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
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