5th Feb 2007 07:01
Pace Micro Technology PLC05 February 2007 Pace Micro Technology plc Results for the half year ended 2 December 2006 5 February 2007 Contact: Neil Gaydon Chief Executive Officer, Pace Micro Technology plc Ginny Pulbrook Director, Citigate Dewe Rogerson Helen Kettleborough Director of Corporate Communications, Pace MicroTechnology plc Telephone: 020 7282 8000 until 12:30Thereafter: 020 7282 2940 There will be a presentation for stockbroking analysts at 9.30am at Citigate Dewe Rogerson's office, 3 London Wall Buildings, London Wall, London EC2M 5SY Pace Micro Technology plc for the 26 weeks ended 2 December 2006 HIGHLIGHTS Performance demonstrates Pace has turned the corner, benefiting from improvedfinancial performance and successful new product shipments worldwide. As aresult revenues have more than doubled and the Company has returned to profit. • Shipments up over 60% to 1.8 million set-top boxes (2005: 1.1 million) • North America contributed over 50% of revenue, confirming Pace's long-term strategy to target the world's largest digital television market • Revenue more than doubled to £180.2m (2005: £78.9m) • Profit before tax and restructuring costs of £1.4m (2005: loss £8.9m) • Diluted earnings per share of 0.1p (2005: loss per share of 4.6p) • Net borrowings of £14.1m (3 June 2006: £6.1m) Business: • US shipments have started well, complemented by continuing solid performances in EMEA and Asia Pacific • US high definition (HD) MPEG-4 personal video recorder (PVR) demand growing • Growth in market demand for high definition products driven by payTV operators, consumer demand and falling prices of high definition ready television displays • Digital television market well positioned for growth due to government digital switchover plans in a number of countries • Continued commitment to new technology development to address new ways of delivering and consuming entertainment services Pace Micro Technology's Chairman, Mike McTighe, commented "During 2006, the Pace management team focused on the need for change within theorganisation. Our actions are beginning to pay off and we are now wellpositioned to capitalise on our strengths. The commercial market place is challenging as short-term demand is oftenunpredictable, but as a result of restructuring, we have created a more customercentric, motivated, and accountable organisation. The Board is confident that progress will continue and that Pace remains ontrack to meet its expectations for the 2006/07 financial year. This is as aresult of management's focus on customer relationships, technology innovation,operational excellence, delivery and profitability, coupled with greater globaldemand for digital products and services." Chairman's Statement Overview Pace has now turned the corner with successful new product shipments takingplace in markets worldwide, most importantly the US. A number of significantorganisational changes initiated by the new management team to resolve executionissues, improve margin performance and reduce costs are starting to deliverresults. During the first half Pace's revenues have more than doubled and theCompany has returned to profit. Good progress is being made in the US, which contributed over 50% of the Group'srevenues in the period, confirming Pace's long-term strategy to target theworld's largest digital TV market. Pace continues to deliver its highdefinition (HD) MPEG-4 personal video recorder (PVR) to DirecTV and a growingnumber of US cable operators have purchased Pace's HD PVR. Following approvalin September 2006, shipments to Comcast of Pace's standard definition (SD) PVRfor US cable networks started. Elsewhere in the world there was solid growth asPace secured business with both new and existing customers. Improving profitability is now a key priority and progress is expected asimprovements are made in product design and operational execution. As a resultof work already carried out, improved margins are now being achieved in some newproducts, but due to the development cycle of a typical set-top box design, itwill take 12 to 18 months to work through. In the wider market, competition between payTV operators and new entrants suchas telcos and operators providing video services over broadband is drivingdemand for new and existing products in the fight both to acquire and retainsubscribers. At the same time consumers purchasing HD-ready displays aregenerating demand for new product solutions that combine high definition, PVRand other digital video services. Momentum is also growing in markets whereanalogue is being phased out with a complete switch to digital, offering furtheropportunities for Pace. The new organisation structure, implemented in summer 2006, has reshaped Pace'sbusiness around its customers, enabling more effective, deeper customerrelationships. The changes are placing Pace in a stronger position to win newbusiness while at the same time enabling operational improvements in the design,manufacture and delivery of new products. This has been evidenced by a numberof successful new contract wins. Results and Financial Review With strong order growth across all regions, shipments increased to 1.8m set-topboxes (2005: 1.1m) and revenues increased to £180.2m (2005: £78.9m). Grossmargin performance was in line with the Board's expectations, decreasing to15.3% (2005: restated: 15.8%), as the business sells through products based onolder and less cost-efficient designs. The current product mix includes somehigh volume products, in particular for the US market, with lower margins. Atthe same time average selling prices have risen from £72 to £100, reflecting thegrowing proportion of higher specification products, such as high definitionPVRs, being shipped. The trading profit before exceptional charges noted below, was £1.4m (2005: lossof £8.9m). Underlying overheads, excluding restructuring costs and the impact ofIAS38, were £26.1m (2005: £27.4m). Under IAS38, Pace capitalised a net £1.3m(2005: £5.5m) of development costs. Restructuring and reorganisation costs of£0.9m (2005: £1.0m) were incurred and, due to organisational restructuring,headcount fell from 660 to 592 during the period. After exceptional costs, theGroup recorded a profit before taxation of £0.5m (2005: loss of £9.8m). TheBoard has decided not to recommend a dividend (2005: nil). The Group finished the period with net debt of £14.1m (3 June 2006: £6.1m), dueto the working capital impact of the Group's significant increase in USproduction and with the large volumes shipped towards the end of the half year. The Board is confident that the Group will be cash generative in the secondhalf of the year. Operating Review The first half of the 2006/07 financial year saw Pace work through thechallenges that had been holding back deliveries on a number of new and highlycomplex set-top box products. These challenges were the result of delays inPace's and third parties' software development, coupled with industry-widedifficulties in the development of silicon and software for the new MPEG-4/H.264compression standard. The resolution of these issues has enabled the businessto move forward. EMEA Pace shipped 1.0m set-top boxes into the EMEA region (2005: 0.9m), an increaseof over 10% on the comparative period. Pace has continued to work with BSkyB,recently winning new business for Digibox and the Sky+ PVR for shipment laterthis calendar year. In Italy, shipments of a standard definition PVR commencedto Sky Italia, alongside ongoing shipments of both high and standard definitionset-top boxes. A new contract was signed with Digiturk, a major Turkish operator, for a highdefinition PVR and basic set-top box. The Digiturk product now in developmentuses a new combination of Irdeto conditional access and OpenTV middleware.These products are expected to create a series of new business opportunities forthe Group, as a number of other payTV operators will require similar solutions. In Germany Pace's performance has been less successful following Premiere's lossof Bundesliga football rights, which has had a direct impact on the demand.Amongst the Group's European cable customers a new box for the UK market is nowin testing and a new box for KDG in Germany is expected to ship later in 2007.Shipments to UPC in The Netherlands have been at a good level during the period. Pace, along with other set top box manufacturers and broadcasters, continues tomonitor the potential re-interpretation by European Union customs authorities ofcustoms regulations that could result in the extension of import duties tointeractive set-top boxes manufactured outside, but imported into, the EU. Nofinal decision has been made so it remains impossible to quantify any potentialimpact. However, Pace has analysed its options against the range of possibleoutcomes and has plans in place to manage those outcomes. Americas Shipments into the Americas increased significantly to 0.6m (2005: 0.1m) as Pacecommenced deliveries to DirecTV and Comcast, two of the world's largest payTVoperators. At the same time Pace's US customer base has expanded, with over 20further cable operators. This is in addition to ongoing business with Rogersand Videotron in Canada. Pace is also working with its US cable customers to meet a new FederalCommunications Commission (FCC) regulation, requiring all cable set-top boxes toincorporate 'separable security', similar to the card-based conditional accesssystems used by many European payTV operators. This regulation comes into placeon 1 July 2007 and Pace is on track to introduce its own range of CableCARDset-top box products. Asia Pacific Shipments to Pace's customers in the Asia Pacific region increased to 265,000(2005: 66,000). In Australia Pace has two customers, Foxtel and Optus. Paceremains Foxtel's lead supplier shipping both standard definition set-top boxesand the iQ PVR and has recently celebrated its one millionth box shipment. PVRshipments continue to Optus, which offers the Foxtel digital service to itscustomers. At Sky New Zealand, Pace has continued to ship this customer'sstandard box and shipments of the PVR have grown, following its launch lastyear. Board and Executive appointments In January, Pace announced the appointment of a new Chief Financial Officer,Stuart Hall. Stuart will start in early April and succeed David Brocksom wholeft Pace on 2 February. The Board would like to thank David Brocksom for theimportant contribution he has made to Pace over the last three years. Future Markets and Technologies Innovation is at the core of Pace's culture and helps keep the Group ahead ofthe competition by exciting customers and opening up new opportunities. A goodexample is DirecTV. Pace was selected to launch DirecTV's cutting edge MPEG-4HD PVR because of the Group's early investment and achievements in this newtechnology. By 2010 there are expected to be over 100 million HD homesworldwide and Pace is well positioned to exploit this growing market. Pace takes a 'Managed Innovation' approach to new technology and productdevelopment, selecting projects based on robust analysis, the likely return oninvestment, and skill availability within Pace and at selected partners. As aresult, Pace can focus on products that meet future customer requirements andexploit market opportunities based on emerging technologies, such as securewireless video, the networked home and video over Broadband. One example where Pace has identified a new market opportunity and created anoffering is MultiDweller. This product distributes digital services - broadcastand broadband - to homes in large apartment blocks much more cost-effectivelythan existing solutions. With analogue switch-off fast approaching, thisproduct could be a compelling solution for many operators. Pace is investing infurther projects and new technologies to take advantage of such additionalmarket opportunities. Outlook As Pace celebrates its 25th anniversary during 2007 shipments are growingsteadily, in particular to the US. The Board is confident that progress willcontinue in the second half as a result of management's focus on customerrelationships, technology innovation, operational excellence, and profitability,coupled with greater global demand for digital products and services. Marginperformance will be constrained in the second half as the Group continues toship older and less cost-effective designs. The Board acknowledges that significant progress has been made, but furtherimprovement is necessary, especially in the area of profitability. Pace'srecent restructuring programme has created a more customer focussed, motivatedand accountable organisation that will enable more predictable engineeringdelivery and improved profitability, a key priority for the business. Digital television markets remain strong and Pace has excellent support from itscustomers and partners as well as a clear plan going forward. As ever, Pace'ssuccess remains highly dependent on the success of its customers' businesses andthird party technology suppliers. The Board is confident that progress will continue and that Pace remains ontrack to meet its expectations for the 2006/07 financial year. Mike McTigheChairman5 February 2007 CONSOLIDATED INTERIM INCOME STATEMENTFOR THE 26 WEEKS ENDED 2 DECEMBER 2006 Note 26 weeks ended 26 weeks ended 52 weeks ended 2 Dec 2006 3 Dec 2005 3 June 2006 £000 £000 £000 Revenue 2 180,217 78,940 178,095Cost of sales: Before exceptional items (152,719) (66,430) (145,984) Exceptional items 3 - - (5,500) _____________ _____________ _____________Total Cost of sales (152,719) (66,430) (151,484) _____________ _____________ _____________Gross profit 27,498 12,510 26,611 Administrative expenses: Research and Development expenditure (12,225) (9,416) (21,433) Other administrative expenses: Before exceptional items (12,546) (12,505) (26,864) Exceptional items 3 (884) (970) (5,883) _____________ _____________ _____________Total Administrative expenses (25,655) (22,891) (54,180) _____________ _____________ _____________Other operating expenses: Impairment loss on trade investment 3 - - (505) _____________ _____________ Operating profit/(loss) 1,843 (10,381) (28,074) Financial income - bank interest receivable 53 592 755Financial expenses - bank interest payable (1,384) (51) (131) _____________ _____________ _____________Profit/(loss) before tax 512 (9,840) (27,450) Tax charge 4 (288) (264) (1,334) _____________ _____________ _____________Profit/(loss) after tax 224 (10,104) (28,784) _____________ _____________ _____________ Attributable to: Equity holders of the Company 224 (10,104) (28,784) Basic earnings/(loss) per ordinary share 5 0.1p (4.6)p (13.0)p Diluted earnings/(loss) per ordinary share 5 0.1p (4.6)p (13.0)p All figures presented on pages 6 to 14 are unaudited. CONSOLIDATED INTERIM BALANCE SHEETAT 2 DECEMBER 2006 2 Dec 2006 3 Dec 2005 3 June 2006 Note £000 £000 £000 ASSETS Non Current Assets Property, plant and equipment 6,877 7,278 7,671 Intangible assets - goodwill 9,436 9,436 9,436Intangible assets - development 12,570 12,972 11,286expenditureInvestments in other companies 349 777 349 Deferred tax assets 2,887 4,009 2,887 ____________ ____________ ____________Total Non Current Assets 32,119 34,472 31,629 ____________ ____________ ____________Current Assets Inventories 27,512 18,822 34,792Trade and other receivables 83,192 43,413 42,337Cash and cash equivalents - 13,864 - ____________ ____________ ____________Total Current Assets 110,704 76,099 77,129 ____________ ____________ ____________ Total Assets 142,823 110,571 108,758 ____________ ____________ ____________ EQUITY Issued capital 11,627 11,487 11,576Share premium 36,521 36,038 36,246Translation reserve (885) 215 240Retained earnings (5,072) 12,868 (5,595) _______ _______ _______ Total Equity attributable to equity holders ofthe parent 42,191 60,608 42,467 _______ _______ _______LIABILITIES Non Current Liabilities Interest bearing loans and borrowings 151 182 154Provisions 6 8,972 9,310 9,284 _______ _______ _______ Total Non Current Liabilities 9,123 9,492 9,438Current Liabilities _______ _______ _______ Trade and other payablesCurrent tax liabilities 72,491 35,274 45,406Interest bearing loans and borrowings 256 220 3 13,930 57 5,937Provisions 6 4,832 4,920 5,507 ____________ ____________ ____________Total Current Liabilities 91,509 40,471 56,853 ____________ ____________ ____________ Total Liabilities 100,632 49,963 66,291 ____________ ____________ ____________Total Equity and Liabilities 142,823 110,571 108,758 ____________ ____________ ____________ CONSOLIDATED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Share Share Translation Retained Total capital premium reserve earnings equity £000 £000 £000 £000 £000 Balance at 4 June 2005 11,349 35,677 150 22,576 69,752 Loss for the period - - - (10,104) (10,104)Employee share incentive charges - - - 314 314Movement in employee share trusts - - - 82 82Issue of shares 138 361 - - 499Currency translation adjustments - - 65 - 65Balance at 3 December 2005 11,487 36,038 215 12,868 60,608 Loss for the period - - - (18,680) (18,680)Employee share incentive charges - - - 179 179Movement in employee share trusts - - - 38 38Issue of shares 89 208 - - 297Currency translation adjustments - - 25 - 25Balance at 3 June 2006 11,576 36,246 240 (5,595) 42,467 Profit for the period - - - 224 224Employee share incentive charges - - - 299 299Issue of shares 51 275 - - 326Currency translation adjustments - - (1,125) - (1,125)Balance at 2 December 2006 11,627 36,521 (885) (5,072) 42,191 CONSOLIDATED INTERIM CASH FLOW STATEMENTFOR THE 26 WEEKS ENDED 2 DECEMBER 2006 26 weeks ended 26 weeks ended 52 weeks ended 2 Dec 2006 3 Dec 2005 3 June 2006 £000 £000 £000 Cash flows from operating activities Profit/(loss) before tax 512 (9,840) (27,450)Adjustments for:Share based payments charge 299 314 493Depreciation of property, plant and equipment 2,073 1,960 4,116Amortisation of development expenditure 5,525 3,317 13,296Impairment of trade investments - - 505Loss on sale of property, plant and equipment - 72 241Net financial charges/(income) 1,331 (541) (624)Movement in trade and other receivables (42,764) 8,414 9,490Movement in trade and other payables 27,722 3,797 13,871Movement in inventories 7,169 (8,687) (24,657)Movement in provisions (1,029) (510) 51 _____________ _____________ _____________Cash generated from/(used in) operations 838 (1,704) (10,668)Interest paid (1,215) (51) (142)Tax paid (51) (93) (258) _____________ _____________ _____________Net cash used in operating activities (428) (1,848) (11,068) _____________ _____________ _____________ Cash flows from investing activities Acquisition of trade investments - (103) (180)Purchase of property, plant and equipment (1,280) (3,090) (5,862)Development expenditure (6,809) (8,839) (17,132)Proceeds from sale of property, plant and equipment - - 5Proceeds from exercise of employee share options - 82 120Interest received - 572 842 ____________ ____________ ____________Net cash used in investing activities (8,089) (11,378) (22,207) ____________ ____________ ____________ Cash flows from financing activities Proceeds from issue of share capital 326 499 796Repayment of loans (23) (22) (50) ____________ ____________ ____________Net cash generated from financing activities 303 477 746 ____________ ____________ ____________ Net change in cash and cash equivalents (8,214) (12,749) (32,529) Cash and cash equivalents at start of period (5,880) 26,647 26,647Effect of exchange rate fluctuations on cash held 221 (34) 2 ____________ ____________ ____________Cash and cash equivalents at end of period (13,873) 13,864 (5,880) ____________ ____________ ____________ NOTES 1. BASIS OF PREPARATION AND BUSINESS ENVIRONMENT BASIS OF PREPARATION This unaudited interim financial information is for the 26 week period ending 2December 2006 and is prepared in accordance with International FinancialReporting Standards ("IFRS") adopted for use in the EU ("Adopted IFRS") at 2December 2006 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 noted in the Annual Report for the year ended 3 June 2006, andas result of delays in the launch of certain products for the North Americanmarket, the Group had stock and purchase commitments for these products of £23mand £60m respectively where there were not corresponding customer approvals orpurchase agreements. As a result of subsequent approvals and shipments, theGroup's net exposure to such North American product has reduced to £7.7m at 5February 2007. The Directors have considered the ongoing sales and consider thatthis value is likely to be realised. The Group has put in place new borrowing facilities to January 2010, based upon85% of relevant trade debtors, as adjusted, up to a maximum of £35m. Thesefacilities are subject to financial performance covenants. In managing the process from product manufacturing to customer approval over thelast period, the Group has and continues to reschedule, cancel or otherwiserenegotiate with its suppliers the timing and value of purchase commitments andpayments, which has included the granting of security interests. The ability andwillingness of suppliers to continue to work with Pace continues to be importantto the management of the business. Pace, along with other set top box manufacturers and broadcasters, continues tomonitor the potential re-interpretation by European Union customs authorities ofcustoms regulations that could result in the extension of import duties tointeractive set-top boxes manufactured outside, but imported into, the EU. Nofinal decision has been made so it remains impossible to quantify any potentialimpact. However, Pace has analysed its options against the range of possibleoutcomes and has plans in place to manage these outcomes. 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. The Board has also modelled a number of alternative business scenarios.Based upon these the Board has concluded that the Group has adequate workingcapital and that therefore it is appropriate to use the going concern basis ofpreparation for this financial information. Interim Financial Information The interim financial information for the 26 week periods ended 2 December 2006and 3 December 2005 have not been audited. Figures for the 52 week period ended3 June 2006 are extracted from the Company's statutory accounts for thatfinancial year. These accounts, prepared under IFRS, have been reported on bythe Company's auditors and delivered to the Registrar of Companies. Theauditors report was unqualified and did not contain statements under Section 237(2) or (3) of the Companies Act 1985. The preparation of interim statements in conformity with Adopted IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. The notebelow "Business Environment" gives further detail on the nature of some of thesefactors. Financial Year-End The annual financial statements are drawn up to the Saturday nearest to 31 May.The current year's financial statements will be for the 52 weeks ending 2 June2007. Reclassification For the 26 week period ended 3 Dec 2005, certain expenses relating to theoperations department, which is responsible for overseeing manufacturing, havebeen reclassified from cost of sales to administrative expenses, the figures forthe 52 week period ended 3 June 2006 having already been so changed. Thisclassification better reflects the overhead nature of the costs and the Group'smove to outsource more of its manufacturing and supply chain function. BUSINESS ENVIRONMENT Priorities The Group continues to focus on: • Operational excellence to deliver a range of quality products on time and profitably for Pace's global customer base. • Growing deeper customer relationships by ensuring Pace has the products and services needed in order for them to be competitive and to improve their average revenue per user (ARPU). • Utilising Pace's core skills to create innovative technology and solutions that will excite the market and drive long-term business growth. 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, customers firm order lead times may be less than the 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 contractual commitments is 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 customersdelivery 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 the riskof foreign currency movements. To manage this risk, the Group's treasury policyis progressively to cover cash flows when these are sufficiently certain and toseek a greater percentage of US dollar sales to provide a commercial hedgeagainst currency 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 Group does not currently take out anyinterest rate swaps. Credit Risk Management has a credit insurance policy in place, which provides cover overmost debtors, subject to excesses, and the exposure to credit risk is monitoredon an ongoing basis. The Group does not require collateral in respect offinancial assets. Deposit investments are undertaken 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 counterpartieswith 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 last year a significant number ofnew products 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. The programme hasfocused on organisation structures and is now focused on business processes; inparticular improving the effectiveness of Pace's development process both ineffectiveness of delivery and in the improvement of product cost. Third Party and Other Risks Pace provides product warranties for its set-top boxes. Although it is difficultto make accurate predictions of potential failure rates or the possibility of anepidemic failure, as a warranty estimate must be calculated at the outset of aproduct before field deployment data is available, these estimates improveduring 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 and to Asustek. Regulatory Like all other businesses, the Group remains exposed to changes in theregulatory environment, including potential modifications in import dutyregimes, discussions on which have been and continue to be held. The Companyhas managed the implementation of the EU WEEE and RoHs directives in the period. 2 Revenue 26 weeks ended 26 weeks ended 52 weeks ended 2 Dec 2006 3 Dec 2005 3 June 2006 £000 £000 £000 The geographical analysis of revenue by destination is as follows: United Kingdom 29,913 40,064 64,446 Continental Europe 31,747 23,191 56,517 Far East and Australasia 19,818 5,176 38,309 North America 98,739 10,509 18,823 ____________ ____________ ____________ 180,217 78,940 178,095 ____________ ____________ ____________ 3 Exceptional items 26 weeks ended 26 weeks ended 52 weeks ended 3 2 Dec 2006 3 Dec 2005 June 2006 £000 £000 £000 Exceptional charge in respect of US product - - 9,000 Restructuring and reorganisation costs 884 970 2,383 Impairment loss on trade investment - - 505 ____________ ____________ ____________ 884 970 11,888 ____________ ____________ ____________ The restructuring and reorganisation charges in all periods relate to a restructuring programme within the Group. An exceptional charge was made in the 52 weeks ended 3 June 2006 following the delay in the delivery of US product, which charge was reflected as a £5.5m inventory write down and a £3.5m charge against capitalised development costs. The US product relates to the HD PVR product for the US cable market, where delays have affected the anticipated product life. The impairment loss in the 52 weeks ended 3 June 2006 related to the Company's investment in VegaStream Limited. 4 Tax charge 26 weeks ended 26 weeks ended 52 weeks ended 2 Dec 2006 3 Dec 2005 3 June 2006 £000 £000 £000 The tax charge is based on the estimated effective rate of taxation on trading for the period and represents: United Kingdom corporation tax at 30% - - - Overseas tax 288 264 212 Deferred tax - - 1,122 ____________ ____________ ____________ 288 264 1,334 ____________ ____________ ____________ 5 Earnings/(loss) per ordinary share Basic earnings/(loss) per ordinary share have been calculated by reference to the profit/(loss) after taxation, and the average number of qualifying ordinary shares of 5p in issue of 224,533,942 (2005: 220,428,226). Diluted earnings/(loss) per ordinary share vary from basic earnings/(loss) per ordinary share due to the effect of the notional exercise of outstanding share options. The diluted earnings/(loss) are the same as basic earnings/(loss). The diluted number of qualifying ordinary shares was 225,959,720 (2005: 224,995,218). 6 Provisions Royalties Onerous Warranties Total under contracts £000 £000 negotiation £000 (see below) £000 At 3 June 2006 6,262 493 8,036 14,791 Charge for the period 1,852 - 3,339 5,191 Utilised (1,253) (493) (4,432) (6,178) ____________ ___________ ____________ ____________ At 2 December 2006 6,861 - 6,943 13,804 ____________ ___________ ____________ ____________ Due within one year - - 4,832 4,832 Due after more than one year 6,861 - 2,111 8,972 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 or defend 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. 7 Contingent liabilities A writ has been issued against the Company by a former customer relating to the supply of set top boxes in 2000/01 in respect of a claim to a maximum liability of c£7.5m. The Directors believe that they have good defences to such a claim and therefore no provision has been made. Circulation to shareholders Copies of this Interim Report will be sent shortly to shareholders and are available on application to the Registered Office: Pace Micro Technology plc, Victoria Road, Saltaire, Shipley, West Yorkshire, BD18 3LF, or online at www.pacemicro.com. There will be an analysts' presentation on 5th February 2007 at 9.30am at Citigate Dewe Rogerson's office at 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:
PIC.L