End of Year report 1998

Press release on unaudited annual results 1 January - 31 December 1998 Net turnover amounted to SEK 318.6 million, an increase of 28 percent (SEK 248.5 million). Results after financial items amounted to SEK -58.7 million (SEK-90.3 mil- lion for the preceding year), an improvement of SEK 31.6 million. The increase in volume has resulted in continually improving capacity utili- sation. The positive trend has continued in 1999. Closer co-operation with Royal Mail established within international mail. Investigation of joint establishment within domestic office mail is taking place. CityMail prepares to file a legal action against Sweden Post seeking damages since the market court in November 1998 held that Sweden Post abused its domi- nant position in order to eliminate competition from CityMail. Revenues For the full 1998 year, CityMail reports revenues of SEK 318.6 million, a growth of 28 percent as compared with the corresponding period in 1997. The strong increase in volume resulted in continually improving capacity utilisation at the beginning of 1999. The capacity utilisation is considerably better in Stockholm than in Gothenburg and Malmö. During the fourth quarter of 1998, CityMail's revenues amounted to SEK 86.4 million, an increase of 26 percent as compared with the corresponding period last year. However, the increase is lower than the increase of 35% which was expected for the final quarter at the time the company adjusted the forecast for 1998. As previously stated in the interim report for the third quarter, the fact that certain major customers refrained from taking decisions regarding their postal distribution prior to the decision of the Market Court (11 November 1998) was the main reason that, in total for the year, volumes were lower than anticipated. Costs Approximately 70 percent of CityMail's costs consist of personnel cost, which primarily relate to the distribution organisation. CityMail can reduce these costs only to a limited extent, since the entire distribution organisation is required in order to maintain the level of service. During the fourth quarter of 1998, CityMail's costs amounted to SEK 100.5 million as compared with SEK 95.4 million for the corresponding period in 1997. The Costs for the entire 1998 year were SEK 377.3 million, which was 3.4% higher than the forecast of SEK 365 million which was previously provided. Costs in the organisation have been dimensioned for a forecast higher volume, especially prior to the end of 1998 and the beginning of 1999. In addition, the costs in the delivery organisation were affected by the fact that the strongly improved labour market in Stockholm has resulted in an increase in personnel turnover (delivery / transportation / recruiting). At the same time, an increase in the sales and marketing activities has been commenced due to the fact that sales growth has been lower than anticipated. Results CityMail's results for the fourth quarter amounted to SEK -14.1 million, as compared with SEK -26.6 million during the corresponding period in 1997. The operating results for 1998 improved to SEK -6.3 million, as compared with SEK -88.8 million for the corresponding period in 1997. Net financial items amounted to SEK -2.4 million (-1.5). Results after financial items improved to SEK -58.7 million (-90.3). Results per share amounted to SEK -7.5 (-11.5). The improvements in results are due to the fact that revenues increased by 28%, however lower than previously expected. In October, the Board of Directors adjusted downwards the forecast which was presented in May, from a neutral result to a new forecast entailing a loss of approximately SEK 40 million. The result for the entire year fell short of the later forecast by approximately SEK 18 million. The explanation for the devia- tion is that revenues in November and December did not experience the same high rate of increase as previously in the year. In addition, the increase in costs described above must be included. Theese costs were to a large extent of a temporary caracter. The Board of Directors believes that the prospects are good for a significant improvement in results in 1999. Financial position The company's liquid funds, including non-utilised credits, amounted to SEK 42.7 million (2.9) on 31 December 1998. The equity ratio on 31 December 1998 was 37.8 percent (21.5). Capital expenditures Capital expenditures during the period amounted to SEK 19.4 million (27.0). Market Court decision The decision of the Market Court means that the Competition Authority and CityMail were vindicated in principle on important questions such as that all of Sweden is one market for bulk mailings and that a price differentiation by Posten requires that the price differences correspond to actual cost differ- ences. In the actual case, the court held that one of Posten's price lists currently could be shown to be cost-motivated, but not the other. The Market Court also held that Posten, at the time of the introduction of the zone prices, had not documented such cost differences and that the zone prices were intended to eliminate competition from CityMail. According to the Market Court, the action thereby constituted an abuse of Posten's dominant position. Geographic expansion In the beginning of the autumn of 1998, a sub-contracting agreement covering all of Gotland was entered into with Wisby Mail. Through the agreement, City- Mail's geographic coverage increased by 2 percent as measured in number of households, corresponding to an additional 26,000 households. Additional co-operation with existing local postal operators in other loca- tions in the country will begin in 1999. Joint new company with ASG One of the most interesting growth areas in the future in the postal sector is the distribution of items based on Internet and distance selling. The total value of Internet trade in Sweden was estimated to amount to slightly more than SEK 500 million in 1998 and is expected to increase to at least SEK 4 billion by 2001. In light of this, CityMail and ASG have formed a jointly owned company for home deliveries. The company, which will operate under the name ASG Direct, is owned 65% by ASG and 35% by CityMail. Marketing and new customers CityMail has continued to expand its sales organisation. During the year, CityMail's total sales organisation increased from 15 to 28 people. The strengthened sales force has resulted in an ability to approach a larger number of potential customers. CityMail has entered into agreements with, largely speaking, all of the potential major customers who were targeted at the beginning of the year. New major customers who were added during the year include, among others, Volvo, Telia, Stockholm Energi, Yves Rocher, Reader's Digest, Göteborg Energi, Svenska Golfförbundet, ICA, Bonniers, Vattenfall, Byggnadsarbetarförbundet, and Extra Film. During 1998, comprehensive efforts have been made to improve the systems for sales follow-up and mechanical processing of midsize and small customers. The result has been a significantly increased repurchasing frequency for these customer categories. CityMail has increased the number of net customers from approximately 1,160 during 1997 to approximately 1,900 for 1998. Viewed in to- tality, customer loyalty during 1998 was extremely high. In total, this provides a sound platform for continued growth through in- creased penetration of existing customers. Personnel The number of full-time employees was 937 (850). During the period, the personnel in the distribution organisation have under- gone training in, and the implementation of, balanced score cards. The remain- ing portions of the company will undergo a corresponding process during the first half of 1999. The process is implemented in the entire company with an individual score card for each distribution office and department. This makes possible increased commitment by the individual employee to endeavour continu- ously to achieve a release of capacity and increased efficiency. Significant events after the close of the annual accounts Closer co-operation between Royal Mail and CityMail Royal Mail and CityMail have resolved to further strengthen the co-operation in Sweden. CityMail now constitutes Royal Mail's international dispatch opera- tor in Sweden for international mail. This means that the increased quantities of inbound international mail from Royal Mail is placed with CityMail. At the same time, CityMail is establishing a service for outbound international mail for Swedish customers. This service means that mail can be sent directly to the receiving country without passing through England. The market for outbound international mail is estimated at just under one bil- lion kronor and is currently characterised by low competition, and accordingly relatively high prices. An investigation is currently also taking place regarding the joint establish- ment of a separate operation for domestic office and letter box mail. This means that CityMail further strengthens customer relations through this expansion of the product range. Claims for damages In it's decision the Market Court held that Sweden Post abused its dominant position through -among other things- the introduction of the "zoneprices". The Market Court constiuted that Sweden Post's actions regarding "zoneprices" was intended to eliminate the competition from CityMail. CityMail has suffered substantionally from Sweden Postes activities. The Swedish competiton law gives the suffering company the right to seek dam- ages. The Board of CityMail, together with legal and financial expertise, presently prepares to file a legal action against Sweden Post seeking damages for the period of 1996-1998. New subcontracting agreement In January 1999, a subcontracting agreement was entered into with CountryMail which covers large portions of Kronoberg county. Pursuant to the agreement, CityMail's geographic coverage increases by approximately 66,000 households, i.e. an additional 5%, approximately. New Deputy Managing Director On 1 April, Sebastian Ehrnrooth will take over as new Deputy Managing Director with operating responsibility for the Swedish core operation. He comes most recently from Bain & Company, where he was employed as a managing consultant and project leader. This press release has not been reviewed by the company's auditors. For additional information, please contact: Håkan Ohlsson, Deputy Managing Director +46 8 709 43 00, +46 70 752 42 01 hakan.o@citymail.se www.citymail.se Future reports/financial information: The Annual report will be available at the Company's offices approximately two weeks prior to the Shareholders Meeting. The Annual Report will be dis- tributed to the shareholders. Shareholders Meeting: 27 April at 4.00 p.m. at the Company's offices in Västberga, Stockholm. 3 months interim report: 27 April Half-yearly report 1999: 11 August Capital Market Day: August 9 months interim report: 8 November 1999 Press release on unaudited annual results: February 2000: Stockholm, 19 February 1999 The Board of Directors CityMail Sweden AB (publ) The Swedish Postal market Business Concept Since its start-up, CityMail has specialised in the sector of computer- addressed mail. This part of the postal market demonstrates sound growth, in- ter alia, due to the fact that companies' databases are being increasingly de- veloped and the possibilities to communicate directly with individuals and se- lected target groups are increasing. CityMail is the first private mail company in the world which, on a large sca- le, has established an operation which differs from the traditional monopoly companies. The business concept is based on the elimination of the sorting element which, in traditional mail handling, is carried out at large sorting terminals. CityMail takes advantage of the fact that customers have computerised their addressing routines. At the time of production, the customers sort the items in postal code order with the aid of their own computers and address data- bases. According to fresh statistics from the National Post and Telecom Agency, the total number of addressed items of mail was unchanged, just over 3.4 billion in 1998. The growth within computer-sorted mail is thus sufficient to compen- sate for the cannibalisation which electronic media are causing within letter box mail and office mail. Ownership In order to realise CityMail's growth potential, in June of 1998 a new stock issue of SEK 100 million was carried out, as well as a listing on the Stock- holm Stock Exchange's O-list. Amongst the larger shareholders are Henderson Investors, Zenith Fund, Fidelity Investments, and the British post office, Royal Mail. The management of CityMail owns approximately 11 percent of the company. New Board members At an extraordinary meeting of the shareholders held on 27 October 1998, it was resolved to appoint three new Board members. The new Chairman of the Board of Directors of CityMail is Jan Freese, the former General Director of the Na- tional Post and Telecom Agency. New members of the Board of Directors include John Dunlop, the Managing Director of Royal Mail International, and Bo Lund- quist, former Managing Director of Esselte. Volume trend 1998 (letter per CityMan anday, rolling 12 months) Income statement in summary Jan-Dec Jan-Dec SEK MILLIONS 1998 1997 Net turnover 318,6 248,5 Operating result -56,3 -88,8 Result after financial item -58,7 -90,3 Taxes 0,0 0,0 Result for the period -58,7 -90,3 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/02/19/19990219BIT00360/bit0001.doc http://www.bit.se/bitonline/1999/02/19/19990219BIT00360/bit0002.pdf