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Sal SM Bny S&P500 | AMEX:NSB | AMEX | Ordinary Share |
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Wednesday 5 March 2003 NSB Retail Systems PLC Preliminary Results Announcement NSB Retail Systems PLC, a leading supplier of software solutions to the global retail industry, today announces preliminary results for the twelve months ended 31st December 2002. Financial Highlights:- * Revenues £73.4m (2001: £93.8m) and operating loss (before exceptional items and amortisation of goodwill) £0.4m (2001: £4.5m profit). * Payroll and overhead costs reduced by £8.5m when compared to 2001. * Exceptional costs of £9.6m include £7.1m arising from substantial reorganisation commenced in the 4th quarter of 2002. * When complete further cost savings of £14.0m per annum anticipated. * Strong operating cash inflow of £3.2m. Operational Highlights:- * Next generation POS software successfully launched. * Significant JCPenney contract for the new POS software product - Connected Retailer® Store solution * Change and re-organisation programme successfully implemented. * Order intake up 11% in North America giving market share increase. Nikki Beckett, Chief Executive of NSB Retail Systems commented:- "Whilst 2002 was undoubtedly a difficult year for the retail sector, NSB has taken decisive action to bring costs into line with lower revenues. Despite the challenging business environment, we have won significant new competitive business including a key contract with JCPenney for our new .Net POS store system. We have a strong product portfolio, unrivalled retail experience and a committed and knowledgeable workforce. The next twelve months are unlikely to show a marked improvement in trading conditions, however, I believe that we have taken the necessary steps to meet the coming challenges." Enquiries: Tulchan Communications 0207 353 4200 Andrew Grant Katie MacDonald-Smith NSB Retail Systems PLC 0118 930 1500 Nikki Beckett Stuart Mitchell CHAIRMAN'S STATEMENT For The NSB Group, 2002 turned out to be a year of great challenge. Our results are disappointing but arguably not out of line with the performance of our sector. Consumer spending softened in North America, with obvious cascading effects on our business. As a result, some of our key clients retrenched, postponing systems investment. Whilst this clearly impacted on the Group's results, I am pleased to say that we took decisive action to minimise the effects. Management restructured the organisation, focusing on our core competencies of software, services and support. We initiated a range of cost-cutting measures, found more ways to drive efficiencies throughout the operations and generated cash. As a consequence of these actions, the company is better positioned for 2003, although our outlook is cautious in the continuing uncertain markets. We are now leaner and more flexible, enabling us to react more rapidly to industry trends and fresh opportunities. The 2002 annual report contains several examples of how these measures have already enabled the company to make gains in a challenging market, including signing on several major new clients on both sides of the Atlantic. The most noteworthy development of the past year was the market's enthusiasm for our Connected Retailer® suite of products. This bodes well for the future. Connected Retailer® is an industry-leading portfolio of solutions with the potential to generate strong sales and renewed growth for The NSB Group. Nevertheless, the key task going forward is to ensure that the gains made in 2002 are consolidated. I am confident that, provided there is no material change in demand, and as we focus on cost control, improving productivity and generating cash, we will return to a solid financial footing. Angus Monro Chairman CHIEF EXECUTIVE'S REVIEW In 2002, global political uncertainty, overcapacity, low consumer confidence and a market reluctance to spend on IT impacted on our results - and indeed on the results of all our competitors. To cite the most telling indicator of how the retail industry is faring - even Wal-Mart has stumbled. These are just some of the new realities of retailing, at least for the near future. Industry analysts predict that this flat market will linger for at least another 12 months. These external forces are beyond our control. However, by working on what we could influence, NSB Group made progress in 2002. We took decisive action to bring expenses into line with lower revenues. We restructured the company along divisional lines rather than geographic regions. This streamlined operations, creating a single infrastructure for Europe and North America. However, this also meant taking the difficult, yet necessary, decision to reduce headcount. The staff employed by the group was reduced by 154 (12.6%) throughout the year. We have closed or are closing offices whilst maintaining good geographic coverage of our core markets. We expect ongoing operating costs to reduce by at least a further £8m in 2003. In addition you will also have seen the announcement of the conditional sale of our UK hardware services business which when completed will reduce costs by a further £4m per annum. Cost control will continue to be a focus item for 2003. RESULTS IN BRIEF Group revenues declined from £93.8m to £73.4m (21.7%). Hardware sales were down across both geographies accounting for a revenue reduction of £9.9m. In the UK, software licences and related professional services were down £9.1m reflecting the weakness in this market over the last two years. The weakening of the US dollar relative to the pound contributed a further £2.3m to the decrease. Despite the £20.4m decrease in revenue, the operating loss before exceptional items and amortisation of goodwill of £0.4m was only £4.9m lower than last year. This is because cost actions reduced our cost base by £8.5m in the current year and hardware is our lowest margin product line. There are three elements to the exceptional charge of £9.6m: * Costs of £7.1m associated with the restructuring I have previously described being principally redundancy and facility closure costs. * A provision against a debtor as described below - £1.8m. * A provision to write the NSB shares held in trust for the benefit of employees down to their market value at year end - £0.7m. The goodwill amortisation charge arising from the Group's four year amortisation policy was £85.3m (2001:£88.5m). However, in addition, in view of reduced valuations in the software sector since RTC and STS were acquired in 2000 and the Group's recent financial performance, an impairment review was conducted on the remaining goodwill. This led to an impairment charge in the year of £99.9m (2001:£5.0m). Consequently after exceptional items and amortisation of goodwill we have incurred an operating loss of £194.5m (2001:£ 89.0m). Operating cash inflow was £3.2m (2001: inflow £11.4m) which was strongly ahead of the operating loss by £3.6m (2001: ahead by £6.9m). At year end cash balances were £4.0m (2001: £10.4m). The WIZ At the half year we reported that our projects with the WIZ had been put on hold while the future of the business was evaluated by its parent Cablevision. In February 2003 Cablevision announced its intention to exit the consumer electronics business. The stores will be closed or sold and we were given notice that the customer did not intend to proceed with our projects. Our contract is with Cablevision and we have requested that they settle the unpaid contract value in the amount of US$5.5m. Cablevision has rejected this and has in turn made a claim for damages based upon among other things breach of contract but have subsequently proposed a settlement conditional upon both companies dropping all claims. The Directors believe that the Group's claim on Cablevision is valid and it will be aggressively pursued. The Directors believe the counterclaim is without merit. Notwithstanding, in the interests of prudence, the Group has provided against the totality of the WIZ debtor balance (£1.8m) as an operating exceptional item at year end. LEADING WITH OUR STRENGTHS Whilst the challenges are great, let us also take stock of NSB Group's strengths and why we continue to attract many of the world's top retailers. * Retail experience: With roots stretching back to 1972, NSB Group represents unmatched industry experience. * Customer base: Our clients are household names throughout the UK, Europe and North America. * People: Our staff possess in-depth knowledge, competitive drive and customer focus. * Global reach: Retailers expanding across borders need partners with NSB Group's international reach. * Product portfolio: Our leading-edge Connected Retailer solutions respond to the new realities of retailing with real benefits. * Brand strength: NSB Group was ranked first for Strategic Value by RIS News, one of North America's premier industry publications. We are recognised as a leader in the industry. NEW BUSINESS Despite the market's reluctance to invest in technology, in 2002 we successfully communicated our key value proposition: with Connected Retailer solutions, retailers can cut costs and ratchet up efficiencies to deliver sustainable competitive advantage and so better cope with a slow economy. As a result, we signed several major contracts: * Lindex, a leading Swedish clothing retailer with more than 350 stores across four northern European countries, chose Connected Retailer CRM to manage its loyalty programmes. * Hudson News, a specialty retailer in the US with 244 stores, chose Store and Sales Analytics solutions. * A&G Group, comprising Asprey and the Crown Jewellers Garrard, installed Connected Retailer Store, Sales Analytics and CRM solutions. * Northern Group Retail Ltd., a Canadian specialty-apparel retailer with 275 stores, purchased 14 Connected Retailer Products to modernise and enhance a series of key business functions. * Brown Thomas, Ireland's premier department stores purchased Connected Retailer Store, Sales Analytics (including Loss Prevention) and CRM. * Fortunoff, jewellery and home furnishings, selected Connected Retailer Store and CRM for its stores in New York and New Jersey. * a|wear, part of the Brown Thomas Group purchased Connecter Retailer Merchandising. Throughout 2002, several other clients strengthened their investment in our Connected Retailer solutions portfolio. Amongst these was Liz Claiborne, who made a strategic decision to implement Connected Retailer Store across its entire estate worldwide, following a successful implementation at its European business Mexx. Another long-standing client, La Senza, an international private-label retailer of lingerie and sleepwear with 275 stores, decided to add Loss Prevention and Replenishment. Late in 2002, noted retailers Clarks, Carters, Triminghams, DCK Concessions (the UK's leading fashion jewellery retailer) and Oasis also signed with us. POWERFUL MICROSOFT PARTNERSHIP Most recently JCPenney, with one of the largest point-of-sale populations in North America, chose to implement our next-generation Microsoft .NET-based Connected Retailer Store Solution. As I said at the time, we view this as an endorsement of our Microsoft-centric approach and the significant investment we have made to adopt .NET as our preferred technology platform. THE YEAR AHEAD Although NSB Group has made great strides in challenging times, I believe we can accomplish more in 2003 if we maintain our focus and intensity whilst addressing some of the strategic and industry issues that lie ahead: * Migration: Existing clients represent the best opportunity for generating new revenue in difficult economic conditions when Boards are reluctant to invest in totally new capital projects. Our job is to communicate the benefits of `migrating' up from the client's legacy systems, and making the migration path attractive with simple and cost-effective plans, alongside demonstrating the clear ROI for retailers of adding complementary additional products to their existing NSB solutions. We were successful with several large clients in 2002; however, much potential remains. * .NET: Microsoft's newest technology offers significant power, flexibility and cost savings to retailers. For example it opens up the possibility for a single solution to be implemented on a wide range of devices, whether point of sale, kiosk or server with the same code base. As a long-standing Microsoft Certified Partner, NSB Group worked with Microsoft and based its new POS 6.0 solution on .NET, which we unveiled to great acclaim at NRF, North America's biggest retail trade show. In fact, private demonstrations of our .NET solution quickly sold out at NRF, as more than 25 retailers demanded information and interviews. During 2003, we will introduce further .NET solutions to the Connected Retailer portfolio. In efforts to root our strategy in the real needs and concerns of clients, we convened an Executive Client Advisory Board ("ECAB") at NRF. This reviewed emerging technologies with senior executives from our clients to ensure our development plans are in step with the market. Some of our ECAB's conclusions: * Business intelligence: `Predictive modelling' enables systems to `think' and make decisions based on vast amounts of data. Clients welcome the new tool but believe we need the right balance between automation and human input. * Mobile computing: Sales representatives and customers armed with wireless devices could soon obtain product information, check prices and complete sales `on the go', bypassing the traditional POS queue. Some retailers even contemplate going fully wireless. Whilst this is the way of the future, the return on investment must be secure before retailers make the financial commitment. * Radio Frequency Identification (RFID): Expected to someday replace bar codes, RFID systems `tag' every item of merchandise with a tiny transmitter. Inventory and product tracking can thus be performed instantly, check-outs are faster and the entire supply chain operates more smoothly. Although this technology is being used by some retailers, it needs further development. OUR STRENGTH IN PEOPLE In a tough market, the people of NSB Group are more united and more determined than ever to succeed. The corporate culture remains focused on this company's long-term success by serving the customer exceedingly well. We now operate a leaner company whose divisions report to a single CEO. The divisions include Marketing, Sales, Development, Customer Support, Customer Services, HR and Administration and Finance. Apart from its associated savings, the restructuring further unifies our team, eliminating competition for resources and promoting one cohesive culture. BOARD CHANGES During the year, Howard Stotland and Bill Lassner have stepped down from the Board. I thank them for their contributions to our company and to our Board of Directors. OUTLOOK As I take stock of all we accomplished in 2002 and look forward to 2003, I am confident that we have taken the right steps. Whilst industry conditions are unlikely to improve in the near term, NSB Group is better prepared to take advantage of the opportunities which are available. We have cut costs, we have restructured and we're now working with renewed energy and focus. We have the leading-edge products the market demands and we have the people to support our clients' success. Nikki Beckett Chief Executive FINANCE DIRECTOR'S REVIEW OPERATING RESULT Overall Group revenues declined 21.7% to £73.4m and earnings fell by £4.9m to give a reported operating loss of £0.4m (before exceptional items and goodwill amortisation). Details of the exceptional items and goodwill amortisation are set out below and result in an operating loss of £194.5m (2001:£89.0m). Revenues Revenues in our North American operation fell to £50.9m from £58.7m last year. The weakening of the US dollar from an average of 1.44 in 2001 to 1.5 to the pound in 2002 accounted for £2.3m of the decrease, with a decline in hardware sales of £5.3m being the principal reason for the rest. In the UK revenues fell £12.7m (36%) to £22.5m, with reduced sales of hardware accounting for £4.6m of the decrease. Software licences and related professional services declined £9.1m reflecting weak conditions in the UK market and resultant poor order intake over the last two years. Cost Base After eliminating the cost of bought-in hardware and third party software, Group operating costs were £69.0m compared to £77.5m in the previous year. Cost actions accounted for most of the decrease, with headcount falling from 1409 at the beginning of 2001 to 1003 at the end of Feb 2003. The Group embarked upon a significant restructuring programme in the final quarter of 2002. A large part of the benefit will be realised in 2003 but the full benefit will not be seen until 2004. This restructuring is described below in exceptional items. Research and Development Own funded R&D expenditure totalled £12.9m compared to £14.5m last year. This represents 17.6% of revenues (2001-15.5%), emphasising the Group's commitment to be at the forefront of market and product innovation. Order Book Order intake (licences only) in North America was £14.1m, an 11% increase on last year on a currency adjusted basis. At 31 December the order book (licences only) stood at £10.3m (2001-£10.2m) of which it is anticipated £3.5m will be recognised in 2003. The pipeline of qualified business opportunities (licences only) capable of closing during 2003 at £36.1m is consistent with the comparable time last year on a currency adjusted basis. Order intake (licences only) in the UK was £2.4m, a decline from last year's level of £8.5m. At 31 December the order book (licences only) stood at £2.7m (2001-£6.1m) of which it is anticipated £1.8m will be recognised in 2003. The pipeline of qualified business opportunities (licences only) capable of closing during 2003 is currently £13m. This is higher than the £10.7m at the comparable time last year. EXCEPTIONAL ITEMS Exceptional costs of £9.6m comprise the following: Redundancy costs of £3.8m and facility closure costs of £3.0m associated with the restructuring of the business. There are also asset write downs of £0.25m associated with the restructuring. Because of the contractual dispute with Cablevision described in the Chief Executive's review, the Directors have included a provision of £1.8m against the related debtor. The Directors view Cablevision's claim for breach of contract for the amount of US$22.0m as without merit and no provision is required. Amounts written off investments of £0.7m represents a provision to write the NSB shares held in the NSB Share Ownership Trust for the benefit of employees down to their market value at year end. GOODWILL CHARGE The Group's policy is to write-off acquired goodwill over a 4 year period, producing a £85.3m charge in 2002 (2001- £88.5m). In addition FRS10 requires that goodwill should be re-evaluated if conditions are indicative of a decline in value of acquired businesses and, if necessary, an impairment charge taken. The Directors concluded that such a re-evaluation was warranted in view of the softness of the Group's markets, the recent financial performance, 2003 outlook for STS and RTC, the market value of NSB and general fall in valuation multiples in the retail software sector. This impairment review resulted in a further charge of £99.9m (2001- £5.0m). TAX AND INTEREST The Group commenced paying interest on the Exchangeable Convertible Preference Shares ("ECPS") in February 2002 as part of a November 2001 restructuring of this instrument issued at the time STS was acquired. Interest expense of £1.0m arises on this debt. The Group has a tax presence in the UK, Canada and the USA. The tax credit in 2002 arose from: * A credit in the UK for taxes overpaid in prior years principally arising from the adoption of the principles of US GAAP revenue recognition policies in 2001. UK operating losses including exceptional costs mean that the Group now has substantial tax losses to carry forward. * A small charge for Canadian taxes. The Group continues to benefit from the ability to take part of the purchase price for STS as a deduction against taxes in Canada. * A charge to US taxes on the Group's sales, services and development activities in the USA. (LOSS)/EARNINGS PER SHARE The Board considers the most relevant measure of (loss)/earnings per share (EPS) is adjusted basic EPS being post tax (losses)/profits (excluding exceptional items and amortisation and impairment of goodwill) divided by the weighted average number of shares in issue. EPS calculated on this basis was a loss per share of 0.16p. (2001 - EPS 0.85p). CASH FLOW The cash inflow from operations was £3.2m (2001 - £11.4m). This inflow exceeded the operating loss, again benefiting from reductions in working capital in both geographies. In North America trade receivables at December 2002 were £11.3m a fall of £4.0m from the comparable position last year. Days sales outstanding (DSO) were 84 days (2001- 82 days). In the UK trade receivables at December 2002 were £5.8m a fall of £6.2m from the comparable position last year. Days sales outstanding (DSO) were 44 days (2001- 90 days). Non-operating cash flows totalled £9.7m, the most significant elements being: * Scheduled principal and interest payments on the ECPS- £4.7m. * Purchase of Own Shares- £1.0m. * Repayment of mortgage on property in Columbus Ohio- £0.8m. * Repayment of loan notes issued at the time of the RTC acquisition- £1.0m. * Tax paid- £1.1m. * Capital expenditure- £1.2m. Principally arising from the implementation of the Lawson financial system which is now complete. CAPITAL STRUCTURE, BANK FACILITIES AND LONG TERM FUNDING Shareholders' funds decreased by £194.4m in the period. Retained losses of £ 195.4m accounted for most of the decrease. Other changes included an unrealised exchange gain of £0.9m principally arising on the ECPS instrument which is denominated in Canadian dollars (see below). Shareholders funds in the Parent Company show a deficit on distributable reserves of £266m principally arising from the write-down of the investments in STS and RTC evident from the goodwill impairment review. The Group is unable to pay dividends while there is a deficit on distributable reserves. The Group has bank facilities in the UK, provided by The Royal Bank of Scotland and Canada provided by Royal Bank of Canada. The UK facilities are currently under review and it is anticipated a multi-option facility of £0.5m will be agreed. This facility will be secured by a general debenture over the UK assets of the group. In Canada the Group has recently agreed an extension to its C$5.5m multi-option facility secured upon the trade debtors of STS Systems Ltd. The only long term funding the Group has is the ECPS which was part of the STS purchase price. This instrument was restructured in November 2001 and again in October 2002 and is now a debt instrument payable on the following dates: 31 March 2004 Canadian $12m 31 January 2005 Canadian $14m 31 January 2006 Canadian $12m 31 July 2006 Canadian $2m 31 January 2007 Canadian $4m 31 July 2007 Canadian $6m Interest is payable at an effective rate of 5% on amounts outstanding. As part of the October 2002 restructuring of the instrument the holders are entitled to a second ranking charge over all of the Group's assets should the Group's bankers take first ranking security over the same assets. TREASURY The Group operates a centralised Group Treasury function. Cash balances and cash flow forecasts are monitored centrally although the placing of surplus funds on deposit is the responsibility of the individual business units. Group Treasury is also responsible for the implementation of the Group's foreign exchange hedging policies. Through the North American operation, the Group has significant exposure to both the US and Canadian Dollar. Most of its revenues are earned in US Dollars although the cost base is substantially Canadian Dollars. However, overall this business is a US Dollar earner. In light of this the Board has adopted the following hedge policy: 1. Group Treasury is to sell forward US Dollars to cover 75% of the Canadian Dollar costs. Hedging is undertaken annually once budgets are approved. 2. Group Treasury is to hedge 75% of the budgeted US Dollar net income of the North American business. Again, this is carried out once budgets are approved. The Board has concluded that, since investments in overseas Group companies are considered long term assets and exchange rates with Sterling are likely to return to equilibrium over time, there is no requirement to hedge the net assets of overseas Group companies. Where an investment is not considered long term or market conditions suggest equilibrium is unlikely, the Board will review its position of not hedging such assets. As reported last year, the ECPS is considered long term debt rather than equity of the company and this position has not altered following the re-negotiation of their terms. However, as the ECPS is acquisition related debt, exchange movements on the value of the amount outstanding at each balance sheet date are taken directly to reserves rather than being credited to the Profit and Loss Account. The Board has therefore concluded that no hedging of the ECPS is required. GOING CONCERN The financial statements will be prepared on a Going Concern basis as set out in note 1 in the basis of preparation. Stuart Mitchell Group Finance Director CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2002 2002 2001 2001 2001 (Unaudited) (Unaudited) (Unaudited) (Audited) (Audited) (Audited) Pre- Pre- goodwill & Goodwill & goodwill & Goodwill & exceptional exceptional exceptional exceptional costs costs Total costs costs Total Note £000 £000 £000 £000 £000 £000 Turnover 2 73,359 - 73,359 93,818 - 93,818 Cost of sales (60,858) - (60,858) (74,554) - (74,554) Gross profit 12,501 - 12,501 19,264 - 19,264 Administrative expenses - before goodwill 3 (12,884) (8,814) (21,698) (14,767) - (14,767) - goodwill 4 - (185,268) (185,268) - (93,470) (93,470) Operating (loss)/ (383) (194,082) (194,465) 4,497 (93,470) (88,973) profit Interest receivable 295 - 295 146 - 146 Amounts written off 7 - (738) (738) - - - investments Interest payable and similar (1,324) - (1,324) (492) - (492) charges (Loss)/profit on ordinary (1,412) (194,820) (196,232) 4,151 (93,470) (89,319) activities before taxation Tax credit/(charge) on loss 5 784 (754) on ordinary activities Retained loss on ordinary (195,448) (90,073) activities after taxation (LOSS)/EARNINGS PER ORDINARY SHARE 2002 2001 Note (Unaudited) (Audited) 6 Pence Pence Basic (49.05) (22.63) Adjusted basic (excluding amortisation and (0.16) 0.85 impairment of goodwill and exceptional costs) Diluted (49.05) (22.63) Adjusted diluted (excluding amortisation and (0.16) 0.82 impairment of goodwill and exceptional costs) CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2001 (Unaudited) (Audited) Note £000 £000 Loss for the financial year (195,448) (90,073) Exchange differences 925 98 Total gains and (losses) relating (194,523) (89,975) to the year CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2002 2002 2002 2001 2001 (Unaudited) (Unaudited) (Audited) (Audited) Note £000 £000 £000 £000 Fixed assets: - Intangible assets 4 57,444 242,712 - Tangible assets 4,832 5,530 - Investments 7 252 - 62,528 248,242 Current assets: - Stock 1,425 920 - Debtors 8 26,925 38,452 - Cash at bank and in hand 3,974 10,432 32,324 49,804 Creditors: amounts falling due within 9 (31,079) (43,110) one year Net current assets 1,245 6,694 Total assets less current 63,773 254,936 liabilities Creditors: amounts falling due after more than one year Exchangeable convertible (21,522) preference (19,763) shares Other creditors (291) (683) (20,054) (22,205) Provisions for liabilities 10 (5,527) (156) and charges Net assets 38,192 232,575 Capital and reserves: Called up share capital 6,479 6,367 Share premium account 191,318 186,643 Exchangeable shares 131,033 135,680 Merger reserve 3,638 3,638 Warrant reserve 7,564 7,564 Profit and loss account (301,840) (107,317) Equity shareholders' funds 11 38,192 232,575 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2001 (Unaudited) (Audited) Note £000 £000 Cash flow from operating 3,213 11,421 activities Returns on investments and (402) (336) servicing of finance Taxation (1,105) (1,525) Capital expenditure and purchase (2,201) (1,586) of own shares Acquisitions: STS (net) - (2,737) Cash (outflow)/inflow before (495) 5,237 financing Financing (5,963) (31) (Decrease)/increase in cash in (6,458) 5,206 the period Reconciliation of net cash flow to movement in net funds: (Decrease)/increase in cash in (6,458) 5,206 the period Cash outflow from decrease in debt and lease 5,137 24 financing Exchangeable convertible - (25,826) preference shares Exchange movements 1,714 19 Change in net debt 12 393 (20,577) Net (debt)/funds at beginning of 12 (16,182) 4,395 period Net debt at end of period 12 (15,789) (16,182) Reconciliation of operating profit to net cash flow from operating activities: Operating loss (194,465) (88,973) Depreciation and amortisation 187,750 94,547 charges Loss/(profit) on sale of fixed 54 (9) assets (Increase)/decrease in stock (505) 404 Decrease in debtors 11,527 10,673 (Decrease) in creditors (6,519) (5,333) Increase in provisions for 5,371 112 liabilities and charges Net cash flow from operating 3,213 11,421 activities NOTES 1. BASIS OF PREPARATION The preliminary results have been prepared in accordance with the Group's accounting policies and are consistent with the policies set out in the annual report and accounts for the year to 31 December 2001. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2002 or 2001. The statutory accounts for 2002 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 financial statements will be prepared on the going concern basis which the Directors believe to be appropriate for the following reasons. The Group made an operating loss before amortisation of goodwill and exceptional items in the year ended 31 December 2002 of £383,000 and incurred exceptional reorganisation, rationalisation and bad debt charges of £8,814,000. At 31 December 2002 the Group had net cash balances of £3,974,000. The Directors have prepared their 2003 budget and cash projections for the 15 month period ended 31 March 2004 which take into account the effects of the reorganisation the Group has carried out. These projections show that the Group will generate cash in the fifteen month period which together with the Bank facilities in place will enable the Group to meet its liabilities as they fall due. These include provision for the scheduled repayment on 31 January 2004 of Canadian $12 million to the holders of the Exchangeable Convertible Preference Shares (`ECPS'). Due to the nature of the Group's business there can be unpredictable variation in the timing of cash flows. Accordingly the Directors have obtained an undertaking from the holders of the ECPS that they will, both jointly and severably, defer the date of part redemption of the ECPS from 31 January 2004 until 31 March 2004. In the event the projections are not being met the Directors will take actions to safeguard the cash generation including a tighter control on costs and any other appropriate measures. 2. TURNOVER A geographical analysis of turnover by destination is as follows: 2002 2001 (Unaudited) (Audited) £000 £000 Europe 22,441 35,207 North America 50,918 58,611 73,359 93,818 A geographical analysis of turnover by origin is as follows: 2002 2001 (Unaudited) (Audited) £000 £000 Europe 22,441 35,132 North America 50,918 58,686 73,359 93,818 An analysis of turnover by activity is as follows: 2002 2001 (Unaudited) (Audited) £000 £000 Software licences 19,797 22,997 Software services and support 47,513 54,288 Hardware and associated services 6,049 16,533 73,359 93,818 3. EXCEPTIONAL ITEMS Administrative expenses include exceptional items of £8,814,000 and amounts written off investments contain exceptional items of £738,000. These are detailed below: 2002 2001 (Unaudited) (Audited) £000 £000 Included in administrative expenses: Redundancy costs 3,759 - Facilities costs 3,016 - Asset write downs 250 - Contractual dispute 1,789 - 8,814 - Amounts written off investments 738 - 9,552 - Exceptional costs comprise the following: Redundancy costs of £3,759,000 and facility closure costs of £3,016,000 associated with the restructuring of the business. There are also asset write downs of £250,000 associated with the restructuring. A provision of £1,789,000 against a debtor with whom there is currently a contractual dispute (further detailed in note 13). Amounts written off investments of £738,000 represents a provision to write down the NSB shares held in the NSB Share Ownership Trust to their market value at year end following a review by the Directors (see note 7). 4. INTANGIBLE ASSETS An analysis of goodwill, amortisation charge and net book value is as follows: 2002 2002 2001 2001 (Unaudited) (Unaudited) (Audited) (Audited) Profit and Balance Profit and Balance loss charge sheet loss charge sheet £000 £000 £000 £000 Upon acquisition of: APT 396 - 1,192 396 Real Time Control ("RTC") 23,724 7,401 21,881 31,125 STS 161,148 50,043 70,397 211,191 185,268 57,444 93,470 242,712 The Directors have adopted a four year amortisation period which they believe is appropriate for all acquisitions. The Directors have reviewed the value of goodwill at 31 December 2002 and, as required by FRS 11 - "Impairment of Fixed Assets and Goodwill" have written down the value of goodwill on RTC by a further £9,180,000 and STS by a further £90,750,000 over the annual amortisation charge. 5. TAXATION 2002 2001 (Unaudited) (Audited) £000 £000 UK corporation tax at 30.00% (2001: (172) (339) 30.00%) UK adjustments for prior periods (1,079) - Overseas taxes 316 385 UK deferred taxation 157 861 Overseas deferred taxation (6) (153) Tax (credit)/charge (784) 754 The differences between the total current tax rate shown above and the amounts calculated by applying the standard rate of UK corporation tax to the loss before tax is as follows: 2002 2001 (Unaudited) (Audited) £000 £000 Tax on Group loss on ordinary activities at standard (58,870) (26,796) UK corporation tax rate of 30% (2001: 30%) Expenses not deductible for tax purposes including 54,964 27,263 goodwill amortisation Other short term timing differences and utilisation 3,863 160 of tax losses Higher tax rates on overseas earnings 338 100 Adjustments to tax charge in respect of previous (1,079) 27 periods Group current tax (credit)/charge for (784) 754 period 6. (LOSS)/EARNINGS PER SHARE Earnings per share is calculated based on the provisions of Financial Reporting Standard 14 - `Earnings per share'. Basic loss per share is calculated by dividing the loss after taxation of £ 195,448,000 by 398.5 million ordinary shares being the weighted average number of shares in issue. (2001: £90,073,000 loss and 398.0 million shares.) Adjusted basic (loss)/earnings per share is calculated by dividing loss after taxation of £195,448,000 but before amortisation and impairment of goodwill arising on consolidation of £185,268,000 and exceptional items of £9,552,000 to give an overall total loss of £628,000 which is divided by 398.5 million ordinary shares being the weighted average number of shares in issue during the year (2001: £3,397,000 profit and 398.0 million shares.) Adjusted diluted earnings per share has been calculated by dividing the loss after taxation of £195,448,000 but before amortisation and impairment of goodwill arising on consolidation of £185,268,000 and exceptional items of £ 9,552,000 to give an overall total loss of £628,000 which is divided by 406.0 million shares, being the average number of shares, including unexercised share options during the year (2001: £3,397,000 profit and 412.0 million shares). For the purposes of the disclosures required by FRS14 "Earnings per share" none of the potential ordinary shares are regarded as being dilutive as their conversion would reduce the basic net loss per share. Consequently the diluted loss per share is the same as the basic loss per share. 2002 2001 (Unaudited) (Audited) (Million Shares) (Million Shares) Weighted average number of shares 398.5 398.0 Dilutive share options 7.5 14.0 Weighted average number of shares for diluted 406.0 412.0 earnings per share £000 £000 Loss after taxation (195,448) (90,073) Adjustment for goodwill amortisation 185,268 93,470 and impairment Adjustment for exceptional items 9,552 - Adjusted (loss)/earnings (628) 3,397 7. INVESTMENTS 2002 2001 (Unaudited) (Audited) £000 £000 Own shares 252 - Fixed asset investments of £252,000 relate to own shares purchased by the NSB Employee Share Ownership Trust. These have been classified within fixed asset investments, as the shares are held for the continuing benefit of the Company through the reward of its employees. The shares have yet to vest unconditionally with the employees and as such have been recognised as a fixed asset of the Company. At the year end the Directors reviewed the valuation of this investment and a write down of £738,000 has been made to the investment to the market value of the shares at 31 December 2002. 8. DEBTORS 2002 2001 (Unaudited) (Audited) £000 £000 Trade debtors 17,070 27,335 Accrued income 4,267 5,332 Other debtors 707 1,249 Corporation tax 1,154 325 Prepayments 3,144 3,283 Total debtors due within one year 26,342 37,524 Other debtors recoverable in more than 583 928 one year 26,925 38,452 Other debtors recoverable in more than one year relate to Federal R&D tax credit recoverable in North America. 9. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 2002 2001 (Unaudited) (Audited) £000 £000 Bank loans and overdrafts - 105 Payments received on account 1,626 1,312 Trade creditors 3,395 4,813 Corporation tax 23 1,234 Taxation and social security 806 2,472 Exchangeable convertible preference - 4,304 shares Other creditors 1,263 1,896 Accruals and deferred income 23,966 26,974 31,079 43,110 10. PROVISIONS FOR LIABILITIES AND CHARGES 2002 2001 (Unaudited) (Audited) £000 £000 SSAP 24 Defined benefit pension - (23) provision Deferred taxation (284) (133) Restructuring (5,243) - (5,527) (156) The restructuring provision is for the future costs to be incurred in 2003 and 2004 following the Company's decision to restructure its business. The costs to be incurred principally relate to redundancies and facilities costs. 11. RECONCILIATION OF MOVEMENT IN SHAREHOLDER'S FUNDS FOR THE YEAR ENDED 31 DECEMBER 2002 2002 2001 (Unaudited) (Audited) £000 £000 Retained loss for the financial year (195,448) (90,073) Exchange differences 925 98 Issue of share capital 140 130 Cost of shares issued for the STS - (137) acquisition Net (deduction) to shareholders' funds (194,383) (89,982) Opening shareholders' funds 232,575 322,557 Closing shareholders' funds 38,192 232,575 12. ANALYSIS OF NET DEBT At beginning Cash flow Exchange At end of year movements of year £000 £000 £000 £000 Cash at bank and in hand 10,432 (6,458) - 3,974 Bank loans due within one (105) 103 2 - year Banks loans due after one (683) 670 13 - year ECPS due within one year (4,304) 4,364 (60) - ECPS due after one year (21,522) - 1,759 (19,763) Net (debt)/funds (16,182) (1,321) 1,714 (15,789) 13. CONTRACTUAL DISPUTE In August our projects with the Wiz had been put on hold while the future of the business was evaluated by its parent Cablevision. In February 2003 Cablevision announced it intended to exit the consumer electronics business and the remaining stores would be closed or sold and we were given notice that the customer did not intend to proceed with our projects. Our contract is with Cablevision and we have requested that they settle the unpaid contract value in the amount of US$5.5m. Cablevision has rejected this and has in turn made a claim for damages based upon among other things breach of contract but have subsequently proposed a settlement conditional upon both companies dropping all claims. The Directors believe that the Group's claim on Cablevision is valid and it will be aggressively pursued. After seeking appropriate legal advice, the Directors believe the counterclaim is without merit. Notwithstanding, in the interests of prudence, the Group has provided against the totality of the WIZ debtor balance totalling £1,789,000 (comprising trade debtor of £382,000 and accrued income of £1,407,000) as an operating exceptional item at year end. END
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