2Q Report January 1-June 30, 2007 for SwitchCore AB (publ)
Corporate Identity Number 556541-8869
Summary
* The Group's sales for the first six months totaled SEK 21.5
million (38.7) and orders received for the same period amounted
to SEK 39.2 million (39.4).
* The Group's operating loss for the period was SEK 79.1 million
(-35.4). Loss after taxes amounted to SEK 79.7 million (-34.6).
The loss per share totaled SEK 0.13 (-0.06).
* Liquid funds at the end of the period stood at SEK 22.4 million
(175.5).
* The Board of Directors decided mid May 2007 to cease all
development work of SwitchCore's third product generation,
Xpeedium3. In conjunction with this decision, all but five
employees were issued with termination of employment notices. All
affected personnel, have been dismissed in line with the
Co-determination Act.
* A balance sheet for liquidation purposes was finalized on April
30. This indicates that the company's equity falls short of the
capital stock by more than 50 percent. It was decided not to
liquidate the company at the AGM on 14 June.
* In recent months the Board and senior management have strived to
find a buyer for SwitchCore's business and, through a non-cash
issue acquire a business that can utilize the company's tax
deficit and the company's stock exchange listing. The Board is
continuing to work with these matters.
General information about the business
SwitchCore AB manufactures, markets and sells integrated network
devices for date, voice and video communication based on the Ethernet
standard. The core of SwitchCore's expertise is in its CXE
technology, which allows for significantly higher network product
capacity. Using SwitchCore's components, customers can develop
network products that cost-efficiently manage and prioritize data,
video and voice traffic for many demanding applications. Customers
and partners are network equipment manufacturers and suppliers,
including Intel, Allied Telesyn, Huawei, Alloptic, Radisys and World
Wide Packets. SwitchCore's headquarters is in Lund, Sweden. The
company is listed on the Stockholm Stock Exchange's Nordic List under
Smaller Companies under the SCOR ticker. Since the company's
announcement to draw up a balance sheet for liquidation purposes, the
company has been placed on the Observation List. For further
information about SwitchCore, please visit http://www.switchcore.com/
Footnote: The figures in parentheses (xx) correspond to the figures
for the same period last year.
Comments by the CEO
As reported in the previous quarterly report, the company has for
some time been negotiating with financial and industrial partners to
participate in the company's continued development of Xpeedium3.
No agreement was however reached, which is why the company stopped
all development activities to avoid a serious liquidity crisis. All
affected employees were issued with notice of termination. In
addition work began to renegotiate/cancel existing contracts, etc. to
thereby reduce the company's costs as quickly as possible.
Because the Board deemed that more than 50% of the parent company's
capital stock was utilized, the Board decided on May 11 to draw up a
balance sheet for the purpose of liquidation as a consequence of the
discontinuation of the Xpeedium3 project and write-downs of all
capitalized development costs. The Board also decided to issue all
but five employees with notice of termination of employment. All
employees have been dismissed after negotiations in line with the
Co-determination Act. The balance sheet for the purpose of
liquidation drawn up revealed that the parent company's equity stood
at SEK 22.4 million on April 30, 2007, which corresponds to 18% of
the capital stock.
A significant tax deficit has resulted from the R&D project
investments made over the years that have not generated the desired
sales revenues as planned. By the close of 2007 this deficit is
estimated to reach about SEK 1 billion. To make the most of this
deficit the Board has been attempting to introduce new
profit-generating business activities in the company. Such a
profit-generating business will be acquired through a non-cash issue.
Discussions and negotiations have also been held with numerous
companies to sell the company's existing business and technology,
either as a whole or individually. Negotiations/discussions are still
ongoing.
Sales and results for the first six months
* The Group's net sales for the first six months amounted to SEK
21.5 million (38.7). Orders for the same period were SEK 39.2
million (39,4), of which 2Q made up SEK 30.7 million (12,0). OEM
sales to Intel made up 38 percent (40) of total sales. SwitchCore
complies with IAS1 as of January 1, 2005. This means the Group
will separately account for capitalized development costs among
the Group's earnings, in total SEK 27.6 million (40.2). The sum
is not included in the above net sales.
* The Group's operating loss for the first six months of 2007 was
SEK 79.1 million (-35.4), of which SEK 70.3 million was reported
in 2Q. The main reason for this dramatic loss is due to the
Board's decision on May 11, 2007 to stop the Xpeedium3
development project. This decision has meant that all capitalized
development costs for 2007 to date have been written down to SEK
0 and that all development costs thereafter have not been
capitalized. (In the annual accounts for 2006, completed after
the 1Q report for 2007 was presented, all capitalized development
costs incurred up to and including 2006 were written down to SEK
0, SEK -103.4 million).
* SEK 27.6 million had been capitalized in 1Q 2007 for the
Xpeedium3 development project, which has now been written down to
SEK 0. A retroactive adjustment (to ensure better comparisons
between 1Q and 2Q) brings the loss for 1Q to SEK 36.4 million
instead of SEK 8.8 million as previously reported.
* The gross profit margin for the period was 23 percent (53). The
low gross profit margin for 2007 is a result of the extra
inventory impairment the company's stock of SEK 6 million.
* Since all billing is in USD, and since much of the Group's
operating expenses are in USD, net exposure in net operating
income is marginal.
* The loss after tax was SEK 79.7 million (-34.6).
* Earnings per share totaled SEK -0.13 SEK (-0.06).
Financing and liquidity
Stockholders' equity stood at SEK 7.4 million (234.7) on June 30,
2007 and equity per share was SEK 0.01 (0.38).
Cash flow for current operations during the period was SEK -44.8
million (2,5).
Liquid funds at the end of the period totaled SEK 22.4 million
(175.5). Liquidity has been negatively affected by the lower sales
volumes and the heavy investments in Xpeedium3.
Capital stock amounts to SEK 123,880,039 with the number of stock
totaling 619,400,196.
Parent company
* The parent company's sales during the first quarter amounted to
SEK 21.5 million
(38.7).
* The parent company's loss after net income/expenses was SEK
81.8 million
(-10.2).
The market and sales
SwitchCore's products address applications based on the Gigabit
Ethernet standard, a communication technology that is ten times
faster than its predecessor, Fast Ethernet. Underlying growth
potential for the Gigabit Ethernet market is strong but falling
prices prevent the market from increasing in value. The next
connection rate is 10 Gigabit Ethernet, which is expected to gain
momentum in 2008/2009.
SwitchCore's customer segments consist of companies that developadvanced network equipment (network switches) for enterprises and
access networks based on the Ethernet standard. Customers are
concentrated to North America and Asia (mainly China, Korea and
Japan).
At the end of the period SwitchCore had around 115 design wins and
around 65 customers. A design win means that a customer has decided
to develop a network switch or router based on SwitchCore's products.
Products
Xpeedium is the common name for SwitchCore's products and the first
generation of products is responsible for most of our sales today.
The OEM contract with Intel includes the Xpeedium products. The
company expects there will be a market for this product family up
until 2010.
Xpeedium2 and Xpeedium2pro are the second-generation product family
from SwitchCore. Although ready for volume production, the product
has not advanced as the company expected. SwitchCore has some 15
design wins coupled to this product family, which remains unchanged
compared to 2006.
SwitchCore carried out development of its third-generation product
family, Xpeedium3, until May 2007, when work was stopped to avoid an
acute liquidity crisis for the company.
Organization and employees
The SwitchCore organization consists of a parent company, SwitchCore
AB, first-tier subsidiaries SwitchCore Options AB, SwitchCore
Singapore Private Limited, SwitchCore Intellectual Property AB, Eroc
Technology AB, SwitchCore Taiwan AB (dormant) and SwitchCore in
Stockholm AB (dormant), and the second-tier subsidiary SwitchCore
Corporation (a wholly-owned subsidiary of SwitchCore Options AB).
At the close of the period the distribution of the Group's employees
was as follows:
The Group had 56 (56) full time employees, of which 49 (49) in Sweden
and the rest of Europe, 5 (5) in the US and 2 (2) in Asia. Of the
employees, 18 (20) percent are female and 82 (80) per cent are male.
The average age is 40 (39).
As a result of SwitchCore's financial problems and decision to stop
development activities of Xpeedium3, all but five employees have been
given notice of termination. These notices became effective at the
beginning of July 2007.
Investments
The Group's investments in tangible fixed assets totaled SEK 0
million (0.6), of which SEK 0 (0.5) was in the parent company. In
addition, investments in the first quarter have been made in
capitalized development costs totaling SEK 27.6 million (40.2), of
which about 26 percent consists of personnel costs and the remaining
portion of other external costs such as consultancy costs, tools and
license costs. Previously capitalized expenses were depreciated by
SEK 27.6 million (23.7). In total, the change in capitalized
development costs is SEK 0 million (16.5). These investments are
related in full to Xpeedium3.
Patents
SwitchCore's patent strategy is built on creating a patent portfolio
where the most important parts of the CXE technology are protected.
The functions of future products are earmarked at an early stage for
possible patenting. In total SwitchCore owns 14 patented inventions
spread over 31 registrations; 7 in Sweden, 11 in the US, 2 in Taiwan,
2 in China and 9 in other countries. At present, a further 1 patent
application has been submitted for review in the US.
Outlook
The Board is working to provide SwitchCore with a new,
profit-generating business in order to utilize tax deficits that have
arisen over the years. Such a business might be acquired through a
non-cash issue.
The Board is also attempting to find a buyer for its existing
business. It is the Board's belief that such a transaction is still
possible.
The company's ability to fulfill its duties and undertakings depend
on the success of these efforts. Some of this will mean
renegotiating/canceling existing contracts, etc. to cut the company's
costs as soon as possible.
SwitchCore's stock
The company's stocks are quoted on the Stockholm Stock Exchange's
Nordic list under small companies. Since the decision to draw up a
balance sheet for the purpose of liquidation, the stocks are quoted
on the Observation list. The average daily turnover of stocks for
January 1-June 30, 2007 was SEK 2,083,533. During the same period,
the average number of traded stocks was 7,969,284 per day. The total
number of stocks in the company at the end of the period was
619,400,196.
Reports 2007
3Q Report January 1-September 30, 2007 to be announced on the
company website
Financial statement January 1-December 31, 2007 to be
announced on the
company website
Accounting principles
This interim report was prepared according to IFRS, meaning that the
report complies with IAS 34. The same accounting principles and
calculation methods used in the most recent Annual Report have been
used in this report.
Reporting and evaluation of financial instruments (IAS 32 and IAS
39):
In accordance with IAS 39, all derivative instruments such as futures
are to be reported in the balance sheet and evaluated at actual
value. Since SwitchCore did not have any futures or other financial
instruments on January 1, 2005 the impact of the opening balances was
zero according to IAS 39. IAS 39 did not have any impact on the
closing balance.
Effects of amended exchange rates (IAS 21):
All foreign business is classified as integrated, i.e. have the same
functional currency as the parent company. They have therefore been
recalculated in accordance with the monetary method. The translation
differences are reported in the Group's profit/loss.
Stock Option Plan (IFRS 2):
The parent company has issued stock options. The programs were issued
before November 7, 2002 and therefore IFRS 2 has no impact on the
company's accounting methods.
The following Board members certify that this interim report reflects
SwitchCore's currently difficult financial situation.
Lund, Sweden August 17, 2007
Per Andersson Lars H
Bruzelius Erwin Leichtle
Chairman
CEO
The report has not been subject to review by the company's auditors.
The entire report, including tables, can be downloaded at:
http://reports.huginonline.com/xxxx
For more information:
SwitchCore will hold a phone conference for media and financial
analysts today, August 17, 2007 at 10 a.m.
Tel: + 46 8 672 81 50
Register code SwitchCore
Or contact:
Erwin Leichtle, CEO
Email: erwin.leichtle@switchcore.com
Mobile: +46 703 38 9300
Anders Widesjö, CFO
Email: anders.widesjo@switchcore.com
Mobile:+46 702 68 7000
The full report with tables can be downloaded from the following
link:
SwitchCore AB (publ): Interim Report 30 June, 2007
| Source: SwitchCore AB
Attachments
