Final Results

Current Trading and Outlook Embargoed for 07.00 Wednesday 17 March 2004 PARITY GROUP PLC PRELIMINARY RESULTS Parity Group plc ('Parity' or 'the Group'), the international IT services group, announces its preliminary results for the year ended 31 December 2003. Commenting on the results, Parity Group Non-executive Chairman Bill Cockburn said: 'It appears that markets in the UK, mainland Europe and the United States are stabilising. Our sales pipeline is stronger than it has been at any time over the past three years, and this has given us the confidence to invest in additional sales resources and new sales management systems. We go into 2004 with better prospects than for some time. New contract wins announced today are demonstrating our strengths and the success of our customer propositions. The substantially reduced cost base makes us strongly operationally geared and helps us to compete in the current market conditions. The careful reinvestment of a proportion of these cost savings will further enhance our competitiveness. Our focus for 2004 is on growth.' Results Overview £'000 2003 2002 % change Continuing Operations Turnover Business Solutions 23,527 26,529 -11.3% Training 25,302 27,138 -6.8% Resourcing Solutions 107,480 100,839 6.6% Americas 17,644 23,035 -23.4% 173,953 177,541 -2.0% Operating profit* Business Solutions 1,530 1,184 29.2% Training 1,410 65 2069.2% Resourcing Solutions 1,325 (227) 683.7% Americas 1 618 -99.8% Central costs and net interest (3,720) (3,565) -4.3% 546 (1,925) 128.4% Exceptional costs (6,390) (21,033) Discontinued operations** (12,249) (224) Amortisation of goodwill (629) (1,385) (18,722) (24,567) Taxation credit 3,117 357 Loss on ordinary activities after taxation (15,605) (24,210) *Before exceptional items, goodwill amortisation and discontinued operations ** Refers to Dutch subsidiary Parity Solutions BV closed in June 2003 Group highlights * Marked improvement in performance in all three European business units * US business recovered H1 loss to achieve breakeven for year * Overhead costs reduced by 35% in past 3 years * Continued success in achievement of stated strategy - Group revenues from more stable outsourcing and managed service contracts increased from £3m in 2001 to £24m in 2003 - 43% of Group revenue now coming from top 20 clients (2001: 29%) - More contract wins announced today * Balance sheet strengthened through rights issue * Focus now is on growth Contract wins announced today * British American Tobacco - contract extension for Business Solutions valued at £1.4m * HBOS (Halifax Bank of Scotland) - contract extension for Training * DWP - selected as preferred supplier in 3 staffing categories of its procurement framework * Marks & Spencer - preferred supplier status for Resourcing Solutions * BT Group - preferred supplier status for Resourcing Solutions * BT Syntegra - preferred supplier status for Resourcing Solutions * T-Systems - preferred supplier status for Resourcing Solutions in Germany Group financials * Group turnover £176.0m (2002: £183.3m), including £2.0m (2002: £5.7m) from discontinued operations * Group pre tax profit before discontinued operations, exceptional items and goodwill amortisation £0.5m (2002: £1.9m loss) * Total exceptional charge for continuing operations £6.4m, resulting in annualised savings in excess of £3.5m * Group loss after tax and discontinued operations £15.6m (2002: £24.2m) * Basic loss per share 7.70p (2002: 12.89p*) * Earnings per share before discontinued operations, exceptional items and goodwill 1.04p (2002: loss 1.20p*) * Final dividend of 0.03p (2002: 0.03p*); total dividend for the year of 0.03p (2002: 0.14p*) * Prior year comparatives restated for shares issued under rights issue Divisional highlights Business Solutions * Second half revenues for ongoing business increased by 3% over first half * Operating profit+ increased by 29% against prior year * Order book at year-end increased by 29% compared to prior year * 63% of revenues from top 10 accounts (2002: 45%) Training * Continued to take market share - revenue down 7% in market that declined by 13% * Reliance on cyclical public training market reduced to 36% of total revenue * Corresponding increase in proportion of revenues from outsourcing and managed service contracts * Major improvement in operating profit+ from £0.1m in 2002 to £1.4m in 2003 Resourcing Solutions * Total revenue up 7% at £107.5m, of which £15.1m came from vendor management outsourcing that moves business into managed services market * Significant improvement in operating profit+ from £0.2m loss in 2002 to profit of £1.3m in 2003 * Both UK and mainland Europe profitable for first time in two years * Contractor numbers on billing increasing steadily * 20% share of UK Government IT staffing services market Parity Americas * Revenue growth of 3% in second half of year over first half after three years of decline * First half loss reversed to breakeven+ for the year * Market stabilising + before discontinued operations, exceptional costs and goodwill amortisation Enquiries: Parity Group plc Telephone 020 7776 0800 Ian Miller, Group Chief Executive Alison Leyshon, Group Finance Director Financial Dynamics Telephone 020 7831 3113 Giles Sanderson Harriet Keen Notes to Editors About Parity Group plc Parity is a professional services company that helps customers ensure that the right people are in the right roles, using the right technology and the right processes in the right way. Parity has four core competencies: * developing and managing large or complex IT systems, and related consultancy services * management and technology training, and workforce development strategy consulting * providing permanent and temporary staff, and managing related back office activities * Managing business processes related to the optimisation of workforce skills and utilisation. Parity operates from 30 offices across the UK, mainland Europe and the USA. Customers across the group include AT&T, CSFB, HP, IBM, JP Morgan Chase, Shell, and in the UK, Barclaycard, British Aerospace, BT, Lloyds TSB, National Health Service and Royal Mail. For more information on Parity, visit www.parity.net Group Overview and Results Turnover and Profits The Group has returned to profit at the trading level in all four business units before exceptional charges and goodwill amortisation, and after central costs. For our continuing businesses, revenue for the year was down slightly against 2002 at £174.0m (2002: £177.5m). However, profit before goodwill amortisation, tax and exceptional costs improved to £0.5m (2002: £1.9m loss). After exceptional costs, goodwill amortisation and taxation the Group reported a loss for continuing businesses of £3.4m (2002: loss of £24.0m). Revenue for the year included £15.1m from the contracts to provide vendor management services that were assigned to Resourcing Solutions following the partnership agreement that the business entered into with Chimes Inc., in 2003. In this initial year of start up the profit contribution on these contracts has been small but this is expected to improve as additional contracts are won. The results for our Dutch Business Solutions unit, Parity Solutions BV, which was put into administration in June 2003, are shown as 'discontinued operations' in the profit and loss account. The loss arising from discontinued operations is discussed below. After exceptional costs, discontinued operations, goodwill amortisation and taxation, the Group reported a loss of £15.6m (2002: £24.2m loss). Exceptional Costs The total exceptional charge for the year of £6.4m for continuing operations is made up of a restructuring charge of £4.2m, £0.7m in respect of a provision against the deficit arising on the Group's defined benefit pension scheme, £ 0.6m in respect of property dilapidations, £0.2m in respect of advisors' fees and £0.7m in respect of a provision against the carrying value of a fixed asset investment. As announced at the time of the rights issue, the Directors saw the opportunity to further rationalise the Group's cost base. The total cost of this restructuring was £4.2m and associated savings in a steady state climate should exceed £3.5m on an annualised basis from 2004. The largest element of the restructuring charge is a property cost of £2.7m. In addition to charges in respect of properties vacated during the year, this includes a top up of £1.0m to our empty property provision in respect of ongoing rent, rates and service charges for properties originally vacated in previous years which have not been sub-let. As highlighted at the time of our interim results we continue to actively seek to sub-let or assign the leases on our empty properties. Since 2001, we have reduced the number of properties across the Group by 21 through a combination of leases expiring, being assigned or sub-let. However, the state of the property market has caused us to take a more cautious view of the length of time this process will take for our remaining empty properties. The 2004 cash cost of the 2003 exceptional restructuring will be £1.4m, with a further £0.4m cash outlay in respect of pre 2003 exceptionals. Of this total cash spend of £1.8m, £1.5m of this total cash spend of £1.8m relates to empty properties. This spend will reduce to £0.9m in 2005 onwards following the expiry of leases at the end of 2004. The Group has reduced costs continuously over the past three years to compensate for declining revenues in the longest-running recession that this sector has known. Between 2000 and 2003 over £23.0m was removed from the cost base. However, the Directors have agreed that certain well-focussed and controlled revenue investment is now required to support the Group's objective to return to growth. In particular, salaries had been frozen for over two years and a modest salary increase across the Group has been agreed with effect from 1 January 2004. In 2004 there will be an increase in our IT costs following the refreshing of our hardware to facilitate a move to a common and more versatile environment. This change will provide enhanced functionality and a solid platform for shared Group-wide applications, including a new sales management system. The 2004 budget assumes further limited revenue expenditure, including additional head count, training and marketing, which will only be committed in line with an increase in revenues. Discontinued operations We reported in our Interim Results that one of our Dutch subsidiaries, Parity Solutions BV, had been put into administration on 13 June 2003. The results of this business, including the associated exceptional costs, have been reported as discontinued operations. The operating loss reported for this business of £ 3.2m comprises an adjustment of £1.6m in respect of the overstatement of revenues in 2002 and a trading loss of £1.6m for the period up to 13 June 2003. In addition, we have reported a loss on termination of this business of £9.0m, the largest element of which is £8.7m of goodwill that had been written off directly to Other Reserves at the time of the acquisition, in accordance with the required treatment under UK accounting standards at that time. For the purpose of calculating the loss on termination, the goodwill has been re-instated and written off through the Group profit and loss account and has therefore not impacted net assets. The loss on termination also includes closure costs of £0.3m. The total net adverse impact on shareholders' funds in 2003 arising from the discontinuation of this business was £3.5m. No further liabilities remain. Rights issue In the second half of the year, the Group raised net funds of £9.2m (including the proceeds of the sale of nil paid rights by the Employee Benefit Trust) by way of a 7 for 8 rights issue which resulted in 134,722,122 new shares being issued at a price of 7.5 pence per new ordinary share. The main purpose of the rights issue was to strengthen the Group's balance sheet which had been impacted by a high level of debt, built up primarily through acquisitions between 1999 and 2001, the write off of £12.8m of goodwill in 2002 and the investment required to fund the cost reduction programmes that the Group has put in place in recent years. A stronger balance sheet means that the Group is better positioned to compete for the larger and longer-running contracts with substantial clients, the winning of which forms a key part of our stated strategy. In addition, the rights issue has enabled the Group to extend the restructuring programme described above, will provide working capital to accommodate increased levels of activity in the business and will fund essential investment in 2004. Taxation Taxation on ordinary activities for the year was a credit of £3.1m (2002: £ 0.4m). The credit includes deferred tax of £2.6m made up of an increase in trading losses carried forward for use in future years of £1.4m and short term and other timing differences of £1.2m which largely relate to the deferral of capital allowances. At the balance sheet date the Group has recognised a deferred tax asset of £3.4m (2002: £1.1m). It is the Group's policy to only recognise a deferred tax asset in respect of tax losses carried forward where it is more likely than not that there will be taxable profits in the short-term against which the deferred tax asset can be offset. The Group has unrecognised deferred tax assets relating to tax losses of £1.9m (2002: £1.4m excluding unrecognised tax assets relating to discontinued operations). Earnings per share and dividends The basic loss per share for the year was 7.70p (2002: loss 12.89p). Earnings per share before exceptional items, discontinued operations and goodwill amortisation was 1.04p (2002: loss 1.20p). Prior year comparatives have been restated to take account of the shares issued under the rights issue. The Board is proposing a final dividend for 2003 of 0.03p per share (2002: final dividend 0.03p per share, total dividend for year 0.14p per share, restated for new shares issued under the rights issue) which, if approved, will result in a cash outlay of £87,000 on payment in July 2004. The retained loss for the year of £15.7m (2002: loss £24.6m), has been transferred to reserves. The distributable reserves of the Company at year end were £20.5m (2002: £24.5m). Cash flow and net debt The trading activities of the continuing business generated a net cash inflow before exceptional items for the year of £0.1m (2002: inflow £5.1m), including a cash outflow from working capital of £2.9m (2002: inflow £4.2m). After a cash outflow of £0.5m from discontinued operations, the net cash outflow from operating activities before exceptional items was £0.4m (2002: £3.9m inflow). The net cash outflow from exceptional items was £4.0m (2002: £3.1m) of which £ 1.4m relates to the 2003 restructuring programme and £2.6m relates to exceptional charges in previous years. Of the latter expenditure, the bulk represents cash outlays on rent, rates and service charges in respect of properties vacated in previous years and £0.6m in respect of dilapidations charges on those empty properties where leases have now terminated. The increase in average borrowings in the year prior to the rights issue led to an increase in net interest paid from £0.7m in 2002 to £1.0m in 2003. At year end, the Group had net debt of £12.0m (2002: £15.0m), a decrease of £ 6.0m compared to the half year. Of the net cash inflow of £9.2m (including the proceeds of the sale of nil paid rights by the Employee Benefit Trust) arising in 2003 from the rights issue, £2.0m has been spent on exceptional items in the second half of the year and £0.5m has been incurred on interest charges. The cash outflow relating to the 2002 final dividend that was paid in July 2003 was £0.1m. Trading activities in the second half of the year gave rise to a cash outflow of £0.3m as working capital requirements increased. Despite the injection of cash following the rights issue, the Board remains acutely aware of the need for the business to generate cash. Each of the business unit Managing Directors and Financial Controllers have been set cash generation targets which form part of the performance conditions for their 2004 bonus. Group cash generation targets are also included in the bonus criteria for the Executive Directors. Capital expenditure business cases must generally demonstrate a pay back period of less than twelve months. Banking facilities Following the successful completion of the rights issue, the £18.0m committed facility with our principal bankers, Lloyds TSB, remains in place through to the end of March 2006. This facility is secured over the trade debtors of our main UK operating companies. The Group also has an overdraft facility of £2.0m (2002: £4.0m) with Lloyds TSB to meet short-term intra month funding requirements. In addition to these facilities, the Group entered into an agreement with HSBC in September 2003 for the provision of a £4.0m invoice discounting facility in respect of its operations in Germany, France and the US. This facility expires in June 2004 but is expected to be renewed annually. The Group therefore has total facilities, including overdrafts, of £24.0m and the Board remains confident of our ability to operate within these facilities for the foreseeable future. Divisional Performance Turnover (£'000) Profit / (Loss) before Return on Sales tax % (£'000) 2003 2002 2003 2002 2003 2002 Continuing operations Business Solutions United Kingdom 23,527 26,529 1,530 1,184 6.5 4.4 Training - United 25,302 27,138 1,410 65 5.6 0.2 Kingdom Resourcing Solutions United Kingdom 79,544 69,100 1,147 241 1.4 0.3 Mainland Europe 27,936 31,739 178 (468) 0.6 (1.5) 107,480 100,839 1,325 (227) 1.2 (0.2) Parity Americas 17,644 23,035 1 618 - 2.7 Operating total before central costs, exceptional items and goodwill amortisation 173,953 177,541 4,266 1,640 2.4 0.9 Central costs (2,831) (2,924) Net interest payable (889) (641) Profit (loss) before tax, goodwill amortisation and exceptional items 546 (1,925) Goodwill amortisation (629) (1,385) Operating exceptional (5,666) (16,343) items Amounts written off investments (724) (4,690) 173,953 177,541 (6,473) (24,343) Discontinued operations Business Solutions Mainland Europe 1,999 5,732 (1,598) (128) Operating exceptional items (1,600) (32) Loss on termination of operations (9,000) - Net interest payable (51) (64) 175,952 183,273 (18,722) (24,567) Group Strategy The Group operates in the IT Services and Business Process Management markets in the UK, mainland Europe and the United States. Its three lines of business are IT Staffing (Resourcing Solutions Division), IT Systems Development and Management (Business Solutions Division), and IT and Management Training (Training Division) and the Group organises along these lines in the UK and mainland Europe. The fourth business unit, Americas, contains all three types of business but the majority of its revenues come from IT Staffing rather than Business Solutions or Training. For the past three years, in the face of the most difficult market conditions in the history of the IT Services industry, the Group has concentrated on developing strategies for each of these businesses to improve the security of revenue and margins by concentrating on winning larger and longer-running contracts with government and high-quality commercial clients. It has also worked at bringing together the unique combination of skills and capability contained within the Group to address a growing market in Business Process Management, specifically in the Human Resources functions of large organizations. These changes are now having the anticipated positive impact on the business. The success of our strategy can be seen by the increasing proportion of revenue coming from outsourcing and other managed service contracts instead of traditional, transactional sales. The Group produced £24m of its continuing revenue (14%) from these contracts in 2003, against £3m (1%) in 2001. That revenue came from multi-year outsourcing contracts in IT applications management, the organisation and delivery of training on behalf of clients, and the management of recruitment processes and temporary labour. This focus on outsourcing and managed services contracts will continue and the Business Process Management market in Human Resources is a particularly attractive target because of the Group's skills, experience and reputation in this area. We are also strongly focussed on key account management and the development of client relationships based on adding value rather than competing on price. With the emphasis on teamwork, information sharing and the development of clients for the mutual benefit of the business units and the whole of the Parity Group, we have seen a major improvement in the proportion of our business coming from our Top 20 Accounts. In 2001, we had approximately 29% of our revenue coming from this source. By 2003, that had increased to 43%. This concentration has protected the Group from the worst of the recent recession in our markets and has sheltered us while we changed the service offering strategy. Going forward, the key account management approach will continue, and the recent strengthening of our sales team should enable us to bring in new key accounts selectively and profitably. While these strategic changes have been taking place, the Group has been addressing in parallel the issues of productivity and cost effectiveness. During the past three years, the Group has reduced overhead costs for continuing operations by 35% and average staff numbers have been reduced by 605. These actions have improved the Group's competitiveness to the point where we compete very effectively with UK and 'offshore' operators in terms of cost per unit of valid output, exploiting the quality of delivery, productivity and ease of communication we believe differentiate Parity from the competition. Going forward, the Group will continue to look to increase the proportion of its revenue from outsourcing and other longer-term contracts. This will reduce our dependence on traditional, commodity business and fit better with our relationship-based, value-adding approach to market. We will continue to manage the cost base to maximise efficiency while recognising that we need to invest in systems, people development and sales effectiveness to maintain and improve our ability to compete. Business Solutions This Business Unit operates from the UK providing consulting, systems development and applications management services. As announced in June 2003, its Dutch operation Parity Solutions BV was put into administration, and the results of this business are shown as 'Discontinued Operations' in the Group profit and loss account. For the continuing business, 2003 saw year on year revenue reduce by 11% to £ 23.5m as the Business Unit focused on only those contracts where we could achieve acceptable margins. However, the second half of 2003 saw the Business Unit return to growth with an increase in revenue of 3% over the first half. Despite the drop in revenue for the year, profitability before exceptional items and goodwill amortisation improved by 29% against the previous year as the improved business mix and lower overheads produced far better margins. Operating profit before exceptional costs and goodwill amortisation was £1.5m for the year, compared to £1.2m for 2002. The Business Unit's order book again showed a substantial improvement as it was increasingly successful in winning large, multi-year contracts in applications management and systems development. The backlog of work sold but yet to be delivered at year end increased by 29% compared to prior year. There was little indication that 2003 was any less competitive than the previous year and clients' IT expenditure continued to be subject to very tight control. Where the Business Unit has been successful is in developing value propositions for existing clients and proactively taking these to the appropriate buyer. A substantial amount of new business was sold without having to bid, demonstrating both the quality of our client relationships and the Business Unit's ability to identify and deliver on opportunities to improve the business of our clients. Where we did bid, we were selective in choosing only those prospects where we had a clear and differentiated advantage, and that pushed up our sales efficiency and reduced our cost of sales. The challenge and opportunity now is to accelerate the return to growth that we saw to a limited extent in the second half of 2003 and to build more scale. For this reason, additional sales resources have been put in place in the first quarter of 2004, including a Business Unit Sales Director. Training The Training Business Unit provides management and technology training through 10 training centres around the UK and also provides managed services for training and development in the UK and mainland Europe. Training's revenue reduced by 7% against the previous year from £27.1m to £25.3m, but that compared with a reduction in the market of around 13%. A survey published by IT Skills Research in mid-2003 found that Parity Training had taken market share in a shrinking market in the UK and had moved from seventh place to second place in the course of twelve months. To offset the effects of the reduction in training spend, Training has successfully reduced its reliance on the cyclical public training market with only 36% of its revenue coming from this source in 2003 compared to 59% in 2001. The balance of 64% of its revenue now comes from consultancy and outsourcing contracts to manage the supply of training and development. While most of these are framework agreements without fixed commitments to volumes, the pricing model for this type of business is such that clients are incentivised to purchase the volumes that they predicted during the contract negotiation stage of the sales process. This source of revenue has proved far more robust than public training over the past two to three years in which the overall training market has suffered negative growth. As a result of the action taken to reduce revenue risk and the implementation of capacity reduction measures in public training, the Business Unit has been profitable in both the first and second halves of 2003 and made a major improvement in profitability compared to the previous year. Operating profit before exceptional costs in 2003 was £1.4m, compared to £0.1m for 2002. This Business Unit continues to expand its offereings in managed services while constantly reviewing and refreshing or replacing its traditional training courses. There is little indication yet that the public training market is improving quickly, but several competitors have left the market and some of the excess capacity should therefore have been removed. The trend towards outsourcing the management of training and development appears to represent a real opportunity for Training. Working with its sister Business Units in the Group gives Training the ability to deploy better technology, create proper value propositions for clients, and maximise the opportunity represented by our blue-chip client base. Resourcing Solutions Resourcing Solutions provides temporary and permanent staff to government and commercial organisations in the UK and mainland Europe. The principal countries in which it operates, apart from the UK, are France, Germany, Holland, Belgium and Switzerland. In addition, an agreement with the market-leading supplier of contractor management software, Chimes Inc., has enabled this Business Unit to move into Business Process Management. The agreement provided two vendor management outsourcing contracts in the UK that brought £15.1m of revenues in 2003. While these contracts made little impact in 2003 on profitability, they are of strategic importance in moving Resourcing Solutions into the managed services market that is a key focus for the Group in improving the quality and predictability of its revenue stream. Including the effect of these contracts, revenue for the year for the UK increased by 15% against 2002 from £69.1m, to £79.5m. As a result of improving sales in the core business in the second half and the effect of the further overhead cost reduction action taken during the year and at the end of 2002, the Business Unit returned to operating profit in 2003. Operating profit before exceptional costs and goodwill amortisation was £1.3m compared to a loss of £0.2m in 2002. The year-end figure compares with a trading profit at the half year of £0.1m. For the first time in two years, both the UK and mainland Europe were profitable for the year. The UK business has benefited from its SCAT approved supplier status with UK Government. Resourcing Solutions now has a 20% share of the UK Government IT staffing services market and in March 2004 was awarded a prestigious framework agreement with the Department for Work and Pensions in the categories of Interim IT Supply, Procurement Consultancy and Project Management Consultancy. As well as seeing numbers on billing increase in the UK, the important German market proved to be relatively strong throughout 2003. France and Benelux maintained their position and Switzerland returned to growth in the second half as a result of improved sales to new clients. This Business Unit plans to increase the proportion of its revenue from managed services, and the Chimes relationship provides it with the technology base to address not only the traditional IT market but other areas of temporary labour management. This is seen as an area of opportunity as the UK and mainland Europe seek to improve the flexibility of its workforce, while meeting the increasingly complex regulations on temporary labour. If Resourcing Solutions can achieve the same change in mix that we have seen in Training, its revenue and contribution should be far more stable and less cyclical in the future. Parity Americas This Business Unit operates from offices in the east of the US but services clients across the Americas. Its primary source of revenue is staffing, but it has profitable and growing businesses in Solutions and Training. The Americas market has been depressed for the past two years as the weak economy affected our key business sectors of technology manufacturing, telecommunications, banking and transportation. Revenue from the Americas had been in decline for almost three years and the Business Unit became loss making in the first half of 2003. For the year, revenues decreased by 23% in Sterling (16.5% in US Dollars), from £23.0m in 2002 to £17.6m in 2003. However, the second half of 2003 showed revenue growth of almost 3% over the first half. The improvement in revenue, combined with the cost reduction actions taken in late 2002 and early 2003, enabled the Americas to recover all of the loss in the first half to breakeven for the full year. The US market is showing increasing signs of stability if not real growth, and with the lower cost base, it is anticipated that this unit should remain profitable even without any overall improvement in the staffing market. Any market upturn should produce higher margins. The Business Unit plans to increase the proportion of its revenue coming from Business Solutions and Training, with support from its European sister Business Units. It has also been brought into the Key Account Management structure of the Group. In 2003 we have succeeded in servicing two major clients on both sides of the Atlantic through the extension of key account management. Further opportunities are being explored. Employees The past three years have seen the Group go through a major transformation. Our businesses have successfully adapted to changes in the market in order and to drive up levels of productivity and ensure competitiveness in a tough market. These changes have not been easy, and the fact that we have been able to maintain quality and customer satisfaction to such a high degree speaks volumes for the attitude and commitment of our people; the Board would like to record its appreciation of their application, dedication and support. Contract wins We are pleased to announce today two contract extensions and four preferred supplier appointments with well known blue-chip companies, as follows: British American Tobacco has awarded business Solutions a two year extension to its existing applications management contract, with a total value of £1.4m; HBOS (Halifax Bank of Scotland) has awarded Training an extension to its ongoing managed service contract to include an 18 month e-learning contract; Department for Work and Pensions has appointed Resourcing Solutions as a preferred supplier in three staffing categories of its procurement framework; Marks & Spencer has appointed Resourcing Solutions as Tier 1 and Tier 2 preferred supplier of resources; BT Group has appointed Resourcing solutions as one of six preferred suppliers for permanent recruitment; BT Syntegra has appointed Resourcing Solutions as one of five preferred suppliers of IT staffing; and T-Systems has appointed Resourcing Solutions in mainland Europe as one of five preferred suppliers of staffing in Germany Current trading and prospects It appears that markets in the UK, mainland Europe and the United States are stabilising. Our sales pipeline is stronger than it has been at any time over the past three years, and this has given us the confidence to invest in additional sales resources and new sales management systems. We go into 2004 with better prospects than for some time. New contract wins announced today are demonstrating our strengths and the success of our customer propositions. The substantially reduced cost base makes us strongly operationally geared and helps us to compete in the current market conditions. The careful reinvestment of a proportion of these cost savings will further enhance our competitiveness. Our focus for 2004 is on growth. Group Profit and Loss Account Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total year year ended year ended year year ended year ended ended ended 31 31 31 31 31 31 December December December December December December 2003 2003 2003 2002 2002 2002 Notes £'000 £'000 £'000 £'000 £'000 £'000 Turnover 3 173,953 1,999 175,952 177,541 5,732 183,273 Operating (172,518) (3,597) (176,115) (178,825) (5,860) (184,685) costs before goodwill amortisation and exceptional costs Goodwill (629) - (629) (1,385) - (1,385) amortisation Operating 2 (5,666) (1,600) (7,266) (16,343) (32) (16,375) exceptional costs Total (178,813) (5,197) (184,010) (196,553) (5,892) (202,445) operating costs Operating (4,860) (3,198) (8,058) (19,012) (160) (19,172) loss Loss on - (9,000) (9,000) - - - termination of operations Amounts 2 (724) - (724) (4,690) - (4,690) written off investments Net interest (889) (51) (940) (641) (64) (705) payable Profit (loss) on ordinary activities before goodwill amortisation, exceptional 546 (1,649) (1,103) (1,925) (192) (2,117) items and taxation Goodwill (629) - (629) (1,385) - (1,385) amortisation Exceptional costs Operating 2 (5,666) (1,600) (7,266) (16,343) (32) (16,375) exceptional costs Loss on - (9,000) (9,000) - - - termination of operations Amounts 2 (724) - (724) (4,690) - (4,690) written off investments Loss on ordinary activities before taxation (6,473) (12,249) (18,722) (24,343) (224) (24,567) Taxation on 3,117 - 3,117 357 - 357 ordinary activities Loss on ordinary activities after taxation (3,356) (12,249) (15,605) (23,986) (224) (24,210) Ordinary 5 (87) - (87) (393) - (393) dividends on equity shares Retained loss for the financial period (3,443) (12,249) (15,692) (24,379) (224) (24,603) Loss per 4 Restated ordinary share - Basic (7.70)p (12.89)p* - Diluted (7.70)p (12.89)p* Earnings (loss) per share before goodwill amortisation, discontinued operations 4 and exceptional costs - Basic 1.04p (1.20)p* - Diluted 1.04p (1.20)p* * Restated for shares issued under rights issue Group Balance Sheet 2003 2002 Notes £'000 £'000 Fixed assets Intangible assets 9,616 10,245 Tangible fixed assets 2,586 4,380 Fixed investments 478 1,177 12,680 15,802 Current assets Stock - work in progress 561 - Debtors - due within one year 40,550 39,028 - due after more than one year 3,418 - Cash at bank and in hand 7 3,241 3,608 47,770 42,636 Creditors: amounts falling due within one year (30,942) (44,466) Net current assets (liabilities) 16,828 (1,830) Total assets less current liabilities 29,508 13,972 Creditors: amounts falling due after more than one (11,058) - year Provisions for liabilities and charges (4,500) (2,364) Net assets 13,950 11,608 Capital and reserves Called up share capital 14,434 7,698 Capital redemption reserve 8 50 50 Share premium account 8 6,062 3,729 Other reserves 8 44,110 35,320 Profit and loss account 8 (50,706) (35,189) Equity shareholders' funds 13,950 11,608 Group Cash Flow Statement 2003 2002 Notes £'000 £'000 Net cash flow from operating activities before discontinued operations and exceptional costs 6 130 5,107 Cash flows from discontinued operations 6 (515) (1,233) Net cash flow from operating activities before 6 (385) 3,874 exceptional items Exceptional items (4,050) (3,075) Net cash flow from operating activities (4,435) 799 Return on investments and servicing of finance Interest received 46 126 Interest paid (1,066) (867) Net cash outflow from returns on investments and servicing of finance (1,020) (741) Taxation (paid) received (164) 508 Capital expenditure and financial investment Purchase of tangible fixed assets (509) (649) Sale of tangible fixed assets 27 531 Additions to fixed investments (25) - Net cash outflow from capital expenditure and financial investment (507) (118) Equity dividends paid (90) (2,676) Net cash outflow before financing (6,216) (2,228) Financing Issue of ordinary share capital 10,104 29 Expenses of share issue (979) - Proceeds on sale of nil paid rights in Employee Benefit 84 - Trust Repayment of loan notes (14) (3,986) (Decrease) increase in borrowings (1,719) 3,000 Repayment of capital element of finance lease (14) - obligations Net cash inflow (outflow) from financing 7,462 (957) Increase (decrease) in cash in the period 1,246 (3,185) Reconciliation of Net Cash Flow to Movement in Net Debt 2003 2002 £'000 £'000 Increase (decrease) in cash in the period 1,246 (3,185) Decrease (increase) in borrowings 1,719 (3,000) Repayment of obligations under finance leases 14 - Variable rate loan notes 2004 repaid 14 3,986 Change in net debt resulting from cash flows in the period 2,993 (2,199) Exchange movements 56 (122) Other non cash changes (91) - Movement in net debt in the period 2,958 (2,321) Net debt at 1 January 2003 (14,995) (12,674) Net debt at 31 December 2003 (12,037) (14,995) Reconciliation of Movements In Equity Shareholders' Funds 2003 2002 £'000 £'000 Loss for the year attributable to shareholders (15,605) (24,210) Dividends (87) (393) Retained loss (15,692) (24,603) Other recognised gains (losses) 175 (394) Shares issued net of issue costs 9,069 29 Gain on sale of nil paid rights in Employee Benefit Trust 84 - Reversal of goodwill previously written off directly to 8,706 - reserves Net increase (decrease) in shareholders' funds 2,342 (24,968) Equity shareholders' funds at start of year 11,608 36,576 Equity shareholders' funds at end of year 13,950 11,608 Group Statement of Total Recognised Gains and Losses 2003 2002 £'000 £'000 Loss for the year attributable to shareholders (15,605) (24,210) Currency translation differences on foreign currency net 175 (394) investments Total recognised losses for the year (15,430) (24,604) Notes to the Accounts 1. BASIS OF PREPARATION The financial information for the year ended 31 December 2003 included in this preliminary announcement does not constitute the full statutory accounts for the year. The results for the year ended 31 December 2003 are an extract from the Company's statutory accounts. These accounts have been reported on by the Company's auditors and will be delivered to the Registrar of Companies in due course. The report of the auditors was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The results for the year ended 31 December 2002 are an extract from the Company's statutory accounts for that year. Those statutory accounts have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. Basis of Consolidation The consolidated financial statements incorporate the results of Parity Group plc and its subsidiary undertakings drawn up to 31 December each year. 2. EXCEPTIONAL COSTS AND DISCONTINUED OPERATIONS Exceptional costs of £6,390,000 in continuing operations (2002: £ 21,033,000) were incurred during the year in respect of the following items: 2003 2002 £'000 £'000 Restructuring of operations Redundancy payments▲ 1,163 1,782 Property restructuring* 2,723 1,561 Other* 363 106 4,249 3,449 Property dilapidations* 551 - Advisors' fees* 184 122 SSAP 24 pension charge▲ 682 - Impairment of goodwill - 12,772 Operating exceptional costs before discontinued operations 5,666 16,343 Amounts written off investments 724 4,690 Total exceptional costs before discontinued operations 6,390 21,033 Segmental analysis of exceptional costs affecting continuing operations 2003 2002 £'000 £'000 Business Solutions - United Kingdom 1,793 9,958 Training - United Kingdom 710 901 Resourcing Solutions United Kingdom 1,836 4,390 Mainland Europe 33 - Parity Americas 220 501 Central costs 1,798 5,283 6,390 21,033 ▲ Classified as staff costs under Companies Act 1985 * Classified as other operating costs under Companies Act 1985 On 9 May 2003, the Group announced that accounting irregularities had been identified at Parity Solutions BV, which resulted in an overstatement of the Group's revenue and operating profit for 2002 of £1,600,000. As reported in the Interim Results, this business was subsequently put into administration and the results for the period have been shown as discontinued operations. The overstatement of revenues in 2002 within discontinued operations has been treated as an operating exceptional item in 2003. Discontinued operations have also been charged with a non-operating exceptional loss on termination of the Dutch operations of £9,000,000, which comprises the reversal of goodwill previously written off to reserves of £8,706,000 and other closure costs of £ 294,000. 3. SEGMENTAL ANALYSIS The Group provides information technology services through its Business Solutions, Training, Resourcing Solutions and Parity Americas business segments. 2003 2002 Profit Profit (loss) (loss) before before Turnover taxation Net Turnover taxation Net assets assets Continuing operations £'000 £'000 £'000 £'000 £'000 £'000 Business Solutions United Kingdom 23,527 1,530 517 26,529 1,184 1,307 Training - United 25,302 1,410 3,218 27,138 65 616 Kingdom Resourcing Solutions United Kingdom 79,544 1,147 1,621 69,100 241 6,667 Mainland Europe 27,936 178 5,615 31,739 (468) 2,001 107,480 1,325 7,236 100,839 (227) 8,668 Parity Americas 17,644 1 1,701 23,035 618 1,409 Operating total before central costs, exceptional items and goodwill amortisation 4,266 12,672 1,640 12,000 Central costs (2,831) (2,924) Net interest payable (889) (641) Non-operating assets and liabilities including (8,338) (12,803) net debt Profit (loss) before tax, goodwill amortisation and exceptional items 546 (1,925) Goodwill amortisation (629) (1,385) Operating exceptional (5,666) (16,343) items Amounts written off Investments (724) (4,690) Intangible assets 9,616 10,245 173,953 (6,473) 13,950 177,541 (24,343) 9,442 Discontinued operations Business Solutions Mainland Europe 1,999 (1,598) - 5,732 (128) 2,166 Operating exceptional (1,600) (32) items Loss on termination of operations (9,000) - Net interest payable (51) (64) 175,952 (18,722) 13,950 183,273 (24,567) 11,608 Turnover and profit are stated on the basis of origin. There is no material difference between turnover and profit by origin and by destination. Turnover for Resourcing Solutions in the UK as shown above excludes £1,977,000 (2002: £1,264,000) of inter-segmental turnover and includes £15,070,000 (2002: £nil) of turnover in respect of management service contracts, further details of which are provided in the Group Overview and Results. Turnover for Business Solutions in the UK excludes £709,000 (2002: £ 59,000) of inter-segmental turnover. Turnover for discontinued operations as shown above excludes £nil (2002: £97,000) of inter-segmental turnover. Turnover for Training as shown above excludes £70,000 of inter-segmental turnover (2002: £107,000). Of the goodwill amortisation charge for the year £543,000 (2002: £ 1,078,000) relates to Business Solutions in the UK and £86,000 (2002: £307,000) relates to Resourcing Solutions in the UK. 4. EARNINGS PER ORDINARY SHARE Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held in the Employee Benefit Trust which are treated as cancelled. Earnings per ordinary share for 2002 has been restated to take into account a deemed change in the weighted average number of shares resulting from the rights issue completed during 2003. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has one class of dilutive potential ordinary shares being those share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year. In October 2003 the Company granted 5,585,000 share options under the Executive Share Option Plan. These options have an exercise price of £0.10 which is less than the average price of the Company's ordinary shares during the year and therefore have been included in the diluted EPS calculations. For share options granted prior to 2003, the exercise price is greater than the average market price of the Company's ordinary shares and consequently the share options granted to employees are excluded from the diluted EPS calculations. 2003 2002 (Loss) earnings per share (Loss) earnings per share (Loss) (Loss) Basic Diluted earnings Basic Diluted earnings pence pence £'000 pence pence £'000 restated restated Loss per ordinary share (15,605) (7.70) (7.70) (24,210) (12.89) (12.89) Exceptional costs (net of tax credit) 4,827 2.38 2.38 20,374 10.85 10.85 Discontinued operations 12,249 6.05 6.05 192 0.10 0.10 Goodwill amortisation 629 0.31 0.31 1,385 0.74 0.74 Earnings (loss) per ordinary share before goodwill amortisation, discontinued operations and exceptional items 2,100 1.04 1.04 (2,259) (1.20) (1.20) Supplementary basic and diluted EPS have been calculated to exclude the effect of goodwill amortisation, discontinued operations and exceptional items. The adjusted numbers have been provided in order that the effects of goodwill amortisation, discontinued operations and exceptional items on reported earnings can be fully appreciated. 4. EARNINGS PER ORDINARY SHARE continued The weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share is as follows: 2003 2002 Average Average number number restated Basic i) Weighted average number of shares in issue 205,375,143 190,552,336 Adjustment for shares held by EBT (2,756,238) (2,756,238) 202,618,905 187,796,098 Dilutive ii) Weighted average number of shares in issue 205,375,143 190,552,336 Adjustment for share options 46,783 - Adjustment for shares held by EBT (2,756,238) (2,756,238) 202,665,688 187,796,098 The number of ordinary shares in issue at 31 December 2003 was 288,691,692 (2002: pre rights issue 153,969,570). 5. ORDINARY DIVIDENDS ON EQUITY SHARES The Directors have proposed a final dividend of 0.03p (2002: 0.03p adjusted for the shares issued under the rights issue) per ordinary share, payable on 5 July 2004 to all shareholders on the register at the close of business on 4 June 2004. 6. RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOW Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total year year ended year ended year year ended year ended ended ended 31 31 31 31 31 31 December December December December December December 2003 2003 2003 2002 2002 2002 £'000 £'000 £'000 £'000 £'000 £'000 Operating profit (loss) before exceptional 806 (1,598) (792) (2,670) (127) (2,797) items Depreciation of 1,619 60 1,679 2,210 156 2,366 tangible assets Amortisation of 629 - 629 1,385 - 1,385 intangible assets Loss on disposal of tangible 2 - 2 108 - 108 assets Movement in (2,926) 1,023 (1,903) 4,074 (1,262) 2,812 working capital Net cash flow from operating activities before exceptional items 130 (515) (385) 5,107 (1,233) 3,874 The net cash outflow from exceptional items during the year was £ 4,050,000 (2002: £3,075,000). The cash outflow from exceptional costs incurred in 2003 was £1,448,000. Cash outflows in 2003 relating to exceptional costs incurred in 2002 and prior years were £2,602,000. Depreciation of tangible assets excludes an exceptional charge of £ 503,000 (2002: £150,000) relating to accelerated depreciation on tangible fixed assets. Discontinued Operations In 2003 Parity Solutions BV contributed £515,000 (2002: £1,233,000 outflow) to the net operating cash outflow, paid £51,000 (2002: £62,000) in respect of servicing of finance, paid £nil (2002: £nil) in respect of taxation and utilised £16,000 (2002: £33,000) for capital expenditure. 7. ANALYSIS OF NET DEBT At Other At 1 January Cash non-cash Exchange 31 December 2003 flow changes movements 2003 £'000 £'000 £000's £'000 £'000 Cash at bank and in hand 3,608 (481) - 114 3,241 Overdrafts (3,575) 1,727 - - (1,848) 33 1,246 - 114 1,393 Borrowings (15,000) 1,719 - (58) (13,339) Obligations under finance leases - 14 (91) - (77) Variable rate loan notes (28) 14 - - (14) 2004 (14,995) 2,993 (91) 56 (12,037) 8. GROUP RESERVES Capital Profit & redemption Share Other loss reserve premium reserves account Total £'000 £'000 £'000 £'000 £'000 At 1 January 2003 50 3,729 35,320 (35,189) 3,910 Premium on shares issued during the year - 3,368 - - 3,368 Issue expenses - (1,035) - - (1,035) Gain on sale of nil paid rights by Employee Benefit Trust - - 84 - 84 Retained loss for the year - - - (15,692) (15,692) Reversal of goodwill in reserves - - 8,706 - 8,706 Exchange adjustments - - - 175 175 At 31 December 2003 50 6,062 44,110 (50,706) (484) The cumulative amount of unamortised goodwill which has been written off to reserves is £60,585,000 (2002: £69,291,000). Other creditors and accruals include unpaid issue expenses of £56,000.

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