Final Results
Microgen PLC
15 March 2006
microgen
15 March 2006
Information Management Solutions
www.microgen.co.uk
Unaudited Preliminary Results for the Year ended
31 December 2005
Microgen plc reports earnings for the year ended 31 December 2005 in line with
previously upgraded market forecasts. The results are reported under IFRS with
2004 comparisons restated accordingly.
HIGHLIGHTS
• Adjusted diluted eps (excl. intangible amortisation,
exceptional items and tax at the effective rate) increased by over 20% to 5.3p
(2004: 4.4p). Diluted eps of 4.1p (2004: diluted eps 3.1p).
• Operating profit before intangible amortisation and
exceptional items increased by 41% to £7.0 million (2004: £5.0 million).
Operating profit increased by 55% to £5.2 million (2004: £3.3 million).
• Operating margins before intangible amortisation and
exceptional items increased to a very strong 17.2% (2004: 11.8%).
• Profit before tax of £5.5 million (2004 : £3.8 million)
• Revenue £40.8 million (2004: £42.4 million), as the Group
continued the migration out of lower margin activities and maintained its focus
on profit.
o 62% of revenue derived from Financial Services sector (2004: 54%).
o 48% of revenue is recurring (2004 : 38%)
• Positive operating cash flow of £4.7 million producing cash
and cash equivalents of £11.8 million and net funds at 31 December 2005 of £5.8
million.
• Investment in research, development and support of software
products increased by 46%. All costs expensed.
• Successful integration of the 3 acquisitions completed
during the year.
Contacts
Martyn Ratcliffe, Executive Chairman 01252-772312
Mike Phillips, Group Finance Director
Giles Sanderson, Financial Dynamics 020-7831-3113
15 March 2006
MICROGEN plc ('Microgen')
Preliminary Results for the Year ended
31 December 2005
Chairman's Statement
Microgen reports another strong operating performance for the year ended 31
December 2005, with strong earnings growth and significant investment in new
products. The Group has continued to evolve, with an increasing proportion of
business derived from Microgen software, particularly within the financial
services sector. In addition, the Group completed three acquisitions during 2005
and these have been successfully integrated.
Group Financial Performance
This is the Group's first report issued under International Financial Reporting
Standards ('IFRS') and the comparative prior year figures have been restated
accordingly. The change to IFRS results has not affected revenue recognition
nor the cash flows of the Group. One of the more relevant elements of IFRS for
IT software companies relates to the capitalisation of product development. The
Board has reviewed the Group's development expenditure against the IFRS
capitalisation criteria while also considering best practice of international
software and solutions companies and has determined that the amount to be
capitalised is nil and therefore all costs have been expensed. Consistent with
the Board's general practice, this is a very conservative interpretation of the
IFRS. A fuller explanation of the impact of the transition to IFRS is presented
in note 11 to the financial statements.
In the year ended 31 December 2005, Microgen generated operating profit before
intangible amortisation and exceptional items of £7.0 million (2004: £5.0
million) from revenue of £40.8 million (2004: £42.4 million). Operating margins
before intangible amortisation and exceptional items increased to a very strong
17.2% (2004: 11.8%).
Recurring revenue (comprising software maintenance/support, annual licence fees,
applications management and managed services) accounted for 48% of the Group
revenue for the period (2004 : 38%). It should be noted that the Group adopts a
conservative approach to recognition of revenue from annual licence fees which
are amortised on a monthly basis over the period of the licence. (This compares
with the alternative policy of recognising either a full year's licence fee or
the full term licence fee at the point of initial revenue recognition.) While
the majority of new licences are now proposed using this model, some customers
do still demand an initial licence fee model where customers seek capital
investment and lower ongoing operating cost. In particular, the BACS customer
base adopts this model due to the relatively low value of the individual
licences and this resulted in increased revenue during the first half of the
year.
Operating profit for the period was £5.2 million (2004: £3.3 million). Profit
before tax in the year was £5.5 million (2004: £3.8 million). Adjusted diluted
earnings per share increased by 20.5% to 5.3p (2004: 4.4p) with a diluted
earnings per share of 4.1p (2004: 3.1p). This is the fifth consecutive year of
strong adjusted earnings per share growth and increase in operating margin.
The Group's effective tax rate of 23.5% (2004: 24.1%) was achieved through the
utilisation of trading losses obtained with acquisitions made over the past 3
years and the conservative recognition of the deferred tax assets. Excluding the
impact of intangible amortisation, exceptional items and prior year tax the tax
rate used in calculating adjusted earnings per share is 26.5% (2004: 25.1%).
Headcount at 31 December 2005 was 460. This compares with headcount at 31
December 2004 of 480 and the addition of 134 staff during the year through the
acquisitions.
During the period and before expenditure on acquisitions and the purchase of the
freehold property, the Group produced positive operating cash flow of £4.7
million (2004: £5.4 million) and continues to have a strong balance sheet with
cash of £11.8 million and net funds of £5.8 million at 31 December 2005.
Consistent with the Group's acquisition strategy, Microgen does not at present
pay a dividend.
Operational Overview
Microgen is organised into two operating divisions : Financial Services and
Commercial. The revenue in each division comprises software, consultancy and
managed services and the detailed breakdown of revenue, costs and margins is
provided in note 1 of this report. The divisional operating income and margin
figures referenced below are reported before group overhead, intangible
amortisation, exceptional items, interest and tax.
Financial Services : This division contributed 62% of Group revenue (2004 : 54%)
and comprises solutions for Banking, Payment Solutions and Asset & Wealth
Management. Revenue in the period increased to £25.1 million, including £1.9
million from acquisitions in the year (2004: £22.7 million) Within the Division:
• The Payment Solutions business experienced very strong organic growth in
2005, enhanced by the upgrade cycle to BACS-IP. This upgrade cycle has
affirmed the benefits of Microgen's development resourcing model, whereby,
having developed a completely new product range, resources have now been
deployed on alternative projects with modest ongoing support costs. Microgen
is one of the leading providers of BACS payment solutions and now that the
BACS-IP upgrade is almost complete, opportunities to broaden the capability
in the payments sector are being explored.
• The Banking business had a mixed performance with the Treasury/FX and
Derivatives Pricing products producing organic growth while revenue
associated with the Derivatives/Commodities Back-Office product declined
reflecting the stage in the product lifecycle and the pending upgrade to the
next generation. The data management product range suffered from the effects
of the product transition combined with events in London over the summer,
but recent evaluations of Microgen Aptitude have confirmed the strong
competitive positioning of the new product. However, it is apparent that
the Group's limited presence in some of the key international financial
centres is currently an inhibitor to the growth of the Banking business and
the Board is evaluating the strategic options to address this limitation. A
new Managing Director has been recruited to develop the opportunities in
this sector and the Payments business is to be integrated into the Banking
business unit.
• The Asset & Wealth Management software-based activities produced good
organic growth, offset by the reduction in general IT consultant deployment.
The South African business acquired in 2004 is consistently profitable and
the management team has recently been strengthened to develop broader
opportunities from this established market presence. The acquisition of Lynx
Wealth Management Systems and Milvus Software in the second half of 2005
have established Microgen as a leading provider to the Wealth Management
sector, particularly in the Channel Islands and the Caribbean.
Overall, the Financial Services division produced operating income of £5.7
million, equivalent to an operating margin of 22.8% (2004: operating income of
£3.9 million and an operating margin of 17.0%). The improvement in operating
margin has been achieved by increasing the proportion of revenue derived from
Microgen software solutions to 78% (2004: 62%), enhanced by the BACS-IP upgrade
cycle, particularly during the first half of the year. Overall in 2005,
recurring revenue accounted for 44% of the divisional revenue, although this
increased to 53% in the second half following the acquisitions.
Commercial : The Commercial division contributed revenue of £15.7 million,
including £1.0 million from an acquisition, equivalent to 38% of Group revenue
(2004 : £19.7 million, equivalent to 46% of Group revenue). Operating profit was
maintained at £3.5 million (2004 : £3.5 million), due to a significant increase
in operating margins to 22.6% (2004 : 17.8%), reflecting the Group's focus on
profitability and cash flow. (Comparative data is impacted by legacy issues
which increased revenue in the division by £3.4 million in 2004.)
Approximately 87% of the divisional revenue is derived from general consultancy
and managed services. 53% of the Commercial division revenue was recurring in
nature, increasing to 56% in the second half following the acquisition of the R/
base SAP managed services operations.
The Commercial Division is organised into three vertical sectors. During 2005,
the Public Sector (primarily Emergency Services) continued to deliver strong
organic growth but the Corporate sector experienced difficult market conditions
with continuing commoditisation of consultancy services. The decline in the
legacy print business continued as anticipated and the low margin contractor
activities acquired with MMT have been effectively exited. The Energy &
Utilities sector reported a decline in revenue from the mature software
installed base, but was successful in deploying Microgen Aptitude based
solutions which will form the platform for future solutions in this market.
Software Product Development
Microgen continues to invest in its software products, with research,
development and support spend increasing by 46%, compared to 2004. Software
development activities total £6.2 million (2004: £4.2 million), comprising
investment in new product development, customer-funded product developments and
support/enhancements of existing products. All the Group's software development
activities are managed in a single organisation to ensure consistency and
quality, with the costs being charged into the business units. This structure
facilitates an investment model that enables Microgen to respond to market
sector dynamics and provide flexibility of resourcing as development projects
progress through the lifecycle stages.
Over the past two years, the Group has invested significantly in developing an
exciting new product called Microgen Aptitude, which is a composite application,
a product category increasingly being recognised by independent analysts as a
key enabler for next generation application development. Now deployed to provide
a number of diverse solutions across several business sectors, recent
evaluations affirm its strong competitive performance and flexibility. Microgen
Aptitude has three distinct applications :
• Rules-Based Business Process Management ('BPM') tool - Microgen Aptitude
is a high performance, rules-based integration and BPM tool, providing a
graphical representation of the business process and a data-driven execution
model. By definition, such a product is not sector-specific but, due to the
experience gained in financial services with the prior generation software,
Microgen Aptitude has been designed to satisfy the demanding performance and
quality requirements of high volume STP transaction processing.
• Composite Application Developer - Using the Microgen Aptitude technology
to develop solutions, either as a one-off custom development or as a
repeatable solution, the product has proven to provide an efficient platform
for applications development. Examples of such deployments include
reconciliations solutions, energy pricing, portals and on-line trading.
• Development Platform -Microgen Aptitude is increasingly providing a core
platform for the re-engineering of existing Microgen software products and
the development of new applications. This re-use of technology is proving to
be efficient in terms of the development process but should also produce a
reduction in ongoing support costs in the longer term. Examples of the use
of Microgen Aptitude include :
• Socrates+ : scheduled for launch in the first half of 2006, this is
the next generation of Microgen's performance measurement product for
the asset management sector.
• Cortex+ : a phased migration of Microgen's back-office derivatives and
commodities trading system, commencing in the first half of 2006.
(Through this programme, Microgen is also developing a model for
migration of legacy core banking systems, which could provide
significant potential in the medium term.)
• Microgen Intelligent Pricing Manager ('MIPM') : The first phase of
this completely new product has been developed in conjunction with a
banking customer. The full product, scheduled for delivery in mid-2006,
will provide an integrated front-office pricing platform for structured
derivative products. Alternatively MIPM can be used for independent
price verification for middle office applications.
• Payment Control System ('PCS') : an intelligent consolidation and
control platform for payments processing, PCS offers the capability to
capture, validate, route and track Direct Debit Instructions or other
payment channels or collections through a number of gateways, such as
BACS or SWIFT.
In addition, Microgen will be launching a new product in the Spring for second
generation internet banking. This highly secure system is targeted at the
private banking sector, where Microgen has established a significant presence,
although the new product can be integrated with any core banking system using
Microgen Aptitude.
Acquisitions
During the year, the Group acquired three companies which were financed through
existing cash resources and a small element of new Microgen shares. All of the
acquisitions have now been successfully integrated.
• R/base was a UK provider of SAP applications management and consultancy
services, specialising in providing managed services. The addition of SAP
capability into the Group's offering has been a strategic objective for some
time and will enhance the skill base across several business sectors. R/base
was acquired in July and has been integrated into Microgen's Commercial
Division.
• Lynx Wealth Management Systems ('LWMS') was a leading provider of
solutions for the offshore trust, fund and banking sector. Acquired in July,
LWMS has been integrated into the Group's Asset & Wealth Management
business, increasing the scale and offerings in this area of financial
services.
• Milvus Software was acquired in November. Milvus is a Guernsey-based
supplier of core banking systems and has also been integrated into the
Microgen Asset & Wealth Management business. Following on from the
acquisition of LWMS, the acquisition of Milvus has established Microgen as a
leading provider of systems to the Wealth Management sector, with a
particularly strong presence in the Channel Islands.
In July, the Group also acquired a freehold property in Fleet consolidating the
above acquisitions, together with a number of existing operations into the
facility. Initially financed through existing cash resources, a commercial
mortgage was obtained in November, secured on the freehold property and the
Group's existing long-leasehold property in London.
The restructuring charges associated with the integration of the above
acquisitions totalled £1.4 million and these costs have been expensed in the
2005 results.
Management Incentive Plans
The Group currently operates performance-based share option plans to incentivise
senior managers of Microgen and to align management and shareholder objectives.
Share-based remuneration forms a key component of management compensation and
focuses on shareholder returns. However the structure and limitations of these
schemes result in inefficiencies both in terms of shareholder dilution and
limited management incentive. Furthermore, with a very active private equity
sector offering significant potential rewards, the opportunities being offered
to proven managers are frequent and attractive and it is imperative that public
companies can offer competitive remuneration in order to retain key managers.
Long Term Incentive Plans can now be structured to provide benefits in terms of
both a reduction in shareholder dilution and improved management incentive.
These schemes are increasingly being adopted by UK listed companies to replace
traditional share option schemes for UK-based senior managers. As a result, the
Remuneration Committee will be proposing introducing such a scheme at the next
Annual General Meeting.
Prospects
Microgen has reported a fifth consecutive year of adjusted earnings per share
growth and increased operating margins. This consistent performance, despite the
difficult market environment over this period, demonstrates the success of the
Board's focus on profitability, and peer group comparisons clearly highlight
that Microgen's operating margins are at the top end of the range for companies
in the UK IT industry. Analysis shows that companies in the sector typically
report operating margins in the 10% range.
The Board is not anticipating a market recovery in the short term and will
therefore maintain its prudent approach. However, with a significantly stronger
product set the Board has now determined to increase investment in organic
growth. As a result, the Board considers that an operating margin from the
Group's continuing operations in the order of 15% is an appropriate target,
which still positions Microgen's profitability at the upper end of companies in
the sector. The Board's objective is to seek to balance short term profitability
with investment that will increase the organic growth rate and enhance
shareholder value in the medium term.
The success of the Group's acquisition integration model enables the Board to
continue to explore strategic opportunities for the further development of
Microgen, including mergers and acquisitions, that could enhance the Group's
offerings and customer base, thereby improving shareholder value. In particular,
the Group's Banking business is presently constrained by its limited
international sales and support organisation and opportunities, through
acquisition or partnership, to address this limitation continue to be explored.
However there can be no certainty that any such transactions will be completed.
In summary, the Board considers the strong performance of the Group to be
affirmation of its strategy, but remains prudent in its short term outlook.
Balancing short term performance with development of the medium term
opportunities remains the priority for the Board. The Microgen Aptitude platform
and the proven acquisition integration model provide a solid foundation for the
future and the Board is optimistic regarding the medium term prospects for the
Group.
Martyn Ratcliffe
Executive Chairman
MICROGEN PLC
Group Income Statement
for the year ended 31 December 2005
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
31 Dec 31 Dec 2005 31 Dec 31 Dec 31 Dec 31 Dec
2005 2005 2004 2004 2004
Before Intangible Before Intangible
intangible amortisation Total intangible amortisation Total
amortisation and amortisation and
and exceptional and exceptional
exceptional items exceptional items
items items
Notes £'000 £'000 £'000 £'000 £'000 £'000
Revenue
Continuing operations 1 37,844 - 37,844 42,444 - 42,444
Acquisitions 1 2,938 - 2,938 - - -
40,782 - 40,782 42,444 - 42,444
Operating costs
Continuing operations (30,774) (399) (31,173) (37,452) (1,665) (39,117)
Acquisitions (2,992) (1,463) (4,455) - - -
(33,766) (1,862) (35,628) (37,452) (1,665) (39,117)
Operating profit
Continuing operations 1 7,070 (399) 6,671 4,992 (1,665) 3,327
Acquisitions 1 (54) (1,463) (1,517) - - -
Operating profit 7,016 (1,862) 5,154 4,992 (1,665) 3,327
Interest payable and similar (159) - (159) (53) (53)
charges
Interest receivable 535 - 535 479 - 479
Profit on ordinary activities
before tax 7,392 (1,862) 5,530 5,418 (1,665) 3,753
Taxation 3 (1,299) (903)
Profit for the year 4,231 2,850
Profit attributable to
equity shareholders 4,231 2,825
Profit attributable to
minority interest - 25
Retained profit transferred
to reserves 4,231 2,850
Earnings per share 4
Basic 4.2p 3.1p
Diluted 4.1p 3.1p
Adjusted earnings per share
(before exceptional items and
with effective tax charge) 4
Basic 5.4p 4.5 p
Diluted 5.3p 4.4p
MICROGEN PLC
Statement of recognised income and expense
Year Ended Year Ended
31 Dec 2005 31 Dec 2004
£000 £'000
Cash Flow hedges:
- net fair value gains net of tax 69 -
- reclassified and reported in net profit (1) -
Exchange differences on translation of foreign operations 84 (32)
Net income/(expense) recognised directly in equity 152 (32)
Profit for the year 4,231 2,850
Total recognised income and expense for the year 4,383 2,818
Attributable to:
Equity Shareholders 4,383 2,793
Minority interests - 25
4,383 2,818
MICROGEN PLC
Group Balance Sheet
As at As at
31 Dec 2005 31 Dec 2004
ASSETS Notes £'000 £'000
Non-current assets
Goodwill 61,892 53,148
Intangible assets 1,410 512
Property, plant and equipment 9,340 3,774
Deferred tax asset 2,122 2,425
74,764 59,859
Current assets
Inventories - raw materials 75 100
Trade and other receivables 5 8,534 7,975
Financial assets - derivative financial 112 -
instruments
Cash and cash equivalents 11,804 14,600
20,525 22,675
LIABILITIES
Current liabilities
Financial liabilities - derivative financial
instruments (43) -
Trade and other payables 6 (16,015) (14,580)
Current tax liabilities (1,367) (439)
Provisions 7 (565) (1,244)
(17,990) (16,263)
Net current assets 2,535 6,412
Non-current liabilities
Financial liabilities - borrowings (6,000) -
Provisions 7 (910) (1,200)
(6,910) (1,200)
NET ASSETS 70,389 65,071
SHAREHOLDERS' EQUITY
Ordinary shares 8 5,120 5,079
Share premium account 9 11,167 11,143
Other reserves 9 37,376 36,723
Retained earnings 9 16,726 12,126
EQUITY SHAREHOLDERS' FUNDS 70,389 65,071
MICROGEN PLC
Group Cash Flow Statement
for the Year Ended 31 December 2005
Year ended Year ended
31 Dec 2005 31 Dec 2004
Notes £'000 £'000
Cash flows from operating activities
Cash generated from operations 10(i) 4,656 5,361
Interest received 551 433
Interest paid (43) (21)
Tax paid (302) (355)
Net cash generated from operating activities 4,862 5,418
Cash flows from investing activities
Acquisition of subsidiaries (including net debt acquired) 2 (7,353) (3,029)
Payment of deferred consideration - (205)
Proceeds from sale of property, plant and equipment 1 480
Purchase of property, plant and equipment (6,441) (919)
Purchase of investment in other company - (2,894)
Proceeds from the sale of investment in other company - 3,500
Adjustment to purchase consideration 2 60 -
Net cash used in investing activities (13,733) (3,067)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital 28 2,416
Redemption of loan notes - (652)
Net proceeds from borrowings 6,000 -
Net cash generated from financing activities 6,028 1,764
Net (decrease)/ increase in cash and cash equivalents (2,843) 4,115
Opening cash and cash equivalents 14,600 10,457
Effects of exchange rate changes 47 28
Closing cash and cash equivalents 11,804 14,600
Microgen plc
1. Segmental analysis
The segmental breakdown given below reflects the divisional operating structure
of the Group. This is the primary segmentation of the operating performance of
the Group reviewed by the Board. The secondary segmentation is by geography.
There is no inter-segment revenue.
The divisions and business categories are allocated central function costs in
arriving at operating profit/(loss). Group overhead costs are not allocated
into the divisions or business categories as the Board believes that these
relates to Group activities as opposed to the division or business category.
Year ended 31 December 2005 Year ended 31 December 2004
Financial Commercial Total Financial Commercial Total
Services Services
Revenue £000 £000 £000 £000 £000 £000
Software based
- continuing operations 17,607 2,089 19,696 14,108 3,293 17,401
- acquisitions 1,942 - 1,942 - - -
19,549 2,089 21,638 14,108 3,293 17,401
Managed services
- continuing operations 1,659 7,734 9,393 1,613 9,513 11,126
- acquisitions - 996 996 - - -
1,659 8,730 10,389 1,613 9,513 11,126
General consultancy
- continuing operations 3,898 4,857 8,755 7,022 6,895 13,917
- acquisitions - - - - - -
3,898 4,857 8,755 7,022 6,895 13,917
Total Revenue
- continuing operations 23,164 14,680 37,844 22,743 19,701 42,444
- acquisitions 1,942 996 2,938 - - -
Total Revenue 25,106 15,676 40,782 22,743 19,701 42,444
Operating costs
Development costs
- continuing operations (4,617) (1,002) (5,619) (3,189) (1,041) (4,230)
- acquisitions (545) - (545) - -
-
(5,162) (1,002) (6,164) (3,189) (1,041) (4,230)
Other operating costs
- continuing operations (12,850) (10,070) (22,920) (15,697) (15,163) (30,860)
- acquisitions (1,382) (1,065) (2,447) -
- -
(14,232) (11,135) (25,367) (15,697) (15,163) (30,860)
Operating costs before group
overheads
- continuing operations (17,467) (11,072) (28,539) (18,886) (16,204) (35,090)
- acquisitions (1,927) (1,065) (2,992) -
- -
(19,394) (12,137) (31,531) (18,886) (16,204) (35,090)
Operating profit before group
overheads
- continuing operations 5,697 3,608 9,305 3,857 3,497 7,354
- acquisitions 15 (69) (54) - - -
Divisional operating profit 5,712 3,539 9,251 3,857 3,497 7,354
before intangible amortisation
and exceptional items
Group overheads (2,235) (2,362)
Operating profit before 7,016 4,992
intangible amortisation and
exceptional items
Divisional intangible
amortisation and exceptional
items
- Intangible amortisation (167) (9) (176) (32) - (32)
- Exceptional costs
- Property provision 107 (258) (151) (685) - (685)
- Restructuring costs (1,124) (105) (1,229) (1,432) (100) (1,532)
Divisional operating profit 4,528 3,167 1,708 3,397
Group exceptional items
- Goodwill adjustment (see note (300) -
7)
- Exceptional costs
- Property provision 93 58
- Restructuring costs (99) (80)
- Exceptional profit
- On disposal of investment - 606
in other company
Operating profit 5,154 3,327
Interest payable and similar (159) (53)
charges
Interest receivable 535 479
Profit before tax 5,530 3,753
Taxation (1,299) (903)
Profit for the year 4,231 2,850
1 (b) Geographical analysis
Year ended 31 December 2005 By origin By destination
Revenue Revenue
£'000 £'000
United Kingdom and Ireland 37,719 34,320
Rest of Europe - 2,647
Americas 685 1,071
Asia 350 620
Africa 2,028 2,124
40,782 40,782
Year ended 31 December 2004 By origin By destination
Revenue Revenue
£'000 £'000
United Kingdom and Ireland 40,874 34,411
Rest of Europe - 4,058
USA 931 3,252
Asia 49 101
Africa 590 622
42,444 42,444
2. Acquisitions
The Group made three acquisitions in the year for a total consideration of
£7,919,000 comprising £7,297,000 in cash and £622,000 in new Microgen shares.
The net debt acquired with these acquisitions was £56,000. In order to present
the net assets of the acquired companies at fair value, total adjustments of
£215,000 were made to the book values of the assets and liabilities acquired.
On 1 July 2005 Microgen acquired the entire share capital of R/Base Limited, a
UK provider of SAP applications management and consultancy services. The
consideration paid in respect of the issued share capital of R/Base was
£1,267,000, comprising £645,000 in cash and £622,000 by the issue of 740,290 new
Microgen shares. The net debt of R/base on acquisition was £396,000 which
Microgen has repaid.
On 13 July 2005 Microgen acquired the entire share capital of Lynx Wealth
Management Systems (Guernsey) Limited ('LWMS'), a leading provider of trust,
fund and private banking systems. The cash consideration paid in respect of the
issued share capital of LWMS was £2,120,000. The net debt of LWMS as at 30 June
2005 was £1,674,000 which Microgen has repaid.
On 7 November 2005 Microgen acquired the entire share capital of Milvus Software
Limited, a provider of solutions for private and international banking. The
cash consideration paid in respect of the issued share capital of Milvus was
£4,532,000. Milvus had cash balances on acquisition of £2,014,000 which were
retained by Microgen.
3. Taxation
The taxation charge for the year comprises:
Year ended Year ended
31 Dec 2005 31 Dec 2004
£'000 £'000
Analysis of charge in the year
Current tax (1,213) (647)
Deferred tax (86) (256)
(1,299) (903)
The total tax charge of £1,299,000 represents 23.5% (2004: 24.1%) of the Group
profit before tax of £5,530,000 (2004: £3,753,000). The total charge in the year
is reduced due to the utilisation and recognition of previously unrecognised
deferred tax in respect of trading losses. After adjusting for the impact of
intangible amortisation, exceptional items and prior year tax charges the tax
rate used in calculating adjusted earnings per share is 26.5% (2004: 25.1%) (see
note 4).
As at 31 December Microgen has a deferred tax asset of £2,122,000 (2004:
£2,425,000) relating to trading losses, timing differences relating to
accounting provisions and capital allowances. At 31 December 2005 the Group had
tax trading losses of £13,606,000 (2004: £15,319,000) and a cumulative
unprovided deferred tax asset in respect of such losses of £4,082,000 (2004:
£4,596,000).
The differences between the total current tax charge and the amount calculated
by applying the United Kingdom corporation tax rate of 30% to the profit on
ordinary activities before tax is as follows:
Year ended Year ended
31 Dec 2005 31 Dec 2004
£'000 £'000
Profit on ordinary activities before tax 5,530 3,753
Tax at the UK corporation tax rate of 30% (2004: 30%) (1,659) (1,126)
Effects of:
Adjustment to tax in respect of prior period (108) (18)
Adjustment in respect of foreign tax rates (6) (15)
Expenses not deductible for tax purposes (337) (261)
Movement in unrecognised deferred taxation 811 517
Total taxation (1,299) (903)
4. Earnings per share
To provide an indication of the underlying operating performance per share the
adjusted profit after tax figure shown below excludes intangibles amortisation,
exceptional items and prior year tax charges and credits.
Year ended Year ended
31 Dec 2005 31 Dec 2004
£'000 £'000
Profit on ordinary activities before tax, intangible
amortisation and exceptional items 7,392 5,418
Tax charge at a rate of 26.5% (2004: 25.1%) (1,960) (1,359)
Adjusted profit on ordinary activities after tax 5,432 4,059
Profit attributable to minority interests - (25)
Adjusted profit on ordinary activities after tax
attributable to equity shareholders 5,432 4,034
Adjustment to goodwill - -
Exceptional items net of tax (970) (1,169)
Prior years' tax charge (108) (18)
Amortisation of intangibles net of tax (123) (22)
Profit on ordinary activities after tax
attributable to equity shareholders 4,231 2,825
The after tax impact of the adjustment to goodwill is £nil as the £300,000
profit and loss account charge for the reduction in goodwill is offset under
IFRS by a £300,000 profit and loss credit for deferred tax.
2005 2005 2005
Earnings Basic Diluted
EPS EPS
£'000 Pence Pence
Profit on ordinary activities after tax 4,231 4.2 4.1
Amortisation of intangibles net of tax 123 0.1 0.1
Exceptional items net of tax 970 1.0 1.0
Prior years' tax charge 108 0.1 0.1
Adjustment to goodwill - - -
Adjusted profit on ordinary activities after tax 5,432 5.4 5.3
Adjusted earnings per share are calculated using the adjusted profit after tax.
Basic earnings per share is based on the weighted average number of shares in
issue during the year of 101,350,132 (2004: 90,599,424). Diluted earnings per
share calculations are based on 102,401,208 (2004: 91,303,621) ordinary shares
calculated as the basic weighted average number of ordinary shares plus
1,051,076 (2004: 704,197) dilutive share options.
5 Trade and other receivables
31 Dec 2005 31 Dec 2004
£'000 £'000
Trade receivables 8,079 6,856
Less: provision for impairment of receivables (596) (691)
Trade receivables - net 7,483 6,165
Other receivables 227 871
Prepayments and accrued income 824 939
8,534 7,975
6 Trade and other payables - current
31 Dec 2005 31 Dec 2004
£'000 £'000
Trade payables 604 894
Other taxes and social security costs 1,486 1,644
Other payables 311 315
Accruals 4,631 6,138
Deferred income 8,983 5,589
16,015 14,580
7 Provisions for liabilities and charges
Provisions for liabilities in respect of surplus properties.
31 Dec 2005 31 Dec 2004
£'000 £'000
At 1 January 2,444 2,604
Credited to the profit and loss account (387) (145)
Charged to the profit and loss account 445 772
Utilised in the year (1,120) (838)
Amortisation of discount 93 51
At 31 December 1,475 2,444
Current 565 1,244
Non-current 910 1,200
1,475 2,444
8 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 2005 145,000,000 £7,250,000 101,585,739 £5,079,287
Issued under share option schemes - - 81,380 £4,069
Issued to vendors of R/Base Limited - - 740,290 £37,015
At 31 December 2005 145,000,000 £7,250,000 102,407,409 £5,120,371
9 Movement on reserves
Share
Premium Other Retained
Account Reserves Earnings
£'000 £'000 £'000
At 1 January 2005 11,143 36,723 12,126
Issued to vendors of R/Base Limited - 585 -
Retained profit for the year - - 4,231
Cash flow hedges - - -
- transfers to net income - (1) -
- net fair value gains in the period - 69 -
Shares issued under share option scheme 24 - -
Exchange rate adjustments - - 84
Share based award - - 198
Deferred tax on share options - - 87
At 31 December 2005 11,167 37,376 16,726
An amount of £585,000 in respect of the acquisition of R/Base Limited has been
transferred to the merger reserve in the year in accordance with S131 Companies
Act 1985.
10 Notes to the Group Cash Flow Statement
(i) Reconciliation of profit for the year to net cash inflow
from operating activities
Year ended Year ended
31 Dec 2005 31 Dec 2004
£'000 £'000
Profit for the year 4,231 2,850
Adjustments for:
Taxation 1,299 903
Depreciation 813 963
Loss on disposal of property, plant and equipment 195 104
Amortisation of intangible assets 176 32
Share-based payment expense 198 107
Exceptional profit on investing activities - (606)
Change in value of goodwill 300 -
Interest income (535) (479)
Interest expense 159 53
Changes in working capital
Decrease in inventories 58 11
Decrease in receivables 1,157 2,068
Decrease in payables (2,332) (485)
Decrease in provisions (1,063) (160)
Cash generated from operations 4,656 5,361
(ii) Reconciliation of Net Funds
31 Dec 2005 31 Dec 2004
£'000 £'000
Cash and cash equivalents 11,804 14,600
Borrowings (6,000) -
5,804 14,600
11 Explanation of transition to IFRS
These are the Group's first consolidated financial statements prepared in
accordance with IFRSs. The accounting policies have been consistently applied in
preparing the consolidated financial statements for the year ended 31st December
2005, the comparative information for the year ended 31st December 2004 and the
preparation of an opening IFRS balance sheet at 1st January 2004, the Group's
date of transition to IFRS.
In preparing its opening IFRS balance sheet and comparative information for the
year ended 31st December 2004, the Group has adjusted amounts reported
previously in financial statements prepared in accordance with UK GAAP.
An explanation of how the transition from UK GAAP to IFRS has affected the
Group's financial position and financial performance is set out in the following
tables and notes accompanying them. There have been no changes to the Group's
revenue recognition nor cash flows as a result of the transition.
31 Dec 2004 1 Jan 2004
Equity as at: Notes £'000 £'000
Total equity reported under UK GAAP 62,287 54,081
Goodwill adjustment a 2,774 -
Amortisation of intangible assets b (32) -
Release of deferred tax on intangible assets b 10 -
Deferred tax asset - share based payments c 32 -
65,071 54,081
Year ended
31 Dec 2004
Profit for the period: Notes £'000
Profit for the period reported under UK GAAP 148
Goodwill adjustment A 2,774
Amortisation of intangible assets B (32)
Release of deferred tax on intangible assets B 10
Share based payments - expensed in the income statement C (107)
Share based payments - change in tax charge c 32
Profit for the period reported under IFRS 2,825
An explanation of how the transition from UK GAAP to IFRS has affected the
Group's earnings per share for the year ended 31st December 2004 is in the table
below:
Effect of
Under UK transition to
GAAP IFRS Under IFRS
Basic earnings per share 0.2p 2.9p 3.1p
Diluted earnings per share 0.2p 2.9p 3.1p
a. Goodwill adjustment; IFRS 3 - Business Combinations
Under UK GAAP goodwill was capitalised and amortised over its useful economic
life, which under Microgen's accounting policies was up to 20 years. Microgen
has taken the exemption under IFRS 1 in respect of goodwill, and therefore the
net book value of goodwill under UK GAAP at 31 December 2003 became the deemed
cost of goodwill as at the date of transition (1 January 2004). Under IFRS this
goodwill balance is no longer amortised but instead subject to an annual
impairment review.
The impact of adopting IFRS is to reverse the goodwill amortisation charged in
2004 and to increase the carrying value of goodwill in the balance sheet dated
31 December 2004.
b. Business combinations; IFRS 3 - Business Combinations
Under UK GAAP the cost of an acquisition over and above the value of the net
assets was deemed to be goodwill. IFRS 3 requires that each acquisition is
considered separately and a value attributed to any identifiable intangible
assets such as software; customer lists and relationships; brand names and in
progress research and development. The goodwill cost is therefore the
difference between the consideration for the investment after deducting the
value of net assets including intangible assets and relating deferred tax
liability.
Microgen has considered the acquisition of AFA Systems plc in September 2004 and
a value of £544,000 was attributed to the intangible asset of customer contracts
and related relationships with a deferred tax liability of £163,000. This
intangible asset will be amortised over the useful life of the asset which in
this case is deemed to be 5 years with the deferred tax liability released to
the income statement over the same period.
c. Employee benefits; IFRS 2 - Share-based Payment
The Group has applied IFRS 2 to all share options awarded after 7 November 2002
that had not vested before 1 January 2005. The standard requires that a cost is
recognised in the income statement based on the fair value of the options and
that this cost is spread over the vesting period of the scheme. The fair value
is measured using an option pricing model.
Microgen has used the Black Scholes models to determine the value of options
awarded under the SAYE Scheme and the Monte Carlo pricing model for shares
awarded under the executive share option schemes.
Under UK GAAP no charge was recorded in the income statement for the award of
share options as all awards were issued at market price. The impact on the Group
accounts of adopting IFRS is a new cost to income statement with a corresponding
credit to equity. The deferred tax impact of the IFRS 2 change has also been
incorporated into the adjustment.
12 Statement by the directors
The preliminary results for the year ended 31 December 2005 and the results for
the year ended 31 December 2004 are prepared under International Financial
Reporting Standards as adopted for use in the EU ('IFRS'). The accounting
policies applied in preparing the 2005 preliminary results are in accordance
with IFRS and are therefore different to those applied in preparing the
financial statements for the year ended 31 December 2004. The Group's current
accounting policies were included in our 2005 Restatement of financial
information under IFRS as published on 15 September 2005.
The financial information set out in this preliminary announcement does not
constitute the Company's statutory accounts for the years ended 31 December 2005
or 31 December 2004. The financial information for the year ended 31 December
2005 and 31 December 2004 are prepared under International Financial Reporting
Standards as adopted for use in the EU ('IFRS'). For the year ended 31 December
2004 the statutory accounts were originally presented under UK GAAP. The
auditors reported on those accounts: their report was unqualified and did not
contain a statement under either Section 237(2) or Section 237(3) of the
Companies Act 1985.
The Board of Microgen has approved that this preliminary announcement of results
can be released on 15 March 2006.
The Annual Report for the year ended 31 December 2005 will be posted to
shareholders in due course and will be delivered to the Registrar of Companies
following the Annual General Meeting of the Company. The report 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 Fleet House, 3 Fleetwood Park, Barley Way, Fleet, GU51 2QJ.
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