Final Results

microgen 11 February 2003 Information Management Solutions www.microgen.co.uk Microgen plc Preliminary Audited Results for the Year ended 31 December 2002 Highlights Microgen plc, the IT services group which provides software, managed services and consultancy, announces preliminary audited results for the year ended 31 December 2002 in line with expectations. Strong operating performance in difficult market conditions. All operating divisions profitable. Results in line with expectations Operating profit before tax, goodwill amortisation and exceptional items increased by 83% to £2.0 million (2001 : £1.1 million) Operating margin increased to 8.0% (2001 : 5.3%) Revenue of £25.3 million (2001 : £21.0 million) Fully diluted adjusted earnings per share increased by 13.0% to 2.6p (2001 : 2.3p). Net loss per share of 4.2p including £1.5 million exceptional charge as a result of acquisition integrations, primarily excess property provision. (2001 : eps of 1.5p restated for FRS19). Gross cash at 31 December 2002 of £9.8m and net free cash of £8.3 million. Net cash inflow from operations of £2.6 million in the period. Microgen-Kaisha : Operating margin maintained at 25% despite difficult market environment for IT consultancy. Revenue of £6.6 million and operating profit of £1.6 million. Microgen-OST : Formed following the acquisition of OST Business Rules in February. Integration successful. Revenue for the 10 months was £7.8 million producing operating profit of £1.1 million. Microgen-Telesmart : Significant improvement in operating margin to 13.1%, producing operating profit growth of 39% to £1.4 million on revenue of £10.9 million. Acquisition of Wishstream, reaffirming Microgen's leading position in e-billing managed service provision in the UK. Successfully integrated. Revenues from managed e-services and payment solutions now exceed legacy print services as e-Services revenue growth rate increased to 34%. Group Development : Benefits of cost-effective operations in Poland, from the OST acquisition, being realised. Investment in R&D increased by 92%. New products to be launched in all divisions in H1 2003. Martyn Ratcliffe, Executive Chairman commented: 'Despite the difficult market conditions, Microgen's disciplined management approach has again produced strong results. The acquisitions completed during the year have been successfully integrated into the Group, delivering increased operating margin and growth in revenue, operating profit and adjusted earnings per share.' Contact : Martyn Ratcliffe, Executive Chairman 01753-847123 Mike Phillips, Group Finance Director Giles Sanderson, Financial Dynamics 020-7831-3113 Ben Way, Financial Dynamics A results presentation will be available from www.microgen.co.uk. Chairman's Statement Despite the challenging market environment, the Board of Microgen reports a strong performance for the year ended 31 December 2002, in terms of both operating results and the strategic development of the Group. The three operating divisions are all profitable and the two acquisitions made during the year have been successfully integrated, with the objectives behind each acquisition being realised. The Group continues to focus on information management solutions which enable customers to manage their data to enhance business processes and information. These solutions are delivered through managed services, software products and consultancy. FINANCIAL SUMMARY For the year ended 31 December 2002, Microgen increased operating profit before tax, exceptional items and goodwill amortisation by 83% to £2.0 million on revenue of £25.3 million (2001: £1.1 million on revenue of £21.0 million). Operating costs have been well managed during the year, reducing by £3.5 million on continuing activities compared with 2001. Together with the acquisition integration strategy, this cost management has delivered a significant improvement in operating margin to 8.0% (2001: 5.3%), while increasing investment in new products and services. Profit before tax, exceptional items and goodwill amortisation increased by 33% to £2.2 million (2001 : £1.7 million). Adjusted earnings per share, (to reflect the underlying operating performance; see note 3) was 2.6p, a 13.0% increase on prior year (2001: 2.3p). As a result of the integration of the acquisitions, a one-time exceptional charge of £1.5 million has been taken, primarily due to an excess property provision. Therefore the Group produced a net loss on ordinary activities after tax and goodwill amortisation of £2.6 million (2001 : net profit of £0.7 million, restated following adoption of FRS19) and a fully diluted loss per share of 4.2p (2001 : eps of 1.5p, restated following adoption of FRS19) As a result of the acquisitions, headcount, including external contractors, peaked in March at 342, but was reduced to 289 at 31 December 2002 (31 December 2001 : 234). The Group produced a positive operating cash flow of £2.6 million and has maintained a strong balance sheet. Following the two acquisitions and a share buy-back of 9.8% of the issued share capital, the Group had a gross cash balance of £9.8 million with net free cash of £8.3 million at 31 December 2002. (The difference in gross cash and net free cash takes account of loan notes and deferred consideration resulting from acquisitions, and net corporation tax payable. All deferred considerations have now been finalised.) After careful consideration, the Board has concluded not to recommend a dividend (2001 : nil) but believe that investment in the strategic development of the Group and/or buy-back of shares is more appropriate in the current market. In accordance with FRS11, the Board has conducted a review of the goodwill held on the balance sheet. While market sentiment may infer an impairment of goodwill, the accounting treatment accepts the results of a discounted cash flow model and, on this basis, the Board have determined that there is currently no justification to take a charge for impairment of goodwill on the acquisitions of Kaisha Technology (1999), Telesmart Developments (2000) or OST Business Rules (2002). With regard to the goodwill associated with the acquisition of Wishstream in September 2002, the Board have decided to write the goodwill off in the first year of acquisition. MICROGEN-TELESMART Microgen-Telesmart provides added-value transactional services in billing, payment and hosted database and document management, where Microgen adds value by processing, distributing, storing and analysing data for a wide variety of applications, including the Group's market-leading business-to-business ('B2B') e-billing service. This position in the e-billing market was further reinforced in September through the acquisition of Wishstream Limited. The division is also one of the leading providers of payment software and solutions. The next generation of BACS software is currently being developed in the Group's development facility in Poland and Microgen has been participating in a deployment programme of the new BACS IP technology with a leading UK bank. For the year ended 31 December 2002, revenue from the division was £10.9 million, producing an operating profit of £1.4 million before Group overhead (2001: revenue of £12.2 million produced an operating profit of £1.0 million). The revenue decline in the legacy print business continued as anticipated while the annual revenue growth rate in managed e-services (database management, payment and billing) increased to 34% (2001 : 24%), such that during the second half of the year, the legacy print business was less than half of the total divisional revenue for the first time. This transition also produced the increase in operating margin to 13.1% (2001 : 8.4%), despite a significant increase in investment in product/service development. MICROGEN-KAISHA Microgen-Kaisha is the Group's consultancy division applying data warehousing and application integration techniques to transform data into information. By combining these skills with the provision of managed services and software available through the Group's other businesses, Microgen-Kaisha has developed a number of new business streams, including : Application Management : Providing greater forward visibility, this business area accounted for over 20% of the division's revenue in the second half of 2002 and benefits from the managed services infrastructure and expertise of the Microgen-Telesmart business. Payment Solutions : Using the technology and expertise from the Microgen-Telesmart payments business, large payment solutions have been deployed as a combination of software product and consultancy. Enterprise Information Integration : Developed from the Microgen-OST technology, but targeted at the commercial sector, this new product will be launched in the first half of 2003. This development continues to differentiate Microgen-Kaisha by combining the application of Group IPR using the skill base of application integration and data transformation. Considering the deterioration in the IT consultancy market, Microgen-Kaisha produced a laudable performance, achieving the strategic objective of maintaining profitability at 25% (2001: 25%). For the year ended 31 December 2002, revenue for the division was £6.6 million, producing an operating profit of £1.6 million before Group overhead and goodwill amortisation (2001 : revenue of £8.8 million, operating profit of £2.2 million). The legacy support services now account for less than 10% of the division's revenue. MICROGEN-OST Microgen-OST was established following the acquisition of OST Business Rules Ltd in February 2002. The division provides business rules based application integration solutions, using OST-developed software, incorporating user-defined business rules to integrate the front, middle and back office systems of major financial institutions. In addition the cross-selling of Microgen-Kaisha consultancy services into the financial services sector made progress in the second half of the year, enabling Microgen-OST to offer a broader range of services to their customer base. During the year, the division was affected by the slow down in the financial services sector, with project deferrals and pressure on consultancy fee rates. Action to realign the cost base has been taken during the second half of the year, including a property provision associated with the relocation of the London offices, in order to position the business more appropriately for 2003. Despite these difficult market conditions, the division produced a creditable performance. For the period from completion of the acquisition to 31 December 2002, revenue of £7.8 million produced an operating profit before Group overhead, exceptional items and goodwill amortisation of £1.1 million, an operating margin of 14%. GROUP DEVELOPMENT CAPABILITY One of the assets acquired with OST was a high quality, cost-effective software product development operation based in Wroclaw, Poland. In order to realise the benefits of scale and establish consistency of process, a Group Development operation was established in Q3 such that all development programs are managed by a Group Development Director responsible for the two facilities in Poland and UK. The Poland development centre is focused on software product development while the UK development operation primarily supports the Microgen-Telesmart services business. A number of development programs have been transferred to Poland and new products for all three divisions are scheduled for launch in the first half of 2003. These include : The next generation BACS IP payment products, currently being implemented in the deployment programme. Two new reconciliation products, based on the same OST-based technology, but with one solution for commercial applications, compatible with the Payment Solutions business (Microgen-Telesmart & Microgen-Kaisha) and a high end product designed for the financial services industry (Microgen-OST). A new Enterprise Information Integration ('EII') product for Microgen-Kaisha. Using the core technology of OST Business Rules, the EII product has been designed for commercial system integration applications. These new products will support Microgen's position at the forefront of Information Management technology. Development staff now account for approximately 20% of the headcount of the Group and consequently the Group's research and development expenditure increased significantly in 2002 to £2.5 million (2001 : £1.3 million). In accordance with the Group's accounting policy, all research and development expenditure is charged to the profit and loss account as incurred. SHARE BUY-BACK During the second half of the year, 6,320,000 shares equivalent to 9.8% of the issued share capital of the Group were purchased for cancellation for a total consideration of £1.96 million. At the forthcoming Annual General Meeting, the Board shall propose to continue this program and will be seeking authorisation to purchase 14.99% of the outstanding issued share capital of the Group. However, it should not be assumed that the Board will exercise any or all of the authorisation which will be a considered decision determined by the Board at the appropriate time, taking into account the strategic objectives of the Group, enhancement of earnings per share and the best interests' of shareholders. FUTURE PROSPECTS While the Group has experienced the impact of the slowdown in the IT sector, the Board's strong financial management continues to prove effective in maintaining both profitability and positive operating cash flow. Furthermore, during 2002, Microgen completed two acquisitions, OST Business Rules Ltd and Wishstream Ltd and the strategic benefits anticipated at the time of each acquisition are being achieved, with both of these businesses now successfully integrated into the Group. This strategy of active integration of acquisitions to realise the operational and cost benefits of scale and thereby deliver increased profitability has proven successful. As the business models of Microgen-OST and Microgen-Kaisha converge with consultants from both divisions being deployed on projects in the Financial Services sector and the OST Business Rules technology being repackaged for the Commercial sector, the Board has now decided to merge these two business units into a single operating division. In planning for 2003, the Board has done so on the assumption that market conditions will not improve in the near term. However the actions taken in integrating the acquisitions, together with the disciplined management approach adopted by the Board, have positioned the Group appropriately for the year ahead. Furthermore, the Board continues to believe that the IT sector is likely to consolidate and will continue to explore strategic opportunities for the further development of Microgen. In summary, despite the deterioration in market conditions, Microgen has delivered improved operating margin on increased revenue, producing growth in operating income and adjusted (operational) earnings per share, together with strong positive cash flow. The Board is pleased with this performance and with the organic and strategic development of the Group during the past year. Martyn Ratcliffe Executive Chairman MICROGEN PLC Group Profit and Loss Account for the year ended 31 December 2002 Audited Year Audited ended Year ended 31 Dec 2002 31 Dec 2001 As restated Notes £'000 £'000 Turnover Continuing operations 1(a) 17,394 21,009 Acquisitions 1(a) 7,938 - 25,332 21,009 Operating costs Continuing operations 1(b) (17,771) (21,329) Acquisitions 1(b) (8,240) - Exceptional items 1(b) (1,495) - (27,506) (21,329) Operating (loss)/profit Operating profit before goodwill amortisation and exceptional items Continuing operations 1(c) 1,024 1,112 Acquisitions 1(c) 1,008 - Operating profit before goodwill amortisation and 2,032 1,112 exceptional items Goodwill amortisation 1(b) (2,711) (1,432) Exceptional items 1(b) (1,495) - Operating loss after goodwill amortisation and (2,174) (320) exceptional items Operating loss 1(d) (2,174) (320) Net finance income 210 571 (Loss)/Profit on ordinary activities before tax Profit on ordinary activities before tax, goodwill 1(c) 2,242 1,683 amortisation and exceptional items Goodwill amortisation (2,711) (1,432) Exceptional items (1,495) - (Loss)/Profit on ordinary activities after goodwill (1,964) 251 amortisation and exceptional items and before tax (Loss)/profit on ordinary activities before tax 1(d) (1,964) 251 Tax on (loss)/profit on ordinary activities 2 (616) 490 (Loss)/Profit on ordinary activities after taxation (2,580) 741 and transferred to reserves Earnings per share 3 Basic and diluted (4.2)p 1.5p Adjusted earnings per share (before goodwill 3 amortisation and exceptional items and with normalised tax charge) Basic and diluted 2.6p 2.3p Statement of total recognised gains and losses 2002 2001 £000 £000 (Loss)/Profit on ordinary activities after taxation (2,580) 741 Exchange rate adjustments 15 - Total recognised (losses)/gains for the year (2,565) 741 Prior Year Adjustment 930 Total recognised (losses)/gains since last Annual (1,635) Report MICROGEN PLC Group Balance Sheet Audited Audited 31 Dec 2002 31 Dec 2001 As Restated Notes £'000 £'000 Fixed assets Intangible assets 37,149 24,599 Tangible assets 1,349 1,215 Investment in own shares 282 114 38,780 25,928 Current assets Stocks - raw materials 86 91 Debtors 4 6,439 4,353 Cash at bank and in hand 9,848 13,168 16,373 17,612 Creditors: due within one year 5(a) (8,115) (6,074) Net current assets 8,258 11,538 Total assets less current 47,038 37,466 liabilities Creditors: due after more than one 5(b) (650) - year Provisions for liabilities and 6 (2,628) (1,273) charges Net assets 43,760 36,193 Equity capital and reserves Called up share capital 7 2,920 2,561 Share premium account 8 29,011 17,594 Other reserves 8 616 300 Profit and loss account 8 11,213 15,738 Equity shareholders' funds 43,760 36,193 MICROGEN PLC Group Cash Flow Statement for the Year Ended 31 December 2002 Audited Audited Year ended Year ended 31 Dec 2002 31 Dec 2001 As restated Notes £'000 £'000 Net cash flow from operating activities 9(i) 2,640 2,997 Returns on investments and servicing of finance Interest received 404 702 Interest paid (248) (87) Interest element of finance lease - (16) payments 156 599 Taxation Tax paid in respect of the current year (190) (313) Tax paid relating to prior years (293) (360) Tax refund 8 1,346 (475) 673 Capital expenditure and financial investment Purchase of tangible fixed assets (367) (559) Sale of tangible fixed assets 1 9 (366) (550) Acquisitions and disposals Purchase of subsidiary undertakings 10 (4,108) - Net cash acquired with subsidiary 122 - undertakings Adjustment to consideration on purchase 100 - of subsidiary undertaking (3,886) - Equity dividends paid to shareholders - (512) Cash (outflow)/ inflow before financing (1,931) 3,207 Financing Issue of share capital 4,165 2 Buyback of share capital (1,960) - Purchase of shares for Trust (200) - Redemption of loan notes (3,394) (2,994) Payment of deferred consideration - (350) Capital element of finance lease rental - (568) payments (1,389) (3,910) Decrease in cash in the period 9(ii) (3,320) (703) Notes to the Preliminary Announcement of Audited results for the Year ended 31 December 2002 1. Turnover, profit and exceptional items 1(a) Turnover Continuing Acquisitions Audited Audited operations £'000 Year Year Ended Ended £'000 31 Dec 2001 31 Dec 2002 £000 £000 Microgen-Telesmart 10,805 97 10,902 12,229 Microgen-Kaisha 6,589 - 6,589 8,780 Microgen-OST - 7,841 7,841 - 17,394 7,938 25,332 21,009 1( b) Operating costs Continuing Acquisitions Audited Audited operations £'000 Year Year Ended Ended £'000 31 Dec 2001 31 Dec 2002 £000 £000 Divisional operating costs Microgen-Telesmart (9,324) (151) (9,475) (11,204) Microgen-Kaisha (4,953) - (4,953) (6,576) Microgen-OST - (6,779) (6,779) - (14,277) (6,930) (21,207) (17,780) Group costs (2,195) - (2,195) (2,198) Movement in property provision 102 81 - 102 Operating costs before goodwill and (16,370) (6,930) (23,300) (19,897) exceptional items Goodwill amortisation Microgen-Telesmart (158) (690) (848) (180) Microgen-Kaisha (1,243) - (1,243) (1,252) Microgen-OST - (620) (620) - Goodwill amortisation (1,401) (1,310) (2,711) (1,432) Operating costs before exceptional (17,771) (8,240) (26,011) (21,329) items Exceptional items Property provision - (1,471) (1,471) - Acquisition integration costs - (24) (24) - Exceptional operating costs - (1,495) (1,495) - Total operating costs (17,771) (9,735) (27,506) (21,329) 1 (c) Profit before tax, goodwill Continuing Acquisitions Audited Audited amortisation and exceptional items operations £'000 Year Year Ended Ended £'000 31 Dec 2001 31 Dec 2002 £000 £000 Operating profit before goodwill amortisation and exceptional items Microgen-Telesmart 1,481 (54) 1,427 1,025 Microgen-Kaisha 1,636 - 1,636 2,204 Microgen-OST - 1,062 1,062 - Divisional operating profit before 3,117 1,008 4,125 3,229 Group costs Group costs (2,195) - (2,195) (2,198) Movement on property provision 102 - 81 102 Operating profit before goodwill 1,024 1,008 2,032 1,112 amortisation and exceptional items Net finance income 210 - 210 571 Profit before tax, goodwill 1,234 1,008 2,242 1,683 amortisation and exceptional items 1 (d) (Loss)/Profit on ordinary Continuing Acquisitions Audited Audited activities before tax operations £'000 Year Year Ended Ended £'000 31 Dec 2001 31 Dec 2002 £000 £000 Operating profit before goodwill 1,024 1,008 2,032 1,112 amortisation and exceptional items Goodwill amortisation (1,401) (1,310) (2,711) (1,432) Exceptional items - (1,495) (1,495) - Operating loss (377) (1,797) (2,174) (320) Net finance income 210 - 210 571 (Loss)/Profit before tax (167) (1797) (1.964) 251 2. Taxation The taxation charge for the year comprises: Audited Audited Year ended Year ended 31 Dec 31 Dec 2001 2002 As restated Current Tax £'000 £'000 UK Corporation tax charge (692) (346) Tax credit on exceptional items 449 - Overseas Corporation Tax (36) - Current Year taxation charge (279) (346) UK Corporation tax prior year (charge)/credit (196) 1,544 Total Current taxation charge (475) 1,198 Deferred Taxation Deferred Tax charge for the year (141) (708) Total taxation on profit on ordinary activities (616) 490 Prior Year Adjustment Microgen Plc has adopted FRS 19 deferred tax for the first time in 2002 which has resulted in a deferred tax asset of £796,000 (2001as restated: £930,000) due to timing differences relating to accounting provisions and capital allowances. In addition the UK group had a potential deferred tax asset of £ 420,000 (2001 as restated: £260,000) relating to taxable trading losses carried forward which has not been recognised in the accounts. Within the prior tax charge, £128,000 relates to additional UK tax payable in respect of dividends received in 1997 from the Group's former German subsidiary upon which agreement of the underlying tax rate was only reached in 2002. The differences between the total current tax charge and the amount calculated by applying the national rates of corporation tax (UK 30%, Poland 28% US 35%) to the (loss)/profit on ordinary activities before tax is as follows: Audited Audited Year ended Year ended 31 Dec 31 Dec 2001 2002 As restated £'000 £'000 (Loss)/Profit on ordinary activities before tax (1,964) 251 Corporation tax credit/(charge) at standard rate 589 (68) of tax of 30% based on (loss)/profit on ordinary activities before tax Adjustment for the effects of: Unrelieved trading losses (178) - Goodwill amortisation not deductible for tax (813) (430) purposes Other expenses not deductible for tax purposes (73) (59) Capital allowances in excess of depreciation 196 211 Current Year taxation charge (279) (346) Uk Corporation tax prior year (charge)/credit (196) 1,544 Group current tax (charge)/credit for the period (475) 1,198 The current year taxation charge of £279,000 (2001: £346.000) represents an effective rate of tax for the group on its profit on ordinary activities before goodwill of 37.3% (2001: 20.6%). 3. Earnings and dividend per share To provide an indication of the underlying operating performance per share the adjusted profit after tax figure shown below excludes goodwill amortisation, exceptional items, prior year tax charges and credits and the impact of adopting FRS 19 Deferred Tax. Year ended Year ended 31 Dec 31 Dec 2001 2002 £'000 £'000 Profit before tax, goodwill amortisation and 2,242 1,683 exceptional items Normalised tax charge at 30% (673) (505) Adjusted Profit on ordinary activities after tax 1,569 1,178 Adjustment to actual current year tax charge (55) 159 Goodwill amortisation (2,711) (1,432) Exceptional items net of tax (1,046) - Prior Year tax (charge)/credit (196) 1,544 Deferred tax charge (141) (708) Profit on ordinary activities after tax (2,580) 741 Earnings Basic Diluted EPS EPS £'000 Pence Pence Profit on ordinary activities after tax (2,580) (4.2)p (4.2)p Normalisation of tax charge 55 0.1 0.1 Goodwill amortisation 2,711 4.5 4.5 Exceptional Item net of tax 1,046 1.7 1.7 Prior years' tax charge 196 0.3 0.3 Deferred Tax charge 141 0.2 0.2 Adjusted Profit on ordinary activities after 1,569 2.6p 2.6p tax Adjusted earnings per share are calculated using the adjusted profit after tax and the weighted average number of shares in issue during the year of 61,308,631 (2001: 51,210,517). Diluted earnings per share calculations are based on 61,308,631 (2001: 51,579,616) ordinary shares calculated as the basic weighted average number of ordinary shares plus nil (2001: 731,099) dilutive share options. 4. Debtors Audited Audited 31 Dec 2002 31 Dec 2001 As restated £'000 £'000 Trade debtors 4,467 2,449 Corporation tax recoverable 105 125 Other debtors 132 258 Prepayments and accrued income 939 591 Deferred tax asset 796 930 6,439 4,353 5. Creditors Audited Audited 31 Dec 2002 31 Dec 2001 As restated (a) due within one year £'000 £'000 Trade creditors 710 642 Other taxes and social security costs 834 854 Other creditors 392 274 Deferred consideration 250 150 Loan notes payable 652 225 Accruals and deferred income 5,277 3,929 8,115 6,074 (b) due after more than one year Loan notes 650 - 6. Provisions for liabilities and charges Provisions for liabilities in respect of surplus properties. Audited Audited 31 Dec 2002 31 Dec 2001 As restated £'000 £'000 Balance brought forward 1,273 1,708 Credited to the profit and loss account (131) (243) Charged to profit and loss account 29 162 Exceptional charge to the Profit and 1,471 - Loss account Utilised in the year (54) (396) Amortisation of discount 40 42 Balance carried forward 2,628 1,273 7. Share Capital The movement in authorised and issued Ordinary Share Capital of 5 pence each during the period is detailed below. Authorised Issued and fully paid Number Amount Number Amount At 1 January 2002 70,000,000 £ 51,214,953 £2,560,748 3,500,000 Increase in authorised share 20,000,000 £ capital on 26 February 2002 1,000,000 Movement in issued share capital in the year: Issued re Placing to raise 5,116,373 255,819 funds in respect of the acquisition of OST Business Rules Limited To the vendors of OST Business 8,302,521 415,126 Rules Limited Shares bought back during the (6,320,000) (316,000) year To the vendors of Wishstream 95,238 4,762 Limited At 31 December 2002 90,000,000 £ 58,409,085 2,920,455 4,500,000 8. Movement on reserves Share --------Profit and Loss Account-------- Premium Other Revenue Goodwill Account reserves Reserve Reserve Total £'000 £'000 £'000 £'000 £'000 At 1 January 2002 as 17,594 300 26,452 (11,644) 14,808 previously stated Prior Year Adjustment - 930 930 (FRS 19 Deferred Tax - - Asset) At 1 January 2002 (as 17,594 300 27,382 (11,644) 15,738 restated) Retained loss for the - - (2,580) - (2,580) year Exchange Rate - - 15 - 15 adjustments Issue re Placing to 4,042 - - - - raise funds in respect of the acquisition of OST Business Rules Limited Shares issued to the 7,472 - - - - vendors of OST Business Rules Limited Shares issued to the 35 - - - - vendors of Wishstream Limited Shares bought back - 316 (1,960) - (1,960) during the year Expenses relating to (132) - - - - share placing At 31 December 2002 29,011 616 22,857 (11,644) 11,213 9. Notes to the Group Cash Flow Statement (i) Reconciliation of operating loss to net cash inflow from operating activities Audited Audited year ended year ended 31 Dec 2002 31 Dec 2001 £'000 £'000 Operating loss (2,174) (320) Depreciation 775 1,365 Goodwill amortisation 2,711 1,432 Exceptional Item- Property Provision 1,471 - Exceptional Item - Other 24 - Loss on sale of fixed assets 25 14 Other non-cash movements - 146 Decrease in stocks 5 31 Decrease in debtors 1,300 1,356 Decrease in creditors (1,497) (1,027) Net cash inflow from operating 2,640 2,997 activities 9 (ii) Reconciliation of net cash flow to movement in funds/(debt) Audited Audited Year ended Year ended 31 Dec 2002 31 Dec 2001 £'000 £'000 Decrease in cash in the period (3,320) (703) Cash outflow from decrease in lease - 568 financing Change in net funds resulting from cash (3,320) (135) flows Issue of loan notes (4,471) - Redemption of loan notes 3,394 2,994 Movement in net funds in the period (4,397) 2,859 Net funds at beginning of the period 12,943 10,084 Net funds at end of period 8,546 12,943 9 (iii) Analysis of net funds At At 1 Jan 2002 Cash flow Acquisitions 31 Dec 2002 £'000 £'000 £'000 £'000 Cash at bank and in 13,168 (3,320) - 9,848 hand Debt due within 1 (225) 225 (652) (652) year Debt due after 1 - (650) (650) year - Total 12,943 (3,095) (1,302) 8,546 The net free cash figure of £8.3 million referred to in the Chairman's Statement is arrived at after deducting cash deferred consideration of £250,000 from the net funds figure shown above. 10. Acquisition of Subsidiaries The group made two acquisitions during the year for a total consideration of £ 16,861,000. The total adjustments required to the book values of the assets and liabilities acquired in order to present the net assets of those companies acquired in accordance with group accounting principles were £270,000 details of which are set out below together with the resulting amount of goodwill arising. Both of these purchases have been accounted for as acquisitions. (a) Acquisition of OST On 8 February 2002 the company announced the acquisition, subject to shareholder approval, of the OST Group. Shareholders' approval was obtained at the EGM on 26 February 2002 and the acquisition of the OST Group was formally completed on 27 February 2002. The key financial details in respect of the acquisition are scheduled below. Notes £000 Consideration and cost in respect of the acquisition: Cash 2,118 Loan Notes 4,471 Ordinary Shares 7,265 Initial consideration 13,854 Increase in fair value of consideration (i) 623 Deferred consideration 250 Fees and costs in respect of the 1,485 acquisition 16,212 Provisional Fair Value Provisional net assets Adjustments Fair Values acquired £000 £000 £000 Fixed Assets 503 - 503 Debtors 4,132 (245) 3,887 Cash 145 - 145 Bank Loan (127) - (127) Creditors (2,958) (25) (2,983) Taxation (84) - (84) Net Assets 1,611 (270) 1,341 Goodwill on acquisition 14,781 Total Consideration and 16,212 costs (i) The increase in the fair value of consideration represents the increase in value of the ordinary shares in Microgen plc between exchange of contracts for the transaction and completion. (ii) The provisional fair value adjustments relate to adjustments of accounting policies to bring them in line with those of Microgen plc. (b) Acquisition of Wishstream On 9 September 2002 the company announced the acquisition of Wishstream Limited. The acquisition was formally completed on 11 September 2002. The key financial details in respect of the acquisition are scheduled below. Notes £000 Consideration and cost in respect of the acquisition: Cash 485 Ordinary Shares 40 Initial consideration 525 Deferred consideration 65 Fees and costs in respect of the 59 acquisition 649 Provisional Provisional net Fair Value Fair liabilities Adjustments Values acquired £000 £000 £000 Fixed Assets 64 - 64 Debtors 2 - 2 Cash 104 - 104 Creditors (211) - (211) Net Liabilities (41) - (41) Goodwill on acquisition 690 Total Consideration and 649 costs From the dates of acquisition to 31st December 2002 the acquisitions have contributed £7,938,000 to turnover and £1,008,000 to Operating Profit before interest, goodwill amortisation and exceptional items. 11. Statement by the directors The figures in the consolidated Profit and Loss Account and Balance Sheet do not amount to full accounts within the meaning of Section 254 of the Companies Act 1985. The Annual Report for the period ended 31 December 2002 will be posted to shareholders in due course and will also be available on the investor relations page of our web site (www.microgen.co.uk). Further copies will be available on request and free of charge from the Company Secretary at 11 Park Street, Windsor, Berkshire SL4 1LU. The comparative figures for 2001 have been extracted from the annual report for the year ended 31 December 2001 and have been restated to reflect the change in accounting policy arising from the adoption by the Group of FRS 19: Deferred Tax.

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