Financial results

Group turnover was £19.4m (1994: £23.7m), 18% less than the turnover in the same period in 1994. After taking into account the effect of destocking by dealers, sales to end customers were down by 11%, reflecting in particular the continuing cost constraints on primary schools' budgets. Gross margins suffered from competitive pressures, falling from 32% to 24%. Although operating costs in Acorn Computers' traditional personal computer business were some 8.5% lower than in the same period in 1994, this was insufficient, given the decline in turnover and gross margins, to return the business to profitability and ACL incurred a loss on continuing operations of £3.4m (1994: £1.8m) before exceptional items. With an operating loss of £1.6m in Online Media as expected, the group made an overall operating loss on continuing operations of £5.0m (1994: £2.2m) before exceptional items.

Exceptional items have been charged in respect of redundancy (£0.6m), the closure of Acorn Computers GmbH (£0.5m), a stock writedown of £1.2m on some product lines and an additional warranty provision of £0.4m.

The group's share of the profit before tax of Advanced RISC Machines for the period is £0.6m (1994: £0.5m), reflecting the continued success and development of that business.

Net interest costs for the period amounted to £0.2m (1994: £0.3m), reflecting the level of borrowings prior to the receipt in April of the proceeds of the rights issue.

The net proceeds of the rights issue, amounting to £17.1m, have been applied to eliminate the group's bank overdrafts, which stood at £8.5m at 31 December 1994, including £2.1m in respect of Online Media. The balance of the rights issue proceeds has been absorbed by continuing investment in Online Media in the first half of this year (£2.4m) and by ACL (£3.7m), with the group retaining net cash of £2.5m at 2 July 1995. The group also retains its bank facilities of £15 million.

The overall loss before tax for the period was £7.6m (1994: £2.0m) and after tax was £7.8m (1994: £2.1m). No dividend is payable.

Acorn Computers Limited ("ACL")

On 10 June 1995 Acorn announced that the traditional personal computer business of ACL was experiencing difficult trading conditions and on 28 July it was announced that David Lee, formerly Director of Finance and Administration at Olivetti UK Limited, was replacing Sam Wauchope as group managing director.

The Board of Acorn has now concluded a strategic review of the position and prospects of ACL in its core educational marketplace. In the light of shortening product life cycles and the competitive price pressures experienced in the last six months, the Board has concluded that the carrying value of some product lines requires downward revision and that a restructuring and repositioning of ACL's activities is necessary to allow it to envisage a return to profitable trading.

The restructuring comprises the following elements:

• ACL's education offering will be strengthened through the formation of a new operating division, Acorn Education, whose mission will be to build progressively on ACL's market leadership and strong brand reputation and to reduce ACL's dependence on hardware sales by providing schools with an increasing range of value added products and services including networking, systems integration and software, covering both industry standard and proprietary hardware platforms.

• ACL's product range has been repositioned more competitively following price reductions of between 18% and 25% and ACL has taken action to preserve sales margins by the introduction of direct sales into education via telesales, a direct sales force and a network of appointed agents. This also brings ACL closer to its customers and in particular to the key purchasing decision-makers.

• ACL's research and development team will form the core of a new operating division, Applied Risc Technologies, a profit centre which will seek opportunities with OEMs outside the educational market to exploit Acorn's expertise in silicon integration, software and hardware design based predominantly around the ARM microprocessor, while continuing to support ACL's existing and future educational product range.

• Staff levels in the UK have today been reduced by 56 people, generating annualised cost savings estimated at £1.4m and allowing the business to lower its breakeven point. Further cost reductions are being undertaken in Australia and New Zealand.

• ACL's loss making German operations have been closed. These operations are disclosed as discontinued in the profit and loss account.

Online Media

Acorn's Online Media division, established in July 1994 and dedicated to the development of products and services for the emerging interactive multimedia market, has made substantial progress in the first half of 1995.

Highlights include:

• Online Media's core product, the digital set-top box, has progressed from an early prototype based largely on ACL desktop computer components to a much more advanced product which has been cost-engineered around the custom-designed ARM7500 microprocessor. This second generation set-top box is completing its development cycle and the third generation product is already in the design stage.

• In February, Phase I of the Cambridge interactive television trial was successfully completed and Phase II was launched. In March, ICL joined the trial and one of its large video servers was connected to the system. The Service Nursery was also launched which offers external companies an opportunity to understand the provision of services for interactive TV. National Westminster Bank and Tesco were amongst the first companies to sign up and the trial is becoming an excellent promotional vehicle for the work of Online Media.

• In June Online Media was awarded a contract to supply digital set-top boxes to the Lightspan Partnership Inc (backed by Comcast, Microsoft and TCI) which will be distributing them to schools and homes around the USA combined with its educational programmes. This contract represents Online Media's first significant entry into the USA multimedia market and is expected to generate substantial revenues.

• Other trials are being announced that use Online Media products. Viewcall has publicly launched a home shopping service served across the standard telephone network that uses the set-top box and Online Media has also secured the supply contract for the trial being organised by DEC for Westminster Cable, a subsidiary of BT.

There have been recent indications that the technological and commercial challenges posed by the introduction of digital interactive TV are such that the major telecommunications providers in both Europe and the US are moving more slowly than predicted towards large scale commercial trials. One of the major challenges now facing Online Media is to capitalise on its technological lead by working with partners who recognise the benefit of ARM-based designs in this area and who see the improved time to market opportunity arising from licensing designs or components from Online Media.

Advanced RISC Machines ("ARM")

ARM continued to grow during the first half of 1995, with sales at £4.2m up 47% over the corresponding period in 1994. In line with the investment plan of the company, staff numbers doubled from the end of June 1994 and the company maintained its profitability.

Major announcements in the first half of 1995 included:

• A joint development agreement with Digital Equipment Corporation to develop the StrongARM family of high performance microprocessors

• The launch of the ARM7TMDI (Thumb) Architecture

• A new licence agreement with ES2 (European Silicon Structures)

• Today ARM is announcing the licence of the ARM7TMDI (Thumb) core to NEC, on of the world's largest semiconductor companies, as well as the launch of the ARM Tools 2.0 toolkit and development products from leading global tools vendors.

Outlook

ACL clearly faces a challenging period. The Board believes that the initiatives announced today ensure that ACL is equipped to meet these challenges.

Both Online Media and ARM are progressing well and the Board has high hopes for the continuing success of these two innovative businesses in the years to come.

E PIOL
Chairman

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