Acorn's significant interest in ARM has been a key attraction for investors for several years and a significant source of shareholder support for Acorn despite the performance of Acorn's own core businesses. Direct access to invest in ARM provided by its flotation requires Acorn to re-examine its business mission beyond that of being an investment vehicle, including its management organisation and sources of finance. The first visible action from this re-examination has been the appointment of Stan Boland as Chief Executive Officer, who has the mandate of the Board to create quickly a focused and sustainable business for the benefit of all shareholders.
As expected, the first half of 1998 witnessed a significant slowdown in Acorn's revenues, falling from £14.2m during the same period in 1997 to £5.3m in 1998. This reduction was most notable in traditional product sales, which fell from £8.5m in 1997 to £3.0m in 1998, but also in consultancy and licensing activities, which fell from £5.6m in 1997 to an aggregate £2.3m in 1998.
The group's operating loss increased from £1.0m in 1997 to just over £5.6m in 1998. This was due to a number of factors: overall reduction in consultancy activity due in large part to the loss of the business previously generated by Oracle's NCI affiliate, the diversion of skilled staff to a number of R&D; activities and the continuation of Acorn's Risc PC2 development, incurring almost £1.0m of costs in the period and writing off development costs of £0.7m previously capitalised in 1997. The anticipation of the launch of the Risc PC2 has contributed to the reduction in sales of current range Risc PC products.
The net cash outflow before financing was £5.8m during the first 6 months of 1998, compared with £2.8m during the same period last year.
During the first half of 1998, Acorn participated in ARM Holdings plc's successful dual listing in London and on NASDAQ. The group sold 2.8 million shares at the time of flotation, realising a pre-tax profit of £14.2m and enabling Acorn to repay its loans in full. As at 30 June 1998, the Group had £4.7m in cash.
Over the past several years the proportion of Acorn's market value represented by Acorn's investment in ARM has increased significantly. Earlier this year ARM achieved a highly successful dual listing of its shares on the London Stock Exchange and on NASDAQ. Following the dual listing Acorn retains a 26 per cent holding in ARM which represents a substantial proportion of the market capitalisation of Acorn.
The Acorn Board believes that the present situation regarding the ARM investment is unsatisfactory in two regards:
Accordingly, the Acorn Board has for some months been exploring ways of returning the ARM stake to Acorn Shareholders, either as a direct shareholding in ARM or as cash. Following detailed advice, it has become apparent that a demerger or distribution in specie of the ARM stake is unlikely to be achieved without realising a substantial chargeable gain within the Acorn Group, which the Board currently estimates at approximately £40 million. Any solution along these lines would therefore need to be structured so as to enable Acorn to meet any such liability.
The Acorn Board is also exploring alternatives to a demerger or a distribution in specie, with a view to resolving the ownership structure of ARM, and providing a tax efficient solution for Shareholders. It is likely that any such alternative would be dependent upon third parties, and it is too early at this stage to assess the likelihood or the timescale of a solution. Your Board will, however, be pursuing an early resolution to the present situation.
Acorn's non-ARM businesses have not, in aggregate, reported an operating profit since 1993 and have undergone several reorganisations and changes in business focus. These changes have adversely affected the product/market positioning of Acorn's core competencies, the quality of its relationships with technology and commercial partners and its ability to attract and retain high quality managers and technologists.
The Acorn Board believes that the Company still retains significant technical expertise which can be profitably developed, but that this development needs to be undertaken in the context of a focused business plan executed by a strengthened management team. Such an approach maximises Acorn's ability to build and develop technology alliances, implement workable business models and maximise the contribution of key contributors within the company.
Acorn's non-ARM businesses have their own discrete risk profiles and funding requirements. It may be appropriate in the medium term for some or all of these businesses to develop and be funded outside of the public markets, whether in the hands of their management or under third party ownership. The Board will be exploring these possibilities over the coming months.
The new executive management team will take early steps to reduce the losses and cash consumption of the non-ARM businesses. This is to be achieved by a combination of disposals, increased focus on targeted revenue-earning activity and a related cost reduction programme. If disposals are unable to be completed in a meaningful timeframe, then some material closures of business activities will be required and implemented.
Despite the challenges facing the non-ARM businesses, the Board believes there are prospects to create successful businesses in two related markets:
Activities peripheral to these areas will be divested or scaled back. Acorn is actively pursuing several opportunities to participate in significant trials of set-top boxes and the Board is encouraged by progress on this front in particular.
The Acorn Board believes that this sharpened focus will enable key alliances and partnerships to be put in place quickly which will endorse Acorn's skillsets and significantly enhance shareholder value.
Gordon Owen
Chairman
Acorn Group plc
14 August 1998