Interim Results

Surface Transforms PLC 28 February 2003 28th February 2003 - Embargoed till 11:45am Interim results for the six months ended 30 November 2002 and Trading Update Chairman's Statement Our drive during the period ended 30 November 2002, has been highly focused on achieving our goal of developing sustainable commercial sales in a number of applications - Formula 1, aircraft brakes and high performance road cars. We also raised additional funds and obtained a listing on the Alternative Investment Market of the London Stock Exchange ('AIM'). We continue to see market interest and inquiries for carbon fibre reinforced ceramic friction materials which have better overall performance than existing carbon-carbon composites in weight saving, reduced wear and improved thermal and frictional properties. The ongoing challenge is to convert this interest into commercially significant sales as rapidly as possible. FUND RAISING During the summer we issued a prospectus for our move from OFEX to AIM. This was in order to raise funds to continue the commercialisation and development of the business's technology and to increase the profile of the Company with investors and institutions. The culmination of this effort was a successful listing on 24th September 2002. Target funds were Â£2.1m net, but due to the state of the market only the minimum Â£1.3m gross (Â£0.9m net) was reached. The business plan recognises that further injections of cash will most likely be required to take the business to a break even situation. INTERIM RESULTS Sales for the first half were below budget at Â£105,475 but were slightly more in value compared to the turnover for the full year ended May 2002. Costs for the period, however, have been kept in line with budget. The results show a significant increase in cost of sales for the period at Â£525,633 compared with Â£156,812 for the whole of the year ended May 2002. This relates mainly to the treatment of stock. We have taken the view that sales in Formula 1 are unlikely in the short term and as a result we have written off Â£290,572 of F1 intermediate stock value from the balance sheet to the profit and loss account. The F1 material will now be used as test material for other projects. The effect of this is to inflate the cost of sales figure during the period. Retained losses for the first half were (Â£794,037) compared to a budgeted loss of (Â£573,209). This relates mainly to a shortfall against expected sales in Formula 1 as a result of longer than expected product development and also the treatment of stock as outlined above. During the period we offset Â£317,104 of fees relating to the cost of our AIM listing and fund raising against the share premium account. SALES ACTIVITIES Aircraft Brakes Working in collaboration with our aircraft brake partner, we have manufactured test brake discs which have been tested on a full-scale dynamometer rig. Design work to lower the weight of the braking system for a new generation of aircraft has identified the value of the weight saving technology to the aircraft manufacturer. We have now built, delivered and invoiced the first pilot plant for this partner and discussions remain ongoing to license the technology. Work on designing a scaled up manufacturing plant for delivery before the end of 2003 has now started. Testing of small and intermediate size brake discs has been successfully completed and testing has now started on full scale discs with test results due in March 2003. We have undertaken in depth discussions with our partner to value the benefit of the Company's technology should this lead to commercial production. We have established, in principle, a value of the licensing income stream for the technology on an identified aircraft application over the 25-year life of this aircraft type. Activity has now increased to meet the aircraft manufacturer's testing deadlines and if the results continue to be positive, we should be in a position to determine accurately what income stream this activity will generate in the very near future. Formula One ('F1') In December 2002 it was announced by the FIA (the governing body of F1) that the rules in F1 would change to both reduce costs and make the sport more competitive (further details are available on the FIA web site). Although the full impact of the rule changes on the F1 market is not yet clear, we do know that the new rules will affect the Company's prospects for sales in 2003/4. The new regulations for cars from the 2004 season onwards will limit the supply of braking equipment to one supplier capable of offering the total braking system to all teams, including brake discs, pads, callipers, and hydraulic systems. The FIA hopes that the introduction of economies of scale will assist those teams that continue to suffer from the escalating costs of technology against a reduction in sponsorship. The current cumulative spend for brake materials runs at cÂ£7m per annum for discs and pads for all the teams. This change in rules will impact on the Company's channel to market for F1. Instead of having the opportunity to sell to each of the 10 F1 teams directly, we will be forced to approach the market through one nominated systems supplier, who has yet to be chosen by F1. Because all teams will use the same discs, pads, callipers and hydraulic system there will be no competitive advantage in braking systems. This reduces the attraction of using the Company's performance enhancing brakes and as a consequence, will adversely impact on forecast sales into F1. To mitigate the impact of this rule change the Company has now started discussions with the potential equipment suppliers. However, it is now the Company's belief that sales into this sector over 2003 and 2004 will be highly unlikely. Within motorsport, the business is now principally focusing its efforts on areas such as Indy Racing League in the USA and GT racing. Indy Racing League The Company has been testing with a number of Indy Racing League teams (IRL) in the USA and in January 2003 we were pleased to report the first sale to one team. We hope that we can expand our customer base rapidly to other teams in this 38 car league. In addition we are working in partnership with a leading calliper supplier to assist entry into this market. GT Racing Testing of our brake discs and pads, in conjunction with our partner, started in GT racing during 2002. GT racing is conducted over longer distances and time periods, which mean that the technical merits of our product should feed through faster. We anticipate achieving sales in the second half of 2003. Rocket Propulsion System Components BAE SYSTEMS has purchased a number of different components for these systems and continues to test their performance. The business made a major technical presentation in October to a wider audience within BAE for use of the Company's product in different applications. We expect to generate further sales this year and see a growing demand from the end of 2003. High Performance Road car As well as supplying test products, the business has been involved in a number of proposals to develop ceramic brake discs and pads with major high performance road car manufacturers for new models. There continues to be significant interest in this area due to the light weight and performance characteristics of the product on high performance cars and use on track days. We continue to work hard in the area to develop friction couples that meet customers' expectations on performance, weight, and increasingly on NVH (Noise Vibration & Harshness). Rail Brakes Over this period activity has been limited to sample preparation with a leading manufacturer of rail brakes. This remains a long-term opportunity. Carbon Fibre Preforms The business produces a carbon fibre preform which has a high proportion of its fibres in the Z direction (Vertical direction), thus providing good 3D strength characteristics. This feature is seen as a benefit to the carbon fibre polymer matrix market due to an increase in delamination resistance over wet lay up 2D structures. Interest by potential customers in this sector has been received and we continue to explore this opportunity. ORGANISATION The executive management team continues to be highly focused on building sales revenues and hitting challenging targets on volume and margin. In the light of lower sales forecasts, the business has reduced its fixed cost and headcount to better match expected income and expenditures. Each of the Directors has accepted a significant voluntary deferment in salary with immediate effect. The proposed EMI share scheme for employees was completed in December 2002. OUTLOOK The outlook for the business has changed significantly in only the last month. New F1 rules will make it difficult for the Company to achieve its previous F1 forecast sales in 2003/4. The business is therefore refocusing its efforts away from F1 towards expanding into other areas. In aircraft brakes we are entering the final stages of testing and hope to have the results of technical trials by late March. Anticipated technology transfer fees for the year ended 31 May 2003 have been delayed beyond the year end, however, we do anticipate these fees will occur during this calendar year. In other sectors we anticipate continued growth albeit from a small base. The business continues to experience growth in interest from potential customers in a variety of fields. The challenge remains to work on the applications and develop those products that will deliver commercial sales most rapidly. Due to lower than budgeted sales the Board has taken immediate steps to reduce the monthly cash burn rate and lower the cost base. Our current assumptions indicate that the business will have to seek additional funds to reach cash breakeven. The Board is considering a number of options to raise further cash to fund its business plans. DIVIDENDS We do not propose a dividend for the period ended 30 November 2002. Derek Whitney Chairman Surface Transforms plc For further information, please contact: David Levis Surface Transforms plc 01928 735 498 Neil Baldwin Brewin Dolphin Securities 0113 241 0126 Neil Boom Gresham PR Ltd. 020 7404 9000 SURFACE TRANSFORMS PLC PROFIT & LOSS ACCOUNT SIX MONTHS ENDED 30 NOVEMBER 2002 Note Six months ended Six months ended Year ended 30 November 30 November 31 May 2002 2001 2002 Restated (Unaudited) (Unaudited) (Audited) Â£ Â£ Â£ Turnover 105,475 32,924 104,063 Cost of sales (525,633) 27,947 (156,812) Gross (loss)/profit (420,158) 60,871 (52,749) Distribution costs (766) - (12,043) Administrative expenses (376,348) (226,247) (514,241) Other operating income - - 10,000 Total operating loss (797,272) (165,376) (569,033) Interest receivable and similar income 3,235 5,292 7,968 Loss on ordinary activities before taxation (794,037) (160,084) (561,065) Taxation on loss on ordinary activities 2 - - - Loss on ordinary activities after taxation (794,037) (160,084) (561,065) Dividends paid and proposed - - - Retained loss for the period/year (794,037) (160,084) (561,065) Loss per ordinary share - basic and diluted 3 9.5p 2.2p 7.5p The Company's operating loss arises from continuing operations. The Company has no recognised gains or losses in these periods/years other than those reported above and therefore no statement of total recognised gains and losses has been presented. SURFACE TRANSFORMS PLC BALANCE SHEET AS AT 30 NOVEMBER 2002 As at 30 As at 30 As at 31 November 2002 November 2001 May 2002 Restated (Unaudited) (Unaudited) (Audited) Â£ Â£ Â£ FIXED ASSETS Intangible assets 12,111 10,955 12,976 Tangible assets 124,311 138,121 130,376 136,422 149,076 143,352 CURRENT ASSETS Stocks 139,388 183,000 338,171 Debtors 79,112 25,433 76,834 Cash at bank and in hand 533,878 233,783 139,595 752,378 442,216 554,600 CREDITORS Amounts falling due within one year (118,349) (76,442) (118,442) NET CURRENT ASSETS 634,029 365,774 436,158 NET ASSETS 770,451 514,850 579,510 CAPITAL AND RESERVES Called up share capital 93,624 73,993 79,156 Share premium account 1,994,383 563,395 1,023,873 Other reserves 520,399 520,399 520,399 Profit and loss account (1,837,955) (642,937) (1,043,918) EQUITY SHAREHOLDERS' FUNDS 770,451 514,850 579,510 SURFACE TRANSFORMS PLC RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Six months ended Six months ended Year ended 30 November 2002 30 November 2001 31 May 2002 (Unaudited) (Unaudited) (Audited) Â£ Â£ Â£ LOSS FOR THE PERIOD/YEAR (794,037) (160,084) (561,065) New share capital subscribed (net of issue costs) 984,978 127,211 592,852 NET ADDITION/(REDUCTION) TO SHAREHOLDERS' FUNDS 190,941 (32,873) 31,787 Opening shareholders' funds 579,510 547,723 547,723 CLOSING SHAREHOLDERS' FUNDS 770,451 514,850 579,510 CASH FLOW STATEMENT SIX MONTHS ENDED 30 NOVEMBER 2002 Note Six months ended Six months ended Year ended 30 November 30 November 31 May 2002 2001 2002 Restated (Unaudited) (Unaudited) (Audited) Â£ Â£ Â£ Net cash outflow from operating activities 4 (585,726) (203,935) (768,880) Returns on investments and servicing of finance Interest received and similar income 3,235 5,292 7,968 Total returns on investments and servicing of finance 3,235 5,292 7,968 Taxation received - - - Capital expenditure Purchase of tangible fixed assets (8,204) (55,177) (52,737) Cash outflow before financing (590,695) (253,820) (813,649) Financing Issue of ordinary share capital (net of issue costs) 984,978 127,211 592,852 (Decrease)/increase in cash in the period/year 394,283 (126,609) (220,797) Notes 1 Basis of preparation The interim financial statements have been prepared on the basis of the accounting policies set out in the Company's last Annual Report and Accounts. The financial information for the year ended 31 May 2002 has been extracted from the statutory financial statements, which have been filed with the Registrar of Companies. The auditors' report on these financial statements was unqualified. The interim report for the six months ended 30 November 2002, was approved by the Board on 25th February 2003. Restatement of November 2001 figures During the year ended 31 May 2002, the directors decided to change their accounting policy with respect to research and development costs. Previously expenditure on research was written off but, where appropriate, the cost of research and development projects had been capitalised as an intangible asset and amortised over 10 years; however, this policy has been changed to one of immediate write off for all such costs. This policy has been changed to reflect industry practise. 2 Taxation There is no charge for taxation during the current period as the estimated effective rate of tax for the year is nil%. 3 Loss per share Six months ended Six months ended Year ended 30 November 2002 30 November 2001 31 May 2002 Restated (Unaudited) (Unaudited) (Audited) Pence Pence Pence Loss per ordinary share Basic 9.5 2.2 7.5 Diluted 9.5 2.2 7.5 Loss per ordinary share is based on the Company's loss for the financial period of Â£794,037 (30 November 2001: Â£160,084; 31 May 2002: Â£561,065). The weighted average number of shares used in the basic calculation is 8,397,875 (7,271,427; 30 November 2001 and 7,515,251 at 31 May 2002). The calculation of diluted loss per ordinary share is identical to that used for the basic loss per ordinary share. This is because the exercise of warrants would have the effect of reducing the loss per ordinary share and is therefore not dilutative under the terms of FRS14. 4 Reconciliation of operating loss to net cash outflow from operating activities Six months ended Six months ended Year ended 30 November 2002 30 November 2001 31 May 2002 Restated (Unaudited) (Unaudited) (Audited) Â£ Â£ Â£ Total operating loss (797,272) (165,376) (569,033) Depreciation and amortisation charges 15,134 37,826 41,110 Decrease/(Increase) in stock 198,783 (145,098) (300,269) Decrease/(Increase) in debtors (2,278) 47,677 (3,724) Increase in creditors (93) 21,036 63,036 Net cash outflow from operating activities (585,726) (203,935) (768,880) 5 Reconciliation of net cash flow to movement in net funds Six months ended Six months ended Year ended 30 November 2002 30 November 2001 31 May 2002 Restated (Unaudited) (Unaudited) (Audited) Â£ Â£ Â£ Increase/decrease in cash and cash equivalents in the 394,283 (126,609) (220,797) period/year Movement in net funds resulting from cash flows 394,283 (126,609) (220,797) Net funds at the start of the period/year 139,595 360,392 360,392 Net funds at the end of the period/year 533,878 233,783 139,595 END This information is provided by RNS The company news service from the London Stock Exchange

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