Interim report January - September 2002

Interim report January - September 2002 Third quarter · Earnings net of financial items for the third quarter amounted to SEK -5.6 million (-1.5m), including non-recurring costs of SEK 4.9 million for a savings programme. · Revenues for the third quarter totalled SEK 58.3 million (64.9m). · The number of employees has been reduced by 30 people since May this year, corresponding to 12 per cent of the company's workforce. Savings of SEK 18.5 million calculated on a full-year basis. The full effect of these measures will be noticed from the fourth quarter. · Contracts for Frango Controller were signed with the Swedish Postal Service (Posten i Sverige), Gamma Holding in the Netherlands and the Raiso Group in Finland, among others. · The company reported a positive cash flow for the period, SEK 2.9 million. Nine months · Earnings net of financial items amounted to SEK -24.5 million (10.9m) for the reporting period. The decline in earnings is attributable to weaker market conditions for software, non-recurring costs amounting to SEK 4.9 million, unrealised exchange losses of SEK 7.6 million, the net effect of higher development expenses in the income statement, which was SEK 8.3 million higher than last year and higher depreciation of SEK 4.3 million. · Revenues for the period January to September totalled SEK 183.9 million (184.2m). · The average number of employees for the period was 226 (210). · The equity ratio at the end of the period was 41 per cent (49%). · Frango in brief Frango is a leading software company that specialises in the field of corporate financial control for organisations and groups. The company develops and sells software and services through its international network of subsidiaries and distributors. Frango is headquartered in Stockholm. The Frango share is quoted on the 'O' list of the Stockholm Stock Exchange (Stockholmsbörsen). Significant events during the period July - September 2002 Magnus Larson resigned from his position as Managing Director of Frango in September. To replace him, Frango's Board of Directors has appointed Tom Löfstedt, the company's founder, as acting MD. Tom Löfstedt thus resumes a fully operational role in the company. The board intends to discuss whether to make this appointment permanent or to initiate a recruitment process prior to next year's Annual General Meeting of shareholders. Severance pay to the Managing Director has been included under non-recurring costs. During the quarter, contracts for Frango Controller were signed with the Swedish Postal Service (Posten i Sverige), Gamma Holding in the Netherlands and the Raiso Group in Finland, among others. Frango has signed a co-operation agreement with software supplier BAAN, a division of Invensys Plc. BAAN will offer its customers Frango's products as part of its iFinance solution. BAAN has more than 15,000 customers, operating primarily in manufacturing industries. Frango has also signed a marketing agreement with DataNet Group GmbH regarding the distribution of Frango's products in Austria, the Czech Republic, Hungary, Slovakia, Slovenia and Croatia. Sales trends and earnings January - September 2002 The first nine months of the year have been weaker than expected. The period has been characterised by more cautious attitudes and investment trends in software have been adversely affected by the slow rate of economic development. The international launch of Frango Controller has been well received in evaluation processes. In addition to software installations ordered by new customers, several installations are currently being implemented for existing customers, who will together make up an important reference group. The last quarter of the year is traditionally Frango's strongest quarter. Net revenue January - September 2002 [REMOVED GRAPHICS] Revenues for the first nine months of 2002 amounted to SEK 183.9 million, virtually the same level as the previous year. The proportion of revenues attributable to new licences during the period was 39 per cent, compared with 45 per cent for 2001. Customers outside Sweden accounted for 81 per cent (83%) of overall revenues. Looking at Europe as a whole, which is Frango's main market, sales rose by 7 per cent, whereas to other markets, sales were considerably lower compared to the previous year, declining by 35 per cent. Revenues from software licences were SEK 12.3 million lower than the previous year and amounted to SEK 70.2 million (82.6m). Revenues for maintenance continued to show strong growth, rising by 34 per cent. Revenues from consulting services improved slightly, by 4 per cent. Earnings net of financial items totalled SEK -24.5 million, to be compared with SEK 10.9 million for the previous year. The decline is primarily attributable to the reduction in licence sales, which to a certain extent also has an impact on revenues from consulting services. Further, additional marketing and internal training costs incurred in relation to the product launches have been charged to the income statement. A stronger krona has produced negative exchange rate differences of SEK -3.7 million. The situation last year was the opposite, resulting in positive exchange rate differences of SEK 3.9 million. External royalty costs rose by SEK 2.1 million compared to the previous year. The net effect of development expenses on the income statement was SEK 8.3 million higher than last year. Cost-saving measures taken during the period have generated non-recurring costs. Since May this year, the number of employees has been reduced by 30 people, and these redundancies have led to a number of severance packages. Including the severance pay for the Managing Director, non- recurring costs amount to SEK 4.9 million. These measures have led to a reduction in personnel expenses, which, based on a calculation for the full year, amounts to SEK 18.5 million. The full benefit of these measures will start to show from Q4 onwards. Operating expenses, before the capitalisation of development expenses, rose from SEK 185.0 million to SEK 214.7 million compared with the corresponding period of the previous year. Of overall operating expenses, a total of SEK 6.8 million (12.1m), attributable to the development of new products, has been reported as capitalised development expenditure in accordance with the Swedish Financial Accounting Standards Council's recommendation (recommendation no. 15) pertaining to Intangible assets. The cost-saving measures already taken have resulted in lower operating expenses overall for the third quarter compared with earlier quarters of 2002 and the previous year (see table below). [REMOVED GRAPHICS] July - September 2002 Sales revenues during the period July - September 2002 were down compared with the corresponding period last year, from SEK 64.9 million to SEK 58.3 million. This is primarily attributable to a fall in revenues from licence sales, although revenues from consulting and training services were also on the decline. Revenues from maintenance continued to improve, rising by 25 per cent. The proportion of revenues attributable to new licences during the third quarter was 35 per cent, compared with 41 per cent for the third quarter of 2001. The economy showed no signs of improvement during the quarter. Despite the positive reception of Frango Controller, the company is still at the stage where sales of new licences for Frango Controller do not yet compensate for the decline in sales for Frango Consolidator. Earnings net of financial items amounted to SEK -5.6 million, to be compared with SEK -1.5 million for the third quarter of 2001. Adjusted for non-recurring costs, this is an improvement compared to the previous year. Non-recurring personnel expenses of SEK 4.9 million were charged to quarterly earnings. Overall operating expenses, including non- recurring costs, fell by 4 per cent compared with the corresponding period of the previous year and by 9 per cent compared with the second quarter. Personnel expenses, adjusted for non-recurring costs, were down 11 per cent compared with the second quarter. Rolling 12 months Based on the developments noted during a rolling twelve-month cycle, from October 2001 to September 2002, revenues amounted to SEK 267.7 million, to be compared with SEK 248.8 million as at 30 September 2001. This corresponds to an 8 per cent improvement in revenues. Earnings net of financial items calculated on a rolling twelve-month basis amounted to SEK -20.4 million, compared with the third quarter of the previous year, when rolling twelve-month earnings amounted to SEK 19.3 million. In addition to the above-mentioned comments relating to the first nine months of the year, the earnings calculated on a rolling twelve-month basis were significantly affected by the period of generally poor economic development witnessed during the last six months of 2001. Further, non-recurring costs of around SEK 8 million were charged to the income statement for the fourth quarter of 2001. Product development The company's new software, Frango Controller, was launched internationally during the second quarter of 2002. Overall, the product has taken more than two years to develop. An earlier version of Frango software, Frango Consolidator, has continued to be developed separately. This means that the company can now offer customers two consolidation systems: Frango Consolidator and Frango Controller. The overall development and maintenance costs for the period January - September 2002 amounted to around SEK 29 million (26m), including development costs of SEK 6.8 million (12.1m) that have been capitalised in the balance sheet. The capitalised development expenses are related to the development of Web-based add-ons to Frango Controller, to manual and online help costs for Frango Controller and to costs related to the international version of Frango Controller. Continued development efforts will focus improving further the functionality of Frango Controller. During the period 1 January 2001 to 30 September 2002, a total of SEK 20.8 million (12.1m) relating to the development of new products has been capitalised in the balance sheet. Depreciation has already begun and depreciation of SEK 3.7 million (0m) has been charged to the net earnings for the period. Market The market for business systems during the first nine months of the year has been sluggish. The market for analytical tools has also been affected and is similarly characterised by more cautious attitudes, thus affecting the will to invest in software. This has led to longer sales cycles, the delay or postponement of more orders and a greater degree of uncertainty when assessing the amount of orders concluded and the timing thereof. The view of company management is that the anticipated market growth has either failed to materialise or been negative. Frango, however, has continued to capture market share in Europe. The company's business sector should experience a recovery in market growth during 2003. IDC forecasts a growth rate of 11 - 13 per cent in 2003 for Frango's market segments. Around 40 per cent of the company's potential target groups have yet to invest in adequate systems for group reporting. Such systems will, for many of these companies, be necessary to fulfil the requirements of new international accounting standards (IAS) within the EU by no later than 2005. In the European market, there have been signs of increasing activity to evaluate group controlling systems in preparation for the transition to IAS in 2005. Employees The average number of employees during the period was 226 (210). At the end of September, the number of employees was 226, to be compared with 234 last year. Since the beginning of May, the number of employees has been reduced by 30 people, which will result in a reduction in personnel expenses. Liquidity, investments and financial position The company's financial position is satisfactory. The company reported a negative cash flow for the nine months, SEK -12.4 million (-8.2m). The Group's liquid funds at the end of the period amounted to SEK 20.9 million (29.4m). Including short-term investments, liquid assets amounted to SEK 22.2 million (37.4m). The company reported a positive cash flow for the third quarter, SEK 2.9 million. Liquid funds have thus been reinforced since the end of the second quarter. As in the past, business activities have been financed with funds generated internally and shareholders' equity. The Group has no bank loans. The company has a bank overdraft facility of SEK 10 million. At the end of September, this facility had not been used. The cash flow at the end of the year is generally positive. For the full year, the company expects to report a positive cash flow and liquid funds, including short-term investments, are expected to return to or exceed the levels reported for the beginning of the year, SEK 36.6 million. The equity ratio at the end of September was 41 per cent (49%). Investments for the period amounted to SEK 10.3 million (20.5m), including SEK 6.8 million (12.1m) relating to capitalised development expenditure for software. The purchase of computers and peripheral equipment accounted for most of the remaining expenditure. Shareholders' equity at the end of the period amounted to SEK 63.1 million. The reduction in shareholders' equity - SEK 20.5 million since the turn of the year - is the result of a SEK -19.4 million reduction in net earnings for the period and negative translation differences of SEK -1.1 million. Parent Company Parent Company revenues amounted to SEK 44.8 million (47.4m), including intra-group invoicing of SEK 44.8 million (45.7m). Earnings net of financial items amounted to SEK -21.8 million (1.6m). Investments for the period amounted to SEK 1.6 million (2.4m). The Parent Company's liquid funds at the end of the period, including short-term investments, amounted to SEK 3.0 million (4.0m). Developments in the share price The year has been characterised by a low turnover and falling share prices. During the first nine months of 2002, a total of 873,424 shares (990,202) were traded, with share purchases representing a turnover of SEK 57.8 million (117.3m) for the period. This corresponds to an average share price of around SEK 66 (118). The highest share price noted during the period was on 3 and 4 January, when the share closed at SEK 97 and the lowest share price was on 25 September and 30 September, when the share closed at SEK 24. A total of 225,877 shares were traded in the third quarter (271,876), representing a turnover of SEK 8.3 million (28.7m), which corresponds to an average share price of SEK 37 (105). On 30 September, the Frango share closed at SEK 23. Frango's market capitalisation at the end of September was SEK 106 million. The share was listed on the 'O' list of Stockholmsbörsen on 23 April 1999. The initial share price was SEK 62. Institutional investors account for around 30 per cent of shareholdings. Approximately 65 per cent of the total number of shares are today in market circulation. Prospects Earnings for the past twelve months have been significantly affected by the weak and uncertain economic climate. The weak start to the year justified a number of cost-saving measures. Some non-recurring costs have been charged to third quarter earnings. At the same time, these measures will help reduce cost levels, which, if calculated on the basis of a full year, would correspond to SEK 18.5 million in personnel expenses alone. Additional cost reductions of around SEK 3 million can be added to this figure. The benefits of those cost-reduction measures taken will have a positive effect on earnings during the fourth quarter. Further, higher sales revenues are expected during the fourth quarter, in line with seasonal trends. In the longer-term perspective, it is felt that demand for the company's products will remain buoyant and be accompanied by strong growth and good profitability. The company's clear focus on its core business, supplying systems for group financial control, has ensured that the company has a strong market position. Further, Frango's new software, Frango Controller, has received a very positive reception from the market. Frango has historically outperformed the market. Frango has benefited from this positive market trend, which has been driven by the increasing trend towards internationalisation seen in recent years, making the preparation of consolidated financial statements and financial reporting far more complex. The financial markets have progressed rapidly, demanding improvements in corporate transparency and reporting speed. At the same time, legal requirements for statutory consolidation have become increasingly extensive and detailed, and are being introduced in a growing number of countries. It is expected that these underlying business drivers will continue to prevail. The recent debate following a number of accounting scandals has also illustrated the need for reliable, standardised system solutions that can provide effective support to executive management teams and other parties involved in the management and administration of groups of companies. Further, the implementation of new international accounting standards (IAS) within the EU by no later than 2005 means that many companies will need to review their requirements for group reporting systems, and this trend will help boost Frango's revenues. Accounting principles The accounts have been prepared in accordance with the recommendations issued by the Swedish Financial Accounting Standards Council (Redovisningsrådet) and the interim report has been prepared in accordance with the council's recommendation pertaining to interim reports, RR 20. For information on the accounting principles applied and definitions of key ratios, please see Frango's Annual Report 2001, page 37 and page 27 respectively. Release of next financial report The year-end report for 2002 will be released on 22 January 2003. Stockholm, 11 October 2002 Tom Löfstedt Managing Director Frango AB (publ) Corporate identity no. 556153-4347 For further information, please contact: Tom Löfstedt, Managing Director, or Karl Ove Grönqvist, CFO, tel. +46 (0)8 555 775 00 Review report We have reviewed this Interim Report in accordance with the recommendation issued by the FAR*). A review is substantially less comprehensive in scope than an audit. Nothing has come to our attention, indicating that this Interim report does not satisfy the requirement of the Swedish Annual Accounts Act. Stockholm, 11 October 2002 Owe Wallinder Anders Malmeby Authorised Public Accountant Authorised Public Accountant *) The Swedish Institute of Authorised Public Accountants Results by quarter [REMOVED GRAPHICS] ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/10/11/20021011BIT00070/wkr0001.doc Full Report http://www.waymaker.net/bitonline/2002/10/11/20021011BIT00070/wkr0002.pdf Full Report