Interim Results

BATM Advanced Communications Ld 14 September 2001 For immediate release 14 September 2001 BATM Advanced Communications Limited Interim Results for the Period Ended 30 June 2001 Highlights Six months ended 30 June 2001(1) 2000 (2) Turnover $42.4m $36.8m Gross Profit $19.8m $16.4m Operating profit (loss) $(1.3)m $5.1m Pre-tax profit $0.3m $9.4m Earnings per share -c 2.40c 1. Pro forma results exclude amortization of goodwill and write-down of inventory 2. Figures include the results of Telco Systems with effect from 07/04/2000. * New products well received * Maintained R&D activity * Continuing to develop new markets * Continuing to cultivate strategic business alliances * Adjusted manpower levels selectively to recognize the current lower level of demand * Maintained strict credit policy, as is evident in our strong balance sheet * Gross margins improved Dr Zvi Marom, Chief Executive of BATM, said: 'BATM mourns with the American people the dead and wounded in this week's appalling terrorist attacks. We send our condolences to our friends, their families and the American people. We are confident that the strength of the American people will help them to overcome these dreadful events and that they will be stronger as a result. Against an extremely difficult trading background, we believe that our results can be judged as being satisfactory. In particular, the steps that we have taken to position ourselves to cushion the effects of the downturn, whilst being ready for the inevitable recovery in market conditions, have left the Company very well placed to be among those that will emerge greatly strengthened form this trough.' For further information please contact: 14 Sept Thereafter BATM Advanced Communications Limited Dr Zvi Marom, Chief Executive 020 7601 1000 00972 3 9386 888 Dresdner Kleinwort Wasserstein Mark Smith 020 7475 7379 020 7475 7379 Shore Capital Graham Shore 020 7408 4090 020 7408 4090 Square Mile BSMG Worldwide Edward Macquisten 020 7601 1000 020 7601 1000 Chairman's Statement Review of the period The first half of the year has been marked by extremely difficult trading conditions in the telecom sector. The downturn in demand that commenced during the previous year has continued and in some areas has accelerated, leading to a significant decline in business activity. The major, debt laden, carriers have lowered and postponed their purchases while bankruptcies have occurred among some small providers and CLECs. Competition for the remaining business opportunities has been fiercer than ever. Against this background, whilst we are disappointed that we have not achieved the targets that we had set, we believe that our results can be judged as being satisfactory. In particular, the steps that we have taken to position ourselves to cushion the effects of the downturn, whilst being ready for the inevitable recovery in market conditions, have left the Company very well placed to be among those that will come out of this business trough greatly strengthened. During this period we have: * Maintained our R&D activity - whilst getting better value for our spend * Continued to develop our new markets * Continued to cultivate our important strategic business alliances * Adjusted manpower levels selectively to recognize the current lower level of demand * Maintained our customary strict credit policy which is evident in our strong balance sheet Financial Performance Turnover for the period was $42,391,000 (2000: $36,828,000), an increase of 15 per cent. This increase is mainly due to the revenues of Telco systems in the first quarter of 2001 (Telco's revenues in the first quarter of 2000 were not consolidated in the results of the first half of 2000). Despite heavy price competition in the market place we have managed to increase our gross profit margins from 44.6 per cent to 46.6 per cent, excluding the write down of inventory referred to above. Selling, general and administrative expenses increased from 19.5 per cent to 33 per cent of sales due, principally, to the inclusion of Telco for the full six months this year. The effects of savings arising from reductions in staffing levels will be felt in the second six months. Gross research and development expenditure was $7,864,000 (2000: $5,253,000). However, after contributions from the Israeli Chief Scientist, US-IS Foundation, 3M and from the European Community, net research and development expenditure was $6,939,000 (2000: $4,133,000). Pro forma operating loss, which excludes the effect of the amortization and write-off of goodwill arising from our acquisitions and a write-down of acquired inventory, amounted to $1,263,000 (2000: Profit $5,088,000). The write-down of inventory is associated, mainly, with the acquisition of the network access products of Ezenia in September 2000. Operating loss after amortization and write-off of goodwill and write-down of stock was $41,774,000 (2000: loss $10,891,000). Financial income was $1,498,000 (2000: $4,319,000), reflecting the decrease in bank deposits, which were utilized primarily for the Telco Systems acquisition and lower interest rates. Pro forma profit before tax, excluding the effect of the amortization of goodwill and inventory write-down, was $343,000 (2000: $9,453,000). Pro forma profit after taxes and minorities, excluding the effect of the amortization of goodwill, was $18,000 (2000: $9,012,000), giving earnings per share of 0.00 cents (2000: 2.4 cents). Actual loss after taxes, including the effect of goodwill and stock write-down, was $40,493,000, giving a loss per share of 10.5 cents. The balance sheet remains strong with cash, deposits and short-term investments of $52,028,000 at the period's end. Research and Development BATM is continuing to invest heavily in R&D, both for enhancements to its existing ranges and in relation to the creation of new products. We are working closely with a number of major academic institutions; with CERN in Switzerland and we are continuing our joint R&D projects with market leaders in our sector. The research is focused around high speed IP networking with extensive load balancing, traffic shaping and quality of service for voice, data and video. The T5 Pro and the T6 have been well received with several orders shipped. Further enhancements are currently being designed, among them WAN interfaces. The company has finished the design of the Titan T7 multi Gigabit / 10 Gigabit advanced routing switch. The product will be officially launched in Q4 this year. Development of our line of Integrated Access Devices and integrated VDSL (long distance Ethernet) platforms is also continuing. The T8 technologies have been successfully implemented in the T6 and T5 Pro which are being shipped in larger volumes to customers. The T8 itself will be launched when market conditions improve and a suitable level of demand can be anticipated. Sales and Marketing We have continued to invest in training enhancing the IP capabilities of our sales force. We are already seeing the evidence of this effort having successfully introduced our equipment into the laboratories of several large Carriers where it is being tested. There is an inevitable time lag between such testing and the receipt of major orders but the results achieved to date indicate that our efforts will produce the anticipated rewards. In particular, we have received an extremely positive response to our VDSL line. In recognition of the present lower level of demand we have reorganized and recently slimmed down our US sales force to support distribution channels for the IP telco market in the North-East US. During the present downturn in the market we shall be focusing on this part of the US market replicating a successful strategy that we have adopted in the European market, mainly Germany. We expect benefits from these actions to come through during the second half of 2001. We are continuing to expand our presence in Europe as business in this region continues to grow. We have started to penetrate the Far East markets mainly through systems integrators and distribution channels. The speed and success of our entry into these important markets will be greatly facilitated and enhanced through these relationships. Investment We have decided no longer to support the access product line of Ezenia, whose development team we took over in September and who are focusing their efforts and talents on our Edgelink range of products. Accordingly we have written off $1.3M in inventory, $4.3M in goodwill and charged $0.4M for purchase obligations in this period. Prospects Despite the continuing downturn in our industry, we remain confident of our medium and long-term prospects. During this difficult period, we believe that the relative position of BATM in comparison to our competitors has improved. We have products that are at the leading edge of our industry and we continue to innovate. We have developed and continue to develop access to our markets. As market conditions improve, as they undoubtedly will, we will be among those that will be in a position to take full advantage of the opportunity. Whilst the short-term remains uncertain we are confident in the future; that BATM will develop into a significant player in our industry. Equally importantly, the company has all the necessary resources to achieve its objectives without need for additional financial resources. We have excellent liquidity, no indebtedness and no bad debt. We have every confidence that we will return to operational profitability by the end of the year. Peter Sheldon Chairman 14 September 2001 Pro Forma Consolidated Profit And Loss Account Excluding Amortization and Write-Off of Goodwill, and write down of Inventory Six months ended Six months ended Year ended June 30, 2001 June 30, 2000 December 31, 2000 $US'000 $US'000 $US'000 Unaudited Unaudited Audited Turnover 42,391 36,828 91,876 Cost of sales 22,597 20,392 49,321 Gross profit 19,794 16,436 42,555 Operating expenses Research and development 7,864 5,253 14,707 costs Less - participation 925 1,120 1,532 Research and development 6,939 4,133 13,175 costs, net Selling, general and 14,118 7,215 20,999 administrative expenses Total operating expenses 21,057 11,348 34,174 Operating profit (loss) (1,263) 5,088 8,381 Financial income, net 1,498 4,319 6,132 Other income, net 108 46 7,735 Profit before taxes on 343 9,453 22,248 income Taxes on income (204) (377) (73) Profit after taxes on 139 9,076 22,175 income Company's share in profit (121) (64) 63 (loss) of associated company Net profit for the period 18 9,012 22,238 Earnings per share (in -- 2.40 5.84 cents) Consolidated Profit And Loss Account Six months ended Six months ended Year ended June 30, 2001 June 30, 2000 December 31, 2000 $US'000 $US'000 $US'000 Unaudited Unaudited Audited Turnover 42,391 36,828 91,876 Cost of sales 25,270 20,392 49,321 Gross profit 17,121 16,436 42,555 Operating expenses Research and development 7,864 5,253 14,707 costs Less - participation 925 1,120 1,532 Research and development 6,939 4,133 13,175 costs, net Selling, general and 14,118 7,215 20,999 administrative expenses Amortization and write down 37,838 15,979 48,306 of Goodwill - mainly Telco Total operating expenses 58,895 27,327 82,480 Operating loss (41,774) (10,891) (39,925) Financial income, net 1,498 4,319 6,132 Other income, net 108 46 7,735 Loss before taxes on income (40,168) (6,526) (26,058) Taxes on income (204) (377) (73) Loss after taxes on income (40,372) (6,903) (26,131) Company's share in profit (121) (64) 63 (loss) of associated company Net loss for the period (40,493) (6,967) (26,068) Loss per share (in cents) (10.5) (1.86) (6.85) Consolidated Balance Sheet As at As at As at 30th June 30th June 31st Dec 2001 2000 2000 $US'000 $US'000 $US'000 Unaudited Unaudited Audited Fixed assets Tangible assets 13,649 12,521 13,587 Goodwill 249,390 304,581 287,269 Total fixed assets 263,039 317,102 300,856 Current assets Stocks 27,411 27,396 28,262 Debtors 19,997 23,164 26,044 Short Term Investments 18,898 30,548 50,482 Cash and cash equivalents 33,130 31,047 7,255 99,436 112,155 112,043 Creditors: amounts falling due within one year 20,049 38,698 30,138 Net current assets 79,387 73,457 81,905 Long Term Investments Investment in associated company 3,315 3,826 3,439 Investment in other companies 5,687 2,601 5,687 Deposit - 500 - 9,002 6,927 9,126 Total assets less current liabilities 351,428 397,486 391,887 Non-current liabilities Restructuring costs - (3,233) - Severance pay fund, net of provision (319) (266) (324) (319) (3,499) (324) Net assets 351,109 393,987 391,563 Capital and reserves Share capital 1,172 1,169 1,171 Additional paid-in capital 397,144 380,431 397,106 Foreign currency translation adjustment 16 16 16 Retained profit (loss) (47,223) 12,371 (6,730) Shareholders' funds 351,109 393,987 391,563 Note 1 - General The unaudited results for the six months ended 30th June 2001 have been prepared in accordance with generally accepted accounting principles set out in the Annual Report and Accounts for the year ended 31st December 2000. The unaudited results for the six months ended 30th June 2000 were prepared on the same basis. The results for the year ended 31st December 2000 have been extracted from the audited accounts for that period which received an unqualified audit opinion. Note 2 - Loss per share Loss per share is based on the weighted average number of shares in issue for the period of 386,444,690 (2000 H1: 375,383,910). Note 3 - Reconciliation of movements in shareholders' funds Share Additional Foreign currency Retained Total capital paid-up capital translation loss US$'000 US$'000 adjustment US$'000 US$'000 US$'000 As at 1,171 397,106 16 (6,730) 391,563 January 1 2001 Exercise of options by Employees and advisors 1 38 39 Loss for the period (40,493) (40,493) As at June 1,172 397,144 16 (47,223) 351,109 30, 2001 (unaudited) Note 4- Material difference between Israeli and UK GAAP The material difference between Israel and UK GAAP, as applicable to the Group's financial statements, is the accounting treatment with regard to employees share option schemes. Israeli GAAP does not require any reflection in the financial statements for the difference, if any, at the date of the award, between the fair value of the share and the exercise price of the option. Under UK GAAP (UITF 17) such a difference is charged to the profit and loss account, basically over the vesting period of the options. Had the company applied such UK GAAP, the loss per share, for the six months ended June 30, 2001 and for the year ended December 31, 2000 would have increased by $0.01 per share. BATM ADVANCED COMMUNICATIONS LTD. CONSOLIDATED STATEMENT OF CASH FLOWS Six months ended June Year ended 30, 2001 December 31, 2000 Note $US'000 $US'000 Unaudited Audited Net cash inflow (outflow) from 5 (4,508) 8,756 operating activities ---------- ---------- Investing activities Acquisition of shares in other - (600) companies Acquisition of shares in associated - (1,334) company Acquisition of shares in subsidiary 6a - (268,314) (Telco) Acquisition of shares in subsidiary 6b - (3,000) (Ezenia) Proceeds from divestment of a company - 3,997 Acquisition of shares in subsidiary - (110) (Connectronix) Loan to associated company - (1,938) Acquisition of fixed tangible assets (1,598) (6,264) Proceeds from sale of tangible fixed - 354 assets Sale of short term bank deposits 31,882 45,408 Sale of (investment in) marketable (50) 900 securities, net Net cash inflow (outflow) from 30,234 (230,901) investing activities ---------- ---------- Financing activities Issuance of share capital, net - 94,345 Exercise of options by employees and 39 492 advisors Increase (decrease) in short-term bank 110 (101) debts, net Dividend paid - (183) Net cash inflow from financing 149 94,553 activities ----------- ----------- Increase (decrease) in cash and cash equivalents 25,875 (127,592) Cash and cash equivalents at 7,255 134,847 the beginning of the period Cash and cash equivalents at 33,130 7,255 the end of the period BATM ADVANCED COMMUNICATIONS LTD. CONSOLIDATED STATEMENT OF CASH FLOWS NOTE 5 - RECONCILIATION OF NET LOSS FOR THE PERIOD TO NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES Six months ended June Year ended 30, 2001 December 31, 2000 $US'000 $US'000 Unaudited Audited Net loss for the period (40,493) (26,068) Company's share in loss (profit) 121 (63) of associated company Write off of goodwill 4,347 - Amortization of goodwill 33,491 48,306 Depreciation and amortization 1,577 2,024 Write off of investment -- 321 Increase (decrease) in severance pay (5) 112 fund, net of provision Decrease in stocks 851 3,731 Decrease (increase) in debtors 6,047 (10,148) Decrease in creditors (10,199) (2,124) Restructuring costs -- (3,543) Gain from divestment of a company -- (1,997) Loss (gain) from marketable securities 87 (43) Interest incurred on investments (335) (1,677) Interest incurred on loan for affiliate 3 (104) Loss on disposal of fixed assets -- 29 Net cash inflow (outflow) from operating (4,508) 8,756 activities NOTE 6 - ACQUISITION OF SUBSIDIARY Year ended December 31, 2000 $US'000 Audited a. Assets and liabilities of the subsidiary at acquisition (Telco) Working capital (excluding cash and cash equivalents) 14,296 Fixed tangible assets 4,566 Intangible assets 8,102 Long- term liabilities (3,543) Excess cost 244,893 268,314 b. Assets and liabilities of the subsidiary at acquisition (Ezenia) Working capital (excluding cash and cash equivalents) 880 Excess cost 2,120 3,000

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