The following is the text of the Chairman's Statement included in the Annual Report and Accounts of the Group for the year ended 31st December, 1994, which are expected to be despatched to Shareholders on 6th March, 1995.
I am pleased to have the opportunity of addressing you again as Chairman of Acorn Computer Group plc, and to report on what has been a mixed year for the Group. Although the computer business of Acorn Computers Limited ('ACL') showed both a trading profit and positive cash flow in the second half of the financial year, this was not enough to recover the losses incurred in the first half. However, Advanced RISC Machines Limited ('ARM'), in which the Group holds a 42.8 per cent. interest, has continued its rapid growth, with a seven-fold increase in profits crowning a year of major operational successes.Online Media, a new division established during 1994 to exploit the emerging market for interactive online multimedia, has started well in developing a position in the market.
Acorn is proposing to raise 17.2 million by means of a Rights Issue of new ordinary shares at 80p per share to enable it to fund the continued development of Online Media and to strengthen the Group's capital base.
At the same time it is also proposed that the enlarged share capital should be admitted to the Official List of the London Stock Exchange. Full details of these and other related proposals, which are subject to shareholders' approval, were set out in the recent circular to shareholders containing full listing particulars relating to Acorn.
Financial results
Revenue for the year was £50.4 million (1993: £54.3 million), on which the Group made an operating loss of £4,164,000, including £1,842,000 attributable to Online Media and a provision for restructuring costs in ACL of £980,000 (1993: operating profit of £104,000). Revenue in 1994 derived almost exclusively from ACL, with the reduction reflecting principally the decline in educational spending in the UK, most notably in the primary school sector where ACL is the major supplier. The decrease in sales revenue was the principal reason for ACL's operating loss (before restructuring costs) of £1,342,000. Although operating costs in ACL's UK business were held at levels comparable with 1993, Group operating costs rose overall, reflecting the initial investment in Online Media and the first full year's operations of ACL's German sales subsidiary.
The restructuring of ACL is expected to lead to a reduction in operating costs in the UK in 1995. The Group's share of ARM's profit before tax is £1,309,000 (1993: £183,000), reflecting the continued success of that operation.
Interest costs amounted to £540,000 (1993: £172,000), reflecting higher borrowings arising from increased stock levels in ACL and the funding of Online Media.
The loss for the year before tax was £3,395,000 (1993: profit £115,000), and after tax was £3,311,000 (1993: profit £104,000). The Directors do not propose the payment of a dividend.
Acorn Computers Limited
This is the original business of the Group, and remains the most significant in revenue terms. It comprises the design, development and sale of powerful but low-cost RISC-based computers in targeted markets, most notably education, the home and a number of professional applications. 1994 proved a difficult year, with the success of the new product line, the Risc PC (launched in April), and good progress in Australia and New Zealand (over 40 per cent sales growth in each) more than offset by declines in sales to UK primary schools. Independent market research indicates that ACL continues to be the leading supplier of computers to UK schools, but total spending in this market is down, particularly in the primary school sector.
In April 1995 ACL expects to release the PC 486 Card, a low-cost second processor card which will allow the Risc PC to run, simultaneously if required, both applications developed for RISC OS and those for Microsoft Windows and for DOS. Networking software will also be released to allow Acorn RISC OS computers to be connected to previously incompatible networks, or to create the core network on which a variety of machine types, from Acorn, Apple Computer or the IBM-compatible PC world can co-exist. The Directors believe these products and capabilities offer ACL a major opportunity to extend its target customer base. Research and development expenditure in ACL during 1994 totalled £2.2 million, relating primarily to development of the Risc PC, the PC 486 card, and new products scheduled for launch later this year.
Gross margin percentages are now showing signs of stability but, in line with the industry, at levels significantly below those achieved in 1992 and earlier years. This has put pressure on ACL to control its costs and to re-examine how it conducts its business. Changes have already been made which have reduced the annual overhead cost of ACL in the UK during 1994. However, more needs to be done and steps have now been taken to reduce the cost base further, thereby further lowering the break-even point. This has resulted in a restructuring provision of £980,000 charged to the Group's results for 1994. It is intended that the focus will remain on developing the technologies and products relevant to ACL's markets in a controlled manner.
In the first half of 1994, higher working capital in ACL led to an increase in Group short-term borrowings to approximately £9.5 million at the interim balance sheet date. In the second half, ACL's working capital was reduced by approximately £2.8 million, with the result that ACL was strongly cash generative. Group short-term borrowings fell to approximately £8.5 million at 31st December, 1994, despite cash utilisation including capital expenditure) of over £2 million in Online Media. The reduction in ACL's working capital is expected to continue over the course of 1995, with stock levels especially being significantly reduced.
Advanced RISC Machines Limited
1994 was another highly successful year for ARM. The company increased its pre-tax profits more than seven-fold while continuing to invest heavily in the future (for example, by doubling the number of its employees, and opening sales and support offices in the United States and in Japan) and winning further important business. Notable amongst the latter was the signing-up of new licensees Samsung Electronics of Korea and AKM of Japan.
ARM is self-financing with significant cash balances and major growth and profit potential. The directors of ARM's holding company, comprising representatives of Acorn, Apple (the other major shareholder) and the managing director of ARM, review these forward plans on a regular and formal basis to ensure all opportunities are evaluated and where appropriate pursued with a view to establishing ARM technology as the world's RISC standard in the market for high volume computing, communications and consumer electronics products.
Online Media
Online Media is a new division established in April 1994 and publicly launched in July 1994 to exploit the emerging market for online interactive multimedia. It is a venture which will require significant investment, with an anticipated net cash outflow for at least a further two years before substantial revenues are likely to emerge.
Online Media is building on the technologies and expertise developed within ACL to offer initially the 'set-top box' and other related products which will allow the consumer, the office professional or the student to access and manipulate the online interactive services now beginning to be developed on a worldwide basis.
Online Media is working in partnership with third parties who are creating the other elements of these services to enable its products to be successful in winning positions in the early trials as these will be influential in the development of this market and of the standards which will define it. Already in 1994 Online Media is a major participant in the Cambridge trial, whose other participants include Cambridge Cable, Anglia Television, Independent Television News and National Westminster Bank. Online Media is also working closely with Northern Telecom of Canada and its UK operations, and indeed Northern Telecom is specifying the Online Media set-top box in a number of prospective trials in Europe and North America. Success in one or more of these ventures could lead to orders for significant volumes of Online Media's set-top boxes, potentially generating revenues which would substantially increase the scale of the Group's activities.
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