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HALF YEAR PROFITS: CAPITA BOOSTED BY TOWN HALL CONTRACTS

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Interim Results to 30 June 1999 ...
Interim Results to 30 June 1999

Strong progress on all fronts

Financial highlights

Six months to 30 June 1999

Six months to 30 June 1998

Change

Turnover£150.2m£117.9m+ 27%

Operating profit£14.0m£10.6m+ 33%

Pre-tax profit£14.1m£10.5m+ 35%

Earnings per share4.73p3.43p+ 38%

Total dividend per share1.2 p0.9p+ 33%

Operating margins9.4%9.0%

Operational highlights

- Strong growth experienced across all sectors, with local government particularly buoyant during the period.

-£50m, 10 year plus contract announced today with Norfolk CC to provide IT, payroll, pension and exchequer services.

- Other significant contract wins announced during the period include:

-£12m, 5 year contract with Hertfordshire CC to design, build and operate local government's first ever integrated customer services call centre;

-£11m, 5 year contract with Kent CC to administer payroll and pensions for 80,000 employees - the largest ever outsourcing of payroll services by a local authority.

- New£2.1m national customer call centre to be set up in Coventry to support Capita's local government operations.

-£27m invested in March in the purchase of a strategic stake in Eastgate Group, providing entry into the insurance outsourcing sector.

- Additional£26.6m invested during the period in four complementary acquisitions to strengthen existing operations in Human Resources Services, Software Services and Property Services.

Rod Aldridge, executive chairman of the Capita Group Plc, commented:

'Our excellent first half results reflect our continuing progress in establishing new client relationships and successfully enhancing existing ones. We continue to invest to strengthen the range of services we are able to offer clients and also to improve our own operational efficiency. Our markets remain very active and we are able to choose from a substantial range and volume of opportunities to further develop the group. We are confident that shareholders will be very satisfied with both the results for the year and our continuing prospects thereafter.'

CHAIRMAN'S STATEMENT

Results

The six months to 30 June 1999 have been highly successful for the Capita Group Plc. Our strong financial results for the half year reflect the progress we have made in establishing many new client relationships and successfully enhancing existing ones. During the period, our turnover increased by 27% to£150.2m (half year to 30 June 1998:£117.9m), operating profits rose by 33% to£14.0m (1998:£10.6m as restated) and net profits before taxation increased by 35% to£14.1m (1998:£10.5m as restated). Earnings per share advanced 38% to 4.73p (1998: 3.43p as restated). Our activities continue to produce strong cash flow with£8.4m generated by operations in the period.

Dividend

The Board has declared an interim dividend of 1.2p net per share (1998: 0.9p), a 33% increase. The dividend will be payable on 14 October 1999 to shareholders on the register at the close of business on 10 September 1999. The dividend is covered 3.9 times by earnings per share.

Business review

Capita focuses on providing a broad portfolio of white collar, professional support services on long term contracts to our chosen markets in the UK. Across all our businesses, we have two clear objectives: to enhance service quality on behalf of our clients and to reduce their costs of delivery.

We have built up an integrated range of support services that are often essential to the smooth running and success of our clients' operations. Our skills are broad and the scope of contracts for which we can bid is wider than that of most of our competitors. This also enables us to be highly selective.

Our chosen markets of the UK's public and private sectors are both active. Indeed, it is estimated that the market for outsourcing services will exceed£8bn by 2002 (source: The Holway Report 1999). Recent research regarding the Business Process Outsourcing (BPO) element of this market, the focus of most of our operations, forecasts a 30% annual growth rate for BPO (source: NelsonHall May 1999).

Our local government market has been particularly buoyant during the period, driven by the introduction of Best Value and the wider Modernising Agenda. The Government is also extending this principle across central government. The regime provides the opportunity for the client and service provider to concentrate on establishing the most appropriate infrastructure and partnership to achieve continuous improvement of services that focus on the needs of the customer. It encourages more innovation, the combined delivery of a broader range of council services and longer term relationships with private sector partners.

As an example, we recently announced a 5 year contract worth£12m with Hertfordshire CC to design, build and operate local government's first ever integrated customer services call centre. This centre will provide the community with consistency in response and service, the highest industry standards for call answering and over 70% of calls to be handled without referral. Indeed, following full implementation, we anticipate managing 1.4m calls per annum. This integrated gateway for the public to access their services will put Hertfordshire at the forefront of best value delivery in this field.

In a similar vein, I am delighted to announce today that Capita has been chosen as the strategic service partner to Norfolk CC for the combined delivery of IT, payroll, pension and exchequer services to the authority. The partnership, covering a 10 year plus period, is valued in excess of£50m. Under the contract, 150 staff will join Capita who will be responsible for providing payroll services to 33,000 council staff, administering over 12,000 pensions and processing in excess of 500,000 transactions per annum. Capita will establish a Business Centre in Norwich incorporating a sophisticated customer services call centre and advanced business processing, providing a hub for incremental business in the area.

Sales activity during the period has principally focused on securing additional contracts from new and current customers rather than extending existing contracts as there are no major renewals scheduled until 2002.

Our strategic account development team has achieved some notable new contract wins with our existing customers. At Kent CC, we have secured an£11m, 5 year contract, to administer payroll and pensions for 80,000 employees across the council and other local public organisations. This represents the largest ever outsourcing of payroll services by a local authority. With Westminster City Council, with whom we already have 6 contracts, we have signed an additional 5 year contract to provide the IT service supporting its council tax operation. We have also extended existing advisory and administration contracts with the Employment Service, NAAFI and, as part of the Government's welfare reform programme, the Benefits Agency, which has recently awarded further significant consultancy projects to Capita.

We continue to increase penetration of the private sector, which now represents over a third of the Group's turnover, through new business development and selective acquisitions. We have signed business and property outsourcing arrangements with a wide range of organisations including BT, BMW, Bass, Halifax, Land Securities and Unilever. One notable contract awarded and implemented in the period was to set up a new safety agency, on behalf of Railtrack Plc, to issue and control safety certification across the UK. This project will run for 5 years and is anticipated to generate revenues of£10m.

The education market continues to develop. Our Learning Network product, developed in response to Capita gaining preferred supplier status for the£230m Government scheme to train teachers in the use of computers and on-line technology, is progressing well. Following successful trials, the product will be launched in September. The DfEE has also recently awarded us a contract to assist in the set up of the newly announced University for Industry. Capita will source and recruit the entire team who will run the organisation. This flagship project is at the heart of the Government's strategy for the learning age and is designed to provide universal access to lifelong learning.

Operational review

Alongside our new contract wins are two further key activities underpinning Capita's success: maintaining our reputation for high quality project implementation and continuous strong operating performance. The six months to 30 June have been a particularly busy and successful period with a record number of project implementations. Three projects merit comment.

In April, a newly created, public information centre in Belfast, designed and operated by Capita for the BBC, was opened by Christopher Bland, chairman of the BBC, in the presence of Marjorie Mowlam, secretary of state for Northern Ireland. This project will handle over 2.5 million customer contacts per annum and encompasses state of the art technology, supported by newly recruited, high calibre personnel. We are delighted by the progress of this contract implementation.

At the same time, we implemented a 3 year contract to provide reception and administrative management services to Trillium, a consortium led by Goldman Sachs, which in turn provides property services to the Benefits Agency. This implementation has also progressed well and the 700 staff who transferred to Capita on 1 April 1999 represent the largest ever TUPE transfer completed by the company.

We are also working on an important internal project, costing a total of£2.1m, to develop a national customer centre to support our local government operations. This centre, which we will create in Coventry, will centralise many of the more fundamental transactions carried out at individual sites throughout the UK and will utilise state of the art telephony, scanning and web-based technology. It will improve further both the consistency and quality of service levels we provide to our clients whilst creating economies of scale to reduce costs both for our clients and the Group. The project will generate benefits from the year 2000 and beyond. Capita is now responsible, across both the public and private sectors, for dealing with over 20 million customer contacts per annum.

Acquisitions

Whilst securing strong organic growth remains the key driver of our business, we continue to enhance our service offering and to seek incremental growth by making small, carefully appraised acquisitions and investments.

In March, we invested£27m in respect of the acquisition of 20.5% of the Eastgate Group Ltd. Formed in 1992, Eastgate is the UK market leader in providing a range of outsourcing services to the insurance industry. Since formation, it has administered $8bn of insurance claims. It now handles 1 million general insurance claims and 3 million telephone calls per annum. The insurance sector is new to Capita and we will extend our presence carefully as our knowledge grows. However, early indications confirm that the current corporate activity and financial pressures within the insurance sector offer substantial potential for outsourcing services.

Within the Education sector, Capita is the market leader in providing administrative software and services to primary and secondary schools and to Local Education Authorities. We acquired Emis Ltd in February and Dolphin Computing Services Ltd in June for£8m in aggregate. Both companies distribute administrative software to the Higher and Further Education sectors and Capita is now also the established leader in this segment. We see strong opportunities for organic growth from these businesses.

During this period, we also strengthened our Human Resources services through the£14.6m purchase of Oldham & Tomkins, a company providing professional IT and project management staff on long term assignment. The acquisition complements our existing recruitment services and brings a valuable resource and highly developed internet based recruitment system. Our Property Services capability was further strengthened through the£4m acquisition of MPM Adams, a leading project management company based in Scotland.

Our people

Once again, I would like to pay tribute to the outstanding contribution made by our 6,500 staff. We have engendered a superb team spirit within Capita and this strength, coupled with our 'can do' mentality, allows us to tackle successfully many demanding projects. It is our culture to place high priority upon ensuring that we meet, and if possible surpass, our customers' expectations. I would like to express the Board's appreciation to all our staff.

We place considerable focus on continuing to strengthen our senior team across the Group. Skills such as project management, financial management and account development remain at the heart of our business and we are investing heavily in both developing our existing skills and adding to them through recruitment. More people than ever will participate in Capita's internal training programmes over the next 12 months and we anticipate doubling the number of participants on our graduate training programme.

Prospects

The Board remains extremely encouraged by Capita's future prospects. We are able to choose from a substantial range and volume of opportunities in pursuit of developing the Group further. We are confident that shareholders will be very satisfied with both the Results for the full year and our prospects thereafter.

R M Aldridge

Executive Chairman

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