4th Sep 2006 07:03
Pace Micro Technology PLC04 September 2006 Pace Micro Technology plc Results for the year ended 3 June 2006 4 September 2006 There will be a presentation for stockbroking analysts at 9.30am at CitigateDewe Rogerson's office, 3 London Wall Buildings, London Wall, London EC2M 5SY Contact: Neil Gaydon Chief Executive, Pace Micro Technology plc David Brocksom Finance Director, Pace Micro Technology plc Ginny Pulbrook Director, Citigate Dewe Rogerson Helen Kettleborough Director of Corporate Communications, Pace Micro Technology plc Telephone: 020 7638 9571 Thereafter: 020 7282 2940 Pace Micro Technology plc for the 52 weeks ended 3 June 2006 SALIENT POINTS • Revenues for the year of £178.1m (2005: £253.3m) • Volume shipments of 2.2m set-top boxes (2005: 3.4m) • Loss before tax and exceptional items £15.6m (2005: profit £9.1m) • Exceptional items of £11.9m with regard to charge against US products, restructuring costs and impairment of trade investment • Full year gross margin of 18.0% (2005: 22.6%) (restated basis) • Diluted loss per share of 13.0p (2005: earnings per share 6.1p) • Net borrowings position £6.1m (2005: net cash £26.4m) • Board and Management succession completed • DirecTV shipments commenced, following product approval All figures, including comparatives, are presented under IFRS. Pace Micro Technology's Chairman, Mike McTighe, commented "As previously announced, the full year results reflect delays emanating fromnew product introduction in the US, a position that is now being resolved asshipments have started to flow through. The new Chief Executive Officer Neil Gaydon and his team have initiated a numberof significant organisational changes to resolve former execution issues,improve margin performance, reduce costs and ensure Pace is best placed to growits business. The Board believes that with shipments to the US underway, a strong performanceof the business in EMEA and Asia Pacific, and the implementation of a new lowercost, but more effective organisational structure, Pace is turning an importantcorner. Pace is in the final stage of field trials on the SD PVR for US cable.As the trials complete and shipments start, expected in the near future,inventory commitments will be realised and the Group will benefit from itsleading technological and market position. The Board acknowledges that there is still much work to do, but believes thatthe changes made since the start of the new financial year will provide greateraccountability within Pace, better customer service, and more predictableengineering delivery. Overall the markets remain strong and Pace has good support from its customersand partners. Therefore the Board is confident that the business has started torecover and will move back into profit this financial year." Chairman's Statement The global market for digital set-top boxes remains strong and Pace's customerbase within this market includes some of the world's largest and mostinfluential payTV operators. However, as previously highlighted, the delays inintroducing leading edge products for the US market have impacted this year'sresults. Nevertheless, the Board is confident in the strength of the underlyingbusiness as payTV operators continue their long-term transition to digitalsystems and the migration to high definition (HD) platforms. Since the year-end, the Group has made important progress in the US. Pace isnow shipping its first satellite product, an HD MPEG-4 personal video recorder(PVR), to DirecTV, the world's largest satellite payTV operator. Pace's HD PVRfor US cable networks has also received approval from a number of otheroperators and shipments have started to some of these, with approvals from otheroperators imminent. Pace's standard definition (SD) PVR for US cable networksis in the final stage of field trials with Comcast. New Chief Executive Officer, Neil Gaydon, has initiated a number of significantorganisational changes to resolve execution issues, improve margin performance,reduce costs and ensure Pace is best-placed to grow its business. Over the last two months, the Group structure has been reshaped to improvecustomer focus, with a combined sales, product and engineering team for eachcustomer group. This approach is more efficient as management layers have beengreatly reduced while at the same time allowing new talent to come to the fore.It has also enabled a headcount reduction of over 10%, greater transparency andaccountability, and a marked reduction in the number of contractors, withoutimpacting customer deliverables. At the same time Pace's internal processes, with particular emphasis on productdevelopment, are being overhauled. Pace's development teams are widelyrecognised as amongst the most talented and experienced in the industry.Nonetheless, improved processes are required to target the recent executionproblems and re-establish a more customer focussed approach to productdevelopment. The changes taking place within Pace are being driven by a strengthenedexecutive management team. The Board and executive team are implementing newappraisal and remuneration systems to ensure Pace's people are appropriatelymanaged and incentivised to deliver significantly improved financialperformance. Results and Financial Review This year is the first in which Pace reports under International FinancialReporting Standards. All prior year figures have been restated accordingly. In Pace's announcement on 30th May 2006 the Board stated that for the 52 weeksto 3 June 2006, it expected a loss before taxation and exceptional items ofcirca £15m and revenues of circa £180m. The Board also noted that theuncertainties in predicting the 2006/07 financial year's outcome could lead tosome impact on the carrying values for the results for the year to 3 June 2006. In the year to 3 June 2006, Pace shipped 2.2m units (2005: 3.4m) and generatedrevenues of £178m (2005: £253m). The underlying pre-tax trading loss for theyear, before exceptional charges noted below, was £15.6m (2005: profit of£9.1m). The Board has considered the carrying values of the items in the balance sheetat 3 June 2006, in particular development expenditure, stock and other balancesheet values related to those US products, which had not been launched at theyear-end. In considering these values, the Board has had particular regard tothe future competitiveness of the products, especially where firm orders havenot yet been received. Delays in the development of the HD PVR for US cable mean that the design usescomponents many of which were ordered, and prices fixed, over a year ago. Newerand less expensive components are now available to use on new designs. Thedelay also affects the anticipated product life of the existing design.Therefore, the Board has decided to write-down the balance sheet carrying valuesat the year-end by £9.0m. This adjustment is shown as an exceptional stockwrite-down of £5.5m and an impairment charge against capitalised developmentcost of £3.5m. During the year to 3 June 2006, and excluding the exceptional stock anddevelopment costs write-down, gross margin decreased to 18% (2005 restated:22.6%). The Group has reallocated the expenses of its operations departmentfrom within cost of sales to overheads better to reflect the nature of thesecosts. This change is explained in Note 3 to this financial information.Margin performance remains a priority, a series of actions to drive improvementsare underway with progress already made as part of the initiatives outlinedabove. Overheads, excluding restructuring costs and other exceptional items, were£48.3m (2005: £48.5m). Underlying overhead spend i.e. after adjusting for theimpact of the capitalisation of development expenditure under IAS38, show a yearon year increase of £6.3m, reflecting the increased investment in newengineering projects incurred in the year. Further reviews are underway todrive cost savings going forward. There are two further exceptional items: restructuring and reorganisation costsof £2.4m (2005: £0.3m) and a loss of £0.5m resulting from the write-off of theinvestment in VegaStream Ltd. After these exceptional costs and the exceptionalinventory write-down, the Group recorded a loss before taxation of £27.5m (2005:profit of £9.0m). The Board has decided not to recommend a dividend (2005:nil). The Group ended the year with net borrowings of £6.1m (2005: net cash of£26.4m), which largely reflects the working capital impact of an increased levelof inventory held to support the roll out of product into the US. Regional Operating Review Pace has had a disappointing year, with delivery delays on a number of new andhighly complex set-top box products. The year was further characterised byindustry-wide difficulties in the development by third parties of silicon andsoftware for the new MPEG-4/H.264 compression standard. This, combined withdelays in Pace's own software development, held back rollout of the Group's ownadvanced HD products. Pace has, however, embraced this new compression standardas it will be the industry's core technology for the next 10-15 years and Paceis now at the forefront of this change. EMEA EMEA remains Pace's largest market, with total shipments of 1.6m set-top boxes(2005: 2.9m). In the UK, Pace has continued to work with BSkyB, recentlywinning new business for Digibox and the Sky+ PVR for shipment later thiscalendar year. The Group also shipped, albeit in smaller quantities, into UKcable. The Group is now benefiting from its early investment in HD, with Pace productsbeing used to launch HD services by Premiere (Germany) and Sky Italia, two ofthe three major European HD launches in the year. The Pace set-top box used byPremiere was the world's most advanced satellite HD box. Pace also continues to lead in PVR, which provides Pace with a higher averageselling price and enables payTV operators to deliver new services to theircustomers. During the year two operators, Sky Italia and Viasat, selected Paceproducts for their PVR launches. The Group commenced shipments to UPC, an important new customer and part ofLiberty Global. Liberty is a leading player in European cable and now ownsanother Pace customer, Ntl Ireland. The new cable platform for UPC createspotential in other markets. Pace, along with other set top box manufacturers and broadcasters, has noted thepotential re-interpretation by European Union customs authorities of customsregulations that could result in the extension of import duties to interactiveset-top boxes manufactured outside, but imported into, the EU. If and until anychange is made, and the timing of its implementation clarified, it is impossibleto quantify any possible impact. Americas Shipments into the Americas increased to 174,000 (2005: 138,000), with shipmentsto Time Warner Cable in the US and Rogers, Videotron and Sasktel in Canada. Since the year-end, Pace has made important progress with shipments now beingmade to DirecTV and a number of cable operators, several of which are newcustomers. Pace's third new US product, an SD PVR for US cable, is nowapproaching the end of its Comcast field trial. As previously announced, theapproval schedule for Comcast deliveries, as a result of the delays, is nowoutside the terms originally agreed in the contract with this customer, but theBoard continues to believe that Pace will generate substantial revenues from itsrelationship with Comcast. Asia Pacific Overall, shipments increased to 400,000 (2005: 350,000 units). Pace's maincustomers within this region are based in Australia and New Zealand, where Paceis leading the rollout of PVR products. In Australia, the Foxtel relationshipcontinues to be strong with Pace its lead supplier, shipping both standardset-top boxes and the iQ PVR for both cable and satellite customers. PVRshipments also commenced to Optus, which offers the Foxtel digital service toits customers. Pace was selected to launch the PVR service for Sky New Zealand,one of its longstanding customers. Board and Executive appointments There has been significant change to the Board with the appointment of NeilGaydon as Chief Executive Officer in April and Mike McTighe as Chairman in May.At the same time, Pat Chapman-Pincher became the Company's Senior IndependentDirector. New appointments to the strengthened Executive Management team include DavidMcKinney (Chief Operating Officer), Jill Ezard (Director of HR), Mike Pulli(President Pace Americas), Ian Sharp (President EMEA & APAC) and HelenKettleborough (Director of Corporate Communications). Future Markets and Technologies Consumer demand for flat panel TVs, HD, PVR services and high quality audio isgrowing, as is the take-up of triple play bundles of voice, video and internet. To support satellite, cable and telco payTV operators as they work to win andretain high value customers seeking out these new products and services, Pace isdeveloping its product range and investigating new technology opportunities.For example, broadband IP capability is being built into Pace's next generationset-top boxes and the Group is working with conditional access partners oncontent protection for anytime-anywhere media consumption. Work also continueson 'Multiroom' technology, enabling content distribution around the home, whichis expected to support high value customer retention for operators.Additionally, progress is being seen in IPTV markets and a new Pace product isbeing launched shortly. Outlook Over the last 12 months Pace has been through a difficult period, from which itis now emerging. The Board believes that with shipments to the US underway, a strong performanceof the business in EMEA and Asia Pacific, and the implementation of a new lowercost, but more effective organisational structure, Pace is turning an importantcorner. Pace is in the final stage of field trials on the SD PVR for US cable.As the trials complete and shipments start, expected in the near future,inventory commitments will be realised and the Group will benefit from itsleading technological and market position. The Board acknowledges that there is still much work to do, but believes thatthe changes made since the start of the new financial year will provide greateraccountability within Pace, better customer service, and more predictableengineering delivery. Overall the markets remain strong and Pace has good support from its customersand partners. Therefore the Board is confident that the business has started torecover and will move back into profit this financial year. Mike McTigheChairman 4 September 2006 CONSOLIDATED INCOME STATEMENTFOR THE 52 WEEKS ENDED 3 JUNE 2006 Note 52 weeks ended 3 June 2006 53 weeks ended 4 June 2005 Results Exceptional Results for Results Exceptional Results before items* the year before items* for the exceptional exceptional year items items £000 £000 £000 £000 £000 £000 Revenue 2 178,095 - 178,095 253,326 - 253,326Cost of sales 4 (145,984) (5,500) (151,484) (196,109) - (196,109) _____________ _____________ _____________ _____________ _____________ _____________Gross profit 32,111 (5,500) 26,611 57,217 - 57,217 Administrative expenses: Research & Development 4 (21,433) (3,500) (24,933) (23,160) - (23,160)expenditure Other administrative 4 (26,864) (2,383) (29,247) (25,359) (145) (25,504)expenses _____________ _____________ _____________ _____________ _____________ _____________Total Administrative expenses (48,297) (5,883) (54,180) (48,519) (145) (48,664) _____________ _____________ _____________ _____________ _____________ _____________Other operating expenses: Impairment loss on trade 4 - (505) (505) - - - investment _____________ _____________ _____________ _____________ _____________ _____________Operating (loss)/profit (16,186) (11,888) (28,074) 8,698 (145) 8,553 Financial income - bank 755 - 755 728 - 728interest receivableFinancial expenses - bank (131) - (131) (318) - (318)interest payable _____________ _____________ _____________ _____________ _____________ _____________(Loss)/profit before tax (15,562) (11,888) (27,450) 9,108 (145) 8,963 _____________ _____________ _____________ _____________ Tax (charge)/credit 5 (1,334) 4,717 _____________ _____________(Loss)/profit after tax (28,784) 13,680 _____________ _____________ Attributable to: Equity holders of the Company (28,784) 13,680 Basic (loss)/earnings per ordinary share 6 (13.0)p 6.2p Diluted (loss)/earnings perordinary share 6 (13.0)p 6.1p The figures for the period to 4 June 2005 have been restated from the audited UKGAAP figures presented on 12 July 2005, on which an unqualified auditors' reportwas given. Details on the IFRS impact on the Group's historical numbers arecontained in the Group's Annual Report and Accounts. The comparatives have alsobeen restated as disclosed in note 3. * The exceptional items relate principally to an inventory write down, impairment of capitalised development expenditure, restructuring costs and an impairment of a trade investment. These are explained in more detail in note 4. CONSOLIDATED BALANCE SHEETAT 3 JUNE 2006 3 June 2006 4 June 2005 Note £000 £000ASSETS Non Current Assets Property, plant and equipment 7,671 6,185 Intangible assets - goodwill 9,436 9,436Intangible assets - development expenditure 11,286 7,450Investments in other companies 349 674 Deferred tax assets 2,887 4,009 ____________ ____________Total Non Current Assets 31,629 27,754 ____________ ____________Current Assets Inventories 34,792 10,135Trade and other receivables 42,337 51,827Cash and cash equivalents - 26,647 ____________ ____________Total Current Assets 77,129 88,609 ____________ ____________ Total Assets 108,758 116,363 ____________ ____________ EQUITY Issued capital 11,576 11,349 Share premium 36,246 35,677 Translation reserve 240 150 Retained earnings (5,595) 22,576 _______ _______ Total Equity attributable to equity holders of the parent 42,467 69,752 LIABILITIES _______ _______ Non Current Liabilities Interest bearing loans and borrowings 154 205 Provisions 7 9,284 9,304 _______ _______Total Non Current Liabilities 9,438 9,509 _______ _______Current Liabilities Trade and other payables 45,406 31,561 Current tax liabilities 3 49 Interest bearing loans and borrowings 5,937 56 Provisions 7 5,507 5,436 ____________ ____________Total Current Liabilities 56,853 37,102 ____________ ____________ Total Liabilities 66,291 46,611 ____________ ____________Total Equity and Liabilities 108,758 116,363 ____________ ____________ CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Share Share Translation Retained Total capital premium reserve earnings equity £000 £000 £000 £000 £000 Balance at 29 May 2004 11,339 35,647 - 8,152 55,138 Profit for the period - - - 13,680 13,680Employee share incentive charges - - - 744 744Issue of shares 10 30 - - 40Currency translation adjustments - - 150 - 150Balance at 4 June 2005 11,349 35,677 150 22,576 69,752 Loss for the period - - - (28,784) (28,784)Employee share incentive charges - - - 493 493Movement in employee share trusts - - - 120 120Issue of shares 227 569 - - 796Currency translation adjustments - - 90 - 90Balance at 3 June 2006 11,576 36,246 240 (5,595) 42,467 CONSOLIDATED CASH FLOW STATEMENT FOR THE 52 WEEKS ENDED 3 JUNE 2006 52 weeks ended 53 weeks ended 3 June 2006 4 June 2005 £000 £000 Cash flows from operating activities (Loss)/profit before tax (27,450) 8,963Adjustments for:Share based payments charge 493 744Depreciation of property, plant and equipment 4,116 4,419Amortisation of development expenditure 13,296 11,035Impairment of trade investments 505 -Loss on sale of property, plant and equipment 241 1Net financial income (624) (410)Movement in trade and other receivables 9,490 9,152Movement in trade and other payables 13,871 (9,046)Movement in inventories (24,657) (129)Movement in provisions 51 (1,653) _____________ _____________Cash (used in)/ generated from operations (10,668) 23,076Interest paid (142) (385)Tax paid (258) (1,378) _____________ _____________Net cash (used in)/ generated from operatingactivities (11,068) 21,313 _____________ _____________ Cash flows from investing activities Acquisition of trade investments (180) (674) Purchase of property, plant and equipment (5,862) (3,594)Development expenditure (17,132) (11,851)Proceeds from sale of property, plant and equipment 5 6 Proceeds from exercise of employee share options 120 29 Interest received 842 728 ____________ ____________Net cash used in investing activities (22,207) (15,356) ____________ ____________ Cash flows from financing activities Proceeds from issue of share capital 796 40 Repayment of loans (50) (38) ____________ ____________Net cash generated from financing activities 746 2 ____________ ____________ Net change in cash and cash equivalents (32,529) 5,959 Cash and cash equivalents at start of period 26,647 20,705Effect of exchange rate fluctuations on cash held 2 (17) ____________ ____________Cash and cash equivalents at end of period (5,880) 26,647 ____________ ____________ NOTES 1 Basis of preparation The financial statements have been prepared in accordance with applicableaccounting standards and under the historical cost convention as modified by therevaluation of derivative instruments. As referred to in the Business Environment section below, the Group customarilyhas a level of inventory and purchase commitments, the realisation of which isnot certain. As a result of delays in the launch of US products, at 3 June 2006these inventories and commitments were at much higher levels than usual. TheGroup inventories included £23 million after provisions, and there were purchasecommitments of c£60 million, in respect of these products, the sales of whichwere not certain, either through pending approvals or through a lack ofcontractual certainty, or both. At 4 September 2006, approvals and contractshad been obtained in respect of a significant proportion of this value; of whichthere remains a total inventory and purchase commitment value, after provisions,of c£16m which is pending approvals and further c£14 million as yet unmatched bycustomer commitments. The Directors have considered the ongoing approvalsprocess and negotiations with customers and have concluded that this value islikely to be realised. The Group has bank facilities to September 2007, based upon 50% of relevanttrade debtors, as adjusted, up to a maximum of £25 million. These facilities arealso subject to product approval and certain performance covenants whichconditions, by their nature, introduce a degree of estimation into thedetermination of facility availability. In managing the product manufacturing schedule to the approval process the Grouphas, and continues to, reschedule, cancel or otherwise renegotiate with itssuppliers the timing and value of purchase commitments and payments, which hasincluded the granting of security interests. The ability and willingness ofsuppliers to work with Pace continues to be important to the management of thebusiness. As noted in the Chairman's statement, no decision in respect of any changes inthe EU import duty classification has yet been reached. Such a decision couldhave a material impact on the future performance of the business in respect ofits EU operations, depending upon the nature of the change and the timing of anyimplementation. The Board has prepared a working capital forecast based upon assumptions as totrading and the realisation of inventory, and the matters above, as well asbuilding in the other circumstances noted in the Business Environment sectionbelow. In particular the Board has noted the importance to the realisation ofinventory and cash of shipments expected in the near future of the SD PVR for UScable as referred to in the Chairman's statement. The Board has also modelled anumber of alternative business scenarios. Based upon these, whilst recognisingthat there is uncertainty, the Board has concluded that the Group has adequateworking capital and that therefore it is appropriate to use the going concernbasis of preparation for these financial statements. International Financial Reporting Standards EU law (IAS Regulation EC 1606/2002) requires that the annual consolidatedfinancial statements of the company, for the 52-week period ending 3 June 2006,be prepared in accordance with International Financial Reporting Standards ("IFRS") adopted for use in the EU ("Adopted IFRS"). Consequently these financial statements have been prepared on the basis of therecognition and measurement requirements of IFRS in issue that are eitherendorsed by the EU and effective (or available for early adoption) at 3 June2006, being the Group's first annual reporting date at which it is required touse Adopted IFRS. An explanation of how the transition to IFRS has affected the reported financialposition and financial performance of the Group together with a summary ofsignificant accounting policies is provided in a note to the Group's AnnualReport and Accounts. This note includes reconciliations of equity and profit orloss for the comparative periods under UK Generally Accepted AccountingPractices ("UK GAAP") to those reported for those periods under IFRS. The financial information set out in this document does not constitute thecompany's statutory accounts for the 52 week period ended 3 June 2006, or the 53week period ended 4 June 2005, but is derived from the 2006 accounts. Statutoryaccounts for 2005, which were prepared under UK GAAP, have been delivered to theRegistrar of Companies, and those for 2006, prepared in accordance with IFRSadopted by the EU, will be delivered in due course. The auditors have reportedon those accounts; their reports were (i) unqualified, (ii) did not include anyreferences to any matters to which the auditors drew attention by way ofemphasis without qualifying their reports and (iii) did not contain statementsunder section 237(2) or (3) of the Companies Act 1985. Business Environment Strategy The Group continues to develop its set-top box strategy on three fronts: • To develop increasingly technologically advanced products • To match the geographic spread of its business with that of the global payTV operator market • To identify and exploit opportunities for additional recurring revenue streams Customers and Markets The global market for payTV products (primarily set-top box products) isgrowing, although concentrated within a limited number of operators, some ofwhich are currently in an unprofitable business development phase. The payTVmarket is attractive, and as with most modern markets, it is highly competitivewith Pace's competitors ranging from divisions of large multinationalelectronics companies to specialist smaller companies. There are a number ofbarriers to market entry, in particular a requirement for complexpost-deployment support to ensure deployed set-top boxes can continue to deliverover time a payTV service as this service grows in size and sophistication. Orders placed by Pace's payTV customers are typically large one-off orders fordelivery over a number of months with supplemental orders for additionalvolumes. As the eventual deployment of the set-top boxes can be unpredictable,revenues can be volatile. The difficulty in predicting Pace's business flow andits risks can be exacerbated by a number of other factors including, forexample, the development process for an advanced set-top box which can take over12 months. The Group works on long lead times (e.g. four months or more) forcomponent supply and manufacture, typical of the industry. In the US market, inparticular, customer firm order lead times may be less than component leadtimes. There are third party delivery risks, for example, difficulties in thedelivery of components or software code and the final go ahead for manufactureand firm order commitments are usually dependent on product approvals andacceptance both from the operator and sometimes from third parties. Inaddition, there is a requirement for frequent design revisions that take intoaccount price deflation and introduction of new, more cost effective electroniccomponents. The revision process places increased demand on engineeringresources but, at the same time, provides a further barrier to entry to newcompetitors. The combined impact of these factors, together with the need to meet customerdelivery requirements, imposes risk on Pace's product introduction programme. Currency Risks The standard 'industry currency' is the US dollar, with the majority ofcomponents and manufacturing capacity purchased in this currency. As a result,due to part of the Group's sales being in Sterling and Euros (the sale prices ofwhich will be fixed for months in advance), the Group remains exposed to therisk of foreign currency movements. To manage this risk, the Group's treasurypolicy is progressively to cover cash flows over a six month period, and to seeka greater percentage of US dollar sales to provide a commercial hedge againstcurrency exposures. Interest Rate Risk The Group's policy is to review regularly the terms of its available short termborrowing facilities and to assess individually and manage each long termborrowing commitment accordingly. The Groups does not take out any interestrate swaps. Credit Risk Management has a credit policy in place, which provides cover over most debtors,subject to excesses, and the exposure to credit risk is monitored on an ongoingbasis. The Group does not require collateral in respect of financial assets. Deposit investments are allowed only in liquid securities and only withcounterparties that have a credit rating equal or better than the Group.Transactions involving derivative financial instruments are with counter partieswith whom the Group has a signed netting agreement as well as sound creditratings. Engineering The Group is dependent on the technological skills of its employees and isworking to increase the average skill base at all of the main development sites. At the same time Pace is seeking to outsource a larger part of its developmentand next generation cost down activity to independent development centres anddesign and manufacturing partners. During the year a significant number of newproducts for new customers have been developed. Development costs directlyattributable to these products are capitalised according to specified criteriaand amortised over the product life. To improve business effectiveness, so the Group is better able to manage thesignificant volume of development work currently underway and in plan, there hasbeen a significant internal re-organisation programme, which is ongoing. Theprogramme has focussed on organisation structures and is now focussed onbusiness processes; in particular improving the effectiveness of Pace'sdevelopment process. Third Party and Other Risks Pace provides product warranties for its set-top boxes. Although it isdifficult to make accurate predictions of potential failure rates or thepossibility of an epidemic failure, as a warranty estimate must be calculated atthe outset of a project before field deployment data is available, theseestimates improve during the lifetime of the product in the field. Pace's products incorporate third party technology, usually under licence.Inadvertent actions may expose Pace to the risk of infringing third partyintellectual property rights. Potential claims can still be submitted manyyears after a product has been deployed. Any such claims are always vigorouslydefended. The Group outsources its manufacture to third party specialist electronicsmanufacturers, in particular to Solectron Corporation. Solectron manufactures asignificant percentage of the Group's products at plants in Romania, Mexico andShenzhen in China. Regulatory Like all other businesses, the Group remains exposed to changes in theregulatory environment, including potential modifications to import dutyregimes, discussions on which have been, and continue to be, held. During theyear, the Company has continued to manage the implementation of the EU WEEE andRoHs directives. 2 Revenue 52 weeks ended 53 weeks ended 3 June 2006 4 June 2005 £000 £000 The geographical analysis of revenue by destination is: United Kingdom 64,446 106,269 Continental Europe 56,517 98,095 Asia Pacific 38,309 24,547 North America 18,823 23,531 Rest of the World - 884 ____________ ____________ 178,095 253,326 ____________ ____________ 3 Reclassification During the period, certain expenses relating to the operations department, whichis responsible for overseeing manufacturing, have been reclassified from cost ofsales to administrative expenses, and the prior period comparatives adjustedaccordingly. This classification better reflects the overhead nature of thecosts and the Group's move to outsource more of its manufacturing and supplychain function. The amount reclassified was £3,779,000 (2005: £3,703,000). 4 Exceptional items 52 weeks ended 53 weeks ended 3 June 2006 4 June 2005 £000 £000 Exceptional charge in respect of US product 9,000 - Restructuring and reorganisation costs 2,383 325 Release regarding reference to Financial Services and Markets Tribunal - (180) Impairment loss on trade investment 505 - ____________ ____________ 11,888 145 ____________ ____________ As referred to in the Chairman's statement an exceptional charge has been made following the delay in the delivery of US product, which charge is reflected as a £5.5m inventory write down within cost of sales and a £3.5m charge against capitalised development costs. The restructuring and reorganisation charges relate to a restructuring programme within the Group. Previously the Company was party to a reference to the Financial Services and Markets Tribunal. Following the settlement of the matter in the 53 weeks ended 4 June 2005 a net release was made from the provision originally established. The impairment loss relates to the Company's investment in VegaStream Limited. This company encountered financial difficulties and, following a decision not to make any further investments, a provision has been made against the carrying value of the investment. 5 Tax (charge)/credit 52 weeks ended 53 weeks ended 3 June 2006 4 June 2005 £000 £000 The tax (charge)/credit is based on the estimated effective rate of taxation on trading for the period and represents: United Kingdom corporation tax at 30% - - Overseas tax (212) (240) Adjustment in respect of a prior year (see below) - 4,760 Deferred tax (1,122) 197 ____________ ____________ (1,334) 4,717 ____________ ____________ Following the agreement of an outstanding Corporation Tax matter with the Inland Revenue in the UK, a one-off tax credit was taken in the 53 weeks ended 4 June 2005 in respect of a prior year. 6 (Loss)/earnings per ordinary share Basic (loss)/earnings per ordinary share have been calculated by reference to the (loss)/profit after taxation, and the average number of qualifying ordinary shares of 5p in issue of 221,742,588 (2005: 219,164,009). Diluted (loss)/earnings per ordinary share vary from basic (loss)/earnings per ordinary share due to the effect of the notional exercise of outstanding share options. The diluted earnings are the same as basic (loss)/earnings. The diluted number of qualifying ordinary shares was 224,618,352 (2005: 223,763,782). 7 Provisions Royalties Onerous Warranties Total under contracts £000 £000 negotiation £000 (see below) £000 At 4 June 2005 6,440 1,139 7,161 14,740 Charge for the period 245 443 4,745 5,433 Utilised (423) (1,089) (3,870) (5,382) ____________ ___________ ____________ ___________ At 3 June 2006 6,262 493 8,036 14,791 ____________ ___________ ____________ ___________ Due within one year - 493 5,014 5,507 Due after more than one year 6,262 - 3,022 9,284 The owners of patents covering technology allegedly used by the Group haveindicated claims for royalties relating to the Group's use (including pastusage) of that technology. Whilst negotiations over these liabilities continue,they are not concluded. The directors have made provision for the potentialroyalties payable based on the latest information available. Having taken legaladvice, the Board considers that there are defences available that shouldmitigate the amounts being sought. The Group will vigorously negotiate ordefend all claims but, in the absence of agreement, the amounts provided mayprove to be different from the amounts at which the potential liabilities arefinally settled. 8 Contingencies Under the Waste Electrical and Electronic Directive producers of electricalgoods, including set-top boxes, are financially responsible for specifiedcollection, recycling, treatment and disposal of past and future electronicproducts. It is not currently possible to estimate the Company's existingliability or future expenses resulting from the related WEEE legislation, as theCompany awaits clarification from all individual European member states ofspecific requirements and policies. A writ has been issued against the Company by a former customer relating to thesupply of set top boxes in 2000/01 in respect of a claim to a maximum liabilityof c£7.5m. The Directors believe that they have good defences to such a claimand therefore, in the absence of any liability, no provision has been made. Circulation to shareholders The Annual Report and Accounts will be posted to shareholders as soon aspracticable and will be available to the public from the Company's registeredoffice at Pace Micro Technology plc, Victoria Road, Saltaire, West Yorkshire,BD18 3LF. There will be an analysts presentation on 4 September 2006 at 9.30am at CitigateDewe Rogerson's office, 3 London Wall Buildings, London Wall, London EC2M 5SY. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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