First quarter results

Zen Research PLC 26 April 2002 26 April 2002 Zen Research plc Report for the first quarter ended 31 March 2002 REVIEW OF BUSINESS ACTIVITIES Multibeam TM Zen Research plc ('the Company') believes that the current market conditions of the PC industry, the primary target market for the Company's MultibeamTM technology, have not changed since the Company last commented upon them. As a result, the attractiveness of this primary market remains severely constrained. As previously reported, Zen Research plc has ceased support for existing MultibeamTM projects indefinitely. The Company's efforts to attract a licensee partner willing to undertake a project based on MultibeamTM technology have, to date, been unsuccessful. In addition, over the past six months, the Company has engaged an investment bank in the United States to seek a buyer for the MultibeamTM business. The investment bank has contacted over twenty-five companies from various fields including multinational consumer electronic companies, semiconductor companies and disk storage companies. To date, no interest has been expressed by any of those companies contacted. Consequently, the Company has decided to immediately reduce its MultibeamTM workforce by an additional fourteen employees. A small team of engineers remains to fulfill the contractual obligations of Zen in respect of a development agreement that had previously been signed with a video player licensee. The development of this technology is expected to be completed before the end of 2002. At this time, there is little visibility as to whether the Company would receive any revenue after that time from this license. New Silicon Value The market conditions within the semiconductor industry remain challenging and revenues from NSV were substantially less than expected. NSV did receive a purchase order from one semiconductor company providing routing and switching solutions for the high speed internet infrastructure market and signed a memorandum of understanding with another. Both arrangements contemplate performing design services for the customer in exchange for the reimbursement of design expenses and, should the NSV designed chip go into production, the realisation of turnover from the sale of ASICs. It is too early to determine what, if any, product revenue would be associated with such customer. However, experience has shown that a significant proportion of ASIC designs are either not incorporated into saleable products or do not result in volume shipments by customers. There can therefore be no assurance that these customers will ever utilise these designs in production. NSV is progressing as planned with design work for its existing customers and continues to ship ASICs on behalf of one customer in accordance with existing arrangements. Under current market conditions, NSV's small size and its engineering location in Israel create further obstacles to winning new design and chip manufacturing contracts. The Company is taking steps that it deems appropriate to minimise the effect of the recent escalation of hostilities in Israel and NSV will incur significant costs to implement these steps. However the Board is hopeful the situation will improve over the coming months. The Company continues to believe in the long-term potential for NSV if the ASIC market recovers. Accordingly, while recognising its need to continue to monitor progress and business performance, the Company continues to fund NSV. This investment may exceed US$12 million in 2002. Scheme of arrangement In view of the technical and financial risks inherent in both the MultibeamTM and NSV businesses, the Company's Board of Directors undertook a review of the alternatives available for delivering value to shareholders. In this context, the Company's chairman and CEO, Davidi Gilo indicated his willingness to put forward a proposal whereby cash would be returned to shareholders by way of a scheme of arrangement and he, together with his family's interests, would take the Company forward as a privately owned company ('the Proposal'). The terms of the Proposal were announced on 27 March 2002 but, as set out in an announcement by the Company on 24 April 2002, the Independent Committee of the Company and Mr Gilo have decided that, in light of an approach by a third party that may or may not lead to an offer to acquire the entire issued share capital of the Company, the posting of the Scheme Circular relating to the Proposal should be postponed at this time pending the third party deciding either to make an offer, within an acceptable timeframe, or to withdraw its interest. FINANCIAL COMMENTARY Turnover Un-audited Three months ended 31 March US$ '000 2002 2001 Change Group Turnover Multibeam 350 182 168 New Silicon Value 888 - 888 1,238 182 1,056 ===== ==== ===== Turnover for the three months ended 31 March 2002 increased compared to the comparable period ended 31 March 2001 but was significantly less than had been expected due to a reduction in shipments of ASICs by NSV. The increase was mainly due to the turnover generated by New Silicon Value, which was acquired in April 2001, although turnover from the Multibeam division also increased in the period. Turnover from the Multibeam division was generated from engineering fees for development work. Turnover from New Silicon Value was generated from shipments of ASICs and engineering fees for development work. Sequential turnover decreased from US$2.516 million to US$888,000 at 31 March 2002 due to the reduction in shipments of ASICs. Cost of sales Cost of sales consists of costs related to ASICs shipped during the period and costs incurred in connection with billings for development work. Additionally, the Company has provided for potential warranty claims that might arise due to product failures. Research and development Un-audited Three months ended 31 March US$ '000 2002 2001 Change Research and development Multibeam 998 3,110 (2,112) New Silicon Value 1,833 - 1,833 2,831 3,110 (279) ===== ===== ===== Research and development expenses for the Multibeam division decreased during the three-month period ended 31 March 2002 compared to the corresponding period. This decrease reflects the reduction in headcount and related expenses and expenditures on outside engineering services as a result of restructuring activities taken during 2001. Spending during the first quarter of 2002 for the MultibeamTM division was focused on the development and enhancement of its intellectual property. See Note 7 for the effect of the further cost reductions implemented for the second quarter of 2002. Expenditures for research and development for New Silicon Value represent costs related to the ongoing development of software tools. Sequential expenditures from the Multibeam division also decreased during the three months ended 31 March 2002, due to a reduction in salary and related expenses, as a result of the restructuring taken during the prior quarter. Sequential expenditures for New Silicon Value also decreased due to the timing of certain expenses. Other operating expenses Un-audited Three months ended 31 March US$ '000 2002 2001 Change Other operating expenses Multibeam 1,774 1,949 (175) New Silicon Value 3,815 - 3,815 5,589 1,949 3,640 ===== ===== ===== Other operating expenses incurred by the Multibeam division for the three-month period ended 31 March 2002, decreased compared to the corresponding period mainly due to decreased headcount and related expenses due to restructuring activities, offset by a writedown of shareholder notes to current net realisable value at 31 March 2002. Other operating expenses related to New Silicon Value consists mainly of payroll and related costs and marketing programs. Goodwill amortization of US$3.1 million for the three months ended 31 March 2002 is also included in NSV other operating expenses. ENQUIRIES: Zen Research plc Tel: +44 (0)207 382 0470 Mark Way, Vice President Investor Relations www.zenresearch.com INDEPENDENT REVIEW REPORT TO ZEN RESEARCH PLC Introduction We have been instructed by the company to review the financial information for the three months period ended 31 March 2002, which comprises the Consolidated Profit and Loss Statement, Consolidated Balance Sheet, Consolidated Cash Flow Statement and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the three months period ended 31 March 2002. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 25 April 2002 Notes: (a) The maintenance and integrity of the Zen Research plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. Zen Research plc Consolidated profit and loss accounts Un-audited Three months Audited ended Year ended 31 March 31 December US$ '000 US$ '000 2002 2001 2001 Group Turnover Multibeam 350 182 826 New Silicon Value 888 - 5,020 1,238 182 5,846 Cost of sales (1,600) - (3,839) Gross profit/loss (362) 182 2,007 Research and development (2,831) (3,110) (15,299) Other operating expenses excluding (5,589) (1,949) (18,715) exceptional items Exceptional items Restructuring costs - - (3,490) Total other operating expenses (5,589) (1,949) (22,205) Total operating expenses (8,420) (5,059) (37,504) Operating loss Multibeam (2,535) (4,877) (19,713) New Silicon Value (6,247) - (15,784) (8,782) (4,877) (35,497) Net interest receivable 609 1,062 3,055 Loss on ordinary activities before (8,173) (3,815) (32,442) taxation Taxation on ordinary activities (70) (122) (335) Loss on ordinary activities after (8,243) (3,937) (32,777) taxation Basic loss per share (0.05) (0.02) (0.18) (US dollars) Fully diluted loss per share (US (0.05) (0.02) (0.18) dollars) Weighted Average 181,261,784 179,919,331 180,512,655 Ordinary Shares The Company has no recognised gains and losses in any of the periods shown above other than the loss for the period shown in the relevant profit and loss account. Accordingly, no separate statement of total recognised gains and losses has been presented. Zen Research plc Consolidated balance sheet Unaudited Audited Unaudited 31 March 31 December 31 March 2002 2001 2001 US$ '000 US$'000 US$ '000 Fixed assets 6,184 9,277 1,008 Intangible assets 4,934 5,055 1,938 Tangible assets 11,118 14,332 2,946 Current assets Stock 208 295 - Debtors - due after more than one year 276 276 1,323 Debtors - due within one year 4,155 2,987 1,014 4,431 3,263 2,337 Short-term investments 48,606 49,443 83,368 Cash at bank and in hand 4,484 10,334 9,185 53,090 59,777 92,553 Creditors - Amounts falling due (11,084) (11,458) (3,817) within one year Net current assets 46,645 51,877 91,073 Total assets less current 57,763 66,209 94,019 liabilities Creditors - Amounts falling due (5,072) (5,291) (4,471) after more than one year Net assets 52,691 60,918 89,548 Capital and reserves Called up share capital 13,725 13,709 13,648 Share premium 101,105 101,105 101,040 Other reserves 37,832 37,832 37,832 Profit and loss account (99,971) (91,728) (62,972) Total equity shareholders' funds 52,691 60,918 89,548 Zen Research plc Consolidated cash flow statement Unaudited Three months Audited ended Year end 31 March 31 December US$ '000 US$ '000 2002 2001 2001 Net cash outflow from operating (6,813) (6,228) (19,867) activities Returns on investments and servicing of finance Interest received 609 1,483 4,077 Interest paid - - - Net inflows/(outflows) from returns on _____ _____ ______ investments and servicing of finance 609 1,483 4,077 Taxation (70) - - Capital expenditure and financial investments Purchase of fixed assets (429) (397) (1,054) Sale of tangible fixed assets - - - Net cash outflow for capital expenditure (429) (397) (1,054) Acquisitions and disposals Purchase of New Silicon Value - - (21,200) (Increase)/decrease in management of 837 (40,642) (6,717) liquid resources Net proceeds from issuances of 16 597 723 ordinary shares Repayment of loan notes due - 180 180 from shareholders Net cash inflow from financing 16 777 903 Decrease in cash (5,850) (45,007) (43,858) Notes to the Preliminary Announcement of Zen Research plc 1. Basis of preparation The financial information for the quarter and year ended 31 March 2002 has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 31 December 2001 and 2000, under the historical cost convention and in accordance with accounting standards applicable in the United Kingdom. 2. Loss per share Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. Diluted loss per share is adjusted for the effect of potential ordinary shares, such as share options and warrants. 3. Reconciliation of movements in shareholders funds Three months ended 31 March US$'000 2002 2001 Loss for the period (8,243) (3,937) Proceeds of issue of ordinary shares 16 597 Net reduction in shareholders' ______ ______ funds (8,227) (3,340) Opening shareholders' funds 60,918 92,888 Closing shareholders' funds 52,691 89,548 ======= ====== 4. Notes to cash outflow from operating activities Three months ended 31 March US$'000 2002 2001 Operating loss (8,782) (4,877) Depreciation of tangible fixed assets 550 204 Amortisation of intangible fixed assets - 139 Amortisation of goodwill 3,093 - Decrease in stock 87 - Increase in debtors (1,168) (431) Decrease in creditors (593) (1,263) Net cash outflow from operating activities (6,813) (6,228) ======= ======= 5. Reconciliation of net cash flow to movements in net funds Three months ended 31 March US$'000 2002 2001 Decrease in cash (5,850) (45,007) Movement in liquid resources (837) 40,642 Movement in net funds (6,687) (4,365) Net funds 1 January 59,777 96,918 Net funds 31 March 53,090 92,553 ====== ====== 6. Contingent liabilities On the acquisition of New Silicon Value (NSV), share options in NSV were granted to certain employees. These options included a 'put' clause whereby employees can require the company to purchase the shares. The first options were scheduled to vest in April 2002. During the first quarter of 2002, the Company revised the option arrangements for the NSV employees to permit the election to receive a bonus equal to the value of the put option payable over time and contingent upon remaining employed by NSV in exchange for cancelling the entitlements under Share Option Schemes. Employees representing approximately 70 per cent. of the potential cost of the put option elected to accept this offer. The remaining potential cost relating to the option scheme and the revised arrangement amounts to US$1.7 million at 31 March 2002. In 2000, the Company had purchased technology to be utilised in its future CD ROM products. The Company had entered therefore into a licence agreement for the acquisition of optical write technology for US$5.0 million. The Company paid US$1.0 million in 2000, and potentially could be liable for an additional US$2.0 million if certain milestones are met. At 31 March 2002, the Company is not obligated to pay for this phase of work as it has not been delivered. The Company believes that these milestones will not be met in accordance with the licence agreement. In April 2001, the Company purchased certain assets of Silicon Value (S.V.) Ltd., a subsidiary of NASDAQ listed Tioga Technologies (''Tioga''). The Company believes that Tioga has not performed certain contractual obligations and certain misrepresentations were made. The Company has filed a suit against Tioga for the release of US$1.8 million from escrow to the Company plus an additional US$598,000. The Company cannot predict the outcome of these claims. The other party opposes these claims and have issued a claim to NSV to release a retained amount of approximately US$590,000 which they claim NSV is holding improperly. NSV has no exposure on this issue as it holds a provision in the balance sheet for this consideration. The Company cannot predict the outcome of these claims. The Company has been advised that the yield on certain NSV designed chips may be lower than anticipated. Failure to resolve this issue may significantly affect the turnover to be expected from NSV in the future and may result in significant additional costs 7. Subsequent events The Company expects to incur professional expenses of approximately US$2,500,000 relating to the preparation of a circular for shareholders pursuant to the Company's announcement dated 27 March 2002, regarding the proposal to return capital to shareholders and return the Company to private ownership. The Company anticipates that it will incur these costs in the quarter ended 30 June 2002, and these costs will be charged to the profit and loss statement in that period. Subsequent to the end of the first quarter, the Company decided to further reduce its workforce connected with the development of MultibeamTM products. The current estimate of costs associated with this decision will be approximately US$350,000. Management is aware of the possibility that the Company may incur further costs to wind down its business, including but not limited to, the possible payment to third party contractors on the various projects. As announced on 24 April 2002, the Company received an approach that may result in a third party making an offer to acquire the entire issued share capital of the Company. As a result of this, the Company has agreed that the posting of the Scheme Circular relating to the scheme of arrangement be postponed pending the third party deciding either to make an offer, within an acceptable time frame, or to withdraw its interest. The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The Company was incorporated on 30 December 1999, and the financial statements for the year ended 31 December 2000 have been delivered to the Registrar of Companies. The auditors' report was unqualified and did not contain a statement either under Section 237(2) or Section 237 (3) of the Companies Act 1985. The financial statements for the year ended 31 December 2001 have not yet been delivered to the Registrar of Companies, nor have the auditors reported on them. The audit report on the full set of financial statements has yet to be signed. This press release contains forward-looking statements regarding among other things the future success of ZenTM technology and New Silicon Value technology. These forward looking statements are based on current expectations and are subject to risks and uncertainties. Actual events and results may differ materially from those described in these forward-looking statements, as a result of several factors, including the successful implementation of Zen technology, the successful integration of New Silicon Value into Zen, the ability of Zen and New Silicon Value to successfully market and sell their products under current market conditions, and other risk factors as set forth in the Zen Offering Circular dated June 26, 2000. This information is provided by RNS The company news service from the London Stock Exchange VDGZZG

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