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RNS Number:4954N
Pace Micro Technology PLC
14 July 2003
Contact: John Dyson
Chief Executive, Pace Micro Technology plc
Ginny Pulbrook,
Director, Citigate Dewe Rogerson
Telephone: 020 7282 2940 until 17:30
Thereafter: 01274 538005
Pace Micro Technology plc
Results for the year ended
31 May 2003
14 July 2003
PACE MICRO TECHNOLOGY PLC
Results for the year ended 31 May 2003
SALIENT POINTS
* Turnover of #166.6m (2002: #351.8m);
* Full year gross margin before exceptional items of 20.9% (2002:
22.7%);
* EBITA loss before exceptional items in H2 reduced to #0.4m (H1 2003:
#15.7m);
* Net cash position #13.1m (2002: net borrowings #19.1m);
* Loss before tax, amortisation of goodwill and exceptional items of
#16.2m (2002: profit of #13.1m);
* Diluted loss per share before amortisation of goodwill and exceptional
items of 6.8p (2002: earnings per share 2.9p);
* Diluted loss per share after amortisation of goodwill and exceptional
items of 22.0p (2002: 16.1p);
* No dividend recommended (2002: 1.10p);
* Overhead run rate for the coming year reduced to #40m p.a. (#2003:
#50.9m)
* New orders from Foxtel, Sky Italia and Viasat.
Commenting on the results, Sir Michael Bett, Chairman, said:
"The results in the second half marked a significant improvement for Pace as the
Group moved close to breakeven, after eighteen months of falling revenues. The
improvement in performance is the positive outcome of management's action to
instigate restructuring, improve margins and lower costs.
Pace has built good customer relationships, developed innovative products and
continues to invest in new technologies. Future growth will be driven by the
ability of digital TV providers to develop their respective businesses and make
profits from the move to digital. The Group's improved financial position,
combined with new orders in May 2003, gives rise to cautious optimism."
Preliminary Announcement
The year ending 31 May 2003 saw the Group move close to break-even at the EBITA
level for the second half, following trading losses in the previous two half
year periods. This significant improvement was delivered through improved
margins and lower costs, on revenues of #83m in the second half of the year. Net
cash was #13.1m (2002: net borrowings of #19.1m).
Results and dividend
Loss before tax, amortisation of goodwill and exceptional items was #16.2m
(2002: profit #13.1m) on turnover of #167m (2002: #352m). Loss per share was
6.8p (2002: earnings per share of 2.9p).
There was a loss before tax and after amortisation of goodwill and exceptional
items of #50.1m (2002: #29.5m).
In the light of the loss and accumulated deficit, the Board has decided not to
recommend a dividend for the 2002/03 financial year.
Exceptional items
The Group's total exceptional costs for the year were #32.5m (2002: #40.0m).
A restructuring programme has almost been completed that will see the workforce
being reduced to less than 600. The restructuring activity includes
negotiations that are expected to result in a management buyout of the
VegaStream division, with Pace retaining a 20% stake and the integration of the
Internet Protocol Television (IPTV) division into a Pace product line. The
changes have resulted in a more efficient and flexible business structure and
lower overheads, against exceptional costs of #9.6m to cover redundancies,
excess space and asset write-offs.
The Board has reviewed the carrying value of the goodwill that arose on the
purchase of Xcom Multimedia Communications and concluded that, in light of the
significant decline over the last year in the markets served by Xcom, it should
be written down by #21.4m to #10m.
In addition, the Board has decided to make a further #1.5m provision against the
Group's loan to the Employee Share Option Plan ("ESOP").
Trading review
The challenging markets experienced by digital TV providers had a direct impact
on Pace, with the Company's set-top box volumes falling 41% to 1.3m units.
Pace's revenues fell 53% as they were further impacted by lower average selling
prices.
In the UK, BSkyB continued to add to its subscriber base and the Sky+ PVR
increased its penetration. Ntl has taken and installed nearly all of the
set-top boxes made in early 2002, while Telewest continued to take boxes in the
second half of the year. Pace's share of the free-to-view DTT market naturally
reduced as a result of new entrants. This segment is subject to severe
competition at the low end of the market.
We expect overall that the UK market will now stabilise at its current level.
Pace has a full range of products for the satellite, cable and terrestrial
markets in the UK, which should result in the Group retaining the largest market
share in this region, but at a lower level than in the past.
In the US, Pace currently supplies Time Warner Cable and Comcast, the US's two
largest cable operators, as well as Bright House Networks. In the last
reporting year, as Time Warner focussed on selling through the Pace standard
definition (SD) set-top boxes they had purchased in the previous year, the
Group's US revenues fell from #38.2m to #9.9m. The US Government has mandated a
move from standard definition broadcasting to high definition broadcasting.
Pace has recently launched its high definition box into Time Warner and Bright
House Networks.
Outside of the UK and US, Pace shipments reduced sharply, the main factors being
lack of finance available to providers, together with a less competitive digital
TV marketplace. However, there have been recent new design wins in Europe with
Sky Italia and Viasat Broadcasting and at Foxtel in Australia, as well as
greater momentum in our existing customers, which together lead us to anticipate
much improved volumes in these markets in the coming year.
Financial Review
Gross margin for the year declined to 20.9% (2002: 22.7%). Performance improved
significantly during the year, with a second half margin of 29.1%. This
improvement was due to a number of factors, not all of which can be assumed to
be recurring at the same level, such as income from a number of one-off
engineering projects. However, the growth in deployment of Sky+ is now
generating a regular monthly income.
Overheads, net of other income and before amortisation of goodwill, decreased to
#50.9m (2002: #66.1m), demonstrating the benefit of the restructuring programme
which commenced in the first half of last year. Expenditure on development was
#27.1m (2002: #36.9m). Selling, general and other administrative expenses were
#23.8m (2002: #29.2m). As noted above, action has already been taken that will
reduce overheads further.
Net assets, excluding goodwill, decreased to #34.1m (2002: #65.7m). Within the
net current assets of #47.9m (2002: #65.0m), net cash was #13.4m (2002: net
borrowings #18.7m). Stocks at the year-end amounted to #16.0m (2002: #46.7m),
comprising #8.5m of raw materials and WIP and #7.5m of finished goods. The
decrease reflects the sale of Ntl finished goods stock, which stood at #23.7m at
1 June 2002 as well as the near-completion of the full outsourcing of
production. The stock turnover rate was 8 times at year-end (2002: 8 times).
Debtors of #57.2m (2002: #80.6m) included an amount of #23m that was uninsured.
The debt collection period was 12 weeks (2002: 12 weeks).
The improvement in Pace's cash position came from the significant decrease in
finished goods stocks as Ntl continued to take delivery of stock in line with an
agreed schedule. In addition, the Group received a repayment of #10.1m of
Corporation Tax. Pace has #20m in existing committed credit lines.
The Group continued its policy of providing for all currently known and
potential claims relating to the alleged use of the intellectual property of
others and was able once again to release part of the overall provision. In the
last year the level of releases exceeded new provisions by #1.8m. There are
still a number of matters outstanding and without any admission of liability,
the Group has provided against these claims and the estimated cost of
litigation. Having taken legal advice, the Board considers that there are
defences available and claims against third parties that should mitigate the
amounts being sought.
Outlook
The results in the second half marked a significant improvement for Pace as the
Group moved close to breakeven, after eighteen months of falling revenues. The
improvement in performance is the positive outcome of management's action to
instigate restructuring, improve margins and lower costs.
Looking ahead to the coming year Pace has won some new business in Europe and
Asia-Pacific and expects to increase its revenues from these regions. The UK
will continue to be an important market for Pace, but we may lose some market
share due to increased competition at both Ntl and Telewest and the numerous
suppliers in the free-to-view market. In the US, we have invested substantial
amounts in our operations over the last three years, as it is by far the biggest
and most developed television market in the world. The US will continue to
incur losses over the next six months or so and offers both upside and risk.
Pace has built good customer relationships, developed innovative products and
continues to invest in new technologies. Future growth will be driven by the
ability of digital TV providers to develop their respective businesses and make
profits from the move to digital. The Group's improved financial position,
combined with new orders in May 2003, gives rise to cautious optimism.
Sir Michael Bett
Chairman
14 July 2003
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31MAY 2003
2003 2002
Note Before Exceptional Total Before Exceptional Total
exceptional items exceptional items
Items (note 3) items (note 3)
#000 #000 #000 #000 #000 #000
Turnover 2 166,597 - 166,597 351,794 - 351,794
Cost of sales (131,794) (2,542) (134,336) (271,832) - (271,832)
____________ ____________ __________ __________ ____________ ___________
Gross profit 34,803 (2,542) 32,261 79,962 - 79,962
Other operating income (52,257) (29,981) (82,238) (68,817) (39,952) (108,769)
and charges
____________ ____________ ___________ ___________ ____________ ____________
Operating (loss)/profit (17,454) (32,523) (49,977) 11,145 (39,952) (28,807)
Net interest payable and (100) - (100) (718) - (718)
similar charges
____________ ____________ ___________ ____________ ____________ ___________
(Loss)/profit on ordinary (17,554) (32,523) (50,077) 10,427 (39,952) (29,525)
activities before
taxation
Tax credit/(charge) on
(loss)/profit on ordinary
activities 4 1,340 706 2,046 (6,796) 1,479 (5,317)
____________ ____________ __________ ____________ ____________ ___________
(Loss)/profit on ordinary (16,214) (31,817) (48,031) 3,631 (38,473) (34,842)
activities after taxation
Dividends 6 - - - (2,386) - (2,386)
____________ ____________ ____________ ____________ ____________ ___________
Retained (loss)/profit (16,214) (31,817) (48,031) 1,245 (38,473) (37,228)
for the financial year
____________ ____________ ___________ ____________ ____________ ___________
Basic loss per ordinary 5 (22.0)p (16.1)p
share
Diluted loss per ordinary 5 (22.0)p (16.1)p
share
Dividend per ordinary 6 - 1.1p
share
RESULTS BEFORE AMORTISATION OF GOODWILL AND EXCEPTIONAL ITEMS
#000 #000
Operating (loss)/profit (16,053) 13,862
(Loss)/profit on ordinary (16,153) 13,144
activities before taxation
Adjusted basic (loss)/earnings 5 (6.8)p 2.9p
per ordinary share
Adjusted diluted (loss)/earnings 5 (6.8)p 2.9p
per ordinary share
CONSOLIDATED BALANCE SHEET
AT 31 MAY 2003
2003 2002
Note #000 #000
Fixed assets
Intangible 10,000 35,822
Tangible 10,269 15,285
Investments 7 2,515 4,033
____________ ____________
22,784 55,140
____________ ____________
Current assets
Stocks 15,967 46,719
Debtors 8 57,201 80,626
- due within one year 49,317 75,088
- due after one year 7,884 5,538
Cash at bank and in hand 13,410 -
____________ ____________
86,578 127,345
Creditors: amounts falling due within one year (38,638) (62,301)
____________ ____________
Net current assets 47,940 65,044
____________ ____________
Total assets less current liabilities 70,724 120,184
Creditors: amounts falling due after more (288) (332)
than one year
Provisions for liabilities and charges 9 (26,331) (18,293)
____________ ____________
Net assets 44,105 101,559
____________ ____________
Capital and reserves
Called up equity share capital 11,312 11,312
Share premium account 35,427 35,426
Shares to be issued - 10,000
Merger reserve - 17,209
Profit and loss account (2,634) 27,612
____________ ____________
Total equity shareholders' funds 44,105 101,559
____________ ____________
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MAY 2003
2003 2002
Note #000 #000
Net cash inflow/(outflow) from operating
activities 10 32,093 (18,910)
Returns on investments and servicing of finance (496) (201)
Taxation 9,082 (8,149)
Capital expenditure and financial (2,001) (8,984)
investment
Acquisitions (5,000) (8,303)
Equity dividends paid (1,528) (2,375)
____________ ____________
Cash inflow/(outflow) before financing 32,150 (46,922)
Financing (48) (143)
____________ ____________
Increase/(decrease) in cash in the year 32,102 (47,065)
____________ ____________
Reconciliation of net cash flow to movement in net funds/(debt)
Increase/(decrease) in cash in the year 32,102 (47,065)
Cash flow from decrease in debt 49 507
____________ ____________
Movement in net funds/(debt) in the year 32,151 (46,558)
Net (debt)/funds at start of year (19,074) 27,484
____________ ____________
Net funds/(debt) at end of year 13,077 (19,074)
____________ ____________
ANALYSIS OF CHANGES IN NET FUNDS/(DEBT)
At 1 June Cash At 31 May
2002 flow 2003
#000 #000 #000
Cash at bank and in hand - 13,410 13,410
Overdrafts (18,692) 18,692 -
____________ ____________ ____________
(18,692) 32,102 13,410
Debt due within one year (50) 5 (45)
Debt due after one year (332) 44 (288)
____________ ____________ ____________
(19,074) 32,151 13,077
____________ ____________ ____________
NOTES
1 Basis of preparation
The annual financial statements are drawn up to the Saturday nearest to 31 May. The current year's
financial statements are for the 52 week period ended 31 May 2003 and the previous year's financial
statements are for the 52 week period ended 1 June 2002.
The financial information set out herein does not constitute the Group's financial statements for the
years ended 31 May 2003 and 1 June 2002 but is derived from those financial statements. The financial
statements for 1 June 2002 have been delivered to the Registrar of Companies, and those for 31 May 2003
will be delivered following the Annual General Meeting. The auditors have reported on those financial
statements; their reports were unqualified and did not contain statements under section 237 (2) or (3) of
the Companies Act.
Uncertainty arising from market conditions
Global markets, particularly the technology sector, are continuing to experience a high degree of
volatility.
The worldwide market for set-top boxes declined in the past 18 months. While there is some evidence of
improved stability over the last six months, there remains continued risk in the digital broadcasting
industry. Lower selling prices are a feature of current and anticipated market conditions.
The Group has a two-year banking facility of which over 12 months remain in the amount of #20m.
The Board has built these circumstances into their working capital forecasts and has modeled various
business scenarios. Based on these, the Board has concluded that, whilst recognising there is some
uncertainty, the Group has appropriate existing banking arrangements and that, in the event it should need
to, it will be able to take action to maintain such facilities.
The Board has therefore concluded it is appropriate to confirm the going concern basis of preparation for
the financial statements.
2 Turnover 2003 2002
#000 #000
The geographical analysis of turnover by
destination is as follows:
United Kingdom 137,494 255,844
Continental Europe 9,806 40,205
Far East and Australasia 9,060 11,072
North America 9,911 38,216
Rest of the World 326 6,457
____________ ____________
166,597 351,794
____________ ____________
3 Exceptional items 2003 2002
#000 #000
Restructuring costs 5,900 4,931
Onerous contracts 3,671 -
Impairment of own shares held in ESOP and 1,500 17,515
QUEST
Impairment of goodwill 21,452 17,506
____________ ____________
32,523 39,952
____________ ____________
In both years the restructuring costs relate to redundancies, fixed asset and inventory write downs and
office closures associated with the rationalisation of the business.
The onerous contracts represent commitments in respect of the future costs associated with vacant
properties leased by the company and raw material purchases arising from the decision to reorganise the
IPTV division.
Provisions have been made in both years against the carrying value of shares held in the Pace Micro
Technology plc Employee Benefits Trust and QUEST.
Following an impairment review a provision has been made against the carrying value of goodwill
attributable to the Group's investment in Xcom Multimedia Communications SAS. In the prior period the
impairment related to a full provision against the goodwill attributable to the investment in VegaStream
Limited.
4 Tax credit/(charge) on (loss)/profit on 2003 2002
ordinary activities #000 #000
The tax credit/(charge) is based on the (loss)/profit for the
year and represents:
Current tax:
United Kingdom corporation tax at 30% (2002: 30%) - -
Overseas tax (300) (3,411)
____________ ____________
(300) (3,411)
Deferred tax:
Origination and reversal of timing differences 2,346 (1,906)
____________ ____________
2,046 (5,317)
____________ ____________
The tax credit in respect of the exceptional items, included within the above tax credit/charge, amounts
to #706,000 (2002: #1,479,000).
5 (Loss)/earnings per ordinary share
Basic (loss)/earnings per ordinary share have been calculated by reference to the (loss)/profit for the
year before and after amortisation of goodwill and exceptional items, and after taxation, on the weighted
average number of ordinary shares of 5p in issue during the year. The loss before amortisation of
goodwill and exceptional items was #14,813,000 (2002: earnings of #6,348,000) and the loss after
amortisation of goodwill and exceptional items was #48,031,000 (2002: loss of #34,842,000). The average
number of qualifying ordinary shares in issue during the year was 218,184,770 (2002: 216,902,805).
Diluted (loss)/earnings per ordinary share may vary from basic earnings per ordinary share due to the
effect of the notional exercise of outstanding share options. In the current and previous period, due to
the Group having made a loss (after amortisation of goodwill and exceptional items) from its continuing
operations, in accordance with the requirements of FRS 14, the diluted earnings per share amounts as
measured based on both before and after amortisation of goodwill and exceptional items are the same as
the basic earnings per share amounts.
6 Dividends 2003 2002
#000 #000
Interim dividend of Nil per ordinary share (2002: 0.40p) - 894
Final dividend of Nil per ordinary share (2002: 0.70p) - 1,584
Dividends waived by Pace Micro Technology Employee Benefits Trust
and QUEST - (92)
____________ ____________
- 2,386
____________ ____________
7 Investments
An amount of #2,515,000 (2002: #4,033,000) is held by the Pace Micro Technology Employee Benefits Trust and
the QUEST in respect of own shares purchased to satisfy options granted to employees (see note 3).
8 Debtors
Debtors include a deferred tax asset of #7,884,000 (2002: #5,538,000) all of which (2002: #5,538,000) is due
after more than one year.
9 Provisions for liabilities and charges
Royalties
under Contingent
negotiation Onerous Corporation cash
(see below) contracts Warranties tax consideration Total
#000 #000 #000 #000 #000 #000
At 1 June 2002 12,593 338 2,862 - 2,500 18,293
Net (credit)/
charge for the
year (1,752) 3,671 5,083 10,087 - 17,089
Utilised (350) (338) (5,863) - (2,500) (9,051)
____________ ____________ ____________ _________ _________ ____________
At 31 May 2003 10,491 3,671 2,082 10,087 - 26,331
____________ ____________ ____________ ________ ________ ____________
The owners of patents covering technology allegedly used by the Group have indicated claims for royalties
relating to the Group's use (including past usage) of that technology. Whilst negotiations over these
liabilities continue, they are not concluded. The directors have made provision for the potential royalties
payable based on the latest information available. Having taken legal advice, the Board considers that
there are defences available that should mitigate the amounts being sought. The Group will vigorously
negotiate all claims but, in the absence of agreement, the amounts provided may prove to be different from
the amounts at which the potential liabilities are finally settled.
The directors consider that to disclose the amounts unused following the negotiation of royalty claims
during the year would be seriously prejudicial to other royalty claims currently under negotiation, in
litigation or in dispute. Accordingly the directors have aggregated amounts released unused with additional
provisions made in order to arrive at the net credit for the year shown above.
10 Net cash inflow/(outflow) from operating 2003 2002
activities #000 #000
Operating loss (49,977) (28,807)
Exceptional items 32,523 39,952
____________ ____________
Operating (loss)/profit before exceptional (17,454) 11,145
items
Amortisation of goodwill 1,401 2,717
Depreciation 6,303 9,013
Loss/(profit) on sale of tangible fixed assets 595 (5)
Decrease/(increase) in stocks 30,752 (7,146)
Decrease in debtors 25,759 6,758
Decrease in creditors (15,714) (35,849)
Increase/(decrease) in provisions for
liabilities and charges 451 (5,543)
____________ ____________
Net cash inflow/(outflow) from operating 32,093 (18,910)
activities
____________ ____________
The Annual Report and Accounts will be posted to shareholders as soon as practicable and will be available
to the public from the Company's registered office at Pace Micro Technology plc, Victoria Road, Saltaire,
West Yorkshire BD18 3LF.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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