Final Results

Close Brothers Group PLC 24 September 2001 Embargoed for release 7.00 am Monday 24th September, 2001 CLOSE BROTHERS GROUP plc The specialist merchant banking group announces results for the year to 31st July, 2001 HIGHLIGHTS 2001 2000 * Operating profit before taxation, exceptional costs £94.2m £155.1m and goodwill amortisation * Earnings per share before exceptional costs 47.4p 78.8p and goodwill amortisation * Operating profit before taxation on ordinary £89.5m £144.8m activities * Earnings per share 44.0p 72.9p * Dividends per share 26.0p 25.0p * Shareholders' funds £408m £371m * Total assets £2.8bn £2.6bn * Asset Management - substantial growth, contributing 23% of profits. * Corporate Finance - active year, results significantly up, 12% contribution. * Banking - significant progress, loan book up 33%, 39% contribution. * Market-Making - sharp decline with market down, launch of Bondscape, 26% contribution. Commenting on the results, Sir David Scholey, Chairman, said: 'Although our market-making profits reflected the dramatic declines in stock market values and volumes compared with the previous exceptional year, the profits of other businesses increased by 28%. It is too soon to assess the impact on the group of the tragic recent events in the USA. Our caution about trading conditions in 2001 has proved well founded and looking to 2002 we retain our prudent stance. We are confident that, with our long established and clear strategy of a mix of specialist activities, we are well placed to weather challenging conditions ahead.' Enquiries to: Rod Kent/Peter Winkworth (Close Brothers Group plc) 020 7426 4000 John Sunnucks (Brunswick Group Limited) 020 7404 5959 Webcast video interview with Rod Kent, Group Managing Director at www.closebrothers.co.uk or www.cantos.com CLOSE BROTHERS GROUP plc PRELIMINARY ANNOUNCEMENT OF AUDITED GROUP RESULTS AND CHAIRMAN'S STATEMENT FOR THE YEAR ENDED 31ST JULY, 2001 The following is the full text of the preliminary announcement of results for the financial year ended 31st July, 2001. The financial information in relation to 31st July, 2001 has been extracted from the statutory accounts of the company, which have yet to be adopted by shareholders at general meeting and have yet to be filed with the Registrar of Companies. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31st July, 2001 Year ended Ordinary Goodwill Total 31st July, activities amortisation ordinary 2000 before activities (Restated) goodwill amortisation £'000 £'000 £'000 £'000 Interest 208,982 - 208,982 166,123 receivable Interest (112,598) - (112,598) (90,609) payable Net 96,384 - 96,384 75,514 interest income Dividend 153 - 153 479 income Fees and 153,753 - 153,753 122,048 commissions receivable Fees and (21,542) - (21,542) (25,708) commissions payable Net dealing 58,331 - 58,331 203,954 income - market-making Other 5,600 - 5,600 6,764 operating income Other income 196,295 - 196,295 307,537 Operating 292,679 - 292,679 383,051 income Administrative 173,732 - 173,732 217,764 expenses Depreciation 6,861 - 6,861 5,688 Provisions 17,919 - 17,919 12,533 for bad and doubtful debts Amortisation - 4,671 4,671 2,305 of goodwill Total 198,512 4,671 203,183 238,290 operating expenses Operating 94,167 (4,671) 89,496 144,761 profit on ordinary activities before taxation Taxation on 28,639 - 28,639 45,516 profit on ordinary activities Profit on 65,528 (4,671) 60,857 99,245 ordinary activities after taxation Minority 1,754 - 1,754 2,668 interests - equity Profit 63,774 (4,671) 59,103 96,577 attributable to shareholders Dividends: Interim 12,121 10,659 dividend 9.0p per share (2000 - 8.0p) Proposed 22,927 22,697 final dividend 17.0p per share (2000 - 17.0p) Total 35,048 33,356 dividends 26.0p per share (2000 - 25.0p) Retained 24,055 63,221 profit for the year Earnings per share before exceptional costs and amortisation 47.4p 78.8p of goodwill Earnings 44.0p 72.9p per share on profit attributable to shareholders Diluted 43.6p 72.3p earnings per share All income and profits are in respect of continuing operations. The comparative figures for the year ended 31st July, 2000 have been restated as a result of the group adopting Financial Reporting Standard No. 19 on Deferred Taxation. CONSOLIDATED BALANCE SHEET At 31st July, 2001 2001 2000 (restated) £'000 £'000 Assets Cash and balances at central banks 586 235 Loans and advances to banks 593,894 631,824 Loans and advances to customers 1,189,405 895,334 Less:- non-recourse borrowings (33,000) - 1,156,405 895,334 Debt securities - long positions 35,764 23,521 Debt securities - other 481,936 486,488 Settlement accounts 147,750 301,340 Equity shares - long positions 33,413 52,917 Equity shares - investments 27,957 21,100 Intangible fixed assets - goodwill 114,080 50,264 Tangible fixed assets 20,468 20,817 Other assets 119,060 136,529 Deferred taxation 11,507 10,466 Prepayments and accrued income 23,863 17,508 Total assets 2,766,683 2,648,343 Liabilities Deposits by banks 55,643 67,382 Customer accounts 1,144,155 1,066,388 Bank loans and overdrafts 607,629 453,685 Debt securities - loan notes issued 18,140 36,281 Debt securities - short positions 38,182 25,891 Settlement accounts 114,174 249,741 Equity shares - short positions 9,594 10,657 Other liabilities 197,372 243,745 Accruals and deferred income 71,910 63,302 Subordinated loan capital 96,937 51,937 Minority interests - equity 5,056 7,975 2,358,792 2,276,984 Shareholders' funds Called up share capital 34,055 33,760 Share premium account 193,253 185,243 Profit and loss account 180,583 152,356 Total equity shareholders' funds 407,891 371,359 Total liabilities and shareholders' funds 2,766,683 2,648,343 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 31st July, 2001 2001 2000 (restated) £'000 £'000 Profit attributable to shareholders 59,103 96,577 Exchange adjustment 13 (80) Total recognised gains and losses related to the year 59,116 96,497 Prior period deferred taxation adjustment 3,517 Total recognised gains and losses since the last 62,633 annual report CONSOLIDATED CASH FLOW STATEMENT For the year ended 31st July, 2001 2001 2000 £'000 £'000 Net cash inflow from operating activities 238,063 117,306 Returns on investments and servicing of finance: Dividends paid to minorities (1,703) (719) Taxation: UK corporation taxation paid (47,608) (36,983) Capital expenditure and financial investment: Purchase of tangible fixed assets (8,243) (13,033) Sale of tangible fixed assets 2,073 1,014 Purchase of equity shares held for investment (14,885) (6,279) Sale of equity shares held for investment 5,655 7,505 (15,400) (10,793) Acquisitions and disposals: Minority interests (acquired)/sold for cash (22,537) 2,443 Purchase of subsidiaries (64,424) (15,103) (86,961) (12,660) Equity dividends paid (34,818) (25,024) Net cash inflow before financing 51,573 31,127 Financing: Issue of ordinary share capital including premium 2,455 2,906 Issue of subordinated loan capital 45,000 30,000 Increase in cash 99,028 64,033 In the directors' view, cash is an integral part of the operating activities of the group, since it is a bank's stock in trade. Nevertheless, as required by Financial Reporting Standard No. 1 (Revised), cash is not treated as cash flow from operating activities but is required to be shown separately in accordance with the format above. THE NOTES 1. The calculation of earnings per share on profit attributable to shareholders is based on profit after taxation and minority interests of £59,103,000 (2000 - £96,577,000) and on 134,422,000 (2000 - 132,501,000) ordinary shares, being the weighted average number of shares in issue during the year, excluding those held by the employee benefit trust. 2. The final ordinary dividend of 17.0p per share is proposed to be paid on 6th November, 2001 to holders of ordinary shares on the register at the close of business on 5th October, 2001. 3. The financial information included in this announcement as regards the group does not constitute statutory accounts for the relevant periods within the meaning of Section 240 of the Companies Act 1985. Statutory accounts of the company for the financial year ended 31st July, 2000, upon which the auditors of the company have given an unqualified report, have been delivered to the Registrar of Companies. CHAIRMAN'S STATEMENT RESULTS The operating profit on ordinary activities before taxation, exceptional costs and goodwill amortisation was £94.2m, compared to £155.1m last year, and earnings per share, on the same basis, were 47.4p compared to 78.8p. After deducting a charge for exceptional costs of £Nil (2000 - £8.0m) and goodwill amortisation of £4.7m (2000 - £2.3m), the operating profit on ordinary activities before taxation was £89.5m (2000 - £144.8m) and earnings per share, on the same basis, were 44.0p (2000 - 72.9p). The board is recommending a final dividend of 17p per share which, together with the interim dividend, gives a total dividend for the year of 26p per share (2000 - 25p). This represents an increase of 4 per cent. over last year's total dividend and based on the above earnings per share of 47.4p is covered over 1.8 times. OVERVIEW The year ended 31st July, 2001 produced the first reduction in the group's profits for 26 years. This was not unexpected and was caused by the dramatic decline in profits from £109 million last year to £27 million this year in Winterflood Securities ('WINS'), our market-making division. Last year we explained that WINS benefited from the exceptional boom in stock market trading, to the tune of some £50 million of additional profits over the normal levels of activity. This year, particularly since autumn 2000, there has been a sustained bear market in small capitalisation stocks and levels of trading have fallen far below previous normal levels. It is important that shareholders understand that, despite this reverse of fortunes in our market-making business, the other three main areas of our business - asset management, corporate finance and banking - continued their growth. Profits from these activities increased some 28 per cent. on last year, which itself was up some 31 per cent. on the previous year: £ million 1999 2000 2001 Asset management, corporate finance, banking 45.6 59.8 76.8 Market-making 35.7 109.0 27.4 Operating profit 81.3 168.8 104.2 Central costs (5.0) (13.7) (10.0) Profit before tax, exceptionals and goodwill amortisation 76.3 155.1 94.2 The balance of the group's operating profits has returned to a more even and sustainable pattern compared to last year's figures: 1999 2000 2001 Asset management 4% 9% 23% Corporate finance 9% 6% 12% Banking 43% 20% 39% Market-making 44% 65% 26% 100% 100% 100% TRADING Asset Management A notable feature of the past year has been the emergence of Close Investments, our Asset Management division. This showed substantial growth and contributed 23 per cent. of our profits. At the year end our funds under management amounted to £3.1 billion, up from £2.6 billion the previous year. Over the last few years we have built up a diverse range of specialist investment businesses where we can earn commensurately higher fees than mainstream products. During the year, we expanded our offshore operations by making some in-fill acquisitions and this area accounted for some 25 per cent. of this division's profits. In our UK-based operations we expanded by the acquisition of OLIM, which concentrates on specialist institutional investment mandates. Overall, our equity funds, including our technology funds, performed well in relation to their peers, in difficult market conditions. We also achieved good performance in our private equity funds and our tax and property-based businesses. This division now has in place the building blocks to achieve its long-term growth objectives across a diverse range of activities, however our immediate outlook is cautious, particularly for the half of our business which is directly affected by stock market conditions. Corporate Finance Our Corporate Finance division had an active year and produced a result significantly ahead of 2000. This division contributed around 12 per cent. of our operating profits. We have deliberately widened the base of revenue generation and have built and recruited teams specialising in, for example, debt restructuring, energy (Middle East), and private placement. We have also strengthened and developed our Close Associates network in Europe, including our investment in Atlas Capital in Madrid. During the year we restructured our French activities focusing on the Dome Close Brothers M&A activities and we have won several mandates in conjunction with our US associate. In the past year we have completed some 61 transactions with a value of approximately £6.7 billion. Our pipeline is healthy but deals are taking longer than normal to fructify and there remains the potential for less completions in the coming year. Banking Our Banking division, which includes all our lending activities together with our central treasury operations, represented some 39 per cent. of group operating profits. We continue to focus on a specialist range of assets against which we will provide loans and to be careful to seek a proper margin of security commensurate with the quality of asset financed. During the past year, our loan book has grown from £0.9 billion to £1.2 billion. Approximately 45 per cent. of this growth arose from businesses acquired, with the balance coming from organic growth. In particular our insurance premium financing operation has achieved substantial growth both by its acquisition of TIFCO and its own expansion, which is continuing. Our credit management companies and Close Property Finance did well. The increasing slowdown in the business of SMEs could have some impact on our debt factoring business, although this will be offset by our recent acquisition of Metropolitan Factors. In asset finance, the past year has been patchy. On the commercial side, the printing sector has picked up somewhat and we continue to diversify our lending into other sectors, with our new business in the machine tools and healthcare sectors growing well. On the consumer side, the car market appears to have passed its worst and we have improved the quality of our business considerably. Our armed forces business, Warrior, has taken longer than expected to sort out but we have a clear turn-round strategy for the future. Taken as a whole, the outlook for the banking division is encouraging. Market-Making Our Market-Making division suffered a sharp decline in profits following its exceptional results in the previous year. WINS trading fell into two distinct halves; the first half started buoyantly but ended with a sharp fall in share prices; in the second half share prices continued to fall persistently exacerbated by a downturn in volume. WINS made profits of some £26 million in its first half and was only just profitable in the second half. Despite this, WINS still delivered a return on capital for the year well above the group average and, through its variable remuneration structure, kept its costs well contained. WINS has continued to create different sources of revenue within its market-place and to expand the range of instruments in which it makes markets. Activity in bonds has expanded beyond our initial horizon of UK gilts and, through Bondscape, our recent joint venture with Barclays, there is now a transparent 'yellow strip' of touch prices for sterling bonds. We have also commenced trading in US stocks and have expanded our European coverage. These new initiatives, like WINS' core business in smaller cap and AIM stocks, are targeted at the retail investor. In current market conditions, it is likely to be some time before retail investors' confidence and activities are restored to previous levels. However, in the medium-term with the advance of technology and the greatly improved access to market information across Europe, we expect private client bargain activity to grow and WINS to benefit. WINS' trading in the opening weeks of the current year remains difficult in view of current market conditions. DIRECTORS Brian Winterflood, who joined us in 1993 and who was the founder of WINS in 1988, will be 65 next January and is to retire from the Board of Close Brothers Group at that time. However, we will still continue to benefit from his experience and business acumen as he will continue as chairman of WINS, but in a non-executive capacity, for the foreseeable future, with Mike Hines and David Macnamara as joint chief executives. Brian has been in jobbing all his working life of nearly fifty years and has long been the Stock Exchange champion of the retail investor. He is a widely known and greatly respected figure in the City. The business that he founded in the 1980s has blossomed into one of the UK's leading retail service providers. He moves towards retirement in the knowledge that WINS is in great shape after a difficult year and on a sound footing to move forward once the retail market picks up, for all of which he has earned our warmest thanks. OUTLOOK The tragic recent events in the USA will inevitably affect business conditions in many ways. It is as yet too soon to assess the impact on the companies in our group. However the caution that we expressed in our interim report about the trading conditions in 2001 has proved well founded and as we look forward to 2002 we retain our prudent stance. The slowdown in economic activity around the world is continuing and is now more universally evident. We cannot predict when retail investors will regain full confidence in the stock market but most areas of our banking and asset management operations continue to have encouraging prospects and our corporate finance side remains busy. We are confident that, with our long established and clear strategy of a mix of specialist activities, we are well placed to weather challenging conditions ahead. Sir David Scholey Chairman

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