing its intellectual property rights, and protecting against challenges by third parties.

• The departure of key personnel.

• Currency and hedging risks (a substantial proportion of ARC group revenues are in US dollars), interest rate risks and credit risks.

• Integration of the new businesses: ARC has completed four business acquisitions in the last 15 months and there are risks and uncertainties regarding the integration of these businesses into the ARC group.

11. Related Party Transactions

Related party transactions in the 6 months ended June 30, 2008 are limited to compensation for key management - see note 5.   INDEPENDENT REVIEW REPORT TO ARC INTERNATIONAL PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended June 30, 2008, which comprises the condensed consolidated income statement, the condensed consolidated statement of recognised income and expense, the condensed consolidated balance sheet, the condensed consolidated cash flow statement, and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Services Authority ("the UK FSA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended June 30, 2008 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

KPMG Audit Plc
Chartered Accountants  

St Albans
August 5, 2008

# # #

About ARC International plc
ARC International is a world leading provider of consumer IP to OEM and semiconductor companies globally. ARC's award-winning, vertically integrated audio and video solutions enable high quality multimedia content to be captured, shared, and played on a wide range of electronics devices. ARC's 140+ customers collectively ship hundreds of millions of ARC-Based chips annually in products such as Mobile TVs, Portable Media Players, WiFi-/WiMAX-enabled computers, 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, and St. Petersburg, Russia. 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, VRaptor, Energy PRO, Sonic Focus and the Sonic Focus logo are trademarks or registered trademarks of ARC International. 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. 

 

END

 

 

IR MGGGRVKGGRZM