DICOM GROUP Chairman's Statement
DICOM GROUP plc
Interim Results 1999/2000
Chairman's Statement
Results
UK GAAP:
The Group reports sales for the six months to 31 December 1999 up 7% at £46.9m (1998: £43.8m). Sales growth in local currency terms was 17%, after adjustment for some commodity business now taken on a commission basis. Operating profits £1,611,000 (1998: £1,221,000) are up 32%. Profit before tax is reported at £1,554,000 (1998: £1,196,000), up 30%. After tax and minority interests earnings per share is calculated at 9.4p (1998: 7.2p).
IAS:
The Group reports sales for the six months to 31 December 1999 up 15% at EUR 72.7m (1998: EUR 63.4m). Sales growth in local currency terms is calculated at 17%, after adjustment for some commodity business now taken on a commission basis. Operating profits EUR 2,050,000 (1998: EUR 1,351,000) are up 52%. Profit before tax is reported at EUR 1,961,000 (1998: EUR 1,315,000), up 49%. After tax and minority interests earnings per share is calculated at EUR 0.11 (1998: EUR 0.07).
The major contributor to this strong improvement in profitability was the Group's principal division Electronic Data and Document Capture (EDC) that saw good growth and improved margins across Europe. The Samsung General Agency Division (SGA) continued to benefit from the strong demand of flat screen technology in both Switzerland and Austria. DICOM's start up division Digital Security has begun to invest in its market presence and was able to win projects primarily in the data security area . The Government Solutions Division reported a loss during the period, due principally to the unwillingness of customers to make commitments in the lead up to Year 2000.
The Group performed in line with its working capital model and ended the period with net borrowings of £0.1m (net funds £1.0m at 30 June 1999) after financing organic sales growth and spending £2.7m in cash on investments during the period.
Operating review
Electronic Data and Document Capture Division (EDC) is the Group's largest division, providing components, consulting and integration services and distribution of key related products to worldwide Electronic Document Management (e-DM) system integrators. The division comprised of two business units (e-DM Components and Services as well as Consulting). A third business unit, Kofax products, has been added with effect from February 2000 following the completion of the acquisition of Kofax Image Products, Inc. (Kofax). EDC achieved sales growth in local currency terms of 22% and accounted for 52% of the Group's sales in the six months to 31 December 1999 (62% on a pro forma combined basis including Kofax). It saw solid growth across Europe with better margins and improved performance in all major territories, despite the postponement of some major document management and data capture projects due to customers Year 2000 concerns. It is pleasing to report that the continuing emphasis on the provision of consulting and other services is improving significantly the quality and quantity of its service revenues. Service income is up by 59% compared to the same period of last year. The increased level of end-user project involvement, sometimes cross-border, is raising the Group's profile and bringing a range of larger project opportunities.
Leveraging its leading position in EDC and building on its experience in data storage, in mid-1999, the Group began investing in a new business division that is focused on three related market areas: Internet security, Video security and Storage security. The Digital Security Division offers hardware and software products as well as services that address internet and data security issues. The products and services comprise PKI (public key infrastructure) based solutions that enable business to business applications to conduct transactions safely over the Internet, Intranets and Extranets. Its particular focus is to address the needs of system integrators and business partners to offer secure data and document transmission and access and to leverage DICOM's position in the EDC market. Early feedback confirms the enormous potential in these markets.
The Group's Samsung General Agency Division (SGA) is the official and sole representative of Samsung Electronics in Switzerland and Austria. Until recently, the Samsung product range offered by the Group has been limited to computer display monitors. The division SGA achieved sales growth in local currency terms of 22% and accounted for 44% of the Group's sales in the six months to 31 December 1999. The introduction of new thin film transistor (TFT) flat screen display technology, which is rapidly displacing the older cathode ray tube, has again brought significant growth and the Group has successfully positioned the Samsung TFT brand as a market leader in the key 14" to 17" sector in both Switzerland and Austria. Demand outstrips supply and TFT prices have recently firmed. Production capacity continues to hold back growth. The division has recently begun distributing on an exclusive basis Samsung's Communication and Internet Access Device products in both Switzerland and Austria and Digital Consumer Electronics products in Switzerland.
The Government Solution Division develops and markets public administration solutions targeted at the administrative requirements of local Swiss municipalities. Sales in this division decreased by 41% (in local currency terms) and accounted for 3% of the Group's sales to 31 December 1999. The considerable decrease in sales is primarily due to decreased order intake due to the unwillingness of customers to make commitments in the lead up to Year 2000. Although higher gross profit margins (due to higher contribution from service income) the division was not able to cover its overheads and reported a loss in the period. The Board is considering the divestiture of this division as part of its strategy to focus on the Group's core business.
Investment in and acquisition of Kofax
On 28 July 1999, the Group announced it had committed an equity investment of US$ 4m to acquire an 18.8% stake in Imaging Components Corporation (ICC), a new US based private equity vehicle formed to make a tender offer for 100% of Kofax at a cost of US$ 70.5m. On 9 September 1999, the Group announced that the tender offer by ICC expired with 84% of all outstanding common stock of Kofax, validly tendered. ICC purchased these shares in accordance with the terms of the tender offer and has since completed procedures to acquire the remaining 16% of Kofax. The Group had a call option over the balance of the equity in ICC at a cost of up to US$ 22.4m in cash and warrants/options over up to 1.1m DICOM shares. Following the successful Neuer Markt Placing, the Group announced that it had exercised its right to acquire the remaining share capital of ICC that it did not already own and to repay of the ICC acquisition debt of US$ 32m.
Kofax, which is based in California and was listed on NASDAQ, is a leading supplier of both application software and image processing products for the imaging, workflow and document management market with emphasis on the document and data capture product segment. DICOM has been a customer of Kofax since 1992 and is now a leading distributor of its products in Europe and South East Asia.
The combination with Kofax creates a major international force in the imaging, workflow and document management market. DICOM and Kofax together will be the only true global suppliers of products and services to the document technologies market, with special focus on the EDC segment.
Kofax reports sales for the six months to 31 December 1999 up 17% at US$21.4m (1998: US$18.3m). This increase is due primarily to the rapid growth (up 66%) in sales of Ascent Capture Software, its application software which provides document capture, data capture and internet based distribution in one application. Total software sales in the half year to 31 December 1999 represented 36% of total sales compared to 27% in the same period last year. Operating profits for the six months to 31 December 1999 US$4,153,000 (1998: US$2,699,000) are up 54%.
On a pro forma combined basis (after adjustment for inter-company sales) and in accordance with IAS, DICOM and Kofax have achieved sales for the six months to 31 December 1999 up 17% at EUR 90.6m (1998: EUR 77.7m) and operating profits of EUR 6,033,000 (1998: EUR 3,699,000), up 63%.
Listing on the Neuer Markt
The Group planned to raise funds at the time of the Neuer Markt listing to enable it to exercise its call option and to acquire the balance of the ICC equity. On 26 January 2000, the Group was pleased to announce that it had agreed to issue 6,000,000 new ordinary shares at EUR 12.50 per share (equivalent to 761p), to raise estimated net proceeds of EUR 67m (equivalent to £41million) pursuant to the Neuer Markt Placing.
Directors
Following the acquisition of Kofax, David Silver, previously non-executive director, has now become an executive director of DICOM.
Dividend
The Board has declared an interim dividend of 1.06p net per Ordinary Share (1998: 0.92p). This will be paid on 4 May 2000 to shareholders on the register on the close of 7 April 2000.
Prospects
We are continuing to see good levels of growth in the market. From 1 February we will have the benefit of the full contribution from Kofax and the recent Placing. The outlook for the full year ending 30 June 2000 remains positive. The Board still sees postponements of major document management and data capture projects due to Year 2000 issues, especially in January and February but expects this effect to level out by the last quarter of this financial year.
The listing on the Neuer Markt and the associated fundraising to finance the acquisition of Kofax represented key strategic opportunities for the Group to improve significantly the underlying quality of the core business, increase critical mass and raise market visibility with both customers and suppliers. The directors view the prospects for the Group with optimism.
Otto Schmid
Chairman and Chief Executive
