UK Listing Authority censures MSW Technology plc for breach of the Listing Rules

The full text of the Committees decision is set out below.

MSW TECHNOLOGY PLC

Introduction

1. A hearing of the Quotations Committee (the Committee) of the UK Listing Authority (the UKLA) took place on 1 August 2000 to consider a referral from the UKLA under paragraph 1.8 of the Financial Services Authoritys Listing Rules. Under the Official Listing of Securities (Change of Competent Authority) Regulations 2000 (the Regulations) responsibility for, inter alia, enforcement of the Listing Rules was transferred to the Financial Services Authority with effect from 1 May 2000. The Regulations also enable the Committee to take action under paragraph 1.9 of the Listing Rules in respect of breaches that occurred before 1 May 2000.

2. The referral concerned the issue by MSW Technology plc (the Company) of a trading update via the London Stock Exchanges Regulatory News service (RNS) at 12:24pm on 11 August 1999 (the Update). The Listing Rules in force throughout the relevant period were those published in January 1999.

   Decision

3. The Committees decision is that the Company breached paragraph 9.2 of the Listing Rules by failing to notify the Exchanges Company Announcements Office without delay of a change in the Companys financial condition, performance of its business and expectation of its performance in relation to its profitability for its 1998/99 year, knowledge of which was likely to lead to substantial movement in the price of its listed securities.

4. The Committee censures the Company and considers it appropriate in the circumstances that its decision and the reasons behind it should be made public.

   Background

5. The Company is a professional services software supplier and consultant which specialises in providing human resources software to military and maritime organisations.

6. The Company has a financial year end of 31 May. In its interim results for the 1998/99 financial year, issued on 16 February 1999, the Company announced a loss on ordinary activities before taxation of 140,309.

7. On the same day as the announcement of the interim results, the Companys broker, Gilbert Eliott, published a forecast for the Companys full year profits for its 1998/99 financial year of 800,000.

8. The Companys management accounts for the eleven month period to 30 April 1999, issued on 25 May 1999, showed a year to date loss of 1.53 million against a budgeted profit of 839,000.

9. In the period leading up to 31 May 1999, the Company was negotiating the terms of several large contracts. In order to achieve its budgeted profits and those forecast by its broker for the 1998/99 year, the Company needed to finalise several of those contracts before or shortly after its financial year end.

10. However, at a meeting of the Companys board on 29 June 1999, concern was expressed over whether those contracts would be finalised in time for revenues from them to be included in the Companys 1998/99 results and the possibility that, if the contracts were not finalised, the Company would therefore make a loss for the 1998/99 year. Although the Company consulted its sponsor after the board meeting on the need for a profits warning, the Company did not fully inform the sponsor of its likely profit outcome, which would not achieve market expectations.

11. After a review of the situation regarding the contracts reported at the 29 June board meeting, at the Companys board meeting on 4 August the draft (unaudited) accounts for the year ended 31 May 1999 were presented. These showed a pre-tax loss for the year. The board resolved to report a loss of about 1.5m to 1.6m, dependent on further assessment of contracts which were still under negotiation at that time. The board also resolved to consult its sponsor in order to formalise the wording of an appropriate announcement.

12. On 11 August 1999 the Company issued the Update, announcing that:

    MSW Technology plcannounces that it is anticipating it will report a loss of approximately 1.6m for the year ended 31 May, 1999. This has been due to contracts not having been finalised during the period...

13. The Companys share price fell from 108.5p to 84.5p (22.11%) following the Update.

14. In its final results published on 16 September 1999 the Company confirmed a loss of 1.64m for the year to 31 May 1999.

15. The Company issued announcements in August and October 1999 regarding board resignations and changes, including, on 13 October, that the former Managing Director had ceased to be a director and employee of the Company.

    Reasons for the Committees Decision

16. The Company has acknowledged that it breached paragraph 9.2 of the Listing Rules by failing to issue the Update sooner.

17. However, the Company has said that since this breach, it has introduced new improved procedures to determine more accurately the likelihood of prospective sales materialising and the point at which income can be recognised in its accounts. New reporting procedures and internal controls on customer billing have also been introduced. The Company is now confident that as a result of these changes, the difficulties which it previously encountered in correctly assessing its financial position, in particular for the period from April to August 1999, will not recur.

18. The Committee has taken into account the Companys admission of its breach, and the concerns of, and steps taken by, the present directors of the Company to ensure future compliance with the Listing Rules.

19. However, the Committee regards the continuing obligation requirements of Chapter 9 of the Listing Rules as a fundamental protection for shareholders. Observance of those continuing obligations is essential to the maintenance of an orderly market in securities and to ensure that all users of the market have simultaneous access to the same information. The Committee therefore takes the most serious view of listed companies which disregard these provisions either by oversight or otherwise. It is important that a listed company carefully considers whether changes in its financial condition, the performance of its business or its expectations of its performance are likely to be price sensitive, and so require disclosure under the Listing Rules. If at any time a listed company is in doubt as to its obligation of disclosure under the Listing Rules it should consult its professional advisers as soon as possible.