Final Results - Year Ended 31 October 1999

Gresham Computing PLC 7 February 2000 Gresham Computing plc Preliminary Results Announcement For the Year Ended 31 October 1999 Chairman's Statement Gresham has produced extremely disappointing results in what has been a difficult year for the IT industry. Group turnover for the year ended 31 October was £30.4 million (1998: £23.1 million) and after exceptional items and before goodwill amortisation there was a pre-tax loss of £401,000 (1998: profit £3,003,000), loss per share was 2.29p (1998: earnings per share 6.15p). The Board regards this performance as unsatisfactory and is taking a number of steps to ensure that the Company returns to profitability. In view of the difficult trading conditions the Board is recommending that no ordinary dividend be paid for the year. During the first six months of the financial year, Group turnover and profit both grew strongly, reflecting both increased sales from existing operations and positive contributions from the four acquisitions made in the period. Early in the second half, however, trading conditions throughout the Group began to deteriorate with unprecedented speed and pre-tax losses for the second six months were £1.9 million after exceptional items and before goodwill amortisation. In my interim statement of 10 June, I anticipated that Year 2000 freezes in new project starts would limit growth and this was confirmed in my trading statement of 5 August, in which I reported a significant loss in the third quarter and that adverse conditions were likely to continue into the first quarter of the year 2000. In the event, however, the severity of the downturn was harsher and more widespread than expected. Staff costs in Financial Systems, Commercial Solutions and Enterprise Storage increased rapidly in the first six months in the expectation of continued growth which in the event failed to materialise. As a result, the Group experienced significant losses during the third quarter and steps were taken to implement a substantial cost reduction programme. In addition, we are conducting a strategic review of Gresham's businesses and competitive position. Operations Gresham Commercial Solutions This division combines revenue from product support and maintenance, together with IT services contracts for systems integration and e-business. Significant contracts completed during the second half have included a £2 million legacy application migration project. An e-business integration project for a large US banking group was made operational in less than two months. As a result of continuing Y2K lockdown, business volumes have been lower than expected in the first quarter. Gresham Financial Systems A buoyant first half-year was reversed by a sudden and severe deterioration in the wholesale banking market sector from May through the year-end, coupled with extra pricing pressure. Staff reductions were significant in this area and accounted for a large proportion of exceptional costs. Adverse market conditions continue for the first quarter but major new opportunities are being developed following the re- direction of sales to e-business application integration projects in banking. Gresham Testing Services The UK testing services business made a positive contribution from the time of its acquisition in April 1999. Business volumes have been lower than expected in the first quarter. Over the last six months focus has altered towards providing e- business integration testing and larger, continuing outsourced testing contracts. Gresham Computer Personnel Some large-scale migration projects contributed positively to a solid first half of the year in the staff agency business. These projects concluded in mid-year and although the business continued to be profitable the revenue and contribution was significantly reduced, in common with the majority of the UK IT staffing industry. This reduced pace has continued through the first quarter. Gresham Enterprise Storage The US operation suffered in the first half of the year but recovered well in the final six months as the management team was strengthened and contracts secured for development of specialist connectivity software for some large IT vendors. This produced a return to profitability that has continued through the first quarter. Board and Management Changes In December, after the year-end, Trevor Read informed the Board of his intention to leave the Company at the end of January 2000. I was pleased to be able to announce that Bill Simpson, who joined Gresham in June, and was instrumental in the cost reduction program and business re-focus, was appointed Chief Executive with immediate effect on 17 December. Bill has extensive IT industry experience and has covered sales, product management, marketing, programme management, strategic planning and general management. One of his first tasks as CEO was to initiate a strategic review of the Company's competitive position with outside advisers and to identify our future strategic options. I was delighted to welcome Clifford Jakes FCA as a Non- Executive Director in September. He brings a wealth of experience in the media and technology business to the Board. Outlook Trading in the first quarter of the current financial year has continued to be difficult. However, the results for the first six months of the current financial year will show reduced losses in comparison with the previous six months. We are retaining staff resources in order to meet upturns in demand although some re-balancing of skills is anticipated. In order to address the market opportunities now arising, Gresham will build on our e-business capabilities, application migration and integration skills. We continue to invest group- wide over £50,000 per month in developing intellectual property that we believe we can sell to our customers through our own direct sales effort, as well as through third party channels. Our global Financial Services Division is building on its banking expertise and relationships with large customers and is attracting significant interest from application vendor partners. These relationships will leverage our integration skills and application management capabilities and widen Gresham's reach into this sector. The current strategic review will confirm how Gresham positions itself for the future, concentrating on our core skills, embracing e-business integration and those sectors of the market where Gresham has knowledge and presence. Roger Graham Chairman For further information, please contact: Gresham Computing plc 0171 653 0200 Roger Graham, Chairman Bill Simpson, CEO Square Mile Communications Limited 0171 601 1000 Tim Jackaman Gresham Computing plc Group Profit and Loss Account for the year ended 31 October 1999 Exceptional Goodwill Total Trading Items Amortisation Group 1999 1999 1999 1999 1998 Notes £'000 £'000 £'000 £'000 £'000 TURNOVER Ongoing 25,562 25,562 11,801 Acquisitions 4,788 4,788 11,262 _______________________________________________ 2 30,350 30,350 23,063 _______________________________________________ Cost of sales 11,941 11,941 10,113 _______________________________________________ GROSS PROFIT 18,409 18,409 12,950 _______________________________________________ Administrative expenses 18,045 463 18,508 10,029 Administrative expenses- exceptional items 620 620 - _______________________________________________ 18,045 620 463 19,128 10,029 OPERATING (LOSS)/PROFIT 2 364 (620) (463) (719) 2,921 _______________________________________________ Operating (loss)/profit ongoing (946) 1,733 Operating profit acquisitions 227 1,188 _______________________________________________ Bank interest receivable 20 20 104 Interest payable (165) (165) (22) _______________________________________________ (145) 0 0 (145) 82 (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 219 (620) (463) (864) 3,003 Taxation on (loss)/profit on ordinary activities 168 (192) (24) 870 _______________________________________________ (LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION 51 (428) (463) (840) 2,133 Dividends - equity interests 0 217 Dividends - non-equity interests 3 66 66 53 ______________________________________________ RETAINED (LOSS)/PROFIT FOR THE YEAR (15) (428) (463) (906) 1,863 ______________________________________________ Basic earnings per share (pence) 4 (2.29) 6.15 Diluted earnings per share (pence) 4 (2.29) 5.47 ______________________________________________ Gresham Computing plc Group Balance Sheet at 31 October 1999 1999 1998 £'000 £'000 FIXED ASSETS Intangible assets 8,868 415 Tangible assets 3,345 2,386 ________________ 12,213 2,801 ________________ CURRENT ASSETS Debtors 8,270 7,556 Cash at bank and in hand 231 1,113 ________________ 8,501 8,669 ________________ Creditors: amounts falling due within one year 6,558 7,144 ________________ NET CURRENT ASSETS 1,943 1,525 ________________ TOTAL ASSETS LESS CURRENT LIABILITIES 14,156 4,326 ________________ Creditors: amounts falling due after more than one year 2,430 417 Provisions for liabilities and charges 49 68 _______________ 11,677 3,841 _______________ CAPITAL AND RESERVES Called up share capital 2,618 2,268 Shares to be issued 2,925 1,769 Share premium account 3,969 335 Special reserve 313 313 Profit and loss account 1,852 (844) _____________ 11,677 3,841 _____________ SHAREHOLDERS' FUNDS Equity interests 11,167 3,331 Non-equity interests 510 510 _____________ 11,677 3,841 _____________ Gresham Computing plc Group Statement of Cash Flows for the year ended 31 October 1999 1999 1998 £'000 £'000 Operating profit (719) 2,921 Depreciation 835 446 Amortisation 594 219 Loss/(Profit) on sale of fixed assets 3 9 (Increase) in debtors 563 (4,281) Increase in creditors (1,381) 1,564 Foreign exchange movement (42) (17) _________________ NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (147) 861 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 20 104 Interest paid (165) (22) Dividends paid to preference shareholders (53) (53) _______________ (198) 29 TAXATION Corporation tax paid (including advance corporation tax) (405) (207) Overseas tax paid (106) (13) ________________ (511) (220) ________________ CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Payments to acquire intangible fixed assets - (214) Payments to acquire tangible fixed assets (1,573) (1,031) Receipts from sale of tangible fixed assets 67 108 _________________ (1,506) (1,137) _________________ ACQUISITIONS Purchase consideration for subsidiary undertakings (2,694) (1,410) Acquisition costs (319) (555) Net cash acquired with subsidiary undertakings (20) 325 ________________ (3,033) (1,640) ________________ EQUITY DIVIDENDS PAID (217) (163) ________________ NET CASH OUTFLOW BEFORE FINANCING (5,612) (2,270) ________________ FINANCING Net cash inflow from financing 4,474 413 _______________ DECREASE IN CASH IN THE YEAR (1,138) (1,857) _______________ Gresham Computing plc Reconciliation of Net Cash Flows to Movement in Net Debt for the year ended 31 October 1999 1999 1998 £'000 £'000 Decrease in cash (1,138) (1,857) Cash inflow from increase in loans (2,000) (360) Repayment of loans 160 269 Receipts from finance lease facility (419) (359) Repayments of capital element of finance leases 218 37 _________________ Change in net funds resulting from cashflows (3,179) (2,270) Exchange differences - 5 Acquisitions (90) (320) Other - (20) ___________________ MOVEMENT IN NET DEBT (3,269) (2,605) NET FUNDS AT 1 NOVEMBER 359 2,964 __________________ NET DEBT AT 31 OCTOBER (2,910) 359 __________________ Analysis of net debt 1999 1998 £'000 £'000 Cash at bank in hand 231 1,113 Bank overdrafts (256) - _______________ Cash (25) 1,113 Long-term loans (2,000) (86) Short-term loans (198) (271) Finance leases (687) (397) _______________ NET DEBT AT 31 OCTOBER (2,910) 359 _______________ Gresham Computing plc Group Statement of Total Recognised Gains and Losses for the year ended 31 October 1999 1999 1998 £'000 £'000 (Loss)/Profit for the financial year (840) 2,133 Exchange difference on retranslation of net assets of subsidiary undertakings (45) (12) _______________ Total recognised gains and losses relating to the year (885) 2,121 _______________ Reconciliation of shareholders' funds for the year ended 31 October 1999 1999 1998 £'000 £'000 Total recognised gains and losses (885) 2,121 Dividends (66) (270) Issues of shares 7,527 900 Shares to be issued 1,156 1,769 Goodwill on acquisitions 104 (4,634) _________________ Total movements during the year 7,836 (114) Opening shareholders' fund 3,841 3,955 _________________ Closing shareholders' funds 11,677 3,841 _________________ Gresham Computing plc NOTES 1. The above financial information does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results for the year ended 31 October 1999 and the balance sheet at that date are extracted from the statutory accounts (on which the auditors have given an unqualified opinion), which will be filed with the Registrar of Companies. The comparative financial information is extracted from the statutory accounts for the year ended 31 October 1998 (on which the auditors have given an unqualified opinion), which have already been sent to shareholders and filed with the Registrar of Companies. 2. Turnover and segmental analysis The group's principal areas of activity are commercial solutions, finance and banking, specialist contract staff and placement and enterprise storage management. Common costs comprise the cost of all central group services. All group operations at 31 October are ongoing. Group turnover and loss on ordinary activities are analysed as follows: Specialist contract Commercial Finance staff and placement solutions and banking 1999 1998 1999 1998 1999 1998 £'000 £'000 £'000 £'000 £'000 £'000 Turnover - ongoing 6,562 7,490 7,290 7,062 10,633 8,247 acquisitions - - - - 1,495 - Inter segment (1,238) (1,450) - (34) (39) - ____________________________________________ 5,324 6,040 7,290 7,028 12,089 8,247 ____________________________________________ Segment operating profit/(loss) - ongoing 554 706 2,342 2,129 786 1,849 - acquisitions - - - - 127 - Goodwill amortisation - - - - (165) - ___________________________________________ 554 706 2,342 2,129 748 1,849 ___________________________________________ Group turnover and loss on ordinary activities continued: Enterprise storage Total management 1999 1998 1999 1998 £'000 £'000 £'000 £'000 2,566 1,796 27,051 24,595 3,293 - 4,788 - (212) (48) (1,489) (1,532) _________________________________ 5,647 1,748 30,350 23,063 _________________________________ (790) 156 2,892 4,840 100 - 227 - (298) - (463) - _________________________________ (988) 156 2,656 4,840 _________________________________ Exceptional items (620) - Common costs (2,755) (1,919) _______________ Operating (loss)/profit (719) 2,921 Net interest (payable)/receivable (145) 82 _______________ (Loss)/profit on ordinary activities before taxation (864) 3,003 _______________ Geographical analysis of turnover by source and destination Source Destination 1999 1998 1999 1998 £'000 £'000 £'000 £'000 United Kingdom 26,146 22,314 18,232 15,839 Europe 730 264 7,161 5,053 North America 3,405 1,724 2,824 1,881 Rest of world 1,558 245 2,133 290 Inter-segment sales (1,489) (1,484) - - __________________________________________ 30,350 23,063 30,350 23,063 __________________________________________ Analysis of profit / (loss) on ordinary activities before taxation by source 1999 1998 £'000 £'000 United Kingdom 3,774 4,663 Europe 39 36 North America (814) 125 Rest of world 120 16 ______________ 3,119 4,840 Exceptional items (620) - Common costs (2,755) (1,919) Goodwill amortisation (463) - Net interest receivable (145) 82 ______________ Profit on ordinary activities before taxation (864) 3,003 ______________ 3. Dividends The directors do not propose to pay a ordinary dividend for the year ended 31 October 1999 (1998: 0.6p per share). 4. Earnings per share (EPS) The calculation of the basic EPS has been based upon losses, after deducting preference dividends, of £906,000 (1998: £2,080,000 profit) and on a weighted average number of ordinary shares of 39,613,267 (1998: 33,835,872) including the weighted average of shares to be issued in respect of acquisitions. 5.Goodwill Goodwill arising on acquisitions prior to 31 October 1998 was set off directly against reserves. Goodwill previously eliminated against reserves has not been reinstated on implementation of FRS 10. Positive goodwill arising on acquisitions since 1 November 1998 is capitalised, classified as an asset on the balance sheet and amortised on a straight line basis over its useful economic life up to a presumed maximum of 20 years. It is reviewed for impairment at the end of the first full financial year following the acquisition and in other periods if events or changes in circumstances indicate that the carrying value may not be recoverable. If a subsidiary, associate or business is subsequently sold or closed, any goodwill arising on acquisition that was written off directly to reserves or that has not been amortised through the profit and loss account is taken into account in determining the profit or loss on sale or closure. For acquisitions made during the current year the amortisation period is 10-15 years depending on the circumstances of the acquired business. 6.This preliminary statement of results will not appear as an advertisement in any newspaper but the annual report is being sent to all shareholders by 10 March 2000 and copies will be available to members of the public from the company's registered office: Mitchell House, Brook Avenue, Warsash, Southampton, SO31 9ZA.

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