Final Results

Xaar PLC 19 February 2003 Meeting today: There will be an analyst meeting today at 10.00 am followed by a press meeting at 11.30 am at the offices of Buchanan Communications. There will also be a lunch at 12.45 pm at Buchanan Communications, 107 Cheapside London. If you would like to attend please contact Charlie Forsyth on 020 7466 5000. Immediate Release 19 February 2003 XAAR PLC PRELIMINARY RESULTS ANNOUNCEMENT For Year Ended 31 December 2002 'Continued Solid Progress : Profitable & Cash Positive' Xaar plc ('Xaar'), the inkjet printing technology group headquartered in Cambridge, has announced its preliminary audited results for the year ended 31 December 2002. Key points • These results mark full implementation of the change in strategy to focus on the group's rapidly growing sales and manufacture of inkjet printheads and ink supplies • Xaar was profitable and cash positive during 2002 without the benefit of new licence revenue • Turnover increased 29% to £30.9m (2001: £24.0m) • Printhead and related product sales grew by 46% to £28.5m (2001: £19.5m) with sales more than doubled for the XJ500 printhead and record shipments for the mature XJ128 • Revenues from licences, royalties and development fees were £2.4m (2001: £4.5m) • Profit before tax was £0.9m (2001: £0.6m) and earnings per share were 1.7p (2001 as restated: loss of 0.6p) • Resolution of tax issues has reduced the charge for 2002 (48%) from that announced in the interim report with a more normal tax charge for 2003 and the future (around 30%) • Year-end cash and liquid resources were £9.9m (2001: £9.8m) • R&D resources now focussed strongly on product development and improvement • Vivid Print Innovations Inc. - agreement in principle announced to acquire start-up business creating in-house Applications Division to boost sales, mainly in the US market On outlook, Chairman, Arie Rosenfeld stated : 'We remain focussed on producing further growth in sales of Xaar products and, more importantly, growth in margins and profitability.' Contacts: Jan Fineman, Chief Executive Today on: 020-7466-5000 Nigel Berry, Finance Director Thereafter on : 01223-423663 Xaar plc www.xaar.co.uk Lisa Baderoon Buchanan Communications Tel No: 020-7466-5000 CHAIRMAN'S STATEMENT Introduction I am pleased to report further significant growth in sales of Xaar products during the second half of the year and solid progress in positioning the group within the digital printing industry as a developer, manufacturer and vendor of high performance inkjet printheads. This change of strategy, set out in the interim report last September, also offers us more control over our future development and growth. The total value of Xaar's product sales increased by 46% during the year with growth during the second half of the year ahead of that for the first half. Within this, the volume of XJ500 heads shipped in the year more than doubled, with over half going to our new markets in Asia, and China in particular. Although no new licence was signed in the year, we received a further small stage payment under an existing licence agreement. Whilst Xaar continues to maintain and develop its extensive portfolio of patents, currently standing at over 700, R&D emphasis has now been swung behind the development and refinement of Xaar's product portfolio. As previously stated, efforts to secure licence revenue continue but, given the difficulty in predicting both quantum and timing, we are planning our business without relying on new licence revenues. In future, we intend to comment on new licences only as and when they arise. Royalty revenues received during the second half-year were little changed from the level reported for the first half of the year, reflecting continued difficult market conditions for many of our licensees. Overall, we are pleased with the growth seen in what we now regard as our mainstream business, during what was another challenging year of change. The company ends the year with a healthy cash balance and no borrowings. Results and Finance Group revenues for the year to 31 December 2002 grew to £30.9m (2001: £24.0m). Sales of Xaar products (printheads, inks and peripherals) increased by 46% to £28.5m (2001: £19.5m). Development fees received for contract R&D projects were £1.2m (2001: £1.5m). Licence fees and royalties were £1.2m (2001: £3.0m) reflecting the fact that no new licence was signed in the year. Within that, royalty income for the year was £0.9m (2001: £1.3m). Profit before tax and exceptional items was £0.9m (2001: £1.6m). There were no exceptional items in 2002 (2001: £1.0m). Earnings per share were 1.7p (2001 as restated: loss of 0.6p). As reported in the end-of-year trading update issued early in January, the immediate benefit of the increase in sales was diluted by somewhat higher than expected warranty returns for the XJ500 product during the latter part of the year. The product has now been modified, with all claims settled or provided for in the results for 2002. An imbalance between manufacturing profits in Sweden and the costs of R&D activities in the UK, together with full utilisation of acquired tax losses in Sweden, gave rise to a disproportionate tax charge in the interim results for 2002. Xaar's tax structure has now been reorganised so that a more normal tax charge will be incurred going forward. Further details are provided in the Finance review. Printheads and related products In the interim statement, we set out clearly our strategy for 'cherry picking' digital printing market segments where Xaar's technology is best suited and where it can become a market leader. Xaar's current strength lies in the graphic arts market, particularly in wide-format printing machines for banner and poster advertising where it is already a market leader in non-water based printing. We have now chosen to enter new markets within the packaging and industrial printing sectors in order to provide greater long-term growth potential. The digital printing marketplace as a whole is huge and capable of successfully supporting a number of different technologies and suppliers; each of the market segments being chosen for a concentration of our marketing effort is substantial in its own right and offers tremendous scope for our products. More details of these initiatives are set out in the Chief Executive's review. In geographic markets, Asia and Europe increased sales by 48% and 45% respectively, whilst sales into the US market declined by 28%. We intend to arrest this decline in the US market over the coming year. The route to market within both packaging and industrial markets is more complex than our current markets and will take time to generate volume sales. We will therefore be working closely with existing and new partners in both these markets. In addition, we have recognised that many customers, especially in the important US market, often require assistance in integrating digital printing technology into their business before they can become significant users of Xaar products. To that end, I am pleased to report that Xaar has reached agreement in principle to acquire for a nominal sum Vivid Print Innovations Inc. (VPI), a San Antonio, Texas, based start-up business. VPI comprises an established engineering team with considerable experience in designing and integrating digital printing systems, mostly utilising Xaar products. Further details are provided in the Finance review. New technology and product development A revised version of the XJ500 product was introduced at the beginning of 2003. This update includes performance enhancing modifications, as well as resolving the problems that gave rise to the recent warranty claims. Sales of the XJ500 are expected to show another year of growth. We continue to develop the new printhead referred to in the interim statement and plan to start previewing the product with customers during the second half of 2003. Technology revenues Royalty income is expected to remain at around current levels for the foreseeable future. Longer term, the company continues to look for new licensing opportunities and to develop new patentable technology. Outlook We remain focussed on producing further growth in sales of Xaar products and, more importantly, growth in margins and profitability. Management continues to maintain tight control over costs and has recently instituted further headcount savings as part of a constant review of the cost base of the business. Demand in key Asian and European markets remains firm at the current time and the proposed increase in systems integration resources is expected to lead to an improved performance in the US, even though it is not clear whether economic conditions will improve in that region in the short term. Arie Rosenfeld Chairman 18 February 2003 CHIEF EXECUTIVE'S REVIEW During 2002 Xaar's resources were focussed on our rapidly growing business of designing, manufacturing and selling printheads and inks, rather than our former strategy which placed an equal reliance on the generation of revenues from intellectual property rights. The strength of what we regard as our mainstream business is shown in the 46% organic growth in revenue and record shipments of printheads and inks to a worldwide market. The decision to move production of the XJ500 to Sweden resulted in improved efficiencies in line with expectations, although this did not result in immediately improved margins due to the level of warranty returns referred to in the Chairman's statement. As a result, margins on product sales were little changed for the second half of the year. Nevertheless, the company was profitable and cash generative without new licence fees during the year, representing an important milestone. Market focus Historically, the majority of our products have sold into the graphic arts market for incorporation into wide format and specialised digital printers of billboards, banners and other advertising materials. This market is expected to continue growing steadily over the coming years. In addition, analysis of other potential market opportunities for Xaar's products has shown that while Xaar printheads can be used successfully in a very wide range of applications, there are particular segments in which Xaar has a clear opportunity to become a market leader and resources are being focussed progressively on these segments. The Chairman's statement refers to the two new markets initially identified to provide future growth; industrial printing and packaging printing. Both contain substantial segments where Xaar's technology brings clear and quantifiable advantages to the customer when compared with existing technologies and processes. Xaar has already successfully sold products into industrial printing applications which include the printing of ceramic tiles, and the marking of legends onto printed circuit boards. The Leopard printhead, launched during 2002 and manufactured by our licensee, Toshiba TEC, enables us to target further applications in this market where near-photographic quality is needed such as plastic cards (for example; credit cards, identity cards and telephone cards), CD and DVD printing. Within packaging printing we also supply to a number of existing customers building printers for coding and marking applications (including bar coding, sell-by dates and logo printing). We will now be expanding into additional sectors including flexible packaging, folding cartons and labels. Development within this area will be accelerated by the acquisition of Vivid Print Innovations Inc. (VPI). Sales Sales of printheads and inks have grown rapidly during the year with the highest growth coming from Asia where turnover increased by 48% and accounted for 55% of the group total. We also saw growth in Europe of 45% contributing 31% to overall turnover. There was a decrease in US sales (accounting for 14% of total turnover) due largely to economic conditions in the US market. We have recently strengthened our operation in China with a small office in Shanghai in addition to our existing operation in Hong Kong. We expect China to continue to be a key market for Xaar. The proposed acquisition of Vivid Print Innovations Inc. is expected to materially improve Xaar's performance in the US market. VPI specialises in integrating printheads into customer applications and building bespoke printers on a customer demand basis. As an integral part of our sales organisation, VPI will offer a complete printing machine design service to customers that wish to use Xaar's products in packaging and industrial applications, but who do not have skills within the digital inkjet printing field. All of VPI's team of experienced engineers have a long history of working with Xaar's printheads and already have a number of projects under way with new customers. The focus of this service will initially be US led but it will also become available to customers on a global basis. In 2002, ink sales grew in line with printhead sales and eight new inks were approved either for direct sales or customer evaluation. Development activities and product portfolio Development activities within Xaar's Cambridge facility have been refocussed onto projects that will have a short or medium-term impact on revenues. Investment in R&D in 2002 was £4.4m (2001: £4.1m), we do not expect this spend to increase over the coming year. Enhancements to the XJ500 product have been a key area of activity during 2002 and by the end of the year resulted in significantly improved performance. This work will continue in 2003 with the emphasis placed on reducing the cost of manufacturing the product. Work on preparing the new Leopard head for launch as a Xaar product was also completed during the year. The Leopard head is the result of our collaboration with Toshiba TEC, a Xaar licensee. Toshiba TEC manufactures the printheads in Japan where it will sell a version direct to major Japanese users. Xaar sells the head under its own brand name into markets outside Japan, and to customers requiring the sales and service back-up offered by Xaar through its network of regional sales offices. The Leopard has concluded field testing with customers in the industrial printing field and is now being made generally available. The Leopard head is unique in its greyscale capability - allowing it to vary dynamically the drop size on a pixel-by-pixel basis giving near-photographic quality at high speeds. The XJ500 and Leopard printheads complement the well established smaller XJ128 currently used extensively in wide-format printers throughout the world, and the XJ126 which is now in full scale production. Development of our next generation of printheads referred to in the interim statement has also been progressed during the year. This development has generated a modular printhead design that can be more rapidly adapted to different formats than is currently the case with existing product designs. The performance shown in prototypes has given us optimism about the future for products based on this platform. Manufacturing In October 2001 we announced our decision to transfer all manufacturing operations into our Swedish plant with R&D activities being undertaken at our Cambridge facility. The move to Sweden was completed during the first half of 2002 and as a result we were able to almost triple output of the XJ500 printhead last year compared to 2001. The higher warranty returns of our XJ500 product during the last four months of the year should be taken in the context of this significant increase in production and sales, in particular to our new markets in China. Once the particular issues giving rise to the problems were identified, changes to the XJ500 were made quickly and we are confident that these problems have now been eliminated. A revised version of the XJ500 is now being offered to the market, providing improved performance, greater reliability and increased manufacturing margin. Although strong demand for the XJ500 has made this the fastest growing product in our portfolio, we also sold record numbers of our XJ128 product which in 2002 still contributed the larger part of our revenue. This is particularly encouraging given the fact that it is now a mature product. Licensing We continue to work towards securing new licensees but we are no longer relying on new licence income as a fundamental part of our business plan. Royalty income has been steady during the year, albeit at a reduced level. We believe this to be a result of the tough market environment facing our licensees, resulting in lower than expected sales of their products. At the current time royalties for 2003 appear likely to continue at a level similar to 2002. Priorities for 2003 Xaar starts 2003 with continuing demand for its printheads and inks, an expanding product portfolio and increased systems integration resources with which to drive our sales and marketing efforts in established and new markets. The key focus for 2003 is to convert higher sales into significantly improved profitability. Emphasis is being placed on reducing the cost of manufacturing of all our products, with ongoing programmes designed to cut material costs, increase yields and control overhead expenditure in order to improve the contribution from our manufacturing operation. A reduction in the group's headcount was implemented in February 2003 at both the Cambridge and Swedish facilities. People As the company is focussing more on its manufacturing business with a target to become a world class manufacturing operation, our staff worldwide have had to respond to rapid change during the year. I would like to acknowledge the contribution everyone in the group has made to this process. Jan Fineman Chief Executive 18 February 2003 FINANCE REVIEW 2002 was a year of change for the group. We have focussed the business on its manufacturing activities, and intend to grow those significantly within existing and new markets. Whilst it is pleasing to report strong growth within this context, there are important issues facing the group which must be addressed during 2003 and which are being given priority. Results for 2002 Turnover for the year was £30.9m (2001: £24.0m) which resulted in a profit before taxation and exceptional items of £0.9m (2001: £1.6m). There were no exceptional items in the year (2001: £1.0m). Net assets at the end of the year were £17.3m (2001 as restated: £15.4m), of which £9.9m was represented by cash and liquid resources (2001: £9.8m). The gross profit margin for the group was 46%, down from 53% in 2001 reflecting reduced technology revenues of £1.2m (2001: £3.0m). Margins on printheads and related products were 42% for the full year, largely in line with the first half, with underlying second-half improvements in yield offset by additional warranty claims of £0.3m. The group taxation charge for the year is a credit of £0.1m (2001 as restated: charge of £0.9m). This is lower than the charge made in the interim results for the reasons set out below. Earnings per share for the year were 1.7p (2001 as restated: loss of 0.6p). We have amended the way we report segmental information for the year to improve understanding of the business. Development fees, which were previously included with technology revenue, have been separately identified. Technology revenue now only includes licence and royalty income. In addition, we have adjusted our reporting of geographic turnover to cover Xaar's three main markets; Asia, Europe and the Americas. Results by class of business are now detailed at both the revenue and gross margin level. Going forward we will also include details of turnover by industry segment, matching the target markets discussed in the Chairman's and Chief Executive's reports; graphic arts, packaging printing and industrial printing. As a guide, for 2002 the majority of sales remain in the company's existing graphic arts market, which accounted for 85% of sales, but newer markets such as packaging, at 12% and industrial markets at 3% made growing contributions in the year. Taxation The strategy changes implemented during the year, including the concentration of manufacturing activities in Sweden, have provided greater clarity with regard to the revenue streams originating within the group and the costs that should properly be associated with those different activities. The result of more closely matching relevant costs and revenues is an underlying group tax charge of 48% for the full year 2002, with a more normalised charge expected from 2003 onwards. In addition, an adjustment of £0.3m was made in the year in order to recognise a deferred tax asset which should have been included in the results for 2001. After taking account of this and other adjustments there was a net credit for the year of £0.1m. A new 100% owned group company, Xaar Group AB, was established in Sweden during the second half of the year. This company now holds the group's investment in XaarJet AB. Costs Total operating costs (including cost of sales) for the group were £30.1m (2001: £22.6m). The increase is a result of three main factors; the higher level of product sales made by the group during the year; the higher proportion of sales of the XJ500, on which yields and margins do not yet match those of our more established XJ128 product (including the cost of warranty returns); and higher operating expenses. The higher expenses arise from a full year of the Hong Kong office, established in the second half of 2001, higher patent costs, marketing costs and external project-related R&D costs. The group is taking steps to reduce its total costs as follows; The XJ500 product was re-engineered during 2002 which has reduced unit costs and improved ease of manufacture. The revised product was introduced early in 2003 and will generate improved yields and margins. Further improvements are planned during 2003. A reduction in group headcount of 10% was made early in February 2003, although savings made in Sweden will only come through during the second-half year due to local employment legislation. The problems resulting in the higher cost of warranty claims have been resolved. The group has implemented an ongoing process of continuous efficiency improvement across the organisation and of refocussing group resources to areas where they can generate maximum returns. Vivid Print Innovations Inc. The group has reached agreement in principle to acquire Vivid Print Innovations Inc. (VPI). Under the agreement Xaar will acquire all the outstanding share capital of VPI for a nominal sum of $1,500. VPI has negligible net assets. The five principals of the business will have remuneration packages commensurate with similar employees within the Xaar group, including an annual bonus scheme related to the results of the VPI business. VPI had (unaudited) turnover of $0.4m in 2002 and the acquisition is expected to be earnings neutral for the full year 2003. Cash and capital expenditure Cash and liquid resources closed the year at £9.9m (2001: £9.8m). This was after capital expenditure, before lease financing, of £1.1m (2001: £1.2m). Total capital expenditure for the year was £1.9m (2001: £1.8m), which was lower than previously indicated due to late delivery of an additional laser costing £0.8m. This will now be commissioned in the first quarter of 2003. The group used additional working capital of £1.0m to support the increase in sales during the year. The group considers its level of cash holding to be prudent in the current economic climate. Nigel Berry Finance Director 18 February 2003 CONSOLIDATED PROFIT AND LOSS ACCOUNT for the year ended 31 December 2002 2002 2001 £'000 £'000 (restated) Turnover 30,870 23,982 Cost of sales (16,770) (11,374) Gross profit 14,100 12,608 Other operating expenses (net) (13,315) (11,231) Operating profit 785 1,377 Exceptional item - (1,049) Profit on ordinary activities before interest 785 328 Interest receivable 275 315 Interest payable (135) (67) Profit on ordinary activities before taxation 925 576 Tax on profit on ordinary activities 86 (939) Retained profit/(loss) for the financial year 1,011 (363) Earnings/(loss) per share - basic 1.7p (0.6)p Earnings/(loss) per share - diluted 1.7p (0.6)p CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year ended 31 December 2002 2002 2001 £'000 £'000 (restated) Retained profit/(loss) for the financial year 1,011 (363) Gain/(loss) on foreign currency translation 718 (489) Total recognised gains and losses relating to the financial year 1,729 (852) Prior year adjustment (332) - Total recognised gains and losses since last annual report 1,397 (852) CONSOLIDATED BALANCE SHEET as at 31 December 2002 2002 2001 £'000 £'000 (restated) Fixed assets Intangible assets 1,260 1,456 Tangible assets 4,733 4,336 Investments 20 20 6,013 5,812 Current assets Stocks 1,967 1,125 Debtors 6,801 5,517 Short term investments - 2,875 Cash at bank and in hand 9,852 6,885 18,620 16,402 Creditors: amounts falling due within one year (6,388) (5,271) Net current assets 12,232 11,131 Total assets less current liabilities 18,245 16,943 Creditors: amounts falling due after more than one year (906) (470) Provisions for liabilities and charges - (1,024) Net assets 17,339 15,449 Capital and reserves Called-up share capital 5,971 5,934 Share premium account 11,129 11,009 Other reserves 1,099 1,095 Accumulated deficit (860) (2,589) Shareholders' funds - all equity 17,339 15,449 CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2002 2002 2001 £'000 £'000 Net cash inflow from operating activities 540 2,769 Returns on investments and servicing of finance 149 248 Capital expenditure and financial investment (1,090) (1,192) Cash (outflow)/inflow before management of liquid resources and financing (401) 1,825 Management of liquid resources 2,875 1,925 Financing (141) 238 Increase in cash in the year 2,333 3,988 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Segmental information Turnover by class of business: 2002 2001 £'000 £'000 Printheads and related products 28,477 19,488 Development fees 1,227 1,463 Licence fees and royalties 1,166 3,031 30,870 23,982 Turnover by geographical segment: 2002 2001 £'000 £'000 Europe & Middle East 9,641 6,652 Asia 17,071 11,553 Americas 4,158 5,777 30,870 23,982 Gross margin by class of business: 2002 2001 £'000 £'000 Printheads and related products 11,859 8,278 Development fees 1,227 1,463 Licence fees and royalties 1,014 2,867 14,100 12,608 2. Earnings/(loss) per ordinary share - basic and diluted The calculation of earnings/(loss) per share is based upon the profit/(loss) for the period after taxation and on the weighted average number of ordinary shares in issue during the period. For basic earnings/(loss) per share, this is 59,603,709 (2001: 58,890,234) and for diluted earnings/(loss) per share, this is 59,842,670 (2001: 58,890,234), the only difference being in relation to movements in share options. 3. Prior year adjustment The Group's policy for accounting for deferred tax has changed to take into account the new accounting standard FRS19 'Deferred tax'. Previously deferred tax was only provided to the extent that timing differences were expected to reverse in the future without being replaced. Deferred tax is now provided in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more or less tax in the future have occurred at the balance sheet date. As a result the comparative figure for the tax on profit on ordinary activities and the deferred tax provision have been restated. The effects of the change in policy are summarised below: 2002 2001 £'000 £'000 Profit and loss account Decrease in profit for the financial year - (332) Balance sheet Decrease in net assets - (332) 4. Financial information The financial information contained in this preliminary announcement of audited results does not constitute the group's statutory accounts for the years ended 31 December 2002 or 31 December 2001. The accounting policies that have been applied are consistent with those applied in the preceding annual accounts, taking into consideration the change as detailed in note 3. The accounts for the year ended 31 December 2001 have been delivered to the Registrar of Companies. The statutory accounts for the years ended 31 December 2002 and 2001 have been reported on by the company's auditors; the reports on these accounts were unqualified and they did not contain any statement under section 237(2) or (3) of the Companies Act 1985. The accounts for the year ended 31 December 2002 are expected to be posted to shareholders in due course and will be delivered to the Registrar of Companies after they have been laid before the company at the annual general meeting on 15 April 2003. Copies will also be available from the registered office of the company, Science Park, Cambridge, CB4 0XR. The registered number of Xaar plc is 3320972. This information is provided by RNS The company news service from the London Stock Exchange WROKRUAAR

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