News release

21 August 2008

Merchant Securities plc

Final results for the year ended 31 March 2008

Merchant Securities plc ("the Group"), the financial services group specialising in institutional and private client stockbroking, corporate finance, corporate broking and private equity, announces its final results for the year ended 31 March 2008.

Financial and operational highlights:

• Significant progress made by the Group in achieving its strategy of building a diversified financial services company;

• Turnover up 30% to  £5,337,254;

• Underlying operating loss before tax of £153,165 (excluding £625,318 of non recurring expenses, amortisation of intangible assets and impairment of investments held for sale);

• Strengthened balance sheet, with net cash balances of £1.8 million at the balance sheet date augmented by an additional £1.5 million net of expenses raised by a share placing in June 2008;

• Dom Maklerski IDM Spolka Akcyjna, ("IDMSA") a large stockbroker based in Poland, subscribed in placing and now holds 17.06% of the increased share capital;

• John East & Partners Limited acquired in October 2007;

• Richard Crossley, No 1 rated Extel analyst, and his team joined the Group in July 2008; and

• The contracts for differences business is performing well.

John Green, Chairman, Merchant Securities plc, says:  

"We expect market conditions to remain difficult, but believe that the diversity of our business activities, namely institutional and private client stockbroking including dealing in contracts for differences for clients, corporate finance and corporate broking, together with a reduced cost base, will assist the Company as we strive to deliver the best possible result for shareholders." 

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CHAIRMAN'S STATEMENT

Introduction

I am pleased to present our results for the year ended 31 March 2008, which has seen significant progress made by the Company in achieving its strategy of building a diversified financial services group. Much progress has been made in highly challenging market conditions.

The financial performance reflects the investment made in restructuring the Company which, together with market conditions, contributed to a loss before taxation of £778,000 for the year ended 31 March 2008.

Strategic Development

During the year the Company made real progress in developing its core activities and strengthening the infrastructure of the business.  We have furthered our aspirations in the corporate finance arena with the acquisition of John East & Partners Limited ("JEP") in October last year. JEP, which has been established some 20 years, is a broadly based corporate finance and corporate broking business. It is a member of the London Stock Exchange, an authorised nominated adviser to companies quoted on AIM and has 40 retained corporate clients, 37 of which are quoted on AIM. It traded profitably in the financial year in the period since its acquisition. JEP's executive chairman, John East, joined the board of the Company following completion of the acquisition.

In February, Merchant Securities Group Limited ("MSGL") introduced a new, upgraded private client investment management system and settlement and clearing functions were transferred to Pershing Securities Limited, a leading international clearing house.

Since the year end our institutional offering has been strengthened with the recruitment of Richard Crossley, John Coulson and Richard Bayley. Richard Crossley has been ranked in the Thomson Extel Survey since its inception and was voted No 1 technical and strategic analyst for 2004 - 2007. John Coulson has over 30 years' experience of institutional sales in the City, with such firms as Laurence Prust & Co, James Capel and WestLBPanmure, now Panmure Gordon & Co, where he was head of sales. Richard Bayley has a Ph.D in pure mathematics from Queen Mary College, University of London and works with Richard Crossley, bringing a systematic approach to the technical analysis behind the daily publication, "Mercantalyst", an insightful and highly regarded technical review of trends in markets.

The contract for differences ("CFD") activity is a growing and successful part of MSGL's business and has been further strengthened by the recruitment of a specialist team headed by John Readings. 

In July 2008 we raised £1.58 million by way of a placing which was supported by management, Gartmore and Dom Maklerski IDM Spółka Akcyjna ("IDMSA"). IDMSA is a Polish independent, non-bank brokerage house with 18 offices throughout Poland and is a member of and listed on the Warsaw Stock Exchange with a market capitalisation of approximately £75 million. In 2007 IDMSA concluded fund raising transactions with a total value of approximately £500 million. We welcome the involvement of IDMSA, which now holds 8 million shares in the Company, equivalent to 17.1 per cent. of our share capital, and hope for a strategic and collaborative relationship.

  Operational and financial review

In a trading update issued on 1 May, we estimated the post tax loss for the year under review to be in the region of £600,000, after taking into account non-recurring items of approximately £400,000.  

In the event, the loss before taxation was £778,000 including non-recurring items of £400,000. A tax credit reduced the loss after taxation to £736,000. Included in the loss for the year were non cash items of £226,000, being amortisation of the intangible asset and goodwill created following the acquisition of JEP, a revaluation of investments held for sale and the impairment of an investment written off against reserves in last years' accounts. Under IFRS, the impairment is now considered permanent and has had to be taken through the profit and loss account, although, because the loss was recognised through reserves last year, there is no impact on the net assets of the group. 

The proceeds of the placing referred to above, have increased net assets of the Group to £9.8 million and our cash balances at the end of July 2008 were £2.9 million.  The Group has no debt, with the exception of very modest equipment leases.

In June 2008, Merchant Securities Group Limited ("MSGL") entered into an agreement with the Financial Services Authority ("FSA") to settle an investigation by the FSA of the firm's systems and controls for the protection of customer information. The settlement resulted in MSGL being fined £77,000, although the FSA found no evidence of any theft or compromise of customer information. We took heed of the FSA's concerns and immediately undertook a thorough review of all systems and controls for the protection of customer data to ensure that they were robust and we are confident that any shortcomings in systems and controls identified by the FSA have been fully resolved.

Board Changes

During the year under review and after the year end there have been a number of board changes. John East joined the board in October last year and Steve Whelton, our former finance director left the Company in March to be replaced by Christopher Hyde who joined the board at the end of March. Following the reorganisation referred to below, Tony Fabrizi stepped down from the board to concentrate on corporate finance. Tony was instrumental in the creation of the group and thanks are due to him for his contribution.  Patrick Claridge, formerly chief operating officer replaced him as acting chief executive and the Company today announces that he has been confirmed in that position. More recently, Christopher Hyde left the Company by mutual consent and we have appointed an experienced interim group financial controller, with a view to making a permanent appointment as soon as possible.

Outlook

Whilst all activities of the Company were adversely affected by the deterioration in markets, the board believes that its strategy of developing a diversified financial services group remains the correct approach. We will seek to enhance our institutional and private client activities and maintain our involvement in the private equity arena, where we believe that a funding gap exists for unquoted companies with a value of less than £5 million.

The board recently instigated a plan to reorganise and streamline operations and reduce overheads. To this end substantial progress has been made in the first quarter of the current financial year. The CFD business continues to grow, benefiting from the current volatility in markets and is now making a positive contribution. JEP's income has diminished as the flotation market has contracted, but its general broadly based corporate finance activities and contracted retainer income, together with one large IPO, has enabled it to generate a small profit in the first quarter of the current financial year. Overall the Group as a whole has continued to trade at a loss in the current financial year. To mitigate this, costs have been taken out of the business and all costs are under detailed scrutiny. Costs have also been incurred prior to the generation of revenue by the new institutional equity team.

We expect market conditions to remain difficult, but believe that the diversity of our business activities, namely institutional and private client broking, trading CFDs and corporate finance and corporate broking, combined with a reduced cost base, will assist the Group as we strive to deliver the best possible result for shareholders.  

Finally, I would like to thank our shareholders for their support and also express my thanks to all members of staff who have worked so hard in a difficult year.

John Green

Chairman

21 August 2008

  Financial statements for the year ended 31 March 2008

CONSOLIDATED INCOME STATEMENT