ARC International plc Announces Unaudited Preliminary Results For the Year Ended December 31, 2008
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ARC International plc Announces Unaudited Preliminary Results For the Year Ended December 31, 2008

SAN JOSE, Calif. & ST. ALBANS, England—(BUSINESS WIRE)—February 24, 2009— ARC International (LSE:ARK), a leading provider of consumer IP to OEM and semiconductor companies worldwide, today announced its unaudited preliminary results for the full year ended December 31, 2008.

Commenting on the company’s performance, Carl Schlachte, president and chief executive officer, said: “In 2008 ARC traded against the backdrop of an increasingly challenging economic environment that worsened in the second half of the year. Including all non-recurring events our net loss was larger than expected. Going forward into 2009, we remain cautious as visibility is limited and uncertainty in the semiconductor industry with lengthening sales cycles may affect the timing of new licence revenues and royalty volumes.”

Schlachte continued, “However a rapid transition to profitability and positive cash flow continues to be our overriding strategic goal, and in response to the challenging semiconductor market and global economic conditions we have taken swift and decisive action to further enhance our ability to achieve this goal within planned timescales. To accelerate growth in our revenues and customer base, we have strengthened our product portfolio through the acquisition of Sonic Focus, transformed our ability to deploy integrated multimedia solutions, broadened our target market to include the higher royalty OEM and consumer electronics sectors, strengthened our worldwide sales and marketing organizations and made significant new appointments to the senior management team. In addition, the company-wide restructuring announced in September 2008 has been substantially completed, and is already delivering improved operational efficiencies, a rationalized and streamlined management structure and product portfolio, and a significantly lower cost base. We will continue to assess industry conditions throughout 2009 to ensure that the company’s cost structure is aligned with revenue opportunities.

“Over the medium to long term we expect consumer demand for devices delivering increasingly higher quality multimedia content to continue to grow, driving OEM and semiconductor companies to create innovative next-generation products with better performance and lower development costs. Feedback from ARC’s worldwide customers and partners confirms our confidence that our integrated solutions and more efficient organization can continue to provide compelling value. We remain confident in our strategy and our ability to execute.”

About ARC International plc

ARC International is a world leading provider of consumer IP to OEM and semiconductor companies globally. ARC’s award-winning, vertically integrated audio and video solutions enable high quality multimedia content to be captured, shared, and played on a wide range of electronics devices. ARC’s 150+ customers collectively ship hundreds of millions of ARC-Based chips annually in products such as PCs and laptops, digital and mobile TVs, portable media players, flash storage, digital cameras, network appliances, and medical and government systems.

ARC International maintains a worldwide presence with corporate and research and development offices in San Jose and Lake Tahoe, Calif., St. Albans, England, St. Petersburg, Russia, and Hyderabad, India. For more information visit www.ARC.com. ARC International is listed on the London Stock Exchange as ARC International plc (LSE:ARK).

ARC, ARC-Based, the ARC logo and Sonic Focus are trademarks or registered trademarks of ARC International with the U.S. Patent and Trademark Office and other international trademark organizations. All other brands or product names contained herein are the property of their respective owners. This release may contain “forward-looking statements” including the development, implementation, and release of features described herein, statements concerning plans, future events or performance and underlying assumptions and other statements that are other than statements of historical fact. These are at the sole discretion of ARC International. ARC’s actual results for future periods may differ materially from those expressed in any forward-looking statements made by or on behalf of ARC. The factors that could cause actual results to differ materially include, without limitation, general economic and business conditions; potential for fluctuations in and unpredictability of ARC’s quarterly results; assumptions regarding ARC’s future business strategy; the ability of semiconductor partners to manufacture and market microprocessors based on the ARC® architecture; the acceptance of ARC technology by systems companies; the availability of development tools, systems software and operating systems; the rapid change in technology in the semiconductor industry and ARC’s ability to develop new products in a timely manner; competition from other architectures; ARC’s ability to protect its intellectual property; regulatory policies adopted by governmental authorities; risks associated with ARC’s international operations; management of ARC’s growth; ARC’s ability to attract and retain employees; and other uncertainties that are discussed in the “Investment Considerations” section of ARC’s listing particulars dated September 28, 2000 filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales.

ARC International plc Unaudited Preliminary Results Year Ended December 31, 2008

STATEMENT FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER

Overview

In 2008, ARC was able to strengthen its competitive position due to strategic acquisitions that culminated with Sonic Focus last February. Today ARC’s Sound-to-Silicon integrated solutions for OEM and chip companies are an industry first, and ARC is recognizing higher value royalties from its new class of customers – OEMs – as planned. Furthermore, ARC’s historical base of semiconductor customers are taking licenses for “Sonic Focus ready” multimedia subsystems, helping stimulate new revenue opportunities in an uncertain economic climate. Additionally, ARC’s royalty income benefitted from higher royalty rates as more post-2003 contracts contributed to the royalty stream.

For the year, these positive developments helped ARC grow the top line despite a deteriorating economic climate and reduced industry confidence. Certain ARC customers were impacted by the global financial conditions, causing them to become more conservative with cash or postpone development projects. As a consequence, two contracts were delayed into the first half of 2009.

Company Restructuring Plan

In early recognition of the worsening global economy, in Q2 2008 management undertook a strategic review of the business to ensure ARC’s strategy and resources were properly aligned with revenue opportunities. The strategic review also identified inefficiencies in the deployment of resources and recommended an improved product development model. The result was a company-wide restructuring announced on September 21, 2008 that created:

The restructuring has brought visible improvements in ARC’s planning and execution. These have resulted most recently in strong interest by OEM and chip customers in ARC’s Sound-to-Silicon solutions at the recent CES and Mobile World Congress events.

ARC’s “Sound-to-Silicon” Solutions

ARC’s strategy is to monetize the increasing trend of consumers to capture, share, and play high quality multimedia content on a variety of electronics devices. By developing and delivering integrated Sound-to-Silicon solutions to OEM and semiconductor companies globally, ARC is helping these customers create new types of devices at lower development costs that deliver a better experience to consumers.

ARC’s Sound-to-Silicon solutions are an industry first, and have been built upon the company’s legacy configurable products and technology that was gained through the strategic acquisitions culminating with Sonic Focus. They address fundamental changes in the way electronics products are created by offering a complete solution that reduces the design effort of ARC’s customers thus increasing their competitiveness.

Introduced at CES in Las Vegas, ARC’s current Sound-to-Silicon solutions include:

Industry Adoption of ARC

Throughout 2008 a number of OEM and semiconductor companies announced they have taken licenses for, or are shipping products containing, an ARC solution:

Current Trading and Prospects

In 2008 ARC traded against the backdrop of an increasingly challenging economic environment that worsened in the second half of the year. Including all non-recurring events our net loss was larger than expected. Going forward into 2009, we remain cautious as visibility is limited and uncertainty in the semiconductor industry with lengthening sales cycles may affect the timing of new licence revenues and royalty volumes.

However a rapid transition to profitability and positive cash flow continues to be our overriding strategic goals, and in response to the challenging semiconductor market and global economic conditions we have taken swift and decisive action to further enhance our ability to achieve this goal within planned timescales. To accelerate growth in our revenues and customer base, we have strengthened our product portfolio through the acquisition of Sonic Focus, transformed our ability to deploy integrated multimedia solutions, broadened our target market to include the higher royalty OEM and consumer electronics sectors, strengthened our worldwide sales and marketing organizations and made significant new appointments to the senior management team. In addition, the company-wide restructuring announced in September 2008 has been substantially completed, and already is delivering improved operational efficiencies, a rationalized and streamlined management structure and product portfolio, and a significantly lower cost base. We will continue to assess industry conditions throughout 2009 to ensure that the company’s cost structure is aligned with revenue opportunities.

Over the medium to long term we expect consumer demand for devices delivering increasingly higher quality multimedia content to continue to grow, driving OEM and semiconductor companies to create innovative next-generation products with better performance and lower development costs. Feedback from ARC’s worldwide customers and partners underpins our confidence that our integrated solutions and more efficient organization can continue to provide compelling value. We remain confident in our strategy and our ability to execute.

ARC International plc Unaudited Preliminary Results Year Ended December 31, 2008

CHIEF FINANCIAL OFFICER’S REVIEW

Strong revenue growth in 1H was offset by deteriorating confidence of certain customers in 2H. Net loss was greater than planned due to the acquisition of and incremental costs from Sonic Focus, the restructuring charges, and the delayed revenue from two licensing contracts. Without these incremental expenses and charges, operating costs were in line with management’s plan for 2008.

Revenue

Total revenue in 2008 in U.S. dollars was up 8% to $31.2 million (2007: $28.9 million). Total revenue in sterling was £17.0 million, up 18% over the same period last year (2007: £14.4 million). License and engineering revenue in U.S. dollars was down 11% to $13.4 million (2007: $15.0 million). In sterling, license and engineering revenue was flat at £7.3 million compared to 2007 (2007: £7.4 million). Maintenance and service revenue in U.S. dollars was down 17% to $3.5 million (2007: $4.2 million). In sterling, maintenance and service revenue was down 14% at £1.8 million (2007: £2.1 million). In U.S. dollars, royalty revenue was up by 47% to $14.3 million (2007: $9.7 million). In sterling, royalty revenue increased 61% to £7.9 million (2007: £4.9 million). Sales in Europe were 20% (2007: 20%) of total sales, North America 55% (2007: 65%) and Asia 25% (2007: 15%).

Cost of sales and operating expenses

Cost of sales decreased 7% to £1.3 million (2007: £1.4 million). Gross margin increased to 92% (2007: 90%). Without the restructuring effects, net operating expenses increased by 25% to £22.8 million (2007: £18.3 million).

The company had 163 employees at December 31, 2008 compared with 196 at December 31, 2007. The 17% decrease in headcount was due to a company-wide restructuring to be completed in Q1 of 2009, and was offset by increase in headcount from the Sonic Focus acquisition. Excluding the effects of the restructuring, research and development costs increased 30% to £9.6 million (2007: £7.4 million). Sales and marketing cost was essentially flat at £5.5 million compared to 2007 (2007: £5.5 million). General and administration costs increased 22% to £4.5 million (2007: £3.7 million). Other expenses, comprised of depreciation and amortization, increased to £3.1 million (2007: £1.7 million) due to additional amortization of intangibles included in the acquisitions. The incremental operating expenses excluding amortization as a result of the acquisition during the year was £1.2 million in 2008. Incremental amortization expenses associated with technologies and intangible assets acquired in 2008 was £0.3 million in 2008. Restructuring costs for 2008 were £2.3 million (2007: £Nil).

Finance income

Interest income was down 40% to £0.9 million (2007: £1.5 million) due to the decrease in average cash balance and decrease in interest rates earned on investments.

Loss for the period

Net loss was £ 7.3 million (2007: £ 2.5 million). The charge for the reorganisation of £2.3 million, and the incremental expenses from the acquisition of Sonic Focus gave rise to the increase in the net loss. Loss per share increased to 4.93p (2007: 1.69p).

Cash flow and balance sheet

The net cash outflow from operations before restructuring costs decreased to £4.8 million (2007: £5.1 million). Capital expenditure, including payments made for acquisitions and investments in associate, was £4.6 million (2007: £8.1 million). Net cash outflow in connection with the reorganisation was £1.6 million, including the share repurchases. The movement in cash and short-term investments during the year was an outflow of £8.5 million (2007: £10.4 million). Net assets at December 31, 2008 were £21.5 million (December 31, 2007: £30.3 million), including cash and short-term investments of £12.7 million (December 31, 2007: £21.2 million).

Dividend

No interim dividend payment will be made for the year ended December 31, 2008 (2007: £Nil).

Acquisitions

During the period ARC acquired Sonic Focus, Inc for a total consideration of £2.8 million. See note 7 for details.

Consolidated income statement          
For the year ended December 31, 2008
 
2008 2008 2008 2007
Before
Restructuring Restructuring Total
(unaudited) (unaudited) (unaudited) (audited)
    Note   £ '000   £ '000   £ '000   £ '000
Revenue 17,047 - 17,047 14,401
Cost of sales       (1,294 )   -     (1,294 )   (1,437 )
Gross profit 15,753 - 15,753 12,964
Operating expenses   3   (22,791 )   (2,273 )   (25,064 )   (18,305 )
Operating loss (7,038 ) (2,273 ) (9,311 ) (5,341 )
Finance income 897 - 897 1,470
Finance expense (14 ) - (14 ) -
Share of post-tax loss of associate       (8 )   -     (8 )   (22 )
Loss before income tax (6,163 ) (2,273 ) (8,436 ) (3,893 )
Tax credit       1,135     -     1,135     1,389  
Loss for the period attributable to equity shareholders       (5,028 )   (2,273 )   (7,301 )   (2,504 )
Weighted average number of shares 147,965,359 148,031,270
Basic and diluted loss per share -pence (4.93 ) (1.69 )

Statement of recognized income and expense  
For the year ended December 31, 2008    
 
2008 2007
(unaudited) (audited)
    Note   £ '000   £ '000
Loss for the year 5 (7,301) (2,504)
Currency translation differences   5   (951)   (54)
Total recognized expense for the year       (8,252)   (2,558)

Consolidated balance sheet
As at December 31, 2008
    2008   2007
(unaudited) (audited)
Note   £’000     £’000  
Assets
Non current assets
Intangible assets 4 11,600 7,506
Property, plant and equipment 1,970 1,537
Investment in associate 443 414
Trade and other receivables       442     417  
        14,455     9,874  
 
Current assets
Inventory - 72
Trade and other receivables 4,060 4,241
Current corporation tax receivable 931 1,368
Short term investments 8,037 11,145
Cash and cash equivalents       4,631     10,100  
17,659 26,926
Total assets 32,114 36,800
 
Current liabilities
Loans and borrowings 78 -
Trade and other payables 7,529 5,729
Provisions for other liabilities and charges       871     163  
        8,478     5,892  
Net current assets 9,181 21,034
 
Non-current liabilities
Loans and borrowings 99 -
Other payables 101 126
Deferred income tax liabilities 1,073 489
Provisions for other liabilities and charges       858     20  
2,131 635
Net assets 21,505 30,273
 
Shareholders' equity
Ordinary shares 153 153
Share premium 3,683 3,683
Other reserves 61,289 61,037
Cumulative translation adjustment (1,462 ) (511 )
Retained earnings       (42,158 )   (34,089 )
Total Equity   5   21,505     30,273  
 

(a) The year ended December 31, 2007 figures are extracted from the audited financial statements for the year ended December 31, 2007.

Consolidated cash flow statement
For the year ended December 31, 2008
   
Year ended Year ended
Dec 31 Dec 31
2008 2007
(unaudited) (audited)
    £'000     £'000  
Cash flows from operating activities
Net loss for the year (7,301 ) (2,504 )
Adjustments for:
Interest receivable (883 ) (1,470 )
Tax credit (1,135 ) (1,389 )
Amortization 2,268 1,211
Depreciation 867 475
Loss on disposal of property, plant and equipment 7 20
Asset disposal from restructuring 218 -
Share based award expense 252 286
Share loss from associate 8 22
Decrease in inventories 72 153
Increase in trade and other receivables (678 ) (477 )
Decrease in trade and other payables (816 ) (1,224 )
Increase/(decrease) in provisions   1,546     (161 )
Cash used in operations (5,575 ) (5,058 )
 
Interest received & paid 894 1,636
Taxes paid (31 ) (28 )
Tax credits received   1,368     701  
Net cash used in operating activities (3,344 ) (2,749 )
 
Cash flows from investing activities
Purchase of property, plant and equipment (1,174 ) (1,502 )
Purchase of intangible assets (688 ) (196 )
Capitalization of R&D assets (249 ) (271 )
Movements on short term investments 3,108 2,355
Investment in associate (37 ) (286 )
Acquisition of subsidiaries, net of cash acquired   (2,472 )   (5,847 )
Net cash used in investing activities (1,512 ) (5,747 )
 
Cash flows from financing activities
Purchase of shares by ESOP (768 ) -
Net proceeds from issue of ordinary shares   -     504  
Net cash generated from financing activities (768 ) 504
 
Effects of exchange rate changes   155     (54 )
Net decrease in cash and cash equivalents (5,469 ) (8,046 )
 
Cash and cash equivalents at January 1   10,100     18,146  
Cash and cash equivalents at end of period   4,631     10,100  

NOTES

1. Basis of presentation

The preliminary results are unaudited and do not constitute statutory accounts within the meaning of s240 of the Companies Act 1985. The statutory accounts for the year ended 2007 have been delivered to the Registrar of Companies. The auditors’ opinion on these accounts was unqualified and did not contain a statement made under s237 (2) or s237 (3) of the Companies Act 1985.

The preliminary results of ARC International plc have been prepared in accordance with the EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. These have been prepared in accordance with the Listing Rules of the Financial Services Authority. In preparing the preliminary results, management have used the principal accounting policies as set out in the Group’s annual report and accounts for the year ended December 31, 2007. The preliminary results have been prepared under the historical cost convention, except in respect of certain financial instruments.

The preliminary results incorporate the accounts of the Company and each of its subsidiaries for the period to December 31, 2008. All new acquisitions are accounted for under the purchase method from the date of acquisition.

The preparation of the preliminary results in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

2. Segment information

Primary reporting format - geographical segments organized into three main locations.
The segment results for the year ended December 31, 2008 are as follows:
         
Europe North America

Asia

Elimination Group
    £ '000  

£ '000

   

£ '000

  £ '000   £ '000
Revenue-external   3,474     9,291     4,282     -     17,047  
Revenue-internal   2,894     258     -     (3,152 )   -  
Segment result (5,655 ) (716 ) (667 ) - (7,038 )
Restructuring (1,689 ) (566 ) (18 ) - (2,273 )
Segment result after restructuring (7,344 ) (1,282 ) (685 ) - (9,311 )
Finance income 864 33 - - 897
Finance expense (10 ) (4 ) - - (14 )
Share of post tax loss of associate   -     (8 )   -     -     (8 )
Loss before tax (6,490 ) (1,261 ) (685 ) - (8,436 )
Income tax credit   942     193     -     -     1,135  
Net profit/(loss) attributable to equity shareholders   (5,548 )   (1,068 )   (685 )   -     (7,301 )
Assets 21,571 10,055 45 - 31,671
Associates   -     443     -     -     443  
Total assets   21,571     10,498     45     -     32,114  
Total liabilities   4,834     5,730     44     -     10,609  
Other segment items
Capital expenditure 1,273 837 - - 2,111
Amortization of intangible assets 1,463 804 - - 2,268
Depreciation 671 193 3 - 867
Other non-cash expenses   46     203     3     -     252  
 
The segment results for the year ended December 31, 2007 are as follows:
 
Europe North America Asia Elimination Group
    £ '000   £ '000     £ '000   £ '000   £ '000
Revenue-external   2,897     9,353     2,151     -     14,401  
Revenue-internal   3,044     193     -     (3,237 )   -  
Segment result (1,585 ) (3,066 ) (690 ) - (5,341 )
Finance income 1,410 60 - - 1,470
Share of post tax loss of associate   -     (22 )   -     -     (22 )
Loss before tax (175 ) (3,028 ) (690 ) - (3,893 )
Income tax credit   1,369     20     -     -     1,389  
Net profit/(loss) attributable to equity shareholders   1,194     (3,008 )   (690 )   -     (2,504 )
Assets 29,263 7,083 40 - 36,386
Associates   -     414     -     -     414  
Total assets   29,263     7,497     40     -     36,800  
Total liabilities   (3,154 )   (3,360 )   (13 )   -     (6,527 )
Other segment items
Capital expenditure 1,677 283 9 - 1,969
Amortization of intangible assets 1,023 188 - - 1,211
Depreciation 357 116 2 - 475
Other non-cash expenses   80     199     7     -     286  
Group only has a single business segment, and therefore, it does not have a secondary reporting format.

3. Summary of net operating expenses
   
2008 2007
(unaudited) (audited)
£ '000 £ '000
             
Operating expenses
Research and development (9,624 ) (7,423 )
Sales and marketing (5,539 ) (5,518 )
General and administrative (4,493 ) (3,678 )
Other expenses (3,135 ) (1,686 )
Restructuring costs   (2,273 )   -  
Net operating expenses   (25,064 )   (18,305 )

4. Intangible assets
     

Developed

   

Brand

 

and in

name

Intangible

Computer

process

Customer

and

assets

Goodwill

software

technology

relationships

other

Total

Group   £'000s   £'000s   £'000s   £'000s   £'000s   £'000s
Cost
At January 1, 2007 13,580 6,046 668 - 78 20,372
Additions - 644 271 - - 915
Acquisition of subsidiary 3,414 - 2,963 404 150 6,931
Exchange difference   17     -     (12 )   -     -     5  
At December 31, 2007   17,011     6,690     3,890     404     228     28,223  
Additions - 2,036 249 - - 2,285
Acquisition of subsidiary 2,042 7 1,275 317 445 4,086
Exchange difference   96     -     (6 )   -     -     90  
At December 31, 2008   19,149     8,733     5,408     721     673     34,684  
Amortization and impairment losses
At January 1, 2007 (13,580 ) (5,322 ) (550 ) - (77 ) (19,529 )
Charge for the year - (610 ) (508 ) (76 ) (17 ) (1,211 )
Exchange difference   -     19     4     -     -     23  
At December 31, 2007   (13,580 )   (5,913 )   (1,054 )   (76 )   (94 )   (20,717 )
Charge for the year - (855 ) (1,127 ) (184 ) (102 ) (2,268 )
Exchange difference   -     (8 )   (90 )   (1 )   -     (99 )
At December 31, 2008   (13,580 )   (6,776 )   (2,271 )   (261 )   (196 )   (23,084 )
Net book value
At January 1, 2007 - 724 118 - 1 843
At December 31, 2007   3,431     777     2,836     328     134     7,506  
At December 31, 2008   5,569     1,957     3,137     460     477     11,600  

5. Statement of changes in shareholders' equity      
     
Cumulative
Share Share Other translation Retained
Group capital premium reserves adjustment earnings Total
(audited)   £'000   £'000   £'000   £'000   £'000   £'000
At January 1, 2007 151 3,256 60,751 (457 ) (31,660 ) 32,041
Shares issued 2 427 - - - 429
Change in value of ESOP reserve - - - - 75 75
Share based award reserve - - 286 - - 286
Exchange loss - - - (54 ) - (54 )
Loss for the year   -   -   -   -     (2,504 )   (2,504 )
At December 31, 2007 (audited)   153   3,683   61,037   (511 )   (34,089 )   30,273  
Change in value of ESOP reserve - - - - (768 ) (768 )
Share based award reserve - - 252 - - 252
Exchange loss - - - (951 ) - (951 )
Loss for the year   -   -   -   -     (7,301 )   (7,301 )
At December 31, 2008 (unaudited)   153   3,683   61,289   (1,462 )   (42,158 )   21,505  

6. Provision for other liabilities and charges
      Office  
Onerous restoration Total
Reorganisation leases costs provision
Group  

£000

    £000   £000     £000  
At January 1, 2008 183 183
Provisions made in the year 1,131 1,142 60 2,333
Utilized (790 ) (12 ) (802 )
Foreign exchange   15           15  
At December 31, 2008   356     1,142   231     1,729  
 
Non-current 778 80 858
Current   356     364   151     871  
 
Reorganisation
In September 2008 the group committed to a plan of restructuring of the group’s organisation. Following the announcement of the plan the group recognised a provision of £2,273,000 for expected restructuring costs, including onerous leases, contract termination costs, consulting fees and employee termination benefits. Estimated costs were based on the terms of the relevant contracts. £790,000 was charged against the provision in 2008. The restructuring is expected to be completed in early 2009.
 
Onerous leases
As part of the restructuring above the group had non-cancellable leases for office space which the group had ceased to use. The lease on the office space in San Jose expires in 2011 and the lease on the office space in St Albans expires in 2012. The obligation for the discounted future payments (at a risk free rate of 4.5%), net of expected rental income, has been provided for. In both cases the company is seeking to sublet the space, but due to recent economic conditions, the expected rental income is nil.
 
Office restoration costs
The group has entered into property leases whereby the company is responsible for the restoration of the office space back to the condition in which it was let. The company vacated a property in Elstree UK in July 2007, and had made a provision for these restoration costs. There is currently uncertainty as to the timing and amount of the restoration payments. The company has established a provision to cover the restoration costs for the office space in St Albans UK and provides a set amount each year so that at the end of the lease the provision will cover the expected restoration costs.

7. Business Combinations

The group purchased 100% of the voting shares of Sonic Focus, Inc. on February 11, 2008 for a total consideration of £2,829,000.

All assets and liabilities were recognized at their respective fair values. The residual excess over the net assets acquired is recognized as goodwill.

The initial accounting for the acquisition was determined provisionally. Any adjustments to the fair values of the acquired assets and liabilities will be recorded within twelve months of the acquisition date.

From the date of acquisition to December 31, 2008, the acquisition contributed £428,000 to revenue, £1,236,000 to the operating expenses (excluding amortization), £333,000 of amortization of intangible assets, and £1,141,000 to net loss.

The results of operations, as if the acquisition had been made at the beginning of the period, would be as follows:

        £ '000s
Revenue       17,129
Net loss       (7,310 )
 

Carrying values

    Provisional

pre acquisition

Fair values
£'000s £'000s
 
Intangible fixed assets 22 2,037
Property, plant and equipment 53 53
Trade and other receivables 69 46
Cash and cash equivalents 68 68
Trade and other payables (780 ) (780 )
Deferred Tax -   (564 )
Net assets acquired (568 ) 860
Goodwill 1,969  
Consideration 2,829  
 
Consideration satisfied by cash paid in the period 1,794
Deferred consideration to be satisfied by issuing shares in the future 756
Transaction costs 279  
2,829  

Part of the cost of the Sonic Focus acquisition will be satisfied in shares. 2,728,915 shares will be issued in two equal installments: 15 months and 30 months after the date of acquisition. The fair value of these instruments is shown in the table above and has been calculated by reference to the ten-day average closing share price prior to the completion of the acquisition on February 11, 2008 and converted into U.S. dollars using the average interbank exchange rate over the same ten-day period.

Goodwill represents the value of the assembled work force and other potential future economic benefit that is anticipated will be derived from the integration of the technology offered by Sonic Focus with the existing products of the group.

The outflow of cash and cash equivalents in the period on the acquisition of Sonic Focus, Inc is calculated as follows:

        £'000s
Cash consideration 1,794
Transaction costs 279
Cash acquired (68 )
2,005  

Total cash and cash equivalents paid during the period for acquisitions include £467,000 for deferred consideration in respect to Alarity, Inc.

The intangible assets acquired as part of the acquisition of Sonic Focus, Inc can be analyzed as follows:

    £'000s
Developed and in process technology 1,275
Customer relationships 317
Brand name and other 445
2,037



Contact:

ARC International
Media:
Lee Garvin Flanagin, +1 408-437-3433
or
Financial Dynamics
Investor:
Juliet Clarke, +44 20 7831 3113