Final Results
Arc International PLC
21 February 2002
ARC INTERNATIONAL PLC
PRELIMINARY RESULTS FOR THE FOURTH QUARTER AND YEAR
ENDED 31 DECEMBER 2001
Elstree, UK - 21 February 2002: ARC International (LSE:ARK), a leading developer
of user-customisable, high-performance 32-bit processor cores, software,
development tools, peripherals and other intellectual property (IP), announces
preliminary results for the fourth quarter and the year ended 31 December 2001.
KEY POINTS
Quarter ended 31 December 2001
• Turnover increased 13% quarter-on-quarter to £2.3 million
• Operating expenses were 9% lower at £7.9 million (Q3 2001: £8.6 million)
• Net loss before exceptional costs was reduced by 8% to £6.2 million (Q3
2001: loss £6.8 million)
• Mike Gulett appointed CEO on 27 December 2001; senior management team
strengthened in early 2002
Year ended 31 December 2001
• Turnover up 8% to £11.4 million (2000: £10.6 million)
• 27 new designs and 15 customers won
• Net loss before exceptional costs was £24.4 million (2000: loss £15.3
million)
• Market uncertainty resulted in delays in concluding licences
• Decisive action taken to restructure the business; cost base reduced by
21% in the second half of the year
• £120.8 million cash in hand at the end of December 2001
Mike Gulett, Chief Executive Officer of ARC International, said:
"The Company now has clearer strategic direction and increased focus that will
generate renewed momentum to exploit our innovative technology. We are
streamlining our organisation into a single unified structure to market all our
microprocessor, peripheral, software and development tool products under the
name of ARC International. The effectiveness of our development and selling
activities will be increased by combining our broad range of capabilities to
provide integrated embedded system solutions for our target markets.
"2002 will be an important transitional year as the new management team
implements further substantial operational changes. Market conditions continue
to be difficult but we believe that we will re-establish growth in the business
and make progress towards achieving profitability."
For further information, please contact:
Mike Gulett, CEO, ARC International, 020 8236 2800
Simon Poulton, CFO, ARC International, 020 8236 2800
Peter Aubusson, Investor Relations Manager, ARC International, 020 8236 2800
Sue Pemberton, Citigate Dewe Rogerson, 020 7638 9571
Freida Davidson, Citigate Dewe Rogerson, 020 7638 9571
ARC's management will be available on 020 7638 9571 on 21 February.
The Company is holding a meeting for securities analysts at 9.30 am on 21
February 2002. A recording of this meeting will be available through the
Company's website: www.arccores.com following the meeting.
2001 Operating Review
After an encouraging start to the year the unprecedented market conditions
resulted in a slowdown in licensing of our technology as the year progressed.
The board took decisive action to restructure the business, reducing headcount
by approximately 25%, rationalising facilities and disposing of surplus
property. Action was also taken to strengthen the senior management team. These
moves have placed the Company in a sound position for the next stage of its
development.
Licensing and Turnover
Our pipeline of prospective licensees for the ARCtangentTM processor remained
healthy throughout the year but market uncertainty resulted in some customers
delaying decisions on concluding licences. This trend continued through to the
end of the year when four deals were deferred in the final days of the last
quarter. Consequently, during the fourth quarter we won one design licence with
a new customer but, since the start of 2002, two of the deferred design licences
have been concluded.
Turnover in the fourth quarter was enhanced by stronger demand for our
development tools and our 186 microprocessor cores. This compensated for the
effect of the deferrals of new licences for the ARCtangent processor and
resulted in a short-term change in turnover mix with approximately 10% of total
turnover in the quarter being accounted for by ARCtangent, compared with 50% in
the fourth quarter 2000.
In 2001 as a whole, we concluded 27 new licences and won 15 new customers for
our ARCtangent microprocessor. Two new tier one companies, Sun Microsystems and
Cypress Semiconductor, signed corporate licences and several established
customers, including Fujitsu and Conexant, re-licensed our technology,
demonstrating their satisfaction with its commercial benefits. Cumulatively we
now have a total of 100 design licences from 59 customers for the ARCtangent
processor.
Management Changes
The board's decisive action to strengthen the senior management has resulted in
the Company now being led by a team with considerable experience of growing
technology businesses.
Mike Gulett was appointed chief executive officer on 27 December 2001, following
the departure of Bob Terwilliger from the board in September 2001. Mike has over
25 years' experience in technology companies. From 1998 to 2001, he was
president and chief operating officer of Virata Corporation, a leading supplier
of DSL processors, which floated on the NASDAQ in 1999. Prior to that he was
president and chief executive officer of Paradigm Technology and has also worked
for VLSI Technology, NCR Microelectronics and Intel.
In the early weeks of 2002 the management team was strengthened further with the
addition of Farzad Zarrinfar as Senior Vice President of Marketing, Haig
Yaghoobian as Senior Vice President of Corporate Development, Tom Huppuch as
Senior Vice President and General Counsel and Dennis McDonald as Senior Vice
President of Human Resources.
Farzad Zarrinfar has more than 20 years experience, most recently as Vice
President of Strategic Marketing with Sony Semiconductor in San Jose. He
previously worked at Altera, Samsung, LSI Logic, Martin Marietta and Texas
Instruments.
Haig Yaghoobian joined ARC in a newly created role, responsible for identifying
and executing successful partnerships to extend ARC's reach and develop our
competitive position. With over 20 years experience, he was most recently Vice
President of Corporate Development at Virata and prior to that worked for AT&T,
Pacific Telesis, TCI and Digital Equipment.
Tom Huppuch, who is a member of the Massachusetts Bar, New York Bar Association
and the American Corporate Counsel Association, was Vice President and General
Counsel at Virata and previously worked for Fortress Technologies and Digital
Equipment.
Dennis McDonald has over 25 years experience, most recently as Vice President of
North American Human Resources at Virata. He has also worked for Rise
Technology, Paradigm Technology, VLSI Technology and Fairchild Semiconductor.
Strategic and Operational Plans
Under the new leadership of Mike Gulett, the Company's strategic direction is
being clarified, building on the conclusions of an extensive review undertaken
in mid-2001. Our goal is to be the world leader in supplying integrated embedded
system solutions for our target markets. Our core products will be centred on
the ARCtangent configurable, extendable processor integrated with our system
software and tools.
The Company's organisation is being streamlined into a single unified structure
incorporating the microprocessor, peripherals, software and development tools
activities all operating under the name of ARC International. This will increase
the effectiveness of our development, marketing and selling of integrated
solutions that combine our broad range of capabilities. Our activities will be
more tightly focused on selected product opportunities within the wireless,
wired networking and consumer electronics markets.
We are targeting market opportunities in which we can best exploit the
ARCtangent processor's key competitive advantages:
• Wireless: its extendable architecture is particularly suitable for
battery-powered applications.
• Wired networking: ARCtangent's multi-processor capabilities, configurable
and extendable architecture and peripherals strength are major benefits.
• Consumer electronics: its configurable features enable it to achieve the
optimum die size, provide the best battery life solution and be customised
for the many highly specific applications in this sector.
We will seek to strengthen further our competitive position and accelerate
growth through strategic alliances and acquisitions with partners whose
technology and expertise can be combined well with our own to create products
that meet customers' needs.
Financial Review
Fourth Quarter ended 31st December 2001
Total turnover in the fourth quarter was £2.3 million compared with £2.0 million
in the third quarter of 2001. Licence income was £1.8 million (Q3 2001: £1.3
million), maintenance and service income was £0.4 million (Q3: £0.5 million) and
royalties were £0.1 million (Q3: £0.2 million). The number of end designs
containing the ARCtangent processor being shipped by our customers was unchanged
during the quarter at 11.
Cost of sales was £0.4 million (Q3: £0.4 million) and gross margin increased to
83% (Q3: 79%). Total operating expenses including cost of sales but excluding
exceptional costs, depreciation and amortisation of goodwill were 9% lower than
in the previous quarter at £7.9 million (Q3: £8.6 million). This represents a
21% reduction in the cost base compared with the second quarter of 2001.
Total employees in the Company at 31 December 2001 was 223 (30 September 2001:
230) comprised of: research and development 135 (30 September 2001: 142), sales
and marketing 53 (30 September 2001:55) and general and administration 35 (30
September 2001: 33). Research and development costs were 5% higher at £3.3
million (Q3: £3.2 million) due to the phasing of software design services costs.
Sales and marketing costs were 14% lower at £2.9 million (Q3: £3.4 million) and
general and administration costs were 26% lower at £1.3 million (Q3: £1.7
million).
There was an exceptional credit of £1.3 million (Q3: a charge of £4.4 million)
being a reduction in the exceptional cost provision taken in the previous two
quarters. This was due to the lease obligations for the San Jose property being
resolved at a lower cost than had been provided for previously. The accrual for
National Insurance contributions on the exercise of share options has been
increased slightly, principally due to the rise in the Company's share price
during the quarter. This has resulted in a debit of £0.1 million (Q3: a credit
of £0.2 million) to the profit and loss account.
Interest income was lower at £1.3 million (Q3: £1.6 million), principally as a
result of the lower cash balance and the fall in average interest rates. The
increased turnover and lower costs resulted in the net loss before exceptional
costs being 8% lower at £6.2 million (Q3: £6.8 million). The net loss including
exceptional costs was £4.9 million (Q3: 11.2 million).
The net cash outflow from operations increased to £7.1 million (Q3: an outflow
of £6.0 million) due to the settlement of the lease on the San Jose property.
The underlying net cash outflow from operations was £4.8 million. Seasonal
timing issues resulted in lower capital expenditure of £0.4 million (Q3: £1.2
million). The movement in net funds during the quarter was an outflow of £5.8
million (Q3: £5.4 million). Net assets at 31 December 2001 were £136.1 million
(30 September 2001:£140.7 million), including net cash of £120.8 million (30
September 2001: £126.7 million).
Year ended 31 December 2001
Total turnover increased by 8% to £11.4 million (2000: £10.6 million). Licence
income was £8.9 million (2000: £8.2 million), maintenance and service income was
£2.0 million (2000: £1.9 million) and royalties were £0.5 million (2000: £0.5
million).
Cost of sales was £1.7 million (2000: £0.9 million). Gross margin was lower at
85% (2000: 92%) due to the increase in costs of our customer support operation
in the first half of the year not being matched by a commensurate increase in
turnover. Total operating expenses including cost of sales but excluding
exceptional costs, amortisation of goodwill and depreciation increased to £35.8
million (2000: £24.7 million) due to the acquisitions of Precise Software
Technologies and VAutomation in March 2000 and the development of the resources
of the business in the first half of the year to drive future growth. Action was
taken in the second half of the year to reduce the operating cost base.
Total employees in the business at 31 December 2001 was 223 compared with 279 at
31 December 2000. Research and development costs were £13.3 million (2000: £9.3
million), sales and marketing costs were £14.3 million (2000: £10.2 million) and
general and administration costs were £6.6 million (2000: £4.4 million).
Exceptional costs, relating to staff reductions in June and August 2001 and
onerous property lease obligations, amounted to £6.6 million (2000: £nil). The
accrual 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 £1.0 million (2000: a charge of £1.1
million) to the profit and loss account.
Interest income increased to £6.6 million (2000: £3.0 million) due to the
Company's higher cash balances over the year as a whole, principally resulting
from the funds raised at the IPO in September 2000.
The net loss before exceptional costs was £24.4 million (2000: £15.3 million).
The net loss including exceptional costs was £29.9 million (2000: £16.4
million). The net cash outflow from operations was £27.3 million (2000: £14.3
million). Capital expenditure was £5.3 million (2000: £3.8 million). The
movement in net funds during the year was a £25.0 million outflow compared with
an inflow of £140.0 million in 2000 resulting from the proceeds of the IPO and a
private placement. Net assets at 31 December 2001 were £136.1 million (31
December 2000: £164.6 million), including net cash of £120.8 million (2000:
£145.8 million).
The board of directors does not recommend the payment of a final dividend in
respect of the financial year. We currently intend to retain future earnings, if
any, to fund the development and growth of our business and do not anticipate
paying cash dividends.
ARC International plc
Consolidated profit and loss account
for the year ended 31 December 2001
3 months ended 3 months ended Year ended Year ended
31 December 31 December 31 December 31 December
2001 2000 2001 2000
(unaudited) (unaudited) (unaudited) (audited)
£'000 £'000 £'000 £'000
Turnover 2,272 3,506 11,450 10,564
Operating costs
Goodwill amortisation (1,017) (1,020) (4,075) (3,379)
Exceptional credit/(costs) (note 4) 1,291 153 (5,526) (1,116)
Other operating costs (8,689) (9,681) (38,277) (25,434)
(8,415) (10,548) (47,878) (29,929)
Total operating loss (6,143) (7,042) (36,428) (19,365)
Interest receivable and similar income 1,282 2,329 6,586 3,008
Interest payable and similar charges - (3) (2) (18)
-------------- --------------- -------------- -------------
Loss on ordinary activities before tax (4,861) (4,716) (29,844) (16,375)
Tax on loss on ordinary activities (77) - (81) -
-------------- --------------- -------------- -------------
Retained loss for the period (4,938) (4,716) (29,925) (16,375)
========= ========== ========= ========
Loss per share (10.83)p (7.72)p
Diluted loss per share (10.83)p (7.72)p
Pre exceptional loss per share (8.83)p (7.19)p
Summary of operating expenses
Operating costs
Cost of sales (377) (291) (1,683) (862)
Research and development (3,346) (3,569) (13,291) (9,298)
Sales and marketing (2,890) (3,890) (14,293) (10,218)
General and administration (1,257) (1,660) (6,583) (4,351)
Exceptional costs - restructuring 1,357 - (6,552) -
Exceptional costs - NI on share options (66) 153 1,026 (1,116)
Depreciation of fixed assets (819) (271) (2,427) (705)
Amortisation of goodwill (1,017) (1,020) (4,075) (3,379)
-------------- --------------- -------------- -------------
Total operating expenses (8,415) (10,548) (47,878) (29,929)
-------------- --------------- -------------- -------------
ARC International plc
Consolidated statement of total recognised gains and losses
for the year ended 31 December 2001
3 months ended 3 months ended Year ended Year ended
31 December 31 December 31 December 31 December
2001 2000 2001 2000
(unaudited) (unaudited) (unaudited) (audited)
£'000 £'000 £'000 £'000
Retained loss for the period (4,938) (4,716) (29,925) (16,375)
Currency translation difference (118) (117) 71 (381)
--------- --------- ---------- ---------
Total loss for the period (5,056) (4,833) (29,854) (16,756)
========= ========= ========== =========
ARC International plc
Consolidated balance sheet
as at 31 December 2001
As at As at
31 December 31 December
2001 2000
(unaudited) (audited)
£'000 £'000
Fixed Assets
Intangible assets 12,280 16,355
Tangible assets 6,702 4,060
-------------------- ------------------
18,982 20,415
-------------------- -------------------
Current Assets
Stock 156 -
Debtors 3,710 6,561
Investments - bank deposits 119,401 143,289
Cash at bank and in hand 1,449 2,569
------------------- ------------------
124,716 152,419
Creditors - amounts falling due within one year (5,198) (8,180)
------------------- -------------------
Net current assets 119,518 144,239
Total assets less current liabilities 138,500 164,654
Creditors - Amounts falling due after more than one year (2) (17)
Provision for liabilities and charges (2,433) -
------------------ -------------------
Total net assets 136,065 164,637
======== ========
Capital and reserves
Called up share capital 283 273
Share premium account 151,033 149,061
Exchangeable shares 4,286 5,025
Merger reserve 107 107
Other reserves 24,702 24,663
Profit and loss account (44,346) (14,492)
-------------------- -------------------
Total shareholders' funds 136,065 164,637
========== ==========
ARC International plc
Consolidated cash flow statement
for the year ended 31 December 2001
3 months 3 months
ended ended Year ended Year ended
31 December 31 December 31 December 31 December
2001 2000 2001 2000
note (unaudited) (unaudited) (unaudited) (audited)
£'000 £'000 £'000 £'000
Net cash outflow from operating activities 1 (7,122) (6,638) (27,304) (14,299)
Returns on investments and servicing of
finance
Interest received 1,328 2,205 6,365 2,869
Bank interest paid - (13) - (13)
Interest element on finance lease rentals (2) (5) (2) (5)
-------------- --------------- -------------- -------------
Net cash inflow from returns on investments 1,326 2,187 6,363 2,851
and servicing of finance
-------------- --------------- -------------- -------------
Capital expenditure and financial investment
Purchase of tangible fixed assets (416) (1,826) (5,307) (3,820)
-------------- --------------- -------------- -------------
Net cash outflow from capital expenditure and (416) (1,826) (5,307) (3,820)
financial investment
-------------- --------------- -------------- -------------
Acquisitions
Purchase of subsidiary undertakings - - - (3,167)
Net cash acquired with subsidiaries - - - 186
-------------- --------------- -------------- -------------
Net cash outflow from acquisitions - - - (2,981)
-------------- --------------- -------------- -------------
Net cash outflow before management of liquid (6,212) (6,277) (26,248) (18,249)
resources and financing
-------------- --------------- -------------- -------------
Management of liquid resources
Movement on term deposits 5,492 (119,577) 23,888 (137,959)
Financing -------------- --------------- -------------- -------------
Issue of ordinary share capital - IPO and 448 24 1,243 126,355
options
Issue of ordinary share capital - private - (18) - 31,971
placings
Capital element of finance lease rentals (1) (4) (20) (8)
Decrease in borrowings - (7) (17) (21)
-------------- --------------- -------------- -------------
Net cash inflow from financing 447 (5) 1,206 158,297
-------------- --------------- -------------- -------------
(Decrease)/Increase in net cash during the (273) (125,859) (1,154) 2,089
period
-------------- --------------- -------------- -------------
1.Reconciliation of operating profit to operating cash flow
3 months ended 3 months ended Year ended Year ended
31 December 31 December 31 December 31 December
2001 2000 2001 2000
(unaudited) (unaudited) (unaudited) (audited)
£'000 £'000 £'000 £'000
Operating profit (6,143) (7,042) (36,428) (19,365)
Depreciation 819 271 2,427 705
Amortisation of goodwill 1,017 1,020 4,075 3,379
Loss on disposal of fixed assets 237 - 237 -
Decrease/(increase) in stocks 296 - (159) -
Share option grant credit 12 93 39 230
(Increase)/decrease in debtors 1,809 (1,964) 2,910 (4,189)
(Decrease)/increase in creditors (368) 984 (2,838) 4,941
(Decrease)/increase in provisions (4,801) - 2,433 -
------------------ ----------------- ------------------- ----------------
Net cash flow from operating activities (7,122) (6,638) (27,304) (14,299)
------------------ ----------------- ------------------ --------------
2. Analysis of net funds
(unaudited) Cash at bank Bank loans Investments Finance leases Total
£'000 £'000 £'000 £'000 £'000
At 31 December 2000 2,569 (15) 143,289 (27) 145,816
Exchange 34 (2) - - 32
Cash flow (1,154) 17 (23,888) 20 (25,005)
------------- --------------- --------------- --------------- --------------
At 31 December 2001 1,449 - 119,401 (7) 120,843
-------------- ---------------- ---------------- ---------------- --------------
3. Reconciliation of net cash flow to movement in net funds
3 months ended 3 months ended Year ended Year ended
31 December 31 December 31 December 31 December
2001 2000 2001 2000
(unaudited) (unaudited) (unaudited) (audited)
£'000 £'000 £'000 £'000
Increase/(decrease) in cash in (273) (125,859) (1,154) 2,089
the period
Movement in term deposits (5,492) 119,577 (23,888) 137,959
--------------- ----------------- ----------------- ----------------
(5,765) (6,282) (25,042) 140,048
Investments/(borrowings) acquired - - - (56)
with subsidiaries
Movement in borrowings 1 11 37 29
Exchange movements (36) (105) 32 (20)
----------------- ------------------ ------------------ ------------------
Movement in funds (5,800) (6,376) (24,973) 140,001
Net funds at beginning of period 126,643 152,192 145,816 5,815
----------------- ------------------- ----------------- ----------------
Net funds at end of period 120,843 145,816 120,843 145,816
------------------ ----------------- ----------------- ----------------
4. Exceptional items
During the year a provision was made for restructuring costs covering redundancy
payments and onerous lease obligations. The net provision charge of £6,552,000
has been included within exceptional items, which has been disclosed separately
on the face of the profit and loss account.
Also included in exceptional items is a credit of £1,026,000 (2000: charge
£1,116,000) for employers' UK National Insurance Contribution on the potential
gain on options granted between 6 April 1999 and 28 September 2000, under
employee share option plans that have not been approved by the UK inland
revenue.
This accrual builds up over the vesting period of the options and varies with
the share price at the end of the relevant period. Last year, this was shown
with other operating costs and disclosed as an exceptional item in the notes to
the accounts. This year, the prior year comparatives have been included within
exceptional items to be consistent with the presentation adopted for other
exceptional items.
5. Accounting policies
The preliminary results for the year ended 31 December 2001 are unaudited. The
financial information set out in the announcement does not constitute the
Company's statutory accounts for the year ended 31 December 2001 or 31 December
2000. The financial information for the year ended 31 December 2000 is derived
from the statutory accounts for that year which have been delivered to the
Registrar of Companies. The auditors reported on those accounts: their report
was unqualified and did not contain a statement under either Section 237 (2) or
Section 237 (3) of the Companies Act 1985. The statutory accounts for the year
ended 31 December 2001 will be finalised on the basis of the financial
information presented by the directors in this preliminary announcement and will
be delivered to the Registrar of Companies following the Company's Annual
General Meeting.
The accounting policies adopted in the preparation of the preliminary
announcement are consistent with those used in the financial statements for the
year ended 31 December 2000.
About ARC International
ARC International is a leading developer of user-customisable, high-performance
32-bit RISC/DSP processor cores (including ARCtangentTM), with integrated
development tools, peripherals and software. Its integrated intellectual
property solutions assist customers in rapidly developing next generation
wireless, networking and consumer electronics products, reducing time to market
for system-on-chip development. Products based on ARC's technology include
digital still cameras, set-top boxes, and network processors.
ARC International employs over 200 people in offices across North America,
Europe and Israel, with key offices in Elstree (England) and San Jose (CA, USA).
Full details of the company's locations and other information are on the
company's web site, www.arccores.com. ARC International is listed on the London
Stock Exchange as ARC International plc (LSE:ARK).
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, the ARC logo and ARCtangent, are trademarks of ARC International.
All other brands or product names are the property of their respective holders.
This information is provided by RNS
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