2. Improving the Multimedia Experience
Consumers around the globe are using a growing number
of electronic products to capture, share, and play high-quality
multimedia content. Improving the multimedia experience –
regardless of the electronic device – presents a significant
market opportunity and is a key part of ARC’s strategy.
3. ARC Who We Are
Overview
01ARC International plc Annual Report and Accounts 2008
ARC International is fuelling the multimedia
revolution by licensing multimedia solutions
and intellectual property (IP) to OEM and
semiconductor companies globally.
The company’s award-winning solutions enable
these customers to significantly enhance the audio
and video experience at lower development costs.
ARC’s 150+ customers collectively ship hundreds
of millions of ARC-Based™ chips annually in a wide
range of products.
ARC International maintains a worldwide presence
with corporate and research and development offices
in San Jose and Lake Tahoe, California, US; St Albans,
England; St Petersburg, Russia; and Hyderabad, India.
Overview
01 Who We Are
02 2008 Highlights
03 ARC’s Markets
04 ARC’s Sound-to-Silicon Solutions
Breathe Life into Digital Audio
05 Chairman’s Statement
Operational Review
07 Chief Executive Officer’s Review
of Operations
09 Chief Financial Officer’s Review
11 Corporate Social Responsibility
Management and
Governance
13 Board of Directors
14 Directors’ Report
20 Remuneration Report
25 Corporate Governance
28 Statement of Directors’
Responsibilities
29 Independent Auditors’ Report
Financial Statements
and Notes
30 Income Statement
Statements of Recognised Income
and Expense
31 Balance Sheets
32 Cash Flow Statements
33 Notes to the Accounts
71 Five Year Summary
Additional Information
72 Shareholder Information
73 Advisers and Corporate Information
2008 Contents
“We use ARC because
it’s an industry
standard and its low
power profile.”
Intel, an ARC customer
“A collaboration
between industry
leaders in media-
oriented applications.”
Toshiba, an ARC customer
“We are pleased to
standardise a key
element of our
technology strategy
on ARC.”
Broadcom, an ARC customer
4. Royalty revenue US$000*
08
07
06
05
04
14,334
9,726
6,288
3,913
5,408
2008 HighlightsOverview
02 ARC International plc Annual Report and Accounts 2008
Strategic direction is strengthened
Acquisitions strengthened product offerings
New “Sound-to-Silicon” solutions were introduced
Entered new market segments
New wins with OEM and chip customers
Strengthened management team
Restructuring
Generates annual cost savings in excess of 25%
Significantly lowers ARC’s cost base while
maintaining development programmes
Enhances ability to deploy multimedia solutions
Revenue by year US$000*
31,188
28,930
24,754
19,007
22,265
08
07
06
05
04
* based on an average exchange rate for the respective year 1 Includes short-term investments
Revenues and royalties increased
Total revenue up 18% at £17.0 million
Royalty revenue up 61% at £7.9 million
Licensing revenue flat at £7.3 million
Net loss increased to £7.3 million
Cash balance1
at £12.7 million
Royalties drove revenue growth
Increase in post-2003 contracts contributing
royalty revenues
Recognised new higher value royalties from
OEM customers
Increase in ARC-Based™ shipments
Operational Financial
Total bookings US$000*
08
07
06
05
04
29,291
37,256
30,531
22,003
22,0580.0
Growth of ARC’s worldwide customer base
08
07
06
05
04
152
144
137
112
96
5. ARC’s Markets
Overview
03ARC International plc Annual Report and Accounts 2008
ARC’s technology is driving an increasing number of high growth markets
relating to how multimedia content is captured, shared, and played. Whether
it’s audio or video players, digital or mobile TVs, media-enabled cell phones,
portable storage cards, or PCs and laptops, ARC-Based™ electronic devices are
helping consumers around the world experience high-quality multimedia content.
PCs and laptops
Media enabled
cell phones
Digital TVs
Flash devices Portable media players
Set-top boxes
ARC is focusing on increasing licensing and royalty revenues from OEM and
chip companies in regions driving the design and development of consumer
electronics devices.
North America
represented
55%
of revenue
Europe
represented
20%
of revenue
Asia
represented
25%
of revenue
6. Today’s music, movies and games suffer from degraded audio
fidelity. Because of digital compression, much of the clarity, warmth,
and realism of the original recording or live performance are lost.
The result is a significant market opportunity to restore these
“emotions” to a wide range of home and portable consumer
electronics devices.
ARC’s “Sound-to-Silicon” solutions take the audio performance
of today’s consumer products to a completely different experience
level. Using technology created by artisans and engineers from
the music industry, they can help customers gain a competitive
advantage by delivering more compelling experiences at
significantly lower costs.
ARC’s Sound-to-Silicon Solutions
Breathe Life into Digital Audio
Overview
04 ARC International plc Annual Report and Accounts 2008
ARC’s “Sound-to-Silicon” Multimedia
Studio in Truckee, California.
7. Chairman’s
Statement
Overview
05ARC International plc Annual Report and Accounts 2008
In 2008 ARC traded against the backdrop of an increasingly challenging
economic environment that worsened in the second half of the year.
Despite this ARC was able to grow top line revenues driven by higher value
royalty payments from new customers. 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 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
organisations 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 rationalised 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
organisation can continue to provide compelling value. We remain confident in our
strategy and our ability to execute.
Richard Barfield
Chairman
ARC International plc
11 March 2009
“A rapid transition to profitability
and positive cash flow continues
to be our overriding goal.”
“To accelerate growth in our
revenues and customer base,
we have strengthened our
product portfolio of multimedia
solutions, broadened our target
market to include more lucrative
consumer electronics sectors,
and strengthened our worldwide
organisation.”
“Going forward into 2009
we will continue to assess
industry conditions to ensure
that ARC is best positioned
to take advantage of revenue
opportunities in the consumer
electronics industry.”
8. OperationalReview
06 ARC International plc Annual Report and Accounts 2008
High Quality Audio Experience
ARC’s solutions create a home entertainment centre listening experience on
PCs and laptops.
A leading consumer electronics company was able to achieve real competitive
differentiation for their device by providing a high-quality audio experience.
The ARC customer also was able to reduce the number of speakers and eliminate
costly audio components thus saving millions of dollars in development costs.
9. Chief Executive Officer’s
Review of Operations
OperationalReview
07ARC International plc Annual Report and Accounts 2008
ARC’s strategy is to monetise 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.
In 2008 ARC grew revenues and strengthened its competitive position in an increasingly
challenging economic environment. The acquisition of Sonic Focus, a leading provider
of audio enrichment technology, was completed in February and brings to ARC a
complementary class of customers and markets. This is helping stimulate new revenue
opportunities in an uncertain economic climate from new companies as well as ARC’s
historical base of more than 150 customers worldwide.
Today ARC’s Sound-to-Silicon solutions are receiving strong interest from OEM and
semiconductor companies. An industry first, they offer a complete solution for a
number of high growth consumer electronics markets:
• ARC® Portable Media Device Solution
Implemented on a portable media device, the ARC PMD Solution enables consumers
to enjoy music, movies, and games anywhere and anytime with a home entertainment
centre listening experience and extended playback time.
• ARC® Digital TV and Home Theater Solution
The ARC Digital TV and Home Theater Solution creates a compelling home
entertainment centre listening experience that provides for the ear what high-
definition video provides for the eye. The ARC solution eliminates costly
components, such as centre channel speakers and woofers. It also enables ARC
customers to create a single device that addresses numerous market opportunities,
such as set-top boxes, digital TVs, and home theaters.
• ARC® PC and Laptop Solution
The ARC Personal Computer and Laptop Audio Solution provides a home
entertainment centre listening experience using existing speakers or headphones.
The solution refines the sound so it resembles the original studio performance.
To ensure ARC is best positioned to deliver on its strategy in the current economic
uncertainty, management undertook a strategic review of the business. The result
was a company-wide restructuring that lowered ARC’s cost base and brought visible
improvements to ARC’s planning and execution by creating:
• A new integrated worldwide sales team and field organisation to accelerate
engagements with OEM and semiconductor customers globally.
“Audio on the HP
TouchSmart PC is
simply amazing.”
HP, an ARC customer
“Sound for an ultra
thin notebook that’s
astounding.”
Lenovo, an ARC customer
ARC’s “Sound-to-
Silicon” Multimedia
Studio in San Jose,
California.
10. Chief Executive Officer’s
Review of Operations
OperationalReview
08 ARC International plc Annual Report and Accounts 2008
• An enhanced global product development organisation to ensure ARC’s integrated
solutions meet the needs of customers creating products for high-volume
multimedia markets.
• A worldwide marketing team under new leadership with in-depth experience and
understanding of the consumer electronics industry and OEM customers. These skills
will assist ARC to continue its focus on delivering integrated multimedia solutions.
The industry adoption of ARC’s products continued throughout 2008. OEM and
semiconductor companies worldwide announced they have taken licenses for,
or are shipping products containing, an ARC solution. They included:
• PC and Laptop applications
• Hewlett Packard – introduced its new TouchSmart PC computer, which has
been heralded as “redefining personal computing” and includes ARC’s Sonic
Focus technology.
• Lenovo – launched the x300 laptop computer running the Microsoft Vista
operating system with ARC’s Sonic Focus technology.
• N-Trig – has signed a multi-year license agreement for ARC’s processor products
for use in N-trig’s DuoSense™ technology for PCs.
• Digital televisions
• A leading mobile digital TV company signed a multi-use agreement for ARC
solutions to provide high-quality digital TV reception in nearly every global
geographic region.
• Abilis announced it has standardised its mobile DTV product development
on ARC technology.
• Fujitsu extended its long-term relationship with ARC and took a new license
for use in its next-generation HDTV products.
• ViXS has taken a license for ARC’s multimedia solutions for use in its XCode™
chipset family, which enables the processing of multiple HD video streams.
• Other electronic market applications
• A leading flash company took an ARC license for flash applications because
of ARC’s recognised leadership in the industry.
• A top ten Taiwan chip company is incorporating ARC’s low power solution into
cellular design that is targeting the worldwide handset market.
• A leading smart card provider signed a new license enabling the existing ARC
customer to create new ARC-Based™ solutions for high volume smartcard-
related devices.
• Toshiba extended its collaboration with ARC by taking a new license for
development of leading-edge processor technology.
For the year, these developments helped ARC grow the top line despite a deteriorating
industry climate. ARC enters 2009 with a strengthened product portfolio and Sound-to-
Silicon solutions that are helping drive new revenue opportunities and deliver higher value
royalties. The restructuring plan has lowered ARC’s cost base and strengthened the
management team. For the year, management remains cautious as visibility is limited
due to the ongoing economic uncertainty. However, we have confidence in ARC’s
strategy, strengthening position in the industry, and attractiveness of our solutions that
help customers increase competitiveness in the growing consumer electronics market.
Carl Schlachte
President and Chief Executive Officer
11 March 2009
“ARC’s technology has
played a significant
role in the success
of our product.”
SanDisk, an ARC customer
“ARC’s technology
enhances our
competitive
differentiation.”
Infineon, an ARC customer
11. Chief Financial
Officer’s Review
OperationalReview
09ARC International plc Annual Report and Accounts 2008
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 US 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 US 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 US 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 US 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 31 December 2008 compared with 196 at
31 December 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 amortisation, increased
to £3.1 million (2007: £1.7 million) due to additional amortisation of intangibles
included in the acquisitions. The incremental operating expenses excluding amortisation
as a result of the acquisition during the year was £1.2 million in 2008. Incremental
amortisation 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).
+18%Total revenue up 18% to
£17.0 million
£7.9million
Royalty revenue in 2008
12. Chief Financial
Officer’s Review
OperationalReview
10 ARC International plc Annual Report and Accounts 2008
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 31 December
2008 were £21.5 million (31 December 2007: £30.3 million), including cash and
short-term investments of £12.7 million (31 December 2007: £21.2 million).
Dividend
No interim dividend payment was made and no dividend has been proposed for
the year ended 31 December 2008 (2007: £nil).
Acquisitions
During the period ARC acquired Sonic Focus, Inc. for a total consideration of
£2.8 million. See note 31 for details.
Treasury policy
The group’s treasury policy seeks to ensure that adequate financial resources are
available for the development of the group’s businesses whilst managing its currency,
interest rate and counterparty risks. Group treasury operates within clearly defined
guidelines that are approved by the Board. The group’s policy is not to engage in
speculative transactions. The group’s policy in respect of major areas of treasury is
set out below.
Currency transaction
The currency gains and losses arise where actual sales and purchases are made
by a business unit in a currency other than its own functional currency (2008: gain
£108,000, 2007: gain £133,000). Most of the group’s sales are in US dollars which
provides a natural hedge against US dollar purchases made within the group. The
group’s policy is to use forward contracts as a hedge against exchange rate movements
to cover net US dollar exposures for customer receivables where collection dates are
certain. The group maintains the majority of its cash and short-term investment
balances in sterling and is therefore not subject to currency exchange risk.
Funding and deposits
The group ended the year with net funds of £12.7 million (2007: £21.2 million).
The majority of the funds have been placed with a leading UK clearing bank to manage
on behalf of the group under guidelines provided by the Board. The balance continues
to be managed in house.
The group expects that future funding requirements will be met by the funds available
currently as at 31 December and revenue from existing licensees (royalty, support,
license renewals) and future operating activities. While losses made in 2008 reduced
the liquidity position of the group between 31 December 2007 and 31 December 2008,
the group restructure has been undertaken to reduce ongoing costs in 2009 onwards
and therefore reduce cash outflow.
Counterparty risk
The group monitors the investment of its funds against pre-determined limits so as
to control exposure to any territory or institution.
Victor Young
Chief Financial Officer
11 March 2009
£12.7million
Net funds
13. Corporate Social
Responsibility
OperationalReview
11ARC International plc Annual Report and Accounts 2008
In addition to the needs of the group’s shareholders, the
group recognises the interests of employees, customers,
suppliers and the local communities and environments
in which we operate. The Board accepts that it must be
mindful of the needs of all of its stakeholders and seeks
to enhance all relationships with the differing groups
concerned. The following policies reflect the Board’s
commitment to corporate social responsibility (“CSR”).
Employee relations policy
The group values its employees and believes they are one
of its best assets. Policies and practices are in place to attract,
motivate, retain and develop the group’s employees. As an
intellectual property (IP) development group with over 70%
of the employees working within research and development,
continual professional development and training is paramount.
In order to retain and integrate the new employees from the
recent acquisitions the group has reviewed the working practices
and culture within the group. This has enabled the new
employees to understand the group’s operations and move
smoothly into its processes.
During 2008 the group undertook a restructure programme
that reduced the number of employees. The restructure and
subsequent employee reductions were handled in accordance
with local customs and laws. As part of the process the group
undertook to assist those employees leaving the group through
programmes of outplacement assistance, as well as liaising with
recruitment companies or other local companies. The group has
also undertaken a programme of measures to ensure that those
employees remaining are fully engaged with the group and the
strategic objectives for the future.
The group seeks to benchmark the salary and total remuneration
of the employees to the industry best practice. To that end
the group partakes in various salary surveys to enable the
management to understand the remuneration currently on offer
within the group’s operational sectors. Employees are given the
opportunity, where legally possible, to share in the rewards of its
future success through the group’s operation of a share option
scheme. Other benefits such as pension contributions to either
state sponsored or defined contribution schemes and health
insurance programmes are available to employees.
The group communicates regularly with the employees through
the use of regular “all employee” meetings and conference
calls chaired by the Chief Executive Officer (CEO). These cover
a wide range of topics that allow each employee easy access
to the senior management to ask questions and quiz them on
recent activities and/or general strategy. These meetings are
supplemented by site level meetings where information is spread
across departments and managers can receive feedback on any
topic or development. The CEO has also implemented an e-mail
update system and web-blog of recent activities. This has proved
popular in spreading news quickly throughout the group.
The group has a policy of helping employees achieve an
appropriate work/life balance. This is accomplished through the
use of policies on maternity and paternity leave, flexible working
arrangements and part time working where appropriate. The
group believes that recent improvements in technology within
the workplace should be implemented to assist employees.
The group has policies that cover grievances and disciplinary
procedures as well as recruitment processes.
The annual appraisal system has been reviewed during the
year to ensure that it is meeting the needs of both the group
and the employee. This review has reinforced the recognition
that development of employees will lead to better designs and
products from the group. The group will continue to invest in
appraisals, training and development to assist employees in their
skills development, both professional and personal. The group
likes to promote from within so all vacancies are advertised
internally, and the group operates a system for employees
to refer people for advertised positions.
Environmental policy
The Board acknowledges that the group has a role to play
in environmental issues. The group does not perform any
manufacturing activities and therefore has negligible impact
on the environment. The group operates from offices with the
main activity being the development of hardware and software
designs by employees working on computers, which does not
involve the use of hazardous substances or waste. The group
policy is to endeavour to minimise the impact of its activities on
the environment and to comply with all relevant environmental
laws and regulations. The group has a policy of recycling
as much as possible, ranging from paper waste to printer
cartridges, reducing energy usage through the use of efficient
lighting products and computer equipment and reducing travel
wherever possible. Under the Waste Electrical and Electronic
Equipment (WEEE) directive the group has a responsibility
to dispose of its computer equipment safely and responsibly.
The group operates with several partners to ensure that all old
computer equipment is recycled or disposed of in a safe manner.
Community
The group aims to work appropriately with the local community
in which it operates. The group encourages its employees to
take part in charitable activities and offers support whenever
possible. The group has also worked with various educational
establishments to provide training and work experience to
young people. This involvement has ranged from one-week
work experience projects to summer internships with the
group. The group has an ongoing relationship with the
University of Edinburgh, whereby the group provides research
projects to the students and the University provides research
services to the group.
14. ManagementandGovernance
12 ARC International plc Annual Report and Accounts 2008
Extended Playback Time
Portable media players containing ARC’s solutions can deliver a natural and
realistic experience with extended playback time.
ARC’s multimedia products provide an integrated solution to manufacturers
and chip makers, cutting overall development costs and extending battery life.
Consumers benefit by having a device that adds clarity to the audio spectrum
with a rich surround sound and reduced listener fatigue.
15. Board of
Directors
ManagementandGovernance
13ARC International plc Annual Report and Accounts 2008
From left:
Richard Barfield
Carl Schlachte
Victor Young
Dr Geoff Bristow
Steven Gunders
Richard Barfield Chairman of the Board
Richard Barfield, 51, joined the Board as a non-executive director
and Chairman of the Audit Committee in September 2003,
becoming Chairman in April 2007. Mr Barfield also chairs two
other private venture capital backed businesses in the IT staffing
and IT reseller industries. Mr Barfield was previously Chief
Executive Officer of Spring Group plc. Whilst at Spring, he was
also Chairman of the Recruitment and Employment Confederation,
the trade association of the UK recruitment sector. He previously
served as Group Finance Director of Northgate Information
Solutions plc and was President of Northgate's Glovia joint
venture with Fujitsu and of the Group's application development
tools business, PRO-IV. Prior to this he occupied senior financial
positions with Bellsouth Corporation and SmithKline Beecham.
Mr Barfield is a Fellow of the Institute of Chartered Accountants,
having qualified with KPMG in 1982.
Carl Schlachte Chief Executive Officer
Carl Schlachte, 45, is president and CEO of ARC International
and joined the Board in 2003. Carl has more than 20 years of
experience in the semiconductor industry, including CEO roles
at global fabless semiconductor and IP companies, and executive
positions at Motorola and ARM Holdings plc. At ARM he
established its North American operations and secured strategic
relationships with some of the largest chip and system
companies in the United States. Carl resides in the East Bay
of Northern California with his wife and children, and is active
in his local community and philanthropic causes. He is also
non-executive Chairman of MOSAID Technologies Inc.
Victor Young Chief Financial Officer
Victor Young, 60, is Chief Financial Officer of ARC International
and joined the Board in 2007. Victor has over 35 years of
corporate accounting and management experience with
technology companies such as Selectica, Mobilitech, BOPS and
Tera Systems. Victor’s industry experience includes service with
PricewaterhouseCoopers, and multinational venture capital,
technology, manufacturing, telecommunications and service
corporations. He is a graduate of San Francisco State University.
Dr Geoff Bristow Non-executive director
Dr Geoff Bristow, 55, joined the Board as senior non-executive
director in September 2003. After gaining a first class electronics
degree from Imperial College, London, and a PhD in engineering
from Cambridge University, he spent five years at Texas
Instruments’ semiconductor division where he was responsible
for SoC (System-on-Chip) devices. Subsequently at ICL plc he
was director of Network Products before setting up Octagon
Industries, a management services company designed to assist
undervalued hi-tech companies. Under Octagon's umbrella he
was attributed with a number of high profile rescues including
Wordplex Information Systems plc (where he was CEO),
Alphameric plc (Executive Chairman) and later in California,
Poqet Computer Corp (Chief Operating Officer). He then
became an Executive Vice President for Fujitsu and has
subsequently been managing an investment portfolio of
young private companies.
Steven Gunders Non-executive director
Steven Gunders, 65, joined the Board as a non-executive director
in June 2007. Currently he is Chairman of the Remuneration
Committee and a member of the Audit Committee. Steven
Gunders has close to 40 years of industry experience and
specialises in corporate strategy, mergers and acquisitions,
and operations. He is a qualified C.P.A. and holds an MBA from
the University of Chicago. A former partner with Deloitte and
Touche, Steven Gunders was the global lead consulting partner
at Deloitte Consulting with a particular focus on private equity
clients’ buy and build strategies both in the United States
and internationally.
16. Directors’
Report
ManagementandGovernance
14 ARC International plc Annual Report and Accounts 2008
The directors present their report and the audited financial
statements for the year ended 31 December 2008.
Business review and principal activities
The Group licenses award-winning consumer electronics intellectual
property (IP) in the form of vertically integrated solutions,
multimedia subsystems, configurable processors, and related
technologies to semiconductor and OEM companies worldwide.
The company is a public limited company quoted on the
London Stock Exchange, registered in England and Wales
and is domiciled in the UK. The address of the registered
office is Verulam Point, Station Way, St Albans, Hertfordshire.
The company’s registered number is 3592130.
The group has principal operating activities in the UK, US,
Russia and in India through the associate Adaptive Chips, Inc,.
The addresses of the principal offices are set out on the back
cover. A list of subsidiaries is given in note 16 to the accounts
on page 58, and the group also operates representative offices
in Taiwan, Japan, Germany and the Netherlands.
A review of the operations and future developments is included
in the Chairman’s statement, Chief Executive’s review of
operations and Chief Financial Officer’s review on pages 5 to
10 and have been incorporated by reference. The group position
at the year end includes a net funds position (including cash
and cash equivalents and short-term investments) of
£12.7 million (2007: £21.2 million) and a net asset position
of £21.5 million (2007: net assets £30.3 million).
The key performance indicators used by the directors and management are summarised below:
Description Metrics Performance Comment
Revenue Revenue for the company Total revenue up 18% from 2007. With all sales made in US dollars the overall
is made up of licencing increase was 8%. Royalties continued to
and engineering revenue, Royalties up 61% from 2007. increase as unit shipments increased.
maintenance revenue and During 2008 customers shipped increasing
royalties on units sold. units of new higher royalty bearing products.
Royalty revenues may fluctuate due to seasonal
fluctuations in volume shipments by licencees,
economic conditions in end markets, end of
life cycles or unforeseen delays in reporting
royalties by licencees.
Revenue per Monitoring revenue per £88,000 compared to During the year ARC has made one
average headcount headcount allows the £91,000 in 2007. acquisition but this headcount increase
directors to measure the has been offset by the restructuring that
efficiency of the group. the group undertook in September. The year
end headcount was 163 which will be carried
through to 2009. Therefore, the revenue per
average headcount should improve.
LBITDA The monitoring of the £3.9 million* versus LBITDA has increased by 5% over 2007,
loss before interest, £3.7 million in 2007. partially due to the delayed revenue from
tax, depreciation and two licencing contracts in 2008.
amortisation allows the
directors to understand
the operating results
of the group. *Before restructuring costs.
New licences New licences signed will 27 new licences versus The group has been focusing on increasing
during year drive future royalties. 34 in 2007. the average deal revenue. Renewing
contracts for new products with existing
customers confirms the customer valuation
of the group’s products.
Net funds used The group is loss making, £8.6 million versus The group used £2.5 million cash for the
so it monitors the cash £10.4 million in 2007. acquisition during the year. Cash outflow
used to ensure that the from operations increased to £5.6 million
cash is put to best use from £5.1 million in 2007, due to changes
for the group. including, year end working capital
movements, one-off restructuring costs and
absorbing the acquisitions during the year.
17. ManagementandGovernance
15ARC International plc Annual Report and Accounts 2008
The directors consider that licencing growth drives an IP
licencing business model. Therefore, revenue-based metrics
such as growth rates, revenue per head and new customers and
licence agreements are key to company growth. The directors
also consider that the move to profitability is important. This is
measured by review of LBITDA and net funds used.
Principal business risks and uncertainties
The Board has a process for identifying and managing business
risks and reviews the major operational risks and uncertainties
for the ARC business at each Board meeting.
This Annual Report contains certain forward-looking statements
that are ARC’s expectations and beliefs about our future
business. These statements are made by the directors in good
faith, based on information available to them at the time of
the approval of the report. Undue reliance should not be placed
on such statements, which are based on ARC’s current plans,
estimates, projections and assumptions. By their nature,
forward-looking statements involve known and unknown risk
and uncertainty because they relate to events and depend on
circumstances which may occur in the future and which in some
cases are beyond ARC’s control. Actual results may differ from
those expressed in such statements, depending on a variety of
factors. These factors include, but are not limited to: consumer
and market acceptance of the company’s products and the
products that use the company’s products; decreases in the
demand for the company’s products; excess inventory levels at
the company’s customers; decline in average selling prices of the
company’s products; cancellation of existing orders or the failure
to secure new orders; the company’s failure to introduce new
products and to implement new technologies on a timely basis;
the company’s failure to anticipate changing customer product
requirements; the company’s failure to deliver products to its
customers on a timely basis; the timing of significant orders;
increased expenses associated with new product introductions;
the commencement of, or developments with respect to, any
future litigation; the cyclicality of the semiconductor industry;
and overall economic conditions.
Trends and factors likely to affect future development,
performance and position of the groups business
The major risks and uncertainties and how the Board tries
to mitigate them are:
1 Its ability to produce new products that satisfy The company undertakes extensive market analysis and has
the target markets. a close working relationship with potential customers, with
a view to identifying the correct product for the target market.
The design cycle for the company’s products can take 12 to
18 months to reach acceptance by its customer base. This long
lead time can lead to difficulties with the timing and scheduling
of product design as well as the potential to miss a market
opportunity for the products developed. Therefore, throughout
the research and development cycle the company operates a tight
project management schedule to ensure that products are on
time and within specification. Product reviews are undertaken
regularly to ensure that those being developed are in line with
market expectations.
2 The company operates an intellectual property (“IP”) The use of the IP business model by companies has increased
business model that relies on licencing IP to customers over the last years. Customers have seen the benefits of licencing
for integration into their own products. industry standard IP and adding to this to make their own
products different than competitors. However, customers could
revert to using “in-house” development teams and cease licencing
in product. The Company undertakes development work to ensure
that its products are ahead of the customers needs and available
when they need them. The company has the advantage in that
it licences to more than one supplier, its development costs should
be recouped over more than one customer, therefore having a
price advantage over in-house development teams.
3 Competitive pressures; ARC’s competitors include Through the use of market analysis the company has focused
major corporations that have a larger base of software on multimedia subsystems, which is a growing market.
support for their product range and much larger The company endeavours to produce products that are compatible
installed customer base. with industry standards and other major players so as to appeal
to the widest customer base.
18. Directors’
Report
ManagementandGovernance
16 ARC International plc Annual Report and Accounts 2008
Results and dividends
The results for the year are set out on page 30. The financial
statements for the group show revenue for the year ended
31 December 2008 of £17.0 million compared to £14.4 million
for the year ended 31 December 2007. There was an operating
loss of £7.0 million (before restructuring charge) for the year
compared with an operating loss of £5.3 million for the year
ended 31 December 2007. The directors do not recommend
the payment of a dividend (2007: £nil).
Policy on payment to suppliers and
financial instruments
The company is a holding company and as of 31 December
2008 had no trade creditors. It is group policy that payment to
suppliers is made in accordance with suppliers’ agreed terms and
in accordance with its contractual and other legal obligations
and this is expected to continue in 2009. The average number
of creditor days for the group during 2008 was 62 days (2007:
40 days). The group policy in respect of financial instruments
and financial risk management is contained within the financial
review on pages 9 to 10 and note 4 to these accounts.
Research and development
The group continues to undertake research and development
activities aimed at the ongoing improvement of its technology.
Research and development costs charged to the income
statement were £9.6 million (2007: £7.4 million) and capitalised
£0.25 million (2007: £0.27 million) as internally generated
development costs.
The group has research and development centres in St Albans
and Cambridge, UK; San Jose, US and St Petersburg, Russia.
During 2008 the group has increased the amount of
development undertaken in India through its associate, Adaptive
Chips Inc. Adaptive Chips provides outsourced development
personnel to the group. It is the group‘s policy that all new
intellectual property is owned in the UK. Intra-company transfer
agreements are in place where necessary to facilitate the
ownership in the UK.
Essential business arrangements
The products that the company develops rely on the latest
technological benefits. As such the company has arrangements
in place with the major electronic design automation companies
to licence their technology to assist in the group’s product
development. These products allow the group to design
microprocessor cores in software and then convert this into
microprocessor chip designs. The group has also undertaken
an increase in the development of processor design through
the associate, Adaptive Chips Inc. Adaptive Chips perform
the productisation and development of the core design work
generated by the group.
4 Factors outside ARC’s control such as a downturn By focusing on the multimedia subsystems market, which is a
in the semiconductor industry and adverse growing area, the company believes that this will help mitigate
economic conditions. any effects of any potential downturn. However, market risks
will still exist.
5 Safeguarding and enforcing its intellectual property The company invests vigorously in its patent portfolio to ensure
rights, and protecting against challenges by that all new inventions are patented and protected. The company
third parties. also has tight controls over the use of its technology through
the licensing process. Potential claims against the company
would affect the business as these are costly and take up a
disproportionate amount of management time. The company
seeks to minimise this risk by following strict reviews of the
project objectives and how the products are intended to operate.
6 The departure of key personnel. The company has a competitive remuneration package for
personnel. The company encourages a working environment
where communication between employees and management
is open and leads to a good working relationship.
7 Currency and hedging risks (a substantial proportion The company operates a treasury policy as detailed
of ARC group revenues are in US dollars), interest rate on the Chief Financial Officer’s review on page 10
risks and credit risks. to reduce these risks.
8 Integration of the new business. ARC has completed four business acquisitions during 2007
and 2008 and there are risks and uncertainties regarding the
integration of these businesses into the ARC group.
19. ManagementandGovernance
17ARC International plc Annual Report and Accounts 2008
As of the date of this report there have been no other changes
to the above interests of the directors in the ordinary shares of
the company.
The company operates a process of orderly rotation of the
directors for re-election to the Board. Richard Barfield offers
himself for re-election at the AGM. Richard Barfield is the
Chairman of the Board and has been with the company since
September 2003. Richard has 25 years of corporate accounting
and management experience. Richard Barfield has a services
agreement with no notice period specified. Geoffrey Bristow also
offers himself for re-election at the AGM. Geoffrey Bristow is the
Senior Non-Executive Director on the Board and has also been
with the company since September 2003. Geoffrey has 25 years
of electronic engineering and management experience and
specialises in working with technology companies. Geoffrey
Bristow has a services agreement with no notice period specified.
The company maintains a directors’ and officers’ insurance policy
for the benefit of all directors and management of the group.
Corporate governance
The Board’s report on corporate governance is set out on
pages 25 to 27.
Donations
During 2008 the group made £nil of charitable donations
(2007: $200). No political contributions were made during
the year (2007: £nil).
Substantial shareholdings
At 20 February 2009 the company had been notified of the
following interests of over 3% in the issued ordinary share
capital of the company:
Number of % of
ordinary shares capital
Gartmore Investment Limited 26,902,498 17.62
Axa Investment Managers 10,660,665 6.98
GAM Fund Management 10,527,812 6.89
Legal & General 9,659,001 6.32
Aviva 8,853,682 5.80
UBS Investment Bank 7,856,963 5.15
River and Mercantile
Asset Management LLP 7,758,378 5.08
Employee Benefit Trust 7,641,799 5.00
Additional information for shareholders
Following the implementation of the EU Takeover Directive
into UK law, the following description provides the required
information for shareholders where not already provided
elsewhere in this report.
Information on the group’s employees
The group operates over three continents in 11 countries,
and as such is very aware of the local environments in which
its employees operate. The group is aware of the diverse local
customs and takes these into account when dealing with its
employees. Even with the diverse geographical locations the
group minimises its environmental impact through using new
methods of communications rather than flights to meetings.
The product ranges that the group develops are to allow
the end consumer products to be more power efficient
and therefore more environmentally friendly also.
The group’s headcount has reduced from 196 in December 1997
to 163 in December 2008. The average number of employees
during 2008 was 193 (2007: 158) with 70% (2007: 72%)
working in research and development. During 2008 the group
undertook a restructuring programme that reduced the number
of employees. Overall the group still has 72% of employees
working in research and development but concentrated on new
product research and initiatives, with development undertaken
by the associate in India. The group recognises that the employees
play an important part in the future success of the company, and
seek to recruit and retain those people who possess the requisite
skills and knowledge as well as the personal commitment to
respond to the challenges of working within a fast changing
technology group. As part of the restructure, the group has
refocused its employee skill base on multimedia based product
offerings. The collaboration of the engineers within the group
and those of the associate in India, should allow the group to
leverage the talented employee workforce and produce new
products in a cost effective and efficient manner.
The restructure and subsequent employee reductions were
handled in accordance with local customs and laws. As part
of the process the group undertook to assist those employees
leaving the group through programmes of outplacement
assistance, as well as liaising with recruitment companies
or other local companies. The group has also undertaken
a programme of measures to ensure that those employees
remaining are fully engaged with the group and the strategic
objectives for the future.
Directors and their interests
The directors in service at the end of the year, and their interests
(which are all beneficial) in the ordinary share capital of the
company, are shown below and details of options held are given
in the remuneration report on pages 23 and 24.
Offered for Shares Shares
Date of re-election at 31 December 31 December
appointment next AGM 2008 2007
R Barfield 03.09.03 Yes 10,000 –
G Bristow 03.09.03 Yes – –
S Gunders 21.06.07 10,000 –
C Schlachte 20.02.04 752,364 681,364
V Young 13.02.07 – –
20. Share capital
As at 28 February 2009, 152,703,048 (28 February 2008:
152,703,048) ordinary shares of 0.1p each were in issue and
listed on the London Stock Exchange. All issued shares
are fully paid up and do not carry any special rights or
additional obligations.
At the AGM on 22 April 2008 (the “2008 AGM”), the
shareholders authorised the company to make market purchases of
up to 5% of the ordinary shares capital and the maximum price
which could be paid was an amount equal to 105% of the average
of the middle market quotation for the five business days
preceding the day of purchase. As at 11 March 2009, no purchases
have been made and the company has an unexpired authority to
repurchase shares up to a maximum of 7,544,698 ordinary shares.
At the 2008 AGM, the shareholders authorised the directors
to allot shares up to an aggregate nominal value of £50,901.
Since the 2008 AGM no shares have been allotted.
The company is not aware of any agreements between
shareholders that may result in the restriction on the transfer
of the company’s shares or of the voting rights attaching
to the company’s shares.
Rights and obligations attaching to shares
Voting
In a general meeting of the company, subject to the provisions
of the Articles and to any special rights or restrictions as to
voting attached to any class of shares in the company (of which
there are none):
on a show of hands, every member present in person shall
have one vote; and
on a poll, every member who is present in person or
by proxy shall have one vote for every share of which
he or she is the holder.
No member shall be entitled to vote at any general meeting or
class meeting in respect of any shares held by him or her if any
call or other sum then payable by him or her in respect of that
share remains unpaid. Currently, all issued shares are fully paid.
No member who is in default of a s.212 notice to provide
information about his holding in shares of the company shall
be entitled to receive notice of or attend or vote at a general
meeting of the company in respect of the shares in which he
is in default.
Deadlines for voting rights
For the purposes of determining which persons are entitled to
attend or vote at a meeting and how many votes such person
may cast, the company may specify in the notice of the meeting
a time, not more than 48 hours before the time fixed for the
meeting, by which a person must be entered on the register
in order to have the right to attend or vote at the meeting.
Directors’
Report
ManagementandGovernance
18 ARC International plc Annual Report and Accounts 2008
Dividends and distributions
Subject to the provisions of the Companies Act 1985 and the
Companies Act 2006 (the “Companies Acts”), the company
may, by ordinary resolution, declare a dividend to be paid
to the members, but no dividend shall exceed the amount
recommended by the Board.
The Board may pay interim dividends, and also any fixed rate
dividend, whenever the financial position of the company,
in the opinion of the Board, justifies its payment. All dividends
shall be apportioned and paid pro rata according to the amounts
paid up on the shares during any portion or portions of the
period in respect of which the dividend is paid.
Liquidation
Under the current articles, if the company is in liquidation, the
liquidator may, with the authority of an extraordinary resolution
of the company and any other authority required by the Statutes
(as defined in the articles):
divide among the members in specie the whole or any part
of the assets of the company; or
vest the whole or any part of the assets in trustees upon
such trusts for the benefit of members as the liquidator,
with the like authority, shall think fit.
Transfer of shares
Subject to the articles, any member may transfer all or any of
his or her certificated shares by an instrument of transfer in any
usual form or in any other form which the Board may approve.
The Board may, in its absolute discretion and without giving
any reason, decline to register any instrument of transfer of
a certificated share which is not a fully paid share or on which
the company has a lien. The Board may also decline to register
a transfer of a certificated share unless the instrument of
transfer is:
i) left at the transfer office for registration; and
ii) accompanied by the certificate for the shares to be
transferred and such other evidence (if any) as the Board
may reasonably require to prove the title of the intending
transferor or his or her right to transfer the shares.
The Board may permit any class of shares in the company
to be held in uncertificated form and, subject to the current
articles, title to uncertificated shares to be transferred by
means of a relevant system.
The Board may refuse to register the transfer of shares in favour
of more than four persons jointly.
Amendment of the company’s articles of association
Any amendments to the company’s articles of association may
be made in accordance with the provisions of the Companies
Act 1985 by way of special resolution.
Appointment and replacement of directors
Directors shall be no less than three and no more than
15 in number.
21. ManagementandGovernance
19ARC International plc Annual Report and Accounts 2008
Directors may be appointed by the company by ordinary
resolution or by the Board. A director appointed by the Board
holds office only until the next following Annual General
Meeting and is then eligible for election by the shareholders.
The Board may from time to time appoint one or more directors
to hold employment or executive office for such period
(subject to the Companies Acts) and on such terms as they may
determine and may revoke or terminate any such appointment.
At every Annual General Meeting of the company, any director
in office who:
a) has been appointed by the Board since the previous Annual
General Meeting; or
b) was elected or last re-elected at or before the Annual General
Meeting held in the third calendar year before shall retire
from office by rotation. A retiring director shall be eligible
for re-election.
The Company may remove a director from office by passing
an ordinary resolution of which special notice has been given.
The Board may remove a director from office if they make a
request in writing signed by at least three quarters of the other
members of the Board.
The office of director will also be vacated if:
i) he or she resigns;
ii) he or she is or may be suffering from a mental disorder;
iii) he or she is absent without permission of the Board from
meetings of the Board for six consecutive months and the
Board resolves that his or her office is vacated;
iv) he or she becomes bankrupt or compounds with his or
her creditors generally;
v) he or she is prohibited by law from being a director; or
vi) he or she is removed from office pursuant to the articles.
Powers of the directors
The business of the company will be managed by the Board
who may exercise all the powers of the company, subject to
the provisions of the company’s memorandum of association,
the articles, the Companies Acts and any ordinary resolution of
the company. The directors may exercise all the powers of the
company to borrow money but shall not at any time without
the prior sanction of an ordinary resolution of the company
exceed a sum equal to £20 million.
Shares held in the Employee Benefit Trust
The trustee of the ARC International plc Employee Benefit Trust
(“EBT”) hold 7,641,799 ordinary shares in ARC International plc.
If any offer is made to shareholders to acquire their shares the
trustee will not be obliged to accept or reject the offer in respect
of any shares which are at that time subject to subsisting awards,
but will have regard to the interests of the award holders and will
have power to consult them to obtain their views on the offer.
Subject to the above the trustee may take the action with respect
to the offer it thinks fair.
Change to the articles during 2008
At the AGM in 2008 the shareholders approved a change to the
articles, as a result of new provisions under the Company’s Act
2006, to allow the directors to authorise conflicts and potential
conflicts of interest in a similar way to the current law. No conflicts
have had to be approved in the period.
Change of control
There are no agreements between any group company and any
of its employees or any director of the company which provide
for compensation to be paid to the employee or director for
termination of employment or for loss of office as a consequence
of a takeover of the company. Details of significant agreements
to which group companies are a party containing provisions
which would be triggered as a consequence of a takeover
of the company, and details of the effect of such provisions,
are set out below.
Significant agreements – change of control
The group has significant agreements that contain termination
and other rights for our counterparties upon a change of control
of the company. The group is party to licensing agreements with
major Electronic Design Automation software vendors, that
specify that in the event of a change of control of the company,
the company must obtain their written consent for the licences to
be assigned. This is a standard contract term in software licences.
The group operates a Performance Share Plan, detailed in
the remuneration report on page 23. On a change in control,
the “default” position is that awards vest only subject to
performance and a pro rata reduction.
Annual General Meeting
The Annual General Meeting (AGM) will be held at 9.30am
on 22 April 2009 at Verulam Point, Station Way, St Albans,
Herts AL1 5HE.
Auditors
Each of the directors as of the date of this report confirms
the following:
As far as the director is aware, there is no relevant audit
information of which the company’s auditors are
unaware; and
He has taken all the steps he ought to have taken as
a director in order to make himself aware of any audit
information and to establish that the company’s auditors
are aware of that information.
During the year PricewaterhouseCoopers LLP resigned as
auditors and KPMG Audit Plc was appointed. KPMG Audit Plc,
have indicated their willingness to continue in office, and a
resolution concerning their reappointment will be proposed
at the AGM.
By order of the Board
Charles Rendell
Joint Company Secretary
11 March 2009
22. The emoluments of directors and their interests in executive
options over shares in the company and share-based awards
are the only auditable elements of the remuneration report.
Remuneration Committee
The members of the Remuneration Committee during the
year were:
Steven Gunders (Chairman)
Richard Barfield
Geoff Bristow (Chairman until 22 April 2008)
All the members of the Committee are non-executive directors
and considered to be independent.
The principal function of the Remuneration Committee is to
determine the remuneration packages of all executive directors
and for monitoring the remuneration of senior management.
This includes base salaries, pension contributions, bonus
payments, share-based incentives and service contracts.
The Remuneration Committee prepares the Board’s Annual
Report to shareholders on the group’s policy on remuneration
of the executive directors and the directors’ remuneration report.
The terms of reference are available on the group’s website:
www.arc.com/upload/company/remuneration_committee_terms
_of_reference_2008.pdf.
Advice provided to the Remuneration Committee
During the year, the following were appointed by the
Committee to provide advice that materially assisted
the Committee:
New Bridge Street Consultants
Charles Rendell (Joint Company Secretary)
Thomas Huppuch (Joint Company Secretary)
Sandy O’Gorman (Vice President Human Resources)
New Bridge Street Consultants were appointed by the
Committee (and provide no other services to the company)
in respect of share-based incentive plans, to ensure that any
new plans fulfil the Committee’s long-term incentive criteria.
Remuneration policy
In determining the company’s policy on remuneration, the
Remuneration Committee has regard to the following objectives:
i) Remuneration packages offered are designed to be
competitive, being comparable with packages available
within other groups operating in similar markets (i.e.
internationally) and on a similar scale, including competitors.
Remuneration
Report
ManagementandGovernance
20 ARC International plc Annual Report and Accounts 2008
ii) Remuneration packages are set so as to attract, retain and
motivate executives of the highest calibre, and at the same
time optimise the interests of shareholders. The Committee
takes into account that the company is striving towards
profitability when reviewing the compensation that is
awarded to directors and senior management.
iii) Consideration of environmental, social and governance
issues. The board reviews the environmental impact of the
company as a whole, together with the social impact and the
governance issues. Currently there are no plans to incorporate
these into the bonus plans or the variable elements to the
remuneration packages. The Board will review this if the
position or operations of the group change.
The policy is designed to provide a mix of performance and
non-performance remuneration so as to align their objectives
to those of the shareholders. The remuneration mix for 2008
has changed with an increased emphasis on the performance
related pay. The percentage available by way of variable
measurable bonus has increased to reward increased performance.
The policy on executive director and senior management
remuneration and appointments is set out below.
There have been no changes to policy, other than an increased
emphasis on variable performance related pay, from the preceding
year and no departures from this policy in the current year. The current
policy is expected to continue through the current financial year.
Elements of the policy
i) Basic salary
In assessing the level of basic salary, the Remuneration Committee
takes account of the pay practices of other companies, the
responsibilities of each director and senior manager, and pay
awards elsewhere in the group. Salaries are reviewed annually
by the Remuneration Committee.
ii) Bonus payments
Bonus payments are paid to executive directors, of up to
75% (2007: 50%) of base salary, and the senior management,
of up to 55% (2007: 25%) of base salary, based on objectives,
including revenue, operating profit and cash flow targets, set
for each individual. The Chief Executive Officer received a bonus
for 2008 of $61,384 or 15.3% of base salary (2007: $29,000).
The bonus payment was for the first half performance.
iii) Share options
Share option grants are a significant element of company
performance-related remuneration. Share options are awarded
on the commencement of employment and are granted by the
Remuneration Committee at the next available meeting.
Employees of the company participates in the executive share
option programme, where appropriate, and the Board considers
this to be a significant employee motivator. The Committee
reviews the number of share options that directors and
23. ManagementandGovernance
21ARC International plc Annual Report and Accounts 2008
employees have been awarded and the exercise price to ensure
that they remain effective. The grants to individual employees
are limited under the scheme rules to normal market practice
of one times salary in any year. The company operates an
Inland Revenue approved scheme that vests after three years,
an unapproved scheme and an incentive stock option plan that
have a vesting schedule of 25% on the first anniversary and
then monthly over 36 months. The company has a process
whereby each year the level of share options outstanding
for each employee is reviewed and where necessary an
“evergreening” grant is made to ensure that they are still
receiving the same incentive. The company uses shares within
the Employee Benefit Trust as well as potential new issue shares
to satisfy these grants.
iv) Long-term incentive plans and interests of shareholders
The Remuneration Committee reviews the level of option awards
to ensure that they are consistent with the industry. At the AGM
in 2007 the Committee proposed and the shareholders approved,
a new long-term incentive plan for executive directors and senior
management. The Committee feels that this performance-driven
plan will align directors’ performance remuneration with the
interests of shareholders generally. The grant to the directors
under this policy are set out in the table on page 24.
v) Pensions
Post-retirement benefits, which comprise only pensions, are
based on contributions to a defined contribution scheme of
up to 5% matched by the employee, paid into a UK personal
pension plan. The contribution is based on salary and bonus
payments in line with company policy for all UK employees,
and is a standard UK contract term. US employees participate
in a 401k defined contribution pension plan that matches
contributions up to 5% of salary, with a maximum of $15,500.
vi) Duration and termination
It is company policy for executive directors to have contracts with
less than one year’s notice period. There are no other termination
payments. Non-executive directors have service agreements for
a period of three years with no contractual termination payments.
Senior management have employment agreements with between
three and nine months’ notice periods.
Performance/non-performance pay ratios
If the total shareholder return growth under the long-term
incentive scheme is on target, and assuming that 100% of the
share options under the group’s share options scheme will vest,
the composition of each executive director’s remuneration will
be as follows:
Non-performance- Performance-
related related LTIP and
basic salary bonus share options
C Schlachte 80% 13% 7%
V Young 86% 9% 5%
All non-executive directors have 100% non-performance-related
remuneration.
External appointments
During the year, C Schlachte served as non-executive Chairman
of MOSAID Inc, a Canadian quoted company. Mr Schlachte has
retained all of the proceeds from this appointment, $90,939
(2007: $66,650).
Service agreements
None of the executive directors’ service contracts have notice
periods of over one year in line with group policy.
Non-executive directors are appointed for an initial period
of three years. It is group policy that they serve the three years
and are then offered for re-election by the shareholders.
Notice Termination
Contract date period payments
C Schlachte 19.02.04 Six months Contractual
salary
V Young 19.12.05 Six months Contractual
salary
R Barfield 03.09.03 None Specified None
G Bristow 03.09.03 None Specified None
S Gunders 21.06.07 None Specified None
There is no unexpired term for any of the directors listed above,
except for Steven Gunders who has 15 months from the date
of this report.
Service contracts are available for inspection at the registered
office of the company and will be available at the Annual
General Meeting.
Non-executive directors’ interests
Non-executive directors do not participate in the company’s
executive share option scheme or pension schemes.
Details of individual directors’ emoluments and interests in share
options are shown in the tables on pages 22 and 23. For details
of directors’ shareholdings in the company, please refer to the
table in the directors’ report on page 17.
Non-executive directors’ fees are arrived at by reference to fees
paid by other companies of similar size and complexity and
reflect the amount of time non-executive directors are expected
to devote to the group’s activities during the year. The non-
executive directors have service contracts that set out their terms
of appointment. Their remuneration is set by the Board (with
individual non-executive directors absenting themselves from
discussions regarding their own remuneration) and comprises
a fixed fee.
24. Remuneration
Report
ManagementandGovernance
22 ARC International plc Annual Report and Accounts 2008
2005 2006 2007 20082004
ARC International total return FTSE all share technology hardware and equipment total return
Rebased total return index
Source: Thomson Datastream, monthly average
0
5
10
15
20
25
30
Emoluments of directors (audited)
The emoluments of the directors of the company were as follows:
Salary Total Pension Total Pension
and fees Bonus Benefits2
2008 2008 2007 2007
Executive directors
C Schlachte1 4
265,039 42,398 11,396 318,833 7,942 173,598 7,072
V Young1 4
(appointed 13 February 2007) 188,203 19,432 20,548 228,183 – 151,713 –
Non-executive directors
R Barfield 80,000 – – 80,000 – 86,875 –
G Bristow3
60,000 – – 60,000 – 61,622 –
S Gunders (appointed 21 June 2007) 30,000 – – 30,000 – 15,807 –
P van Cuylenburg4
(resigned 3 April 2007) – – – – – 55,673 –
Total 623,242 61,830 31,944 717,016 7,942 545,288 7,072
The emoluments shown above are for the period when each
individual was a director of the company. Details of dates are
contained in the directors’ report. No directors waived their
rights to emoluments.
1 Payments for 2008 made in US dollars converted at year-end rate of $1.4479 (2007: $1.9973).
2 Benefits include provision of health benefits.
3 The figure for Geoff Bristow includes £25,833 for time spent on strategic projects over and above time as a director
which was paid to Decision Curve Limited, a company controlled by Geoff Bristow (2007: £36,623).
4 Includes amounts paid by ARC International I.P. Inc.
Share price performance
ARC International total return relative to FTSE all share
technology hardware and equipment.
In the opinion of the directors, this index is the most appropriate
index to measure the total shareholder return of the company
for these purposes because this index comprise similar companies
to the company.
25. ManagementandGovernance
23ARC International plc Annual Report and Accounts 2008
Options vest 25% on the anniversary of grant and then monthly over
three years.
Richard Barfield, Geoff Bristow and Steven Gunders have
no interest in executive options.
All executive share options are issued at market value. The
market price of the company’s shares at the end of the year
was 11.75p. The range of prices during the year was 11.00p
to 34.50p. As of the date of this report, there have been no
changes in the interests of the directors in options over ordinary
shares of the company.
Long-term incentive plan (audited)
The long-term incentive plan, the performance share plan (“PSP”),
was approved by shareholders at the AGM in April 2007.
The Committee believes that a new long-term incentive policy
reflects current market and best practice and ensures that share-
based incentives are offered to the most senior executives in
as efficient a manner as possible from an accounting cost and
dilution perspective. The main features of the PSP are as follows:
Conditional awards over free shares are granted, as opposed
to market value options. This move away from an option-
focused incentive policy reflects recent emerging trends
in market and best practice.
In normal circumstances, awards over shares worth no
more than 125% of salary may be made each year. This limit
broadly reflects emerging market practice and allows the
Committee to offer competitive levels of performance-linked
long-term incentive awards.
All awards to executive directors will be subject to challenging
performance conditions. To ensure that the PSP encourages
the group’s senior executives to generate above market returns
for its shareholders, initial awards will vest by reference to the
group’s TSR performance over a three-year period compared
to the fully-listed Technology Hardware and Equipment sector
companies with current market capitalisations no less than
£20 million. No portion of an award will vest if ARC is ranked
below the median. If ARC is ranked at the median 25% of an
award will vest, with full vesting if ARC is ranked at or above
the upper quartile. For the awards during 2008 this group
was made up of the following companies:
Arm Holdings Filtronic
CSR Trafficmaster
Spirent Communications Zetex
Wolfson Microelectronics Danka Business Systems
Imagination Technologies group CML Microsystems
Psion Plasmon
Vislink Northamber
On a change in control, the “default” position is that awards
vest only subject to performance and a pro rata reduction.
Again, this approach accords with best practice.
It is currently intended that no executive director will receive
PSP awards and share option grants in the same year.
The charge to the income statement in respect of grants under
the Long Term Incentive Plan was £90,310 (2007: £62,000).
Interest in executive options over shares
in the company (audited)
The interest in executive options over shares in the company
as at 31 December 2008 for the directors is as follows:
Number at Number at Exercise Date
1 January Granted Exercised Lapsed 31 December price Date from which Expiry
2008 in year in year in year 2008 p of grant exercisable date
C Schlachte 2,500,000 – – – 2,500,000 20.75 23.02.04 23.02.05 23.02.14
V Young 1,400,000 – – – 1,400,000 26.0 16.02.06 16.02.07 16.02.16
26. Remuneration
Report
ManagementandGovernance
24 ARC International plc Annual Report and Accounts 2008
Share-based awards (audited)
During 2008 there were no share-based awards under the plan
approved by shareholders in 2004 and therefore no charge to
the income statement (2007: £2,964).
A resolution approving the remuneration report has been
drafted and will be put to the shareholders at the AGM.
This report has been prepared on behalf of the Board and
approved by the Board on 11 March 2009.
By order of the Board
Steven Gunders
Chairman of the Remuneration Committee
11 March 2009
Share options awarded to directors under the Long Term
Incentive Plan are:
Number at Number at Exercise
31 December Granted Exercised Lapsed 31 December price Value Date Vesting
2007 in year in year in year 2008 p vested of award date
C Schlachte 236,842 – – – 236,842 0.1 – 15.05.07 15.05.10
– 400,000 – – 400,000 0.1 – 14.05.08 14.05.11
– 400,000 – – 400,000 0.1 – 29.09.08 29.09.11
V Young 105,263 – – – 105,263 0.1 – 15.05.07 15.05.10
– 200,000 – – 200,000 0.1 – 14.05.08 14.05.11
– 200,000 – – 200,000 0.1 – 29.09.08 29.09.11
27. Corporate
Governance
ManagementandGovernance
25ARC International plc Annual Report and Accounts 2008
The directors subscribe to the principles of good governance
and the code of best practice on corporate governance.
The company has embedded the principles into the processes
used by the directors and the establishment of the various
committees of the directors.
The company is in compliance with the provisions set out
in Section 1 of the 2006 Combined Code on corporate
governance issued by the Financial Reporting Council, except
that the Chairman of the company is also Chairman of the
Audit Committee.
The directors supervise the management of the business and the
affairs of the company and see their prime responsibility as being
to determine the broad strategy of the company. The directors
have embedded the principles of good corporate governance
and the process by which risks are identified and controlled and
effective accountability assured.
with information in a form and of a quality appropriate to
enable it to discharge its duties.
In addition to the Board meeting as a whole during the year,
the non-executive directors meet without the executive directors
being present.
All the directors have access to the advice and services of the
joint company secretaries and the provision of independent
professional advice at the company’s expense. The company
maintained directors’ and officers’ liability insurance throughout
the year.
Performance evaluation
The non-executive directors met during the year to appraise
the former Chairman’s performance and also take into account
the executive directors’ view. The whole Board performs an
evaluation of its performance by a process of self-assessment
questionnaires. This process is an external system for evaluations
designed by Evalu8 Software. The Board performed an evaluation
of the Board as a whole and the committees for 2008. Therefore
the company considers that it was in compliance with principle
A.6, in that a rigorous and formal process for evaluating the
Board and committees was in place.
Board committees
The Board has delegated responsibility in a number of areas
to three sub committees with clearly defined terms of reference.
The Terms of Reference for the Remuneration, Audit and
Nomination Committees are available on the company’s website,
www.arc.com/company/directors.html.
Directors
Chairman Richard Barfield
Senior non-executive director Geoff Bristow
Non-executive director Steven Gunders
Executive director –
Chief Executive Officer Carl Schlachte
Executive director –
Chief Financial Officer Victor Young
The Board considers Richard Barfield, Geoff Bristow and Steven
Gunders to be independent.
Richard Barfield is Chairman of the Board and Audit Committee.
The roles of the Chairman and Chief Executive Officer are
separated, with a clear division of responsibilities between them.
The Chairman of the company is responsible for running the
Board, and the Chief Executive is responsible for running the
company’s business. Each director is provided with sufficient
information for him to discharge his duties and responsibilities
as a director including training and access to independent
professional advice. The Articles of Association require each
director to submit himself for re-election at least every three years.
Operation of the Board
The Board meets on a regular basis throughout the year.
The Board has reserved certain items for its review and approval,
including the annual and interim results; annual business plan;
significant capital expenditure which is not included in the
current business plan and is not in the ordinary course of
business of the company; and senior management appointments.
Other matters are delegated to Board committees including
those detailed below. The Board is supplied, in a timely manner,
Audit Committee
Committee Chairman Richard Barfield
Committee member Steven Gunders
The Board has established an Audit Committee comprising
two non-executive directors. The directors are responsible for
ensuring that a sound system of internal control to safeguard
shareholders’ investments and the group’s assets is being
maintained. The Committee assists with this process. The
Committee meets at least twice a year and reviews the annual
and half-yearly financial statements and the other documents to
be sent to shareholders before they are submitted to the Board.
The Committee also meets with the auditors without the
presence of executive management. The Committee considers
the appointment of auditors, receives a report from them at
each meeting where financial statements are reviewed and
ensures that appropriate relationships are maintained with
the auditors (in respect of audit and non-audit fees). As part
of ensuring that the appropriate relationship is maintained,
the Committee recommends that different firms are invited
28. Corporate
Governance
ManagementandGovernance
26 ARC International plc Annual Report and Accounts 2008
to tender for non-audit work. The Audit Committee reviews
non-audit services undertaken by the auditors to ensure that
auditor objectivity and independence are safeguarded. However,
the group moved its UK taxation services to KPMG as it believed
that they would be able to provide an efficient and cost effective
service. The group continues to use independent companies for
taxation services outside of the UK.
* Attended Audit and Remuneration Committee meetings by invitation.
( ) Those eligible to attend.
Operational management
The executive directors are supported by a team of senior
managers who are responsible for assisting in the development
and achievement of the group’s corporate strategy. The senior
management includes the Chief Technology Officer – who assists
in the development of the product line.
Internal controls
The directors have overall responsibility for establishing financial
reporting procedures to provide them with a reasonable basis
to make proper judgements as to the financial position and
prospects of the group, and have responsibility for establishing
the group’s system of internal control and for monitoring its
effectiveness. Internal control systems are designed to meet the
particular needs of the group and the risks to which it is exposed
and include financial, operational and compliance controls and
risk management.
The internal controls have been in place for the year under
review and up to the date of the approval of the accounts and
are periodically reviewed by the Board and Audit Committee.
During 2007 the Board put in place a process whereby the risks
facing the company were reviewed at each Board meeting and
this continued in 2008. This ensures that the review remains
up to date and accords with the guidance in the Turnbull report.
The Board conducts an annual assessment of the internal controls.
Although no system of internal control can provide absolute
assurance that physical and financial assets are safeguarded,
the system of control is designed in such a way that transactions
are authorised and properly recorded and material errors and
irregularities are either prevented or detected with the minimum
of delay.
The Board has considered the need for an internal audit function
and, given the scale and nature of the group’s operations,
has concluded that one is not required at the present time.
Remuneration Committee
Committee Chairman Steven Gunders
Committee member Richard Barfield
Committee member Geoff Bristow (until April 2008)
The Board has established a Remuneration Committee
comprising two non-executive directors. The role of the
Committee is to set the company’s policy on the remuneration
of the executive directors and senior management and to
determine their specific remuneration packages, including
bonus and share option arrangements. The report on directors’
remuneration is set out on pages 20 to 24. The whole Board
decides upon the remuneration of the non-executive directors,
although no director is involved in deciding his own remuneration.
Nomination Committee
Committee Chairman Richard Barfield
Committee member Geoff Bristow
The Nomination Committee is responsible for reviewing
the Board structure, size and composition and to make
recommendations to the Board with regard to any adjustments
that are deemed necessary; to be responsible for identifying
and nominating candidates for the approval of the Board; to fill
Board vacancies as and when they arise as well as put in place
plans for succession, in particular, of the Chairman and Chief
Executive Officer; and to make recommendations to the Board
for the continuation (or not) in the service of an executive
director as an executive or non-executive director.
It is noted that the Board met as follows:
Remuneration Audit Nomination
Board Committee Committee Committee
In person 5 1 2 –
By teleconference 3 11 2 –
In committee 1 – – –
And the directors’ attendance at Board and Committee
Meetings was:
Remuneration Audit Nomination
Board Committee Committee Committee
R Barfield 9 (9) 12 (12) 4 (4) –
C Schlachte* 9 (9) 2 – 1 –
V Young* 9 (9) 1 – 3 –
G Bristow 8 (8) 5 (5) – –
S Gunders 8 (8) 12 (12) 4 (4) –
29. ManagementandGovernance
27ARC International plc Annual Report and Accounts 2008
Financial reporting and monitoring of operations
A detailed annual plan is collated from submissions by each
functional department. The plan is reviewed by executive
directors and approved by the Board. The annual plan is used
to monitor and control actual performance. The process of
maintaining a sound system of internal control includes the
use of financial reports both for weekly information and on a
monthly basis. The group has a weekly management meeting
that discusses sales and software development schedules.
Each site and function manager must prepare a weekly report
of activities for discussion. This is then followed by a monthly
report of results, where these are compared with the annual
plan and forecasted results. Monthly meetings discuss results
and a report is prepared and sent to the Board for review.
The Board meets each quarter to discuss the results and review
the future plans.
Treasury operations
The group’s treasury function operates within clearly defined risk
management guidelines monitored by the Board. Its policies and
procedures are designed to set guidelines for the management
of interest rates on cash deposits and the exposure to foreign
exchange movements. All these policies and positions are
regularly monitored and conservatively managed. It is a group
policy not to undertake any speculative transactions which
create additional exposures over and above those arising from
normal trading activity, and to manage the counterparty risk
to protect the capital of the group.
Whistleblowing policy
In 2004 the Board established a “whistleblowing” hotline
operated by a third party. Employees are encouraged to use
this to report possible improprieties directly to the Board through
this anonymous process. The Chairman of the Audit Committee
is the nominated director to receive these calls and follow up
with appropriate action. To date, however, there has been
nothing reported.
Annual Report
In submitting this Annual Report and the financial statements
to the shareholders, the Board has sought to ensure that a
balanced and understandable assessment of the group’s position
and prospects has been presented to the shareholders.
Auditor independence
The company operates a policy that non-audit work is only
undertaken by the external auditors when they are most suited
to undertake it. The company had appointed an independent
firm to advise on taxation matters in general and especially for
specific projects such as UK Research and Development tax
credits, however a review of taxation advisers in the UK was
undertaken and KPMG were appointed as taxation advisers
in the UK. When KPMG were appointed auditors it was felt
that it was still appropriate to keep KPMG as taxation advisers.
The company has also undertaken royalty audits of its licensees
and has used the previous auditors, PricewaterhouseCoopers,
as well as a smaller more specialised audit firm. The amount
paid to the external auditors during the year for audit and other
services are set out in note 7 on page 50. The Board considers
that the auditor independence is not compromised.
Relations with shareholders
In addition to ensuring that sufficient information is
disseminated in order to maintain an orderly market in the
shares of the company, the company maintains a regular
dialogue with major institutional shareholders. The company
reports its financial results on a half-yearly basis to its shareholders.
The management presents to shareholders and the analyst
community and receives feedback from the company’s financial
PR advisers and brokers who obtain feedback after the investor
and analyst meetings.
The company operates an investor relations section on the
company website. This is updated regularly with information
including the results of the AGM voting, any financial press
releases and the ability to register to receive all press releases
the company makes.
The company prides itself on the comprehensive business
information that is provided not only on itself but its products
and partners. The Chief Executive Officer and the Chief Financial
Officer have met with shareholders, obtaining their views and
reporting to the whole Board. The senior non-executive director
and Chairman of the Board have had extensive correspondence
with shareholders during the year.
The AGM of shareholders will be held on 22 April 2009.
The company sees this as an opportunity to communicate with
all shareholders, including private investors in the company.
The AGM will be held at the company’s offices at St Albans
which will enable not only employee shareholders to easily
partake in the meeting but investors to meet with local
management. The Chairmen of the Audit and Remuneration
Committees will be in attendance to respond to any queries,
and it is expected that all directors will attend the AGM.
Going concern
On the basis of current financial projections and facilities
available, the directors have a reasonable expectation that the
group and the company has adequate resources to continue in
operational existence for the foreseeable future and, accordingly,
consider that it is appropriate to adopt the going concern basis
in preparing the financial statements.
By order of the Board
Charles Rendell
Joint Company Secretary
11 March 2009
30. Statement of Directors’
ResponsibilitiesIn respect of the Annual Report, the directors’ remuneration report and the financial statements
ManagementandGovernance
28 ARC International plc Annual Report and Accounts 2008
The directors are responsible for preparing the Annual Report,
the directors’ remuneration report and the group and parent
company financial statements in accordance with applicable
law and regulations.
Company law requires the directors to prepare the group and
parent company financial statements for each financial year.
Under that law the directors are required to prepare the group
financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union
and have elected to prepare the parent company financial
statements on the same basis. The financial statements are
required by law to give a true and fair view of the state of affairs
of the company and the group and of the profit or loss of the
group for that period.
In preparing those financial statements, the directors are
required to:
select suitable accounting policies and then apply
them consistently;
make judgements and estimates that are reasonable
and prudent;
state that the financial statements comply with IFRSs
as adopted by the European Union; and
prepare the financial statements on the going concern
basis, unless it is inappropriate to presume that the group
and parent company will continue in business.
The directors confirm that they have complied with the above
requirements in preparing the financial statements.
The directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the company and the group and enable
them to ensure that the financial statements and the directors’
remuneration report comply with the Companies Act 1985.
They are also responsible for safeguarding the assets of the
company and the group and hence for taking reasonable
steps for the prevention and detection of fraud and
other irregularities.
The directors are responsible for the maintenance and integrity
of the company’s website and legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
the financial statements, prepared in accordance with the
accounting standards referred to above, give a true and fair
view of the assets, liabilities, financial position and profit
and loss of the Company and the undertakings included
in the consolidation taken as a whole; and
the director’s report included a fair review of the development
and performance of the Company and the undertakings
included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties
that they face.
By order of the Board
Charles Rendell
Joint Company Secretary
11 March 2009
31. Independent
Auditors’ ReportTo the members of ARC International plc
ManagementandGovernance
29ARC International plc Annual Report and Accounts 2008
We have audited the group and parent company financial
statements (the ’’financial statements’’) of ARC International plc
for the year ended 31 December 2008 which comprise the group
income statement, the group and parent company balance
sheets, the group and parent company cash flow statements,
the group and parent company statements of recognised income
and expense and the related notes. These financial statements
have been prepared under the accounting policies set out therein.
We have also audited the information in the directors’ remuneration
report that is described as having been audited.
This report is made solely to the company’s members, as a body,
in accordance with section 235 of the Companies Act 1985. Our
audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to
them in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report,
the directors’ remuneration report and the financial statements
in accordance with applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union are
set out in the statement of directors’ responsibilities on page 28.
Our responsibility is to audit the financial statements and the
part of the directors’ remuneration report to be audited in
accordance with relevant legal and regulatory requirements
and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view and whether the financial
statements and the part of the directors’ remuneration report
to be audited have been properly prepared in accordance with
the Companies Act 1985 and, as regards the group financial
statements, Article 4 of the IAS Regulation. We also report
to you whether in our opinion the information given in the
directors’ report is consistent with the financial statements.
In addition we report to you if, in our opinion, the company has
not kept proper accounting records, if we have not received all
the information and explanations we require for our audit, or if
information specified by law regarding directors’ remuneration
and other transactions is not disclosed.
We review whether the corporate governance statement reflects
the company’s compliance with the nine provisions of the 2006
Combined Code specified for our review by the Listing Rules
of the Financial Services Authority, and we report if it does not.
We are not required to consider whether the Board’s statements
on internal control cover all risks and controls, or form an
opinion on the effectiveness of the group’s corporate
governance procedures or its risk and control procedures.
We read other information contained in the Annual Report
and consider whether it is consistent with the audited financial
statements. We consider the implications for our report if
we become aware of any apparent misstatements or material
inconsistencies with the financial statements. Our responsibilities
do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the Auditing
Practices Board. An audit includes examination, on a test basis,
of evidence relevant to the amounts and disclosures in the
financial statements and the part of the directors’ remuneration
report to be audited. It also includes an assessment of the
significant estimates and judgements made by the directors in
the preparation of the financial statements, and of whether the
accounting policies are appropriate to the group’s and company’s
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary
in order to provide us with sufficient evidence to give reasonable
assurance that the financial statements and the part of the
directors’ remuneration report to be audited are free from
material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the
financial statements and the part of the directors’ remuneration
report to be audited.
Opinion
In our opinion:
the group financial statements give a true and fair view,
in accordance with IFRSs as adopted by the EU, of the state
of the group’s affairs as at 31 December 2008 and of its loss
for the year then ended;
the parent company financial statements give a true and
fair view, in accordance with IFRSs as adopted by the EU as
applied in accordance with the provisions of the Companies
Act 1985, of the state of the parent company’s affairs as
at 31 December 2008;
the financial statements and the part of the directors’
remuneration report to be audited have been properly
prepared in accordance with the Companies Act 1985 and,
as regards the group financial statements, Article 4 of the
IAS Regulation; and
the information given in the directors’ report is consistent
with the financial statements.
KPMG Audit Plc
Chartered Accountants and Registered Auditor, St Albans
11 March 2009
32. 2008 Group
Before 2008 2008
restructure restructure Total 2007
Notes £000 £000 £000 £000
Continuing operations
Revenue 5 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 6, 24 (22,791) (2,273) (25,064) (18,305)
Operating loss (7,038) (2,273) (9,311) (5,341)
Finance income 10 897 – 897 1,470
Finance expense 10 (14) – (14) –
Share of post-tax loss of associate 17 (8) – (8) (22)
Loss before income tax (6,163) (2,273) (8,436) (3,893)
Income tax credit 11 1,135 – 1,135 1,389
Loss for the year attributable to equity shareholders 28 (5,028) (2,273) (7,301) (2,504)
Weighted average number of shares 13 147,965,359 148,031,270
Basic and diluted loss per share – pence 13 (4.93) (1.69)
All activities relate to continuing operations.
The notes on pages 33 to 70 are an integral part of these consolidated financial statements.
Statements of Recognised
Income and ExpenseFor the year ended 31 December 2008
Group Company
2008 2007 2008 2007
Notes £000 £000 £000 £000
Loss for the year 28 (7,301) (2,504) (8,252) (2,558)
Currency translation differences 28 (951) (54) – –
Total recognised expense for the year (8,252) (2,558) (8,252) (2,558)
Income
StatementFor the year ended 31 December 2008
FinancialStatementsandNotes
30 ARC International plc Annual Report and Accounts 2008