Interim Results

Parity Group PLC 7 September 2000 PARITY GROUP PLC Interim Results for the six months to 30 June 2000 Parity Group plc, the e-business and software services group, announces its results for the six months to 30 June 2000. Group Summary * Group turnover £139.2m (1999: £153.6m) * Group pre-tax profit £7.1m (1999: £10.3m)* * Basic earnings per share 3.14p(1999: 4.71p)* * Interim dividend maintained at 0.93p * Net funds of £0.3m at 30 June 2000 * Investment Programme revenue costs £1.0m * All businesses profitable across the Group * Quiet post-Y2K market improves recently *excluding goodwill amortisation Divisional Highlights: Parity Solutions: e-business solutions * Return on sales remains above 10% * E-business revenues up sixfold at £9.3m * Parity Web Academy attracts strong interest * Quiet systems integration market stabilises recently * Application partnerships with Broadvision, Infobank and e-docs. Parity Software Services: international IT skills * US subsidiary improves revenues and profits * Recent upturn in Europe after quiet first half * Strong growth in demand for permanent IT skills in all markets * Strong list of new blue chip customers * Exclusive UK incentive programme for consultants and staff launched with AIR MILES in September * Improvement in demand for flexible IT skills in recent months Commenting on the results, Parity Group Chairman Philip Swinstead said : 'The Group has performed creditably in the difficult market conditions following the Y2K slowdown with reduced revenues but respectable margins and every business profitable. E-business skills have been in great demand across the Group and we have won many pilot web projects which should in due course lead to major integration requirements. During this phase when customers have been investigating the impact of e-business, many have delayed expenditure on new systems or upgrades, leading to a significant reduction in demand for traditional systems projects. I am pleased to announce today that Ray King has been appointed Deputy CEO in addition to his responsibilities as Group Finance Director. Recently we have seen an improvement in demand for IT skills, our investment programme is gathering momentum and we are in very good shape for the future. I expect the hard work and dedication of our staff this year to be rewarded as market conditions improve.' For further information please contact: Parity Group plc Telephone: 0207 831 3113(on the day) Telephone: 0207 776 0800 (thereafter) Philip Swinstead, Executive Chairman Ray King, Deputy CEO and Group Finance Director Michael Harrington, Group Communications Director Financial Dynamics Telephone: 0207 831 3113 Giles Sanderson Jon Earl Interim Results Whilst growth in demand for e-business services and staff has remained robust, traditional IT services markets have been slow to recover from the year 2000 issue. The second quarter failed to deliver the upturn and consequent growth for which Parity and many other industry participants had budgeted. The Group has responded appropriately to the difficult market conditions by strictly controlling costs and establishing the targeted investment programme which was announced at the AGM. This is designed to further enhance the e-business skills and offerings in Parity Solutions and develop Parity Software Services as an integrated international business. Group turnover in the first six months of 2000 was £139.2m (1999 : £153.6m). Profit before tax and goodwill amortisation was £7.1m (1999 : £10.3m), with all businesses in the Group profitable in the period. Investment programme revenue costs were £1.0m (Parity Solutions £0.7m, Parity Software Services £0.3m). Basic earnings per share before goodwill amortisation were 3.14p (1999 : 4.71p). The Group's effective tax rate excluding goodwill amortisation and exceptional items was 33.0% (1999 full year : 33.2%). If the results of overseas subsidiaries had been translated using the average exchange rates prevailing during the corresponding period in 1999, turnover and profit before tax would have been £2.4m higher and £0.1m higher, respectively. The Board has declared an unchanged interim dividend of 0.93 pence per share. The dividend will be paid on 8 November 2000 to shareholders on the register at the close of business on 6 October 2000. The Group balance sheet remains strong with net funds of £0.3m at 30 June 2000 compared to net debt of £1.6m at 31 December 1999. Divisional Performance Six months ended Turnover(£m) Profit*(£m) % RoS 30 June 2000 1999 2000 1999 2000 1999 Parity Solutions 35.5 27.1 3.67 3.69 10.3 13.6 (UK) Parity Software Services UK 50.7 69.3 2.69 4.08 5.3 5.9 Continental Europe 30.0 36.1 0.97 2.38 3.2 6.6 USA 23.0 21.1 2.08 1.94 9.0 9.2 103.7 126.5 5.74 8.40 5.5 6.6 Central Costs (2.14) (1.64) Interest (net) (0.19) (0.14) Total 7.08 10.31 Goodwill (0.54) (0.07) amortisation Parity Group plc 139.2 153.6 6.54 10.24 * Profits stated after charging investment programme costs Parity Solutions Parity Solutions' operating profit of £3.7m was unchanged compared with the same period in 1999 and reflected over 10% return on sales. Demand for ebusiness and web design remained very strong across the consultancy, systems and training businesses. By the end of June over 25% of revenues were generated from e-business work. Growth in profits from this e- business expansion and from the 1999 acquisitions was offset by the slowdown in the traditional IT projects area and the external costs of the investment programme. Revenues from the Consultancy and Systems businesses were £23.6m (1999 : £19.3m), reflecting organic growth of 5% on top of the Idev and TMS acquisitions. E-business turnover for these businesses grew sixfold to £6.8m compared to £1.0 m last year. In contrast to the demand for e-business, the systems integration market was particularly quiet with fewer requirements issued and projects being delayed as clients reconsidered their IT strategy. We did initiate some reduction in the number of staff with traditional skills but also invested for the future by re- skilling suitable unallocated staff. The investment programme will ensure that we continue to build a significant skill base in the new technologies. Parity Training is now one of the leading IT training companies in the UK. The business has seen encouraging organic growth in sales of 8% in the period in addition to the integration of the Comtec acquisition. Demand for ebusiness related courses was strong with turnover up fourfold to £2.5m (1999 : £0.5m). The Parity Web Academy has been launched and the first courses will begin in September with both external and internal students. Parity Software Services The demand for web-related skills remained very strong across Europe and the USA but growth was constrained by the limited supply of qualified people. Following the sharp decline at the end of 1999, Parity's consultant numbers in the UK and Europe stabilised in the second quarter of this year and recently new business requirements have increased significantly. Whilst margins were affected by the supply/demand imbalance earlier this year, the situation has now improved across our business as customers focus again on quality and service. Return on sales in the UK in the first half remained strong at 5.3% having benefited from strict cost control in difficult market conditions. In Continental Europe, returns were significantly lower compared to the prior period due to the decision to keep the valuable office network intact through the down-turn, notwithstanding weaker sales. In this market, as in the UK, the number of customer requirements has increased recently. The United States market was less severely affected by Y2K, allowing Parity Teltech to grow both revenues and profits. Tight labour markets have made assignments challenging to fulfil, but margins have remained stable. Sales were up 6% in dollar terms and return on sales was 9%. Demand for permanent IT staff has been strong in all key markets and Parity Selection has prospered. New clients in the period include Oracle in the UK, IBM, Cable & Wireless and MCI WorldCom in the Netherlands, Canal+ in France and Alliance Capital, Bayer, Bell South and Reuters in the USA. Parity's international presence puts it in a strong position to win further new business with international accounts. Investment Programme The £7m programme of investment announced at the AGM in June has started very well. Already we have made progress on a number of fronts and have the major developments scheduled and where relevant staffed. The expenditure in the first half was £1.2m of which £0.2m was capital. Looking ahead, the predicted costs for the second half are about £3.1m of which some £0.4m is capital. In the first half of next year we anticipate that the spend will be £2 - £2.5m most of which will be charged to the profit & loss account. The Web Academy was launched in July and has been well received with a high level of interest from potential students. As a consequence we have decided to have a rolling start to the Academy rather than fixed quarterly semesters. This initiative is expected to become profitable next year. We have now put in place the Infobank e-hub demonstrator and delivered the first e-hub to E24 plc. The slow pace of take-up of the ASP proposition in Europe has caused us to reduce the level of expenditure in this area. We are continuing to pursue Infobank e- hubs opportunities and application solutions for clients. Throughout this year Parity Solutions will increase its marketing spend to establish its reputation in the e-business field, particularly through relevant conferences, symposia and related advertising. In Parity Software Services we are putting in place the management structure to enable it to operate as a standalone division. Four new offices in Ipswich, Reading, Amsterdam and Hamburg were opened during the period and more are planned. In addition our fast- growing permanent recruitment brand, Parity Selection, has been rolled out through the UK branches, is developing in the US with the opening of a new office in New Jersey and is now expanding through our Continental offices. The investment programme will continue until the middle of next year and will address the following additional issues in the two divisions: In Parity Solutions the Web Pack project will create software components for the rapid development of new web sites. The business' leading edge methodology practices will be updated to cover end-to-end e-business projects. A new standard methodology, to be known as Evolve, will be created. We will continue the general reskilling process to increase the number of staff skilled in technologies such as Java, Windows 2000, XML and the Microsoft Web Tools. These staff will also produce the content for our new e-knowledge portal, enabling leading edge e-business practices to be shared within the company. Finally, in order to ensure that we can offer our clients advice on 'best of breed' application products, we will continue to invest in developing our consultants' skills in these products, including the creation of demonstrators. The supplier relationships that we have forged are key to providing application solutions in the areas of supply chain management, customer relationship management, e-billing and multi-media contact centres. Parity Software Services will continue the projects started in the first half including the rebranding of all its businesses under the Parity banner. Recently the new AIR MILES initiative was launched for staff and contractors. A new IT infrastructure has now been defined and will be rolled out across the international businesses over the next nine months. The investment programme was targeted to ensure that the two Parity businesses have the skills, tools and infrastructure to take full advantage of the escalating demand for the new technologies and we are confident that shareholders will see full value from this initiative in the coming years. Current Trading and Prospects The Group has achieved sensible margins in unexpectedly poor market conditions in the first half without jeopardising the staff levels, skills and infrastructure that we will need as the market picks up. There are recent encouraging signs of renewed activity but after very mixed signals through this year we are not relying on a significant upturn before the beginning of next year. Investment spend will rise in the second half but is expected to be balanced by the better trading conditions seen now compared to the first quarter of the year. The mood is now more optimistic across the Group and this bodes well for the future. The market outlook for 2001 is encouraging and the Board believes that Parity's early move into the new technologies last year and this year's investment programme will create an excellent base for renewed growth. Group Profit and Loss Account Six months Six months Year ended ended ended 31 30 June 30 June December 2000 1999 1999 Notes £'000 £'000 £'000 (unaudited) (unaudited) (audited) TURNOVER 139,241 153,556 314,154 Operating costs before goodwill amortisation (131,969) (143,106) (292,634) and exceptional items Goodwill amortisation (543) (73) (219) Exceptional items - - (2,542) Operating costs (132,512) (143,179) (295,395) OPERATING PROFIT 6,729 10,377 18,759 Net interest payable (191) (137) (198) Profit on ordinary activities before 7,081 10,313 18,780 taxation and goodwill amortisation Goodwill amortisation (543) (73) (219) PROFIT ON ORDINARY ACTIVITIES BEFORE 6,538 10,240 18,561 TAXATION Taxation on ordinary (2,337) (3,379) (6,819) activities PROFIT ON ORDINARY ACTIVITIES AFTER 4,201 6,861 11,742 TAXATION Dividends 4 (1,424) (1,384) (3,773) RETAINED PROFIT FOR THE FINANCIAL PERIOD 2,777 5,477 7,969 EARNINGS PER ORDINARY 5 SHARE - Basic 2.78p 4.66p 7.92p - Diluted 2.73p 4.53p 7.77p EARNINGS PER SHARE BEFORE GOODWILL AMORTISATION AND 5 EXCEPTIONAL ITEMS - Basic 3.14p 4.71p 9.61p - Diluted 3.08p 4.58p 9.42p The difference between recognised gains and losses reported in the profit and loss account and the total recognised gains and losses for the period amounts to £514,000 of exchange gains (1999 half year - £281,000 of exchange losses) (1999 full year - £1,200,000 of exchange losses) which have been taken directly to reserves. Group Balance Sheet 30 June 30 June 31 Dec 2000 1999 1999 £'000 £'000 £'000 (unaudited) (unaudited) (audited) FIXED ASSETS Intangible assets 20,988 5,774 22,370 Tangible assets 6,537 4,767 6,123 Investments 2,380 1,668 1,497 29,905 12,209 29,990 CURRENT ASSETS Debtors 58,150 65,076 57,117 Taxation recoverable after 3 87 3 more than one year Cash at bank and in hand 5,748 6,436 12,997 63,901 71,599 70,117 CREDITORS: amounts falling due within one year Variable rate loan notes payable (810) (560) (810) Other creditors (50,774) (52,340) (59,751) (51,584) (52,900) (60,561) NET CURRENT ASSETS 12,317 18,699 9,556 TOTAL ASSETS LESS CURRENT 42,222 30,908 39,546 LIABILITIES PROVISIONS FOR LIABILITIES (671) (938) (770) AND CHARGES NET ASSETS 41,551 29,970 38,776 CAPITAL AND RESERVES Called up share capital 7,655 7,455 7,598 Shares to be issued 255 - 1,986 Capital redemption reserve 50 - 50 Share premium account 2,874 - 1,554 Other reserves 35,263 30,839 34,390 Profit and loss account (4,546) (8,324) (6,802) EQUITY SHAREHOLDERS' FUNDS 41,551 29,970 38,776 Group Cash Flow Statement Six months Six months Year ended ended ended 30 June 30 June 31 Dec 2000 1999 1999 £'000 £'000 £'000 (unaudited) (unaudited) (audited) NET CASH FLOW FROM OPERATING ACTIVITIES 6,762 4,456 23,404 BEFORE EXCEPTIONAL ITEMS EXCEPTIONAL ITEMS (244) - (2,298) NET CASH FLOW FROM OPERATING 6,518 4,456 21,106 ACTIVITIES NET CASH OUTFLOW FROM RETURN ON INVESTMENTS AND SERVICING OF (205) (137) (182) FINANCE TAXATION PAID (2,415) (1,765) (8,338) NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL (2,438) (1,763) (2,926) INVESTMENT NET CASH OUTFLOW FROM ACQUISITIONS - (6,197) (14,813) AND DISPOSALS EQUITY DIVIDENDS PAID - - (3,547) NET CASH INFLOW/(OUTFLOW) 1,460 (5,406) (8,700) BEFORE FINANCING NET CASH (OUTFLOW)/INFLOW FROM (6,952) (1,102) 9,339 FINANCING (DECREASE)/INCREASE IN CASH IN (5,492) (6,508) 639 THE PERIOD Reconciliation of net cash flow to movement in net funds £'000 Decrease in cash in the period (5,492) Reduction in borrowings under variable rate credit 7,276 facilities Exchange movements 125 Movement in net funds in the period 1,909 Net debt at 1 January 2000 (1,612) Net funds at 30 June 2000 297 Analysis of net funds/(debt) At At 1 January Cash Exchange 30 June 2000 flow movements 2000 £'000 £'000 £'000 £'000 Cash at bank and in hand 12,997 (7,402) 153 5,748 Overdraft (3,555) 1,910 14 (1,631) 9,442 (5,492) 167 4,117 Variable rate credit facilities (10,244) 7,276 (42) (3,010) Variable rate loan notes (810) - - (810) Net funds/(debt) (1,612) 1,784 125 297 Reconciliation of operating profit to net cash flow Six months Six months Year ended ended ended 30 June 30 June 31 December 2000 1999 1999 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Operating profit before exceptional items 6,729 10,377 21,301 Depreciation of tangible fixed assets 1,185 1,006 1,890 Amortisation of intangible fixed assets 543 73 219 Gain on issue of own shares held by ESOP to - - (166) option holders (Profit)/loss on disposal of tangible fixed assets (8) 7 20 (Increase)/decrease in working capital (1,588) (6,635) 680 Utilisation of provisions (99) (372) (540) Net cash flow from operating activities 6,762 4,456 23,404 Reconciliation of Movements in Shareholders' Funds Six months Six months Year ended ended ended 30 June 30 June 31 December 2000 1999 1999 £'000 £'000 £'000 (unaudited) (unaudited) (audited) Profit on ordinary activities after 4,201 6,861 11,742 taxation Dividends (1,424) (1,384) (3,773) Retained earnings 2,777 5,477 7,969 Other recognised gains/(losses) 514 (281) (1,200) Share options exercised 11 430 1,177 Shares issued to QUEST Share capital and share premium 1,347 - - Movement on profit and loss reserve (1,035) - - 312 - - Shares issued to vendors Share capital and share premium 19 - 1,620 Shares to be issued (1,400) - - Other reserves 873 - 2,880 (508) - 4,500 Shares to be issued to vendors (331) - 1,986 Net increase in shareholders' funds 2,775 5,626 14,432 Shareholders' funds at start of period 38,776 24,344 24,344 Shareholders' funds at end of period 41,551 29,970 38,776 Investment Programme Expenditure Six Months Ended 30 June 2000 Total External Internal revenue Capital costs costs costs costs £m £m £m £m Parity Solutions 0.2 0.5 0.7 0.2 Parity Software 0.3 - 0.3 - Services Total 0.5 0.5 1.0 0.2 Internal costs represent the cost of salaries and associated payroll overheads in respect of consultants working on investment programme projects. Total revenue costs of £1.0m were charged to the Profit & Loss Account during the period. Notes to the Accounts 1. The information contained in this interim statement does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. 2. The combination of Parity Group plc and Parity Limited (formerly Parity plc) following the Scheme of Arrangement on 5 July 1999 under which Parity Group plc became the holding company of Parity Limited and its subsidiaries, has been accounted for on a merger accounting basis as if it had occurred on 1 January 1999. 3. The financial information for the six months ended 30 June 2000 has not been audited but has been reviewed by PricewaterhouseCoopers and their report is attached. The financial information has been prepared on the basis of the accounting policies set out in the Group's statutory accounts for the year ended 31 December 1999 which have been delivered to the Registrar of Companies. The auditors' report on these accounts was unqualified and did not contain a statement under section 237 of the Companies Act 1985. 4. The interim dividend will be paid on 8 November 2000 to all Shareholders on the register at the close of business on 6 October 2000. 5. The calculation of earnings per Ordinary share is based on a profit after taxation and goodwill amortisation of £4,201,000 (30 June 1999 : £6,861,000, 31 December 1999 : £11,742,000). The calculation of earnings per share before goodwill amortisation and exceptional items is based on a profit after taxation of £4,744,000 (30 June 1999 : £6,934,000, 31 December 1999 : £14,248,000). The weighted average number of Ordinary shares used in the calculation of the basic and diluted earnings per share after adjusting for the impact of the Scheme of Arrangement are as follows: Six months Six months Year 2000 1999 1999 Average Average Average number number number i)Basic weighted average number of shares 152,202,316 148,459,884 149,165,867 Shares in issue Adjustment for shares held by ESOP (1,156,238) (1,130,124) (907,938) 151,046,078 147,329,760 148,257,929 ii) Dilutive weighted average number shares 152,202,316 148,459,884 149,165,867 Shares in issue 1,757,523 2,893,044 2,038,625 Adjustment for options and for shares held by ESOP 153,959,839 151,352,928 151,204,492 The number of Ordinary shares in issue at 30 June 2000 was 153,104,215 (30 June 1999: 149,118,993, 31 December 1999 : 151,957,011). Auditors' independent review report to Parity Group plc Introduction We have been instructed by the Company to review the financial information set out on pages 6 to 10 and we have read the other information contained in the interim report for any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the Directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data, and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2000. PricewaterhouseCoopers Chartered Accountants 7 September 2000 Copies of the Interim Report will be sent to shareholders and will be available from the Company Secretary at the registered office: 16 St Martins Le Grand London EC1A 4NA Tel: 020 7776 0800 Fax: 020 7776 0801 email: cosec@parity.co.uk web site: www.parity.co.uk

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