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Orbital Engine Corporation Limited's financial results announced
today are dominated by major changes in accounting treatments that
reflect the current stage of OCP commercialisation and the Board's
initiatives to eliminate all intangible items from its balance sheet
by the end of the 1999 financial year.
Total revenue has increased by $6.909 million
(30%) to $29.959 million largely as a result of higher levels
of contract engineering work related to product market introduction.
Total operating expenditure increased by $2.956 million (6%) to
$50.502 million. In 1995, the Company had capitalised $20.543
million in pre-production expenditure and start-up costs. The
equivalent costs were expensed in the 1996 financial year.
As Orbital technology enters production, demands shift from a heavy
emphasis on development to commercialisation activities. As a result
of restructuring undertaken during the year, the Company expects
a substantial reduction in the ongoing expenditure levels. Orbital
continues to place emphasis on revenue growth, improved productivity
and reducing costs to ensure the maximum future return to shareholders.
After the major changes in accounting policy
and other abnormal expenses (totalling $62.106 million) the operating
loss after income tax is $69.829 million compared to a loss of
$7.787 million in 1995 (refer consolidated profit and loss account
following).
Major Changes in Accounting Treatments
Orbital has implemented significant changes
in the way it reports its financial results due to commercial
introduction of OCP technology and as part of Orbital's goal to
harmonise its Australian and United States financial reporting.
The Company is no longer capitalising any of its pre-production
expenditure and start-up costs and has commenced amortisation
of capitalised pre-production expenditure and patents. The amortisation
charge for 1996 was $19.948 million. In addition, the Company
has expensed $29.202 million representing certain previously capitalised
pre-production expenditure and all costs associated with its manufacturing
operations at Tecumseh, Michigan having regard to the stringent
criteria set out in Australian Accounting Standards.
The Company has consciously invested substantial
funds to create a valuable capital asset in the form of fully
developed OCP technologies and products. These technologies are
entering the market and Orbital considers it prudent and appropriate
to expense these product development related costs in a manner
consistent with world industry practice.
The implementation of this policy will result
in much lower operating results than would otherwise be the case
through to June 1999. Thereafter, Orbital's future operating results
will not be similarly adversely affected.
Other Abnormal Items
An abnormal expense of $2.202 million has
been incurred in respect of a mediated settlement of litigation
with Walbro Corporation, and a provision of $2.506 million for
legal fees and settlement costs of litigation arising from a public
offering of American Depositary Shares at the time of our US listing
in December 1991. Regrettably, the highly litigious nature of
the US business sector has resulted in the economic entity being
burdened with extremely expensive legal costs even when the claims
can be defended.
During 1996, the Company continued to realign its group operations
as demands shift from a technology development focus to customer
driven commercialisation activities and as part of this process
reduced its Australian and United States work force. This resulted
in employee redundancy costs of $1.725 million.
The remaining abnormal items are represented
by Orbital's 50% share of the operating result of the Mercury
Orbital Technology Partnership ($5.405 million) which reflects
the extensive research and development programs currently being
undertaken by this entity and the write down of certain land and
buildings ($1.118 million).
REVIEW OF OPERATIONS
Products using Orbital technology went on
sale to retail customers for the first time in 1995/1996. This
historic step for Orbital and its shareholders occurred in both
the marine and automotive markets. The momentum generated by these
first sales together with growth in the automotive Direct Injection
market and the formation of important strategic alliances has
placed Orbital in a unique position to rapidly and successfully
commercialise its technology across its chosen markets.
The ground breaking achievements of 1995/1996
that have helped build this momentum include the release of the
Genesis vehicle to the Australian Federal Government, shareholders
and other interested parties; market introduction of the Mercury/Orbital
Direct Fuel Injection (DFI) marine engine; introduction of an
Asian sports motorcycle program; a new licensee, Bombardier-Rotax;
delivery of the first direct injected 4-stroke engines; and
development of new and expanded alliances with Brunswick Corporation
and Siemens Automotive.
Automotive 2-stroke
On 2 July 1996, 20 Ford Festivas powered
by Orbital Combustion Process (OCP) engines were accepted by the
Federal Minister for Administrative Services, David Jull, from
Orbital's Chief Executive Officer, Kim Schlunke, at the National
Science and Technology Centre in Canberra. Since July, the Orbital
"Ecosport" vehicles have been delivered to Orbital shareholders,
the West Australian State Government and other interested parties.
A total of 100 vehicles will be sold and driven in the market
place.
These vehicles have been received extremely
well by customers and the automotive media. The overwhelmingly
positive feedback reinforces the better fuel economy, lower emissions
and improved performance demonstrated to the Australian public
and to the worldwide automotive community. Motor companies have
been impressed by the success of the Genesis project and several
Asian manufacturers are considering similar vehicles for their
markets.
The Ecosport vehicles are being used by
the Commonwealth Government's vehicle fleet manager, DASFLEET.
Over the next two years DASFLEET will be providing Orbital with
regular in-service data on the vehicles. This allows Orbital to
continue monitoring emissions, fuel consumption, reliability and
customer acceptance of Ecosport.
Orbital's prototype vehicle the S2S (Sports
2-stroke) was unveiled at the Melbourne Motor Show in March
and received overwhelming public and media interest when displayed
in auto shows throughout Australia and in Asia. The car is powered
by an Orbital 1.2 litre, three cylinder 2-stroke engine. It
weighs as little as 750 kilograms which contributes to an impressive
fuel economy benefit of 4.72 litres per 100 kilometres, and emissions
benefits that are equivalent to ten times better than the Australian
standard.
Automotive 4-stroke
Several programs are currently underway
with major automotive industry companies to demonstrate the benefits
of Orbital's direct injection technology on current and future
mass production 4-stroke engines. Orbital has taken a significant
step in the introduction of this technology to the market with
the formation of a strategic alliance with the established US
fuel system supplier, Siemens Automotive.
The direct injection of fuel into the combustion
chamber of 4-stroke engines continued to emerge during the
year as the next major innovation in the evolution of current
generation 4-stroke engines. Orbital is a market leader in
direct injection of gasoline engines as it is presently the only
company in the world with direct injection systems in the marketplace.
The Company has demonstrated its market proven, lean burn, stratified
charge, combustion process and air assisted fuel injection system
can be readily fitted to existing 4-stroke automotive engines.
The near term commercialisation prospects are further enhanced
because only relatively minor changes to existing mass production
engine facilities would be needed.
Marine and Recreational Vehicle Engines
In May 1996 Orbital and Bombardier-Rotax,
the largest manufacturer of personal watercraft, signed a licence
agreement to use Orbital technology in the recreational vehicle
market. The recreational vehicle market includes products such
as snowmobiles, all terrain vehicles and personal watercraft.
This agreement comes as manufacturers of
marine, motorcycle and recreational vehicles in Asia, Europe and
the United States expand their business with Orbital to help meet
the new emissions regulations that are being implemented, and
to also help reduce their fuel consumption and to improve performance.
In July 1996, Mercury Marine confirmed that programs are underway
to introduce Orbital technology across both its V6 engine range
and its lower horsepower outboard engines. This followed the successful
launch of Mercury Marine's first DFI engine, a V6 200 horsepower
outboard earlier in 1996. Better fuel economy and lower emissions
are being achieved with this DFI technology.
Motorcycle and Small Engine Fuel Systems
Throughout 1996 Orbital and its partnership
with Brunswick Corporation (METEOR I) expanded their role in the
European and Asian motorcycle markets with new licensing related
activities and applications and engineering support for low volume
direct fuel injection systems. Five motorcycle demonstrations
were completed in the first six months of 1996 in Asia and Europe.
Orbital and METEOR have developed a fuel system for small motorcycle
engines that is capable of an improved performance feel over tested
carbureted motorcycles. This system can now provide the customer
with an exhaust emissions solution plus an over-all performance
advantage which should encourage customers to introduce Orbital's
systems ahead of legislated regulations. 2-stroke engines dominate
the growing worldwide motorcycle market which currently exceeds
15 million units in annual sales and is faced with stringent emissions
legislation.
Strategic Alliances
Siemens Automotive Corporation and Orbital
Engine Corporation Limited have joined forces to expand and exploit
Orbital's direct fuel injection technology.
Orbital and Siemens have outlined the features
of a proposed strategic alliance that will be responsible for
manufacturing, distributing, selling and further developing Orbital's
unique direct injectors to manufacturers in the global automotive,
marine, motorcycle and recreational vehicle markets.
Through this alliance, Orbital will secure
a quality, high volume supplier of fuel systems to help meet current
and future demands from customers that are commercialising Orbital's
technology, and Siemens will gain access to a leading edge technology
in the emerging automotive direct injection system market and/or
new customers in the marine, motorcycle and recreational vehicle
markets.
In July 1996, Orbital Engine Corporation
Limited and Brunswick Corporation expanded their partnership to
develop, market and manufacture a broad range of Orbital fuel
systems to the motorcycle, marine, recreation and other non-automotive
markets. This expanded partnership will build on the commercialisation
successes to date, the strength of Brunswick and Orbital, and
the market created by governments worldwide working to create
a healthier environment.
Capital Restructure
At the 1995 Annual General Meeting shareholders
overwhelmingly approved two special resolutions giving effect
to a capital reduction and restructure of Orbital. If approved
by the Court, the restructure will result in a reduction of the
Company's share premium reserve of $236.083 million with a corresponding
reduction in amounts denominated as patents, licenses and technologies
in the consolidated accounts. These amounts arose as a result
of corporate restructurings and not cash expenditures in developing
the technology.
An application for the Capital reduction
was lodged with the Federal Court in March 1996 and was adjourned
after discussion with the Australian Securities Commission (ASC).
It was jointly agreed that Orbital would first submit a detailed
application for specific relief from certain Australian Accounting
Standards which is provided for under Section 313 of Australian
Corporations Law. The ASC is presently considering Orbital's Section
313 application.
Orbital had hoped this matter would have
been resolved by 30 June 1996, so all policy issues related to
its intangible assets were concluded and thereby achieve substantial
harmonisation between Australian and United States Generally Accepted
Accounting Principles. The Company is seeking to resolve the issue
with the ASC as expeditiously as possible and obtain Court approval
as directed by shareholders.
The Orbital Board
This past year has also seen changes in
the Orbital Board with the appointment of Mr Ross Kelly as Chairman.
Mr Kelly has had extensive experience with a number of Australia's
largest businesses on both strategic and operational matters in
his earlier career as Operations Director (Asia Pacific Zone)
of PA Management Consultants. Mr Kelly is currently Chairman of
Sumich Group Limited and holds a number of other directorships.
Mr Russell Fynmore retired as Chairman and
Non-Executive Director in January 1996. Orbital acknowledges the
outstanding contribution that Mr Fynmore has made to the success
of the Company throughout his twenty four years associated with
Orbital.
Mr Richard Carter was transferred to BHP
Melbourne and was replaced by Mr Ian Egan, Group General Manager
and Senior Vice President of BHP Titanium Minerals. Mr John Marshall
also joined the Board after many years on Orbital Engine Company
(Australia) Pty Ltd's Board and has extensive experience in the
automotive industry.
Consolidated Profit and Loss Account for the twelve months
ended 30 June 1996
| |
1996 |
|
1995 |
| |
$000's
| |
$000's |
|
| Operating revenue |
29,959 |
|
23,050 |
Total operating expenditure |
(50,502) |
|
(47,546) |
Add: amounts capitalised as pre-production expenditure and
start-up costs |
- |
|
20,543 |
|
Operating (loss) before abnormal items and income tax |
(20,543) |
|
(3,953) |
|
| Abnormal expenses |
Expensing of deferred pre-production expenditure and start-up
costs capitalised in prior financial years |
(29,202) |
|
- |
Ammortisation of cash expenditure on certain intangible assets |
(19,948) |
|
- |
Share of partnership result |
(5,405) |
|
- |
Provision for legal fees incurred and estimated settlement
costs of legal action |
(2,506) |
|
- |
Settlement of legal action relating to a controlled entity |
(2,202) |
|
- |
Employee redundancy costs |
(1,725) |
|
- |
Write down in value of certain land and buildings |
(1,118) |
|
|
|
Operating (loss) before income tax |
(82,649) |
|
(3,953) |
|
Income tax (expense)/credit attributable to operating (loss),
including abnormal tax write-offs |
12,820 |
|
(3,834) |
|
Operating (loss) after income tax attributable to members
of the Company |
(69,829) |
|
(7,787) |
|
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