Final Results

Tribal Group PLC 21 June 2005 Tribal Group plc Preliminary results for the year ended 31 March 2005 Highlights: - Revenues up 23.6 per cent to Â£229.5m - Profit before tax* of Â£17.9m - Establishment of divisional structure now completed - Integration benefits starting to flow - Entry into healthcare delivery - Â£214m NHS contract signed during the year - Â£50m Ofsted school inspection contracts signed in April 2005 - Forward order book up from Â£94m to Â£350m Strone Macpherson, Chairman of Tribal Group plc, commented: This was a challenging year for the Group, with significant organisational change which, as anticipated, affected margins adversely. The Group has, however, now completed its restructuring into seven divisions and has made good progress with the integration of businesses into this structure. Management has been strengthened at group and divisional level. The Group's markets remain buoyant and our profile within them has continued to improve. We are seeing an increasing number of opportunities to deliver an integrated service solution that brings together skills from across the Group. We recently announced contracts worth Â£50m with Ofsted to provide school inspections. The Group will continue to focus primarily on organic growth. The highlight of the year was the award to Mercury Health, Tribal's healthcare delivery business, of a Â£214m NHS contract to design, build and manage a regional network of five treatment centres, as part of the Government's Independent Sector Treatment Centre programme. This contract gives Tribal a significant share of this new market which in time is expected to deliver up to 15 per cent of NHS elective surgery. The Group continues to be well placed to take advantage of the many opportunities arising in the markets it serves. Financial highlights: Year ended 31 March 2005 2004 Turnover Â£229.5m Â£185.7m up 24% Gross revenue Â£179.9m Â£152.2m up 18% Operating profit* Â£22.4m Â£23.2m down 3% Operating margins on gross revenue* 12.4% 15.2% Profit before tax* Â£17.9m Â£20.1m down 11% (Loss)/profit on ordinary activities before taxation (Â£0.2m) Â£5.3m Loss on ordinary activities after taxation (Â£5.6m) (Â£0.9m) Adjusted diluted earnings per share* 15.6p 20.5p down 24% Operating cash flow before Mercury Health Â£17.5m Â£34.3m Operating profit to cash conversion* 78% 148% Note: *The operating profit, operating margins, profit before tax and adjusted diluted earnings per share are stated before goodwill amortisation and impairment of Â£16.6m (2004: Â£10.7m), employee benefit trust credit of Â£0.2m (2004: costs of Â£1.0m) and exceptional items of Â£1.7m (2004: Â£3.0m) (see page 14 and page 20). For further information contact: Henry Pitman, Chief Executive, Tribal Group plc Tel: 01285 886020 Simon Lawton, Group Finance Director, Tribal Group plc Neil Bennett/Colin Browne, Maitland Tel: 020 7379 5151 A copy of the presentation on these results made to analysts on 21 June 2005, will be made available on the Group's website: www.tribalgroup.co.uk from 9am today. Tribal Group plc Chairman's statement I am pleased to report on the results of Tribal Group plc for the year ended 31 March 2005. During this period, we strengthened our position as a leading professional support services and consultancy business, predominantly operating in the UK public sector. The Group is now well positioned in its core markets of education; local government, housing and regeneration; health and social care; and central government. The year also saw our successful move into the direct delivery of healthcare services through Mercury Health. Results This was a challenging year for the Group with significant organisational change which, as previously indicated, adversely affected margins. Nevertheless, we continued to deliver revenue growth with turnover for the year up 24 per cent at Â£229.5m (2004: Â£185.7m). Operating profit* was Â£22.4m (2004: Â£23.2m) and operating margins* were 12.4 per cent (2004: 15.2 per cent). Profit before taxation* was Â£17.9m (2004: Â£20.1m), loss after tax was Â£5.6m (2004: Â£0.9m), and adjusted diluted earnings per share* were 15.6p (2004: 20.5p). Goodwill amortisation was Â£16.6m (2004: Â£10.7m) and included an impairment write down of Â£5.2m (2004: Â£0.6m) relating to a review of the carrying value of two businesses. During the year, the Group generated operating cash flow before Mercury Health of Â£17.5m (2004: Â£34.3m), representing an operating profit* to cash conversion rate of 78 per cent (H1 24 per cent and H2 114 per cent). Net debt at the year end was Â£53.0m, representing gearing of 35 per cent, with interest cover of over five times. Our gross return on capital employed was 12.3 per cent (2004: 15.0 per cent). * The operating profit, operating margins, profit before tax and adjusted diluted earnings per share are stated before goodwill amortisation and impairment of Â£16.6m (2004: Â£10.7m), employee benefit trust credit of Â£0.2m (2004: cost of Â£1.0m) and exceptional items of Â£1.7m (2004: Â£3.0m) see page 14 (consolidated profit and loss account) and page 20 (earnings per share note). Organisational restructuring During the year, the Group continued the process of implementing its new corporate structure. Our businesses are now managed as seven divisions: consulting, education, resourcing, technology, property, communications and healthcare delivery. The integration of businesses into this structure has enabled us to strengthen management and financial reporting arrangements and provide a better focus for business development. There has been a very positive response across the Group to this reorganisation and we are already seeing the benefits of offering a more integrated package of services across our customer base. The ability to do this will increasingly differentiate Tribal from other competitors in our markets, opening up more opportunities and creating barriers to entry. Major contracts During the year, we signed our largest contract to date, a Â£214m contract with the NHS to design, build and manage a regional network of treatment centres for elective surgery and diagnostic procedures. Implementation is progressing well and the first centre is expected to open in August 2005. This contract has given Mercury Health, the Group's healthcare delivery business, a significant market share and places us in a strong position to bid for the next wave of contracts, which are expected to be procured during the next 12 months. Since the year end, the Group has announced two contracts with a combined value of Â£50m with Ofsted to provide school inspection services. We are currently preferred bidders on further significant contracts. As a result of our contract wins, our committed revenue has increased to Â£350m, up from Â£94m. Dividend The Group paid a dividend of 1.0p per share following the announcement of the interim results last November. The board is pleased to announce that it is recommending a final dividend of 2.0p per share, making a total of 3.0p per share for the year. Board changes I would like to record the Board's gratitude to Dominic Collins who stood down as non-executive director on 24 March 2005 and Miles Hunt who retired at our last Annual General Meeting on 14 September 2004. Both Dominic and Miles made significant contributions to the Group and we thank them for their guidance and support. There have been no other board changes during the period. Staff The Group is a people-based business and its success is a result of the broad base of talented employees across the Group. We would like to put on record the thanks of the Board to our 2,000 employees at all levels. Their efforts have ensured that Tribal continues to be one of the most respected, dynamic and fast-growing companies in its markets. Prospects Tribal is firmly established as a major supplier of high value-added consultancy and professional support services to the public sector. We are well placed to take advantage of opportunities to build and extend our service offering, to increase the level of committed revenue by successfully bidding for longer-term contracts, and to leverage our relationships and advisory experience to develop delivery services in our principal markets. With the reorganisation largely completed, investment in business development, account management and bidding for long-term contracts is being increased to ensure long-term revenue growth across the Group. The focus continues to be on improving profitability, margins and operational efficiency. We are now starting to see the benefits of the significant investment we have made over the last 18 months in developing the Group's infrastructure and in our divisional and central management. The Group has started the year well and, although first half results will be influenced by the increased weighting of trading to the second half and by our continuing investment in products, services and capacity building, the Board is confident about the Group's future prospects. Strone Macpherson Chairman Chief Executive's statement During the year, our businesses have continued to strengthen their service offering and have increasingly been able to offer customers an integrated package of services drawn from across the Group. This capability, alongside our excellent relationships with public sector organisations, positively differentiates Tribal from its competitors. Markets We continue to operate in expanding markets and to benefit from increasing government expenditure, particularly in education and health. We now work in sectors that account for over Â£250bn of annual government spending. While Tribal has benefited from increasing public expenditure, the main driver to our business continues to be the growing acceptance and use of the private sector in reforming and delivering public services. The Government's election manifesto and subsequent Queen's Speech confirmed the continuing and increasing use of the private sector in public service reform, particularly in education and health. In her first speech following the election, the Secretary of State for Health, Patricia Hewitt, announced the procurement of Â£3bn of elective surgery procedures from the private sector through the extension of the independent sector treatment centre (ISTC) initiative. There continue to be other major opportunities as a result of a number of specific government initiatives. The 'Building Schools for the Future', academies and hospital PFI programmes together present very significant capital investment plans until at least 2010; the Gershon Review will introduce cost efficiencies across government through improved supply chain and business process management and lead to a radical re-design of many services; the Lyons Review, which recommends the relocation of government departments and agencies to areas outside London and the south-east, is generating the requirement for improved technology and resourcing solutions; and the Children Act is re-shaping education and social services departments. In the year ended 31 March 2005, 94 per cent (2004: 96 per cent) of our revenues were from the public sector and we expect to retain this focus in the immediate future. We are, however, starting to see opportunities to increase our presence in the private sector as we transfer and apply the skills that we have developed in the public sector. Operating review Tribal provides a range of consultancy and professional support services and, through Mercury Health, is moving into the delivery of public services. Tribal Consulting Year ended Year ended 31 March 2005 31 March 2004 Â£000 Â£000 Gross revenue 55,238 42,130 EBITA** 6,669 7,121 EBITA margin ** 12.1% 16.9% ** before goodwill and employee benefit trust costs Consulting achieved revenue growth of 31 per cent due, in part, to a full year contribution from HACAS, which was acquired in July 2003. Operating profit** was down by 6 per cent and operating margins** were significantly lower compared to 2004. This was, in part, a consequence of organisational restructuring but also as a result of lower utilisation rates in parts of our healthcare practice, increasing competitive pressures in certain areas and higher associate costs due to skill shortages, particularly in the first half of the year. Areas of underperformance were addressed and margins across the division improved in the second half of the year. We have now built one of the largest consultancy businesses operating in the public sector with expertise across local government; housing and regeneration; health and social care; and central government. Generally, the market for consultancy remains buoyant and average fee rates remain firm. During the year, we have continued to build our local government practice by expanding our regional coverage and developing our advisory services in areas such as PFI and performance improvement. Our housing and regeneration consultancy has expanded into economic development, establishing two new teams in Edinburgh and Manchester, both of which have achieved notable contract successes, including business planning for the National Nuclear Academy, the evaluation of Hull Citybuild, the city's urban regeneration company, and securing a substantial high profile contract with English Partnerships to provide consultancy support to the Government's first-time buyers initiative. This business area will be further developed in 2005/06. Our housing consultancy remains the leading adviser to registered social landlords. The Government's agenda for 'sustainable communities' will ensure that this remains an expanding market for us. A major contract completed during the year was the setting up of Wakefield Housing Trust, the largest housing stock transfer to a single organisation. In our health and social care consultancy, we continue to be involved in ground-breaking areas of activity, including advising existing and aspirant foundation hospital trusts; continuing support for the implementation of the NHS National Programme for IT (NPfIT); developing the first 'productive time delivery framework', and planning a new model for contract management to enable GP practice-based commissioning work. Other successes include the closure of our nineteenth PFI project as corporate finance adviser, membership of winning teams on four major PFI developments, including Sherwood Forest and Colchester, and further growth of our project support for primary care 'local improvement finance trusts' (LIFT). At the end of the year, we established a Centre for Organisational Learning as a focal point for our HR consultancy activities. The centre has already won work with clients such as the Forensic Science Service, Hull and East Yorkshire NHS Trust and Merton Council. In central government, we have made excellent progress, having now grown to 50 consultants from a standing start two years ago. Major assignments have been won with the Ministry of Defence, Environment Agency, Pensions Regulator, Cabinet Office and the Foreign and Commonwealth Office. A number of recent wins, such as a senior management training programme within the Ministry of Defence, have been against competition from the major international consultancy groups. Management processes have been strengthened and, as a result of our divisional integration exercise, all support services have been brought together in a shared service centre that will also deliver improved financial management arrangements. Tribal Resourcing Year ended Year ended 31 March 2005 31 March 2004 Â£000 Â£000 Gross revenue 24,684 20,909 EBITA** 5,252 5,406 EBITA margin ** 21.3% 25.9% ** before goodwill and employee benefit trust costs Resourcing achieved good levels of turnover growth, up 36 per cent to Â£74m, with gross revenue growth of 18 per cent in a competitive public sector market. There has been some pressure in certain areas on consultancy fee rates and advertising commission rates which, combined with increased investment in infrastructure, has resulted in lower operating margins**. The opportunities for our resourcing business continue to be driven by organisational change within our client organisations. Our recruitment advertising business has continued to grow its contractual base. We now work with over 50 local authorities and over 100 health trusts, with an additional Â£9m new advertising turnover secured this financial year. Whilst we saw some slowdown in advertising spend by the NHS, the market in local government and education has remained strong. During the year, we won several major local authority advertising contracts including Camden, Westminster and the Cambridgeshire councils' consortium; new NHS contracts with Sheffield and Nottingham Primary Care Trusts; and a new university contract with Nottingham Trent. Our resourcing proposition has been further developed and now includes a web-based product, 'careers for leaders'. Although it is still early days, this is showing good potential and we will continue to increase our investment in this area. We are experiencing strong growth in our healthcare supply business, where profit and margins have increased. We have recently opened a new office in the north-west and will continue to invest in this area in 2006. During the year, we established a new interim management business to target senior management roles in local government and housing. This has had a successful start and will make a good contribution in 2005/06. We expect to extend this service into other Tribal markets over the next 12 months. Although our executive resourcing business has experienced challenging market conditions with increased competition, we continue to see good levels of growth. Over the last 12 months, we have made over 30 chief executive appointments across the local government and housing sectors, work that has been important in raising the Group's profile in these markets. We are now differentiating ourselves from most of our competitors by agreeing three year preferred supplier contracts for executive resourcing services, as we have done recently with Wolverhampton Council. We also continue to develop new markets in the central government and 'not for profit' areas. Over the next year, we will be launching several new resourcing products which will extend our range of services and will help further to increase barriers to entry. Tribal Communications Year ended Year ended 31 March 2005 31 March 2004 Â£000 Â£000 Gross revenue 9,958 6,921 EBITA** 2,382 1,741 EBITA margin ** 23.9% 25.2% ** before goodwill and employee benefit trust costs Within Communications, both gross revenue (up 44 per cent) and operating profit* * (up 37 per cent) showed good growth, with Geronimo and Tribal MPC both making full year contributions following their acquisition by the Group in 2003/04. The integration of our communications businesses in education, local government and health is now well advanced. Based on the consolidated fee income of the division, we have created a top ten public relations agency as judged by PR Week criteria and are one of the top three companies working in the Â£300m per annum public sector communications market. Much of this work is procured through framework arrangements. We are on all the main government frameworks including the Department of Health, Central Office of Information, Department for Work and Pensions, Learning and Skills Council and Department for Education and Skills. We are currently responsible for developing and delivering a number of public information campaigns. Our contract to deliver the UK-wide 'Aimhigher' campaign, which advises young people on the benefits of going on to higher education, is worth Â£5m over four years. We are also working with the Department for Work and Pensions on the 'Age Positive' and 'Age Partnership' campaigns, which promote age diversity in the workplace, and the Edge Employer Awards for the Edge Foundation which raises awareness of the value of practical learning. Our communications work in local government continues to develop. We now have interim heads of communication in a range of public sector bodies, including the London Fire & Emergency Planning Authority and the London Borough of Tower Hamlets, and are running best value communications reviews for both the Cambridgeshire Constabulary and the Association of Local Government. Within the NHS and health sector, we have substantially developed our creative businesses with new offices opening in Nottingham and Bury St Edmunds. We are confident that our new integrated management arrangements put us in a strong position to capitalise on the growing opportunities for PR and communications services in the public sector. We are now well placed to expand both our capacity and geographical coverage. Tribal Property Year ended Year ended 31 March 2005 31 March 2004 Â£000 Â£000 Gross revenue 21,331 18,443 EBITA** 2,658 2,819 EBITA margin ** 12.5% 15.3% ** before goodwill and employee benefit trust costs Property achieved revenue growth of 16 per cent, 7 per cent of which was from the acquisition of Derek Hicks and Thew (DHT) in November 2004. The decline in operating profit and margins was a consequence of the significant investment made in extending geographic coverage and in developing capacity for capital spending programmes such as 'Building Schools for the Future'. Our architecture business, now employing close to 300 people, has extended its regional network to include Exeter and Liverpool. We have also set up our first off-shoring centre in Cape Town that will provide the business with the capacity needed to run several major public sector PFI projects in parallel. We have also now fully integrated our education and healthcare practices. Our property services business continues to grow and has, during the year, extended its building surveying operation and the regional spread of its project management business. We will continue to invest in the growth of this business area. We are currently involved in the major capital programmes in healthcare (PFI, independent sector treatment centres (ISTCs), local improvement finance trusts (LIFT) and Procure 21), and in education (Building Schools for the Future, academies, further education colleges and higher education institutions). We have well-established relationships with many of the major contractors. A number of significant contracts have been won which underpin much of our future revenue growth. In health, we have recently won work at Birmingham Hospital PFI; we are currently preferred bidder on the Â£250m Peterborough PFI hospital project; and, working with Mercury Health, are involved in the first wave of the ISTC programme. Extending our work in higher education, we have recently won a Â£40m research facility at Oxford University's Old Road campus. In further education, we have now established a leading market position and are winning both property consultancy and architectural work. For example, we have been appointed to deliver the Â£40m first phase of the new campus for the Mid-Kent College at Chatham; we are advising on the Â£25m campus redevelopment at Barking; and within the academies programme, we have won project management contracts in Reading and Leicester. Increasingly, there are opportunities to provide clients in the property area with an integrated proposition. For Solihull College, we brought together our property and grant funding capability; for the academies programme, we combined our education and property project management skills. Over the next few years, we will be focusing on developing new services to complement our existing offering and extending our presence in our core markets while diversifying into related sectors such as science and higher education. Tribal Education Year ended Year ended 31 March 2005 March 2004 Â£000 Â£000 Gross revenue 36,317 35,884 EBITA** 5,784 6,634 EBITA margin ** 15.9% 18.5% ** before goodwill and employee benefit trust costs Education achieved overall revenue growth of 1 per cent despite the decline of our teacher training business. Excluding teacher training, the division's activities delivered organic growth of 20 per cent and an operating margin of 18 per cent The integration of our education services and advisory businesses has strengthened our position as a top five education company. In April 2005, we announced that we had won contracts worth Â£50m over four years to deliver school inspection services for Ofsted. These contracts, which increased our market share from 21 per cent to approximately 30 per cent, are together the largest educational contract we have won to date. We are seeing increasing signs that we are well placed to win other large scale contracts in education. During the year, we increased investment in our education benchmarking service, extending our product into higher as well as further education, where it has been used by over 100 colleges. During 2005/06, we will seek opportunities to take this business into other Tribal markets. Our highly successful school improvement programme 'Pupils' Champions!', which currently provides teaching support through contracts with the DfES and LEAs to schools in disadvantaged areas, has been expanded to meet the needs of the post-16 sector (Students' Champions) and the professional development requirements of teachers (Teachers' Champions). All are now part of our overall product range 'Tribal's Champions'. The market for courses and conferences for teachers and FE lecturers, which now accounts for 4 per cent of the Group's turnover, has remained difficult, with funding changes and switching priorities impacting delegate numbers. However, the market for distance learning continues to be very strong with over 100 colleges now working with us. Our e-learning and skills for life services have also been developing well with major contracts won with the DfES, LSC, FE colleges and regional development agencies. Good opportunities are emerging to bring together our property and education consultancy expertise to support capital projects. The Building Schools for the Future (BSF) initiative will now include primary as well as secondary schools and the Government has also announced an extension of the academies programme. In further education, Sir Andrew Foster is undertaking a fundamental review of the future management of FE colleges, with likely benefits for private sector involvement. All these will create further demand for our services. Looking ahead, we are confident that opportunities will emerge for the increasing involvement of the private sector in the delivery of education, including the opportunity in the future to run schools and colleges. Tribal Technology Year ended Year ended 31 March 2005 31 March 2004 Â£000 Â£000 Gross revenue 34,391 30,457 EBITA** 5,145 4,308 EBITA margin ** 15.0% 14.1% ** before goodwill, employee benefit trust costs Operating profit in technology was up 19 per cent The two acquisitions made during the year, Aldcliffe Computer Systems and Strategic Information Technology Services (SITS), contributed 16 per cent to revenue growth. We have now integrated our education software businesses, managed services activities, and information management services and systems operations. We are now the market leader in many of our sectors, providing services to over 35 per cent of FE colleges, 60 per cent of universities, over 50 per cent of local education authorities and more than 30 per cent of work-based learning providers. We are becoming increasingly successful at winning contracts which incorporate our complete service offering of technology, consultancy and managed services. In particular, we are making strong headway in taking on the management of learning delivery. Significant contracts during the year include a Â£4m contract with Total for information management services; a Â£1.5m contract with the Science Learning Centres to deliver and support an online learning environment; a Â£9m contract with Ufi learndirect as a 'hub' operator to manage its learning centres across the south west; and the Learning and Skills Council awarded us a contract to manage the information, advice and guidance (IAG) service in Dorset. These wins are a direct result of investment in our bidding capabilities and our combined service offering as an integrated division. We are now well-positioned to bid for progressively larger contracts, predominantly in the education and skills market, but also from the private sector where there is growing demand for our information management services. Mercury Health - healthcare delivery Year ended Year ended 31 March 2005 31 March 2004 Â£000 Â£000 Gross revenue 349 7 EBITA** (343) - ** before goodwill, employee benefit trust costs and exceptional items The revenue and operating loss reported for this division is in line with expectations reflecting the start-up nature of Mercury Health and the associated business development overheads. We expensed bid costs of Â£1.7m in accordance with UITF34 'Pre-contract costs' as an exceptional item. In December 2004, we signed a Â£214m contract with the NHS to design, build, staff and operate a regional network of treatment centres. This contract, which runs until June 2011, was part of the Â£2.5bn first wave of contracts procured under the Government's Independent Sector Treatment Centre (ISTC) initiative. This NHS initiative was developed to seek private sector capacity to develop treatment centres to carry out over 250,000 elective surgery procedures per annum. The contract provides Mercury Health with guaranteed volumes and there will also be opportunities to secure additional volumes from both the NHS and the private sector. Financing for the contract totalled Â£57.5m. The Group has provided equity of Â£17.5m and secured additional funding of Â£40.0m comprising non-recourse senior debt of Â£33.5m and equipment lease finance of Â£6.5m. The implementation of the contract is well advanced and the centres located in High Wycombe, Haywards Heath, Portsmouth and Gillingham are scheduled to open between Summer 2005 and Summer 2006. A fifth centre in Havant is due to open in early 2008. We have made excellent progress with the establishment of the Mercury Health management team, recruiting some experienced managers from the NHS and private sector healthcare companies. As a result of this contract, Mercury Health has a significant share of this progressive new market. The Government has already announced that there will be further procurements, commencing over the coming months, with a combined value of more than Â£4bn over five years. Mercury Health intends to bid selectively for a number of these contracts. Mercury Health will be supported in these bids, and in the development of its existing business, by the Hospital for Special Surgery, one of the leading orthopaedic hospitals in the US. We expect that the NHS market for independent healthcare will grow very strongly over the next few years, driven in part by the move to 'payment by results', and we believe that Mercury Health is well placed to take advantage of these developments. Customers The majority of the Group's customers continue to be at the delegated level of government. For example, in education: schools, colleges and universities; and in health: primary care trusts, acute trusts and strategic health authorities. However, we have continued to make very good progress in developing our customer base in central government. Now that the re-organisation of our business is completed, we are increasing our investment in business development, account management and in bidding for longer-term contracts. We have developed bidding resource in each of our divisions and have also increased the size of our central team. We are particularly targeting contract opportunities that allow us to provide an integrated service offering, deploying skills from across the Group. The major example of this has been the Mercury Health contract, which brought together our consulting, resourcing, property and communications services. There are now many other examples of different parts of the business successfully working together. Branding and profile From 1 April 2005, with very few exceptions, businesses across the Group commenced trading as Tribal. This re-branding has been received positively by staff and customers and it will help to raise further Tribal's profile in its markets. It will also assist by enabling us to present a fully integrated proposition to our customers. Growth During the financial year, we announced three acquisitions: SITS, a student administration software business in the higher education market, Aldcliffe, a trainee administration software business in the work-based learning market, and DHT, a healthcare architectural practice based in Liverpool. These businesses are now integrated into our technology and property divisions and are all performing ahead of our expectations. The acquisitions made in the year cost an aggregate initial consideration of Â£16.0m, paid for by a combination of cash and shares. Deferred consideration of up to Â£5.9m is payable in respect of these acquisitions, principally in shares, based on increases in operating profits. At the year end, our total estimated earn-out liability in respect of the period to 31 March 2007 was Â£21.8m, of which we expect to pay Â£14.3m in 2005/06 and Â£7.5m in 2006/07. Although these liabilities are primarily to be satisfied in shares, the Group always retains sufficient headroom in its banking facilities to finance the remaining earn-outs in cash. As previously announced, in a number of cases, we have already crystallised earn-out payments in order to facilitate our integration process. While we do still consider there to be interesting consolidation opportunities in our markets, we are currently focused on delivering organic growth through increasing headcount, developing new services and winning new contracts. Over the year, the businesses owned for two full years or more have increased headcount by 12 per cent and demonstrated underlying organic revenue growth of 5 per cent. We have continued to broaden and strengthen our management teams with an increasing number of high quality senior managers joining us from major support services and consultancy competitors. We have adopted a very proactive approach to the recruitment of consultants and senior managers. We are seeing an acceleration of cross-selling, with many examples of the Group providing our customers with an integrated package of services from across the business. Our five sector service groups (education; health and social care; local government and housing; regeneration; and central government) are now well established and are becoming more influential in developing the Group's strategy, marketing approach and brand profile in their respective markets. The operational head office in London and the network of regional hub offices are making a significant contribution to joint working as well as enabling us to consolidate our office network, reducing the number of individual locations over the next two years. Management The Group is managed through a divisional structure. We are confident that the benefits of integration have been achieved whilst retaining much of our entrepreneurial culture. We have now appointed divisional CEOs to lead each of the seven divisions. We are starting to see benefits from cost efficiencies, brand leverage, shared best practice, enhanced recruitment and staff development initiatives and from shared services provided from the Group's eight hub offices. The Group's executive management board, consisting of divisional CEOs and other key Group directors, is responsible for the strategic and operational management of Tribal, assessing investment priorities and managing the Group's risk profile. People We are a business that relies on the quality and commitment of our people and our success is due to the hard work and professional integrity of our management and employees across the Group. We have created a culture in which individuals at all levels are given a high degree of autonomy within a supportive Group framework. We have established a clear set of values which encourage entrepreneurialism, profit focus and a dynamic culture within a strong ethos of customer service, integrity and social awareness. Our staff believe they are making a substantial contribution to improving public services and to the lives of those affected by those services. We have exceptionally talented individuals amongst our middle and senior management teams. Many of our directors are nationally leading figures in their specialist areas. We will continue to recruit ambitious and talented individuals who will contribute to the growth of the business. These will be from a variety of backgrounds, both public and private sector. In October 2004, we launched the second Tribal management development programme in conjunction with Henley Business School. In the last two years, 50 individuals have attended. We will continue to invest further in the development of our senior managers and staff during 2005/06. Tribal is committed to positive and proactive communications with our employees. We have embraced the 'Information and Consultation Rights' directive and introduced elected staff forums which are currently being rolled-out across the business. We have also during the year introduced an independent and confidential counselling service for our staff and are currently reviewing our Employee Assistance Programme to ensure it is delivering a valuable service in a range of areas. We are grateful to staff at all levels of the company for their effort throughout the year and for their contribution to our continuing success. Prospects We have now completed our organisational re-structuring and are well-advanced with our integration process. We have won several major contracts which demonstrate the potential of the Tribal business model. The Group is now in a strong position to take advantage of the many opportunities arising in its key markets. Henry J Pitman Chief Executive Consolidated profit and loss account For the year ended 31 March 2005 2005 Before 2004 Before Goodwill, Total goodwill Goodwill Total goodwill, EBT and EBT and EBT and EBT and Exceptional exceptional exceptional exceptional Items items items Note Items Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Turnover(gross earnings) 2 Continuing operations 221,035 - 221,035 185,744 - 185,744 Acquisitions 8,435 - 8,435 - - - 229,470 - 229,470 185,744 - 185,744 Direct agency costs (49,613) - (49,613) (33,523) - (33,523) - Gross revenue 2 179,857 - 179,857 152,221 - 152,221 Cost of sales (102,772) - (102,772) (81,134) - (81,134) Gross profit 77,085 - 77,085 71,087 - 71,087 Net administrative expenses (54,707) - (54,707) (47,934) - (47,934) Goodwill amortisation and impairment - (16,636) (16,636) - (10,690) (10,690) Employee benefit trust credit/(costs) - 244 244 - (1,025) (1,025) Exceptional items 3 - (1,747) (1,747) - (3,040) (3,040) Total administrative expenses (54,707) (18,139) (72,846) (47,934) (14,755) (62,689) 22,378 (18,139) 4,239 23,153 (14,755) 8,398 Operating profit 2 Continuing operations 20,044 (17,694) 2,350 23,153 (14,755) 8,398 Acquisitions 2,334 (445) 1,889 - - - 22,378 (18,139) 4,239 23,153 (14,755) 8,398 Net interest payable (4,451) - (4,451) (3,076) - (3,076) Profit/(loss) on ordinary activities before taxation 17,927 (18,139) (212) 20,077 (14,755) 5,322 Taxation 5 (5,367) - (5,367) (6,176) - (6,176) Profit/(loss) on ordinary activities after taxation 12,560 (18,139) (5,579) 13,901 (14,755) (854) Minority interest (equity) (303) - (303) (108) - (108) Profit/(loss) for the financial year 12,257 (18,139) (5,882) 13,793 (14,755) (962) Dividends (equity) 6 (2,280) - (2,280) (2,090) - (2,090) Retained profit/(loss) for the year 9,977 (18,139) (8,162) 11,703 (14,755) (3,052) Earnings/ (loss) per share Basic 4 17.2p (25.4)p (8.2)p 22.0p (23.5)p (1.5)p Diluted 4 15.6p (23.8)p (8.2)p 20.5p (22.0)p (1.5)p Consolidated balance sheet At 31 March 2005 31 March 31 March Note 2005 2004 Â£000 Â£000 Fixed assets Intangible assets - goodwill 7 197,188 200,798 - development expenditure 740 557 Tangible assets 13,047 6,356 Investments 151 190 -------- -------- 211,126 207,901 Current assets Stocks 9,102 2,058 Debtors 8 56,959 45,245 Cash at bank and in hand 12 28,335 41,740 -------- -------- 94,396 89,043 Creditors: amounts falling due within one year 9 (75,734) (67,784) -------- -------- Net current assets 18,662 21,259 -------- -------- Total assets less current liabilities 229,788 229,160 Creditors: amounts falling due after more than one year 10 (78,489) (72,015) -------- -------- Net assets 151,299 157,145 -------- -------- Capital and reserves Called up share capital 3,748 3,448 Share premium account 86,928 79,548 Revaluation reserve 91 - Capital reserve 9,545 9,545 Merger reserve 36,615 33,444 Shares to be issued 17,934 27,172 Profit and loss account (5,456) 2,861 -------- -------- Equity shareholders' funds 149,405 156,018 Equity minority interests 1,894 1,127 -------- -------- Total capital employed 151,299 157,145 -------- -------- Reconciliation of movements in consolidated shareholders' funds At 31 March 2005 31 March 31 March 2005 2004 Â£000 Â£000 Loss for the financial year (5,882) (962) Dividends (2,280) (2,090) New share capital subscribed (net of issue costs) 7,680 36,995 Increase in revaluation reserve 91 - Movement in merger reserve 3,171 17,605 Movement in shares to be issued (8,571) (10,355) Share related awards (244) 912 Share related awards acquired - 248 Share option exercises (578) - -------- -------- Net (reduction)/addition to shareholders' funds (6,613) 42,353 Opening shareholders' funds 156,018 113,665 -------- -------- Closing shareholders' funds 149,405 156,018 -------- -------- Consolidated cash flow statement For the year ended 31 March 2005 31 March 31 March Note 2005 2004 Â£000 Â£000 Cash inflow from operating 11 12,240 31,293 activities Returns on investments and servicing of finance Interest paid (5,547) (4,957) Interest element of finance lease (8) (14) rental payments Interest received 914 1,347 ------- -------- Net cash outflow from returns on investments and servicing of finance (4,641) (3,624) Taxation Corporation tax paid (4,655) (7,772) Capital expenditure and financial 13 investment Payments to acquire tangible fixed (5,315) (3,399) assets Payments in respect of items in the course of construction (2,652) - Development costs capitalised (640) (502) Payments to acquire investments (35) (10) Sales of investments 170 865 Sale of tangible fixed assets 2,265 718 -------- -------- Net cash outflow from capital expenditure and financial investment (6,207) (2,328) Acquisitions Purchase of subsidiary undertakings (12,988) (55,813) Net cash acquired with subsidiary undertakings 5,067 7,350 -------- -------- Net cash outflow from acquisitions (7,921) (48,463) Equity dividend paid (2,135) (688) -------- -------- Cash outflow before financing (13,319) (31,582) Financing Issue of ordinary share capital less 106 20,123 issue costs Repayment of borrowings (6,231) (11,617) New secured loans less issue costs 6,095 35,243 Capital element of finance lease rental payments (56) (98) ------- -------- Net cash (outflow)/inflow from financing (86) 43,651 ------- -------- (Decrease)/increase in cash in the year 13,405) 12,069 ------- -------- Consolidated cash flow statement (continued) For the year ended 31 March 2005 31 March 31 March 2005 2004 Â£000 Â£000 Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash in the year (13,405) 12,069 Cash outflow from movement in debt (1,680) (27,615) --------- -------- Change in net debt resulting from cash flows (15,085) (15,546) Finance leases acquired with subsidiaries (31) (1) Debt acquired with subsidiaries - (267) New finance leases (18) - --------- -------- Movement in net debt in the year (15,134) (15,814) Net debt at the start of the year (37,897) (22,083) --------- -------- Net debt at the end of the year (53,031) (37,897) --------- -------- Notes 1 Preliminary Announcement The Board of directors approved the preliminary announcement on 21 June 2005. The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 March 2005 or 2004, but is derived from those accounts. Turnover represents the amounts (excluding value added tax) derived from the provision of goods and services to third party customers and includes the gross amounts billed in respect of commission based income. Direct agency costs comprise media payments and production costs in respect of commission based income. Gross revenue comprises commission and fees earned in respect of turnover. Cost of sales includes the direct expenditure incurred in providing the goods and services described above, including the costs of associates and the salary costs of employed fee earners. Administrative expenses include the salary costs of non-fee earners. The comparative results for cost of sales and administrative expenses have been shown on a consistent basis and this has resulted in a net reclassification of Â£16.5m (2004: Â£15.3m) from administrative expenses to cost of sales. There is no impact on operating profit or net assets in either period. In all other respects the financial information is prepared on a basis consistent with the accounting policies as stated in the previous year's financial statements. Statutory accounts for 2004 have been delivered to the Registrar of Companies and those for 2005 will be delivered following the company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under s237 (2) or (3) of the Companies Act 1985. International Financial Reporting Standards ('IFRS') The Group will adopt IFRS in its consolidated financial statements for the year ending 31 March 2006. The Group has made significant advances in assessing the financial impact of convergence with IFRS and in compliance with European Union regulation the interim results for the half year to 30 September 2005 will be presented under IFRS. 2 Segmental analysis The Group operates through seven divisions, Tribal Communications, Tribal Consulting, Tribal Education, Tribal Property, Tribal Resourcing, Tribal Technology and Mercury Health. The turnover and profit before tax of the Group for the year has been derived from its principal activities, wholly undertaken in the United Kingdom. Turnover Gross revenue Operating profit before goodwill, EBT and exceptional items 2005 2004 2005 2004 2005 2004 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Communications 9,958 6,921 9,958 6,921 2,382 1,741 Consulting 55,238 42,130 55,238 42,130 6,669 7,121 Education 36,317 35,884 36,317 35,884 5,784 6,634 Property 21,331 18,443 21,331 18,443 2,658 2,819 Resourcing 74,297 54,432 24,684 20,909 5,252 5,406 Technology 34,391 30,457 34,391 30,457 5,145 4,308 Mercury Health 49 7 349 7 (343) - Central and bid costs - - - (5,169) (4,876) Inter segment sales (2,411) (2,530) (2,411) (2,530) - - ------- ------- ------ ------- ------- -------- Total 229,470 185,744 179,857 152,221 22,378 23,153 -------- -------- ------- ------- -------- -------- Items below operating profit before goodwill amortisation, EBT and exceptional items, are not analysed by division. Notes (continued) 3 Exceptional items The exceptional items of Â£1,747,000 (2004: Â£3,040,000) are in relation to further bid and implementation costs incurred on the NHS Independent Sector Treatment Centre contract. In September 2004 the Board received sufficient assurance to believe the contract would reach financial close (which occurred on 10 December 2004) and has capitalised subsequent bid costs post September 2004 in accordance with UITF 34. 4 Earnings per share Earnings per share and diluted earnings per share are calculated by reference to a weighted average number of ordinary shares calculated as follows: 2005 2004 thousands thousands Weighted average number of shares outstanding: Basic weighted average number of shares in 71,421 62,622 issue Employee share options 890 1,926 Shares to be issued in respect of deferred consideration 6,164 2,695 -------- ------- Weighted average number of shares outstanding for dilution calculations 78,475 67,243 ------- ------- The adjusted basic and adjusted diluted earnings per share figures shown on the profit and loss account on page 14 are included as the directors believe that they provide a better understanding of the underlying trading performance of the Group. A reconciliation of how these figures are calculated is set out below: 2005 2004 Earnings (Loss)/ Earnings (Loss)/ earnings earnings per per share share Â£000 pence Â£000 pence Basic and adjusted basic earnings per share: Loss and basic loss per share (5,882) (8.2)p (962) (1.5)p Adjustments: Goodwill amortisation and impairment 16,636 23.3p 10,690 17.1p EBT costs net of tax (244) (0.3)p 1,025 1.6p Exceptional items 1,747 2.4p 3,040 4.8p ------ ------- ------ ------- Adjusted earnings and adjusted basic earnings per share 12,257 17.2p 13,793 22.0p ------ ------- ------ ------- 2005 2004 Earnings (Loss)/ Earnings (Loss)/ earnings earnings per share per share Â£000 pence Â£000 pence Diluted and adjusted diluted earnings per share: Loss and diluted loss per share (5,882) (8.2)p (962) (1.5)p Adjustments: FRS 14 adjustment* - 0.7p - 0.1p Goodwill amortisation and impairment 16,636 21.2p 10,690 15.9p EBT costs net of tax (244) (0.3)p 1,025 1.5p Exceptional items 1,747 2.2p 3,040 4.5p ------ ------- ------ -------- Adjusted earnings and adjusted diluted earnings per share 12,257 15.6p 13,793 20.5p ------- ------- ------ -------- * FRS 14 requires presentation of diluted earnings per share when a company could be called upon to issue shares that would decrease net profit or increase net loss per share. For a loss making company, net loss per share would only be increased by the exercise of out-of-money options. Hence the adjustment is made to diluted earnings per share. Notes (continued) 5 Taxation The effective rate of tax on operating profit before goodwill amortisation, EBT costs and exceptional items was 30.0% (2004: 30.8%). 6 Dividends 2005 2004 Â£000 Â£000 Interim paid 1.0 pence per share (2004: 1.0 pence) 750 690 Final proposed 2.0 pence per share (2004: 2.0 pence) 1,530 1,400 ------- ------- Total 3.0 pence per share (2004: 3.0 pence) 2,280 2,090 ------- ------- 7 Intangible fixed assets: Goodwill Â£000 Net book value at 31 March 2004 200,798 Goodwill arising on acquisitions 17,299 Revisions to prior years (4,273) Amortisation charge (11,436) Impairment (5,200) -------- Net book value at 31 March 2005 197,188 -------- 8 Debtors 2005 2004 Â£000 Â£000 Trade debtors 45,537 38,972 Other debtors 1,037 878 Prepayments and accrued income 8,350 4,629 Amounts recoverable on contracts 1,391 388 Deferred tax 644 378 ------- ------- 56,959 45,245 ------ ------ Notes (continued) 9 Creditors: amounts falling due within one year 2005 2004 Â£000 Â£000 Loan notes 3,802 8,168 Obligations under finance leases and hire purchase contracts 20 44 Trade creditors 25,457 23,209 Corporation tax 5,758 4,510 Other taxation and social security 9,264 8,500 Other creditors 1,666 1,176 Accruals and deferred income 27,039 18,950 Deferred consideration 1,198 1,827 Dividends 1,530 1,400 ------- ------- 75,734 67,784 ------- ------- 10 Creditors: amounts falling due after more than one year 2005 2004 Â£000 Â£000 Bank loans 77,518 71,423 Obligations under finance leases and hire purchase contracts 26 2 Deferred consideration 411 590 Other creditors 534 - ------- ------- 78,489 72,015 ------- ------- 11 Note to the cash flow statement Reconciliation of operating profit to operating cash flows 2005 2004 Â£000 Â£000 Operating profit 4,239 8,398 Depreciation 2,715 2,134 Goodwill amortisation and impairment 16,636 10,690 Amortisation of development expenditure 457 255 Profit on sale of investments (95) (203) Profit on disposal of fixed assets (30) (25) (Credit)/contribution to employee share awards (244) 912 Amortisation of employee benefit trust - 113 Increase in debtors (6,636) (3,717) Decrease in creditors (1,798) 12,317 (Increase)/decrease in stocks 543 419 Exceptional items 1,747 3,040 -------- ------- Net cash inflow from operating activities (excluding Mercury Health) 17,534 34,333 Mercury Health - increase in stocks (7,574) - increase in debtors (379) - increase in creditors 4,406 - Exceptional items (1,747) (3,040) -------- -------- Net cash inflow from operating activities 12,240 31,293 -------- -------- Notes (continued) 12 Net debt 2005 2004 Â£000 Â£000 Cash at bank 26,810 34,273 Cash collateralised 1,525 7,467 ------- ------- 28,335 41,740 Loan notes - cash backed (1,525) (7,467) Other loan notes (2,277) (701) Bank loans (77,518) (71,423) Finance leases (46) (46) -------- ------- (81,366) (79,637) -------- ------- Net debt (53,031) (37,897) -------- ------- 13 Capital expenditure Included in tangible fixed asset additions and disposals is the sale and leaseback of medical equipment for Mercury Health comprising cost and proceeds of Â£2.2m. 14 Acquisitions Since 31 March 2004, Tribal Group plc has acquired the following principal subsidiary undertakings: Date Subsidiary acquired April 2004 Aldcliffe Computer Systems Limited October 2004 Strategic Information Technology Services Group Limited November 2004 Derek Hicks & Thew Limited This information is provided by RNS The company news service from the London Stock Exchange

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