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Executive Report
Released 11 September 2001

Review of Operations

The 12-month period to 30 June 2001 was a difficult time for the technology sector in all global markets. Most IT companies suffered from poor trading conditions as the demand for IT products and services declined.

Prophecy International was similarly affected. A number of large contracts that were not closed in 2000/1 are still being pursued and will result in a substantial contribution to our half year result.

The impact on our financial performance is detailed below.

Neither the Board nor the management of the company is satisfied with these results.

Whilst the external factors are acknowledged, there have been internal factors that have also impacted our performance. Consequently a number of actions have been taken to position the company for significantly improved performance in 2001/2.

These include:

· The restructure of the company to strengthen our overseas operations which are our biggest opportunity markets. This includes the location of myself as CEO in North America.

· A redefinition of our marketing strategies to ensure maximum revenue generation from existing customers and concentrated new business development centered on our rapid application assembly technology.

· The establishment of a consulting and training group to increase services revenues.

· The reduction of our expense base including reduction in non-customer related headcount and review of executive salaries.

There were a number of significant achievements in the area of sales and marketing. These are detailed below. It is relevant to note that whilst the volume of business was down due to overall market conditions, these achievements confirm that there is great potential for our products in global markets.

In declaring the annual result the Board has taken a number of bold decisions to ensure that the company's accounts are positioned to benefit from improved operational and financial success in 2001/2.


The Prophecy International Holdings Limited group achieved total revenues from operating activities for the twelve months ending 30 June 2001 of $10.9m (comparative $12.8m).

The results for the year were impacted by the following decisions by the Board.

· A doubtful debt provision of almost $1.5m made in relation to an overseas debtor who at the date of this report appears unable to meet its obligations.

· A change in the treatment of foreign exchange gains or losses from the company's overseas subsidiaries, reducing revenue by over $0.4m.

· A reversal of Future Income Tax Benefits attributable to losses, increasing the tax charge by almost $2.3m.

These 'one-off' events have impacted on the profitability for the year, with the group reporting a loss from ordinary activities before tax of $3.5m and a loss from ordinary activities after tax of $4.9m. Without these items the group would have reported a small loss of $0.8m.

Nevertheless the group's Financial Position remains strong, with $8.5m in cash reserves at year-end. The group also reported a net cash inflow from operations of $0.5m for the year. The group remains virtually debt free.

As a result the group is well placed to take advantage of expected improved trading conditions in 2001/2 and the opportunities that are expected to arise from the group's new Java based technology.

Research and Development

During the year the group made significant progress in the development of its new Java based rapid software solution technology which it expects to release shortly.

This new product will allow the rapid assembly of 100% Java based software solutions without the need for Java programmers and database experts whilst retaining Prophecy's trademark flexibility and ability to deliver maximum results in a minimum period. Most major software projects today utilize the Java development environment and as a result there is a shortage of Java programmers worldwide thus driving up development costs. Our technology bypasses the need for such costly staff, allowing instead for a business to utilize existing IT staff to assemble solutions with greater speed and much less risk than traditional coding methodologies.

This product is expected to enhance the appeal of the Prophecy product set - taking it to new world markets and capitalizing on the increasing popularity of the platform and vendor independent Java development language. The product will be of particular appeal for Business to Business (B2B) developments, web deployments, and integration with legacy systems.

Prophecy has also continued to develop and enhance its existing ProphecyOpen rapid application assembly and financials product, and through the acquisition of UK based Tecsun Computer Services Limited has enhanced this product set with CHRyStal, a fully featured human resource system developed using Prophecy's own product.

Sales and Marketing

Late in the year a review was conducted of our sales marketing plans and performance.

This review, which studied our performance in this and prior years together with market conditions, resulted in the development of group marketing strategies that we have begun to implement.

These strategies seek to focus more resource in growing revenue from our installed base of over 300 global customers. Many of these customers have indicated an interest in upgrading their existing Prophecy products to our current product range. In addition we seek to concentrate our efforts on our existing business partners, who can augment our market coverage and our services capability.

The level of interest in our rapid application assembly technology (both current and future products) remains extremely high amongst both our existing and prospective partners. There is a major emphasis on and expansion of strategic alliances with some of the worlds largest IT companies, and this work is well advanced. Here we will see our products reach vast world markets through being incorporated into alliance partner products, or sold through their existing distributor networks.

Further, we remain committed to search for potential acquisitions in circumstances where the global technology is complementary to that of Prophecy and where additional global growth can be obtained.

In endorsing these strategies, the management has accepted a business plan whose goals include the growth of the company through organic growth and acquisitions eight fold in the next three years. The goals also include the shift of the company's business from being largely direct sales to a majority of indirect sales in this period.

Furthermore the strategies call for dramatic growth in our services revenues which will follow the IT market trend.

As early indications of the success of these actions the following strategic customer orders were secured in the year.

· A major Australian financial institution provided orders and revenue totaling over $2m as a result of a partnership in developing a Framework solution.

· Electronic Data Systems (EDS) provided an order to use the Framework for the development of a student loans system for the US Federal Education department (further orders for this project have been received in 2001/2).

· A major UK university provided an order for the migration of their systems from Prophecy Classic to the current Prophecy Open suite of applications.

In the year our services revenues were up 98% over the previous year. Our customers recognize the technical capabilities of the company and are seeking increased contribution from Prophecy to leverage their investment in our products.

There is much work still to be achieved but the last quarter of the year closed with a positive trend into the New Year.

Outlook for 2001/2

The global IT market will remain difficult based on available market indicators. However the Board and the management believe that we have taken the necessary actions to position the company for a return to profit and a return to revenue growth.

The release of our Java Framework is eagerly awaited by both existing and prospective customers and major alliance partners. Our intention is to focus our efforts on building awareness of this world class technology in the Australian and USA markets in 2001/2. This will result in sustained and increasing revenue streams in the Q3/4 fiscal periods.

Prophecy is a company in transition. We have a solid heritage of providing applications based on leading edge technology for which we own the intellectual property rights. We will leverage the investment that our customers have made in that technology. Furthermore we will demonstrate that the heritage continues with the release of the Java Framework in early 2001/2.

We have an established international distribution network that positions us for success in taking our new technology to market.

We have taken the essential actions to provide a platform for our success throughout the 2001/2 period.

We are confident that this year will see Prophecy achieve its financial objectives and return to profitability with continued positive cashflow. The year will also confirm that we have the platform for sustained growth over the next 3-year period with the aim of increasing shareholder value.



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