Final Results

23 February 2005 Microgen plc Preliminary Audited Results for the Year ended 31 December 2004 Microgen plc, the IT solutions and services group announces preliminary audited results for the year ended 31 December 2004 with strong operating performance and successful acquisition integration. Highlights * Preliminary results ahead of expectations * Adjusted diluted earnings per share* up 45% to 4.2p (2003 : adjusted eps of 2.9p), 4th consecutive year of growth in adjusted eps * Operating profit** from Continuing Operations increased by 126% to £5.1 million (2003 : £2.3 million) * Operating margin** on Continuing Operations increased to 12.6% (2003 : 9.3%) * Total revenue of £42.4 million increased by 61% (2003 : £26.4 million) * Profit before tax** increased by 119 % to £5.5 million (2003 : £2.5 million) * Operating profit of £0.1 million (2003: operating loss of £2.6 million) after goodwill amortisation and exceptional charges. Profit before tax of £ 1.1 million (2003: loss before tax £2.4 million) and profit after tax of £ 0.2 million (2003: loss after tax £2.0 million) * Earnings per share of 0.2p (2003 : loss per share of 3.2p) * Net cash inflow from operations of £5.4 million in the period * Net funds at 31 December 2004 of £14.6 million * Acquisition of AFA Systems plc completed in September 2004. Restructuring of the business completed ahead of schedule producing profitable contribution in November and December and break-even operating profit** in the 16 weeks since completion compared to a significant operating loss** in the first six months of 2004 prior to acquisition. * Investment in Group Development Function increased by 75% to £4.2m (2003 : £2.4m). Microgen Aptitude ™ launched. * excluding goodwill and exceptional items and with a normalised tax charge of 30% ** before goodwill amortisation and exceptional items Contact : Martyn Ratcliffe, Executive Chairman 01753-847122 Mike Phillips, Group Finance Director Giles Sanderson, Financial Dynamics 020-7831-3113 Ben Way, Financial Dynamics An analyst presentation will commence at 10.30 a.m. today at the office of UBS, 7th Floor, 1 Finsbury Avenue, London CE2M 2PP A results presentation will be available from www.microgen.co.uk. Chairman's Statement Although the general market environment in 2004 continued to be unpredictable, there were signs of improvement in some sectors. This operating climate was consistent with the Board's planning assumptions at the start of the year. As a result, Microgen is reporting a strong operating performance for the year ended 31 December 2004, with a significant increase in operating margins on continuing operations to 12.6% and a 45% increase in adjusted diluted earnings per share. Microgen's rapid acquisition integration model proved highly effective in 2004 as the two transactions completed towards the end of 2003 (MMT Computing plc and Imago QA Limited) were consolidated, delivering significantly enhanced earnings in this first full year following completion of these transactions. The acquisition of AFA Systems plc in September 2004 has followed a similar post-acquisition integration model which has already been effective in reducing the cost base, turning a significant reported loss in the first half of the year when it was an independent listed company, into a profitable contribution in November and December. This strong financial and operating performance has been achieved while increasing investment in the Group's software product development, which will underpin the organic development of Microgen in the future. In particular the first version of Microgen Aptitude ™ was completed, on time and to budget, after a 15 month development programme. This exciting new product has evolved from the Group's rules-based integration expertise, but also offers the flexibility to deploy solutions rapidly for a wide variety of applications, both within existing Microgen products and to address new market opportunities. FINANCIAL SUMMARY For the year ended 31 December 2004, Microgen increased operating profit before goodwill amortisation and exceptional items from Continuing Operations to £5.1 million on revenue of £40.6 million (2003: £2.3 million on revenue of £24.2 million). Including the acquisition of AFA Systems plc, (which contributed £1.9 million of revenue and an operating profit before goodwill amortisation and exceptional items of £2,000), profit before tax, goodwill amortisation and exceptional items increased by 119% to £5.5 million (2003 : £2.5 million). Adjusted diluted earnings per share (before goodwill amortisation, exceptional items and with a normalised tax charge to reflect the underlying operating performance) was 4.2p, an increase of 45% on prior year (2003: 2.9p). After including goodwill amortisation of £2.8 million, net exceptional charges of £1.6 million and net finance income of £0.4 million, the Group produced a profit before tax for the year of £1.1 million (2003: loss before tax of £2.4 million), and a profit after tax of £0.2 million (2003 : net loss of £2.0 million) producing a fully diluted earnings per share of 0.2p (2003 : loss per share of 3.2p). The net exceptional items include a one-time exceptional charge arising from the integration of the AFA acquisition of £2.1 million together with £0.1 million of other exceptional operating costs, partially offset by an exceptional profit of £0.6 million associated with the purchase and subsequent disposal of the strategic stake acquired in Diagonal plc (see below). Through its acquisitions, Microgen has now accumulated tax trading losses being carried forward in the order of £17 million. As far as practicable, the Board is working to progressively utilise these tax losses. In 2004, the effective tax rate was 24% of profit before tax and goodwill amortisation. (The adjusted earnings per share figures above are based on a normalised tax rate of 30% and do not take into account this additional benefit.) Headcount, including external associates and contractors at 31 December 2004 was 485 (31 December 2003 : 581). The reduction in staffing is primarily due to the integration of the acquisitions and the progressive exit from the low margin contractor activities which formed part of the MMT revenue base. The Group produced a positive operating cash flow of £5.4 million and had net funds of £14.6 million at 31 December 2004. After careful consideration, the Board has concluded not to recommend a dividend (2003 : nil) and continues to consider that further investment in the strategic development of the Group offers greater opportunity for shareholders in the medium term. OPERATIONAL REVIEW The acquisitions completed over the past three years have significantly changed the structure of the Group. The Microgen approach is to fully integrate acquisitions, retaining the customer focus (sales and delivery) in each business unit, but achieving the benefits of scale by the consolidation of support staff and infrastructure. In particular, the cross-training of consultants and centralised consultancy resource planning, enables the Group to achieve high utilisation levels, which have been a major contributor to the strong financial performance in 2004. In addition, average fee rates increased by 19% through the year as the contractor placement business acquired with MMT declined and consultants were migrated to more attractive business sectors. The Group's software applications are primarily related to transaction processing, analysis and systems integration; vertical solutions are targeted at financial services and energy trading, although the repackaging of technology increasingly offers the potential for new market opportunities. Microgen's consultancy capability includes vertical industry and product implementation expertise, together with generic skills in data warehousing, integration, software testing and third party product applications. The Group also has capability in managed services, both in terms of applications management and outsourced billing, analysis and electronic document management services. The Group is now structured as three divisions : * Financial Services, comprising software-based solutions for Banking, Asset Management and Derivatives applications. * Solutions, primarily consultancy based, services and applications management. * Billing Pricing & Payment, comprising the outsourced managed services associated with billing and electronic document management, the software payment solutions and the software solutions associated with pricing in energy markets. Financial Services Division The Financial Services businesses are software-based with applications covering * Banking : Financial Data Repository, Treasury & Capital Markets Trading, Rules-Based Integration and Reconciliations * Asset Management : Front, Middle and Back Office, Multi-Manager/Pooled Pensions Solutions, Customer Management and Performance Measurement * Derivatives : Pricing, Risk Management and Back Office Solutions The implementation of most of these applications requires significant consultancy resource, including industry as well as product expertise. This resource is provided by Microgen staff or associates, who are increasingly being required to undertake Microgen product accreditation. Microgen has experienced an improving market environment in Financial Services during 2004. One contributing factor is undoubtedly the increasing regulatory and reporting demands within the Financial Services industry. However, the Board's decision to move virtually all software licensing to an annual licensing model, thereby eliminating the high up-front initial licence fee, has also been attractive to customers who generally remain cautious regarding IT investment. This action, which should produce a less volatile revenue stream, was only feasible because of the Group's efficient operating model and cost structure. For the year ended 31 December 2004, the Financial Services Division reported revenue of £13.7 million including £1.9 million from the 16 weeks of the AFA businesses (2003 : £6.4 million). Operating profit increased substantially to £ 2.1 million (2003 : £0.9 million) with AFA making a positive contribution in the period since acquisition. Solutions Division The Group's Solutions businesses are primarily based around consultancy services, organised into three business sectors of Commercial, Emergency Services and Financial. Microgen's capabilities extend throughout the project lifecycle from analysis, through design and implementation, to testing and acceptance and thereafter to ongoing management and support of applications. During 2004, utilisation was maintained at a high level through Microgen's centralised consultancy resource management and active cross training/ deployment of staff. Overall, revenue for the division was £16.3 million (2003 : £6.7 million), although the revenue is somewhat inflated, particularly in the first half of the year, by the low margin contractor placement business which has been, and continues to be, progressively exited. As a result, operating profit increased substantially to £3.1m (2003 : £0.8m) and operating margin increased to 18.9% (2003 : 11.9%). Billing Pricing & Payment Division Microgen is a leading provider of BACS payment software and solutions in the UK. Following the launch of BACS-IP, all UK customers processing BACS payment transactions will need to upgrade their payment software. Microgen has developed a completely new range of products at the Group's development facility in Poland, which are being well received in the market. Almost 30% of Microgen's customer base has now migrated to BACS-IP and new marketing initiatives are being pursued to increase the Group's market share in order to maximise the long term potential of this business. The strategy for the Group's energy pricing business has been changed significantly during the past year. Acquired with MMT in 2003, the business had been built around large systems, with an established installed base. Substantial investment had been made prior to the acquisition in a completely new solution, which extended the software product offering to incorporate multi-fuel, multi-country capability in a very large integrated solution. Unfortunately the cost of the software and implementation was beyond the budget of the target market for the product and the development programme was therefore terminated during the year. To replace this 'integrated solution', a modular strategy has been adopted with solutions for pricing and registration now well advanced using the Microgen Aptitude ™ core technology. Microgen also provides a multi-channel outsourced billing solution which can deliver the full spectrum of bill output requirements (print, e-bill, e-analysis and electronic document management) from a single billing datastream. This multi-channel service capability continues to be a key differentiator in this market. For the year ended 31 December 2004, the division reported revenue of £12.4 million (2003 : £13.4 million, including a one-off exceptional revenue of £2.2 million). Revenue in the legacy print services continued to decline, offset by the growth experienced in electronic managed services and the payments business, augmented by the revenue from the Energy business. Operating profit for the division was £2.2 million (2003 : £3.7 million, including a one-off exceptional operating profit of £1.5 million) CORPORATE ACTIVITY On 7 June 2004, Microgen announced that it had acquired a strategic stake in Diagonal plc and that the Board was considering whether or not to make an offer for Diagonal. A competing offer (at the top of Microgen's indicated price range) was subsequently made for the company and after due consideration of the options available, the Board determined to accept the alternative offer for its shareholding in Diagonal. Following completion of the transaction, the stake was sold and, after deducting expenses associated with the activity, Microgen made an exceptional profit of £0.6 million before tax. On 13 August 2004, Microgen made a recommended offer for AFA Systems plc, which was declared wholly unconditional on 13 September. The integration of AFA followed the established Microgen integration model and was completed rapidly, achieving significant cost savings through the consolidation of business operations. Restructuring charges of £2.1 million have been taken in 2004, including a property provision of £0.7 million for the excess property. As a result of the rapid integration process, the loss making AFA businesses produced profit contribution in November and December, a significant turnaround in such a short period of time. PRODUCT DEVELOPMENT AND SUPPORT The Group's software development and support teams are primarily based in Wroclaw, Poland and Cape Town, South Africa, with a smaller presence in Belfast and London. The Cape Town facility is co-located with Microgen's South African business operations. The Wroclaw development centre in Poland has evolved to be the primary source of core technology and also the hub for group-wide development services management, such as product testing, quality, etc. The development of Microgen Aptitude ™, the next generation business rules integration product which delivers processing performance comparable with stand-alone integration tools but incorporates a multi-functional rules engine and business process management capability, was completed to specification, on time and to budget through a 15 month development program. A patent application has also been filed associated with this new product technology. In addition, the Wroclaw centre supports the operating systems for the billing and document management services and also developed and supports the BACS-IP payment applications. The Cape Town development facility, acquired with AFA, has been restructured to focus on the development and support of the treasury product and most of the asset management products. The established financial services sector in South Africa provides cost-effective application development resource with a good understanding of the business requirements, essential for application development in this sector. The Belfast and London development activities are primarily focused on financial services, particularly applications requiring strong domain knowledge and close customer interaction. In addition, the energy trading products are continuing to be developed and supported in the UK. During 2004, the investment in the Group's product development and support activities totalled £4.2 million (2003 : £2.4 million), accounting for 9.9% of the Group's total revenue or 27.6% of the revenue derived from the software-based businesses. Of this expenditure, approximately one third was associated with customer-funded development activity. With the increase in software-based businesses, following the AFA acquisition, the development spend in 2005 is anticipated to increase as a proportion of revenue, although, due to the efficiencies of the Group's development strategy including the reuse of technology across applications, this metric should progressively reduce. FUTURE PROSPECTS Over the past three years, the Microgen Group has expanded dramatically through the acquisition of five companies. It is Microgen's ability to integrate these businesses into the Group that enables real shareholder value to be delivered. Microgen has developed a successful model that rapidly migrates acquisitions from completion of the transaction into integrated operations, thereby minimising the risk and disruption inherent in such activities. The Board continues to explore potential further opportunities that may enhance shareholder value, but remains prudent in its evaluation of such activities and there is no guarantee that suitable acquisitions will be identified or transactions completed. However, while the past three years have been dominated by the changes resulting from acquisitions, the organic development of each business post-acquisition is as, if not more, important. Each business is reviewed regularly, both in terms of ongoing operating performance and new market opportunities. In addition, potential new applications derived from the Microgen Aptitude ™ technology are now being actively explored in each business area, enabling the Group to maximise output from the development resource without the inefficiency and cost of traditional parallel development programs. While market conditions in certain sectors show some signs for optimism, overall the market continues to be unpredictable and the Board of Microgen will continue to manage the business accordingly. This is consistent with the challenging market environment in which the Group has operated in recent years, an environment in which Microgen has consistently delivered a strong operating performance, producing growth in operating income and adjusted earnings per share, correlated with strong positive cash flow. Martyn Ratcliffe Executive Chairman MICROGEN PLC Group Profit and Loss Account for the year ended 31 December 2004 Audited Audited Audited Audited Audited Audited 2004 2004 2004 2003 2003 2003 Before Goodwill Before Goodwill goodwill amortization goodwill amortization amortization and amortization and and exceptional and exceptional exceptional exceptional items items Total items items Total Notes £'000 £'000 £'000 £'000 £'000 £'000 Turnover Continuing operations 1 40,561 - 40,561 24,216 2,200 26,416 Acquisitions 1 1,883 - 1,883 - - - 42,444 - 42,444 24,216 2,200 26,416 Operating costs Continuing operations (35,464) (2,756) (38,220) (21,962) (7,078) (29,040) Acquisitions (1,881) (2,257) (4,138) - - - (37,345) (5,013) (42,358) (21,962) (7,078) (29,040) Operating profit/ (loss) Continuing operations 1 5,097 (2,756) 2,341 2,254 (4,878) (2,624) Acquisitions 1 2 (2,257) (2,255) - - - Operating profit/ 5,099 (5,013) 86 2,254 (4,878) (2,624) (loss) Exceptional profit on disposal of fixed asset 2 - 606 606 - - - investment Net finance income 426 - 426 268 - 268 Profit/(Loss) on ordinary activities before tax 5,525 (4,407) 1,118 2,522 (4,878) (2,356) Tax on profit/(loss) on ordinary activities 3 (945) 384 Profit/(Loss) on ordinary activities after 173 (1,972) taxation Minority Interest (25) - Retained profit/(loss) transferred to 148 (1,972) reserves Earnings per share 4 Basic and diluted 0.2 p (3.2) p Adjusted earnings per share (before goodwill amortisation and exceptional items and with normalised tax 4 charge) Basic 4.3 p 2.9 p Diluted 4.2 p 2.9 p MICROGEN PLC Group Balance Sheet Audited Audited as at as at 31 Dec 2003 31 Dec 2004 (as restated) Notes £'000 £000 Fixed assets Intangible assets 51,042 44,435 Tangible assets 3,774 4,088 Investments - 11 54,816 48,534 Current assets Stocks - raw materials 100 111 Debtors 5 10,104 10,878 Cash at bank and in hand 14,600 10,457 24,804 21,446 Creditors: due within one year 6 (14,889) (13,295) Net current assets 9,915 8,151 Total assets less current liabilities 64,731 56,685 Provisions for liabilities and charges 7 (2,444) (2,604) Net assets 62,287 54,081 Capital and reserves Called up share capital 8 5,079 4,330 Share premium account 9 11,143 39,849 Shares to be issued - 185 Merger reserve 9 36,389 - Other reserves 9 334 334 Profit and loss account 9 9,342 9,226 Equity shareholders' funds 62,287 53,924 Minority Interest - 157 Capital employed 62,287 54,081 MICROGEN PLC Group Cash Flow Statement for the Year Ended 31 December 2004 Audited Audited Year ended Year ended 31 Dec 2004 31 Dec 2003 Notes £'000 £'000 Net cash flow from operating activities 10(i) 5,361 4,800 Returns on investments and servicing of finance Interest received 433 356 Interest paid (21) (38) 412 318 Taxation Tax paid in respect of current year (440) (368) Tax paid relating to prior years (123) (68) Tax refund 208 - (355) (436) Capital expenditure and financial investment Purchase of tangible fixed assets (919) (598) Sale of tangible fixed assets 480 9 Purchase of fixed asset investment 2 (2,894) - Sale of fixed asset investment 2 3,500 - 167 (589) Acquisitions and disposals Purchase of subsidiary undertakings 11 (3,511) (7,488) Net cash acquired with subsidiary 11 732 5,505 undertakings Repayment of subsidiary debt acquired during the period (250) (644) Payment of deferred consideration (205) (250) Adjustment to consideration on purchase of subsidiary undertakings - 41 (3,234) (2,836) Equity dividends paid to shareholders - - Cash inflow before financing 2,351 1,257 Financing Issue of share capital 2,416 2 Redemption of loan notes (652) (650) 1,764 (648) Increase in cash in the period 10(ii) 4,115 609 1. Segmental analysis The segmental breakdown given below reflects the divisional operating businesses of the Group following the significant change in the structure arising from the acquisitions made in the past three years. This is the primary segmentation of the operating performance of the Group reviewed by the Board. Group operating performance was previously reported by business category (Software Based, Managed Services and Consultancy) and this information is also provided below. There is no inter-segment turnover. The divisions and business categories are allocated central function costs in arriving at operating profit/(loss). Group overhead costs, goodwill and exceptional 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. 1(a) Turnover, operating profit by division Audited year ended Audited year ended 31 Dec 2004 31 Dec 2003 Continuing Operations Acquisition Total Total £000 £000 £000 £000 Turnover by division Continuing operations - Financial services 11,845 1,883 13,728 6,357 - Billing, pricing & payment 12,419 - 12,419 11,163 - Solutions 16,297 - 16,297 6,696 40,561 1,883 42,444 24,216 Exceptional revenue - Billing, pricing & payment - - - 2,200 40,561 1,883 42,444 26,416 Audited year ended Audited year ended 31 Dec 2004 31 Dec 2003 Continuing operations Acquisition Total Total Operating profit/(loss) by division £000 £000 £000 £000 Continuing operations - Financial services 2,122 2 2,124 934 - Billing, pricing & payment 2,221 - 2,221 2,190 - Solutions 3,075 - 3,075 794 7,418 2 7,420 3,918 Group overhead (2,321) - (2,321) (1,702) 5,097 2 5,099 2,216 Movement in property provisions - - - 38 Operating profit before goodwill amortisation and exceptional items 5,097 2 5,099 2,254 Goodwill amortisation (2,634) (140) (2,774) (2,211) Exceptional operating items Exceptional profit on exceptional - - - 1,460 revenue Exceptional Group overhead costs - - - (295) Exceptional (costs)/credits - Property provision 58 (685) (627) (1,133) - Restructuring costs (180) (1,432) (1,612) (2,699) (122) (2,117) (2,239) (2,667) Total Goodwill and exceptional operating items (2,756) (2,257) (5,013) (4,878) Operating profit/(loss) 2,341 (2,255) 86 (2,624) Exceptional profit on disposal of fixed asset investment (see note 2) 606 - Net finance income 426 268 Profit/(Loss) on ordinary activities before taxation 1,118 (2,356) 1 (b) Turnover and operating profit by business category Audited year ended Audited year ended 31 Dec 2004 31 Dec 2003 Continuing Turnover by business category operations Acquisition Total Total £000 £000 £000 £000 - Software based 13,450 1,883 15,333 7,773 - Managed services 11,125 - 11,125 11,080 - Consultancy 15,986 - 15,986 5,363 40,561 1,883 42,444 24,216 Exceptional revenue - Managed services - - - 2,200 40,561 1,883 42,444 26,416 Audited year ended Audited year ended 31 Dec 2004 31 Dec 2003 Continuing operations Acquisition Total Total £000 £000 £000 £000 Operating profit/(loss) by business category - Software based 2,644 2 2,646 864 - Managed services 1,938 - 1,938 2,853 - Consultancy 2,836 - 2,836 201 7,418 2 7,420 3,918 Group overhead (2,321) - (2,321) (1,702) 5,097 2 5,099 2,216 Movement in property provisions - - - 38 Operating profit before goodwill amortisation and exceptional items 5,097 2 5,099 2,254 Goodwill amortisation (2,634) (140) (2,774) (2,211) Exceptional operating items Exceptional profit on exceptional - - - 1,460 revenue Exceptional Group overhead costs - - - (295) Exceptional costs - Property provision 58 (685) (627) (1,133) - Restructuring costs (180) (1,432) (1,612) (2,699) (122) (2,117) (2,239) (2,667) Total goodwill and exceptional operating items (2,756) (2,257) (5,013) (4,878) Operating profit/(loss) 2,341 (2,255) 86 (2,624) Exceptional profit on disposal of fixed asset investment (see note 2) 606 - Net finance income 426 268 Profit/(Loss) on ordinary activities before taxation 1,118 (2,356) 1 (c) Geographical analysis By Year ended 31 December 2004 By origin By origin Destination Profit/(loss) Turnover before Turnover taxation £'000 £'000 £'000 United Kingdom and Ireland 40,873 724 34,412 Rest of World 1,571 394 8,032 42,444 1,118 42,444 By Year ended 31 December 2003 By origin By origin Destination Profit/(loss) Turnover before Turnover taxation £'000 £'000 £'000 United Kingdom and Ireland 26,134 (2,555) 22,681 Rest of World 282 199 3,735 26,416 (2,356) 26,416 2 Exceptional profit on disposal of fixed asset investment On 7 June 2004, Microgen plc announced that it had acquired a strategic shareholding in Diagonal plc by way of market purchases of 6,811,000 shares, equivalent to 7.46% of the issued share capital of Diagonal at a total cost of £2.7 million in cash. The average purchase price of the shares was 38.9p each. The stake was acquired with a view to seeking an active dialogue with Diagonal in order to determine whether or not to make an offer for the Company. Microgen indicated that any such offer would have been in the range of 50 pence to 55 pence per Diagonal share in a combination of cash and new Microgen shares. The Diagonal Board rejected Microgen's approach. On 13 July 2004, a recommended offer for Diagonal was announced at a price of 55 pence in a combination of cash and new publicly quoted equity from an alternative bidder. On 3 August 2004, Microgen announced that following further evaluation of the opportunity including appropriate due diligence, taking account of the then current valuation of the alternative offer the Board of Microgen would accept the alternative offer with regard to Microgen's 7.46% shareholding in Diagonal and would not be making an offer for Diagonal. The alternative offer for Diagonal was declared wholly unconditional on 27 August 2004 and Microgen subsequently sold the publicly traded equity received as part consideration for the Diagonal shares. The exceptional profit on disposal of the fixed asset investment is arrived at as follows: £'000 Interim dividend on Diagonal shares 48 Cash received from alternative offeror 2,060 Net proceeds of disposal of publicly quoted shares 1,392 Net proceeds from disposal of Diagonal shares 3,500 Cost of acquisition of Diagonal shares (2,678) Professional Fees (216) Exceptional profit on disposal 606 The net proceeds on disposal of the shares in Diagonal is equivalent to 51.4 pence per Diagonal share. The tax effect of the exceptional profit was a tax charge of £214,000. 3. Taxation The taxation charge for the year comprises: Audited Audited Year ended Year ended 31 Dec 2004 31 Dec 2003 Current Tax £'000 £'000 UK corporation tax charge at 30% (456) (252) Foreign corporation Tax (214) (19) Current year taxation charge (670) (271) Tax credit on exceptional items 277 29 UK corporation tax prior year charge (254) (41) Total current taxation charge (647) (283) Deferred taxation Deferred tax (charge)/ credit for the year (534) 667 Prior year deferred tax credit 236 - Total deferred tax (charge)/credit (298) 667 Total taxation (charge)/credit on profit/(loss) on ordinary activities (945) 384 The total tax charge of £945,000 represents 24.3% of the Group profit before tax and goodwill amortisation of £3,892,000. The Group has recognised a deferred tax asset of £1,940,000 (2003: £1,488,000) due to trading losses, timing differences relating to accounting provisions and capital allowances. In addition, at 31 December 2004 the Group had tax trading losses of £17,416,000 and a cumulative unprovided deferred tax asset in respect of such losses of £5,225,000 (2003: £1,754,000). 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/(loss) on ordinary activities before tax is as follows: Audited Audited Year ended Year ended 31 Dec 2004 31 Dec 2003 £'000 £'000 Profit/(Loss) on ordinary activities before tax 1,118 (2,356) Corporation tax (charge)/credit at standard rate of (335) 707 tax of 30% Adjustment for the effects of: Trading losses not recognised for deferred tax 275 189 Goodwill amortisation not tax deductible (832) (663) Other amounts not (deductible)/ taxable (261) 84 Capital allowances in excess of depreciation 181 147 Other timing differences 594 (706) Higher rate of tax on overseas profits (15) - UK corporation tax prior year charge (254) (41) Group current tax charge for the period (647) (283) 4. Earnings 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 and prior year tax charges and credits. Audited Audited Year ended Year ended 31 Dec 2004 31 Dec 2003 £'000 £'000 Profit before tax, goodwill amortisation and 5,525 2,522 exceptional items Normalised tax charge at 30% (1,658) (757) Adjusted Profit on ordinary activities after tax 3,867 1,765 Adjustment to actual current year tax charge 988 486 Goodwill amortisation (2,774) (2,211) Exceptional items net of tax (1,356) (2,638) Prior Year tax charge (254) (41) Deferred tax (charge)/ credit (298) 667 Profit/(Loss) on ordinary activities after tax 173 (1,972) 2004 2004 2004 Earnings Basic Diluted EPS EPS £'000 Pence Pence Profit on ordinary activities after tax 173 0.2p 0.2p Adjustment to actual current tax charge (988) (1.1)p (1.1)p Goodwill amortisation 2,774 3.1p 3.0p Exceptional Items net of tax 1,356 1.5p 1.5p Prior Years tax charge 254 0.3p 0.3p Deferred tax charge 298 0.3p 0.3p Adjusted profit on ordinary activities after 3,867 4.3p 4.2p 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 90,599,424 (2003: 60,712,928). Diluted earnings per share calculations are based on 91,303,621 (2003: 61,007,318) ordinary shares calculated as the basic weighted average number of ordinary shares plus 704,197 (2003: 294,390) dilutive share options. 5. Debtors Audited Audited 31 Dec 2004 31 Dec 2003 £'000 £'000 Trade debtors 6,354 6,852 Corporation tax recoverable - 400 Other debtors 871 390 Prepayments and accrued income 939 1,748 Deferred tax asset 1,940 1,488 10,104 10,878 6. Creditors: due within one year Audited Audited 31 Dec 2004 31 Dec 2003 £'000 £'000 Trade creditors 894 996 Corporation tax payable 120 - Other taxes and social security costs 1,644 839 Other creditors 924 377 Loan notes payable - 652 Accruals 5,963 6,995 Deferred income 5,344 3,436 14,889 13,295 7. Provisions for liabilities and charges Provisions for liabilities in respect of surplus properties. Audited Audited 31 Dec 2004 31 Dec 2003 £'000 £'000 Balance brought forward 2,604 2,628 Credited to the profit and loss account - (41) Exceptional charge to the Profit and Loss 772 1,509 account Exceptional credit to the Profit and Loss (145) (376) account Utilised in the year (838) (1,166) Amortisation of discount 51 50 Balance carried forward 2,444 2,604 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 2004 134,000,000 £ 86,592,854 £4,329,643 6,700,000 Increase in authorised share capital on 10 September 2004 11,000,000 £ 550,000 Movement in issued share capital in the year: Issued to the shareholders of MMT Computing plc 340,280 £17,014 Issued on exercise of share 1,906 £95 options Issued on placing of shares 4,300,000 £215,000 Issued on acquisition of the Loan Note in AFA Systems plc 1,778,857 £88,943 Issued to the shareholders of AFA Systems plc 8,571,842 £428,592 At 31 December 2004 145,000,000 £ 101,585,739 £5,079,287 7,250,000 9. Movement on reserves Audited Share Profit Premium Merger Other and Account Reserve Reserves Account £'000 £'000 £'000 £'000 At 1 January 2004 39,849 - 616 9,226 Prior year adjustment (1) - - (282) - At 1 January 2004 as restated 39,849 - 334 9,226 Retained profit for the year - - - 148 Transfer to merger reserve (2) (30,907) 30,907 - - Exchange rate adjustments - - - (32) Shares issued to shareholders of MMT Computing plc - 168 - - Shares issued on placing of 4,300,000 2,201 shares Shares issued to shareholders of AFA Systems plc - 4,400 - - Shares issued on acquisition of the Loan Note in AFA Systems plc - 914 - - At 31 December 2004 11,143 36,389 334 9,342 (1) Following the adoption of Urgent Issues Task Force Abstract 38 - Accounting for ESOP trusts, the Company has restated its own shares held through ESOP trusts as a deduction from reserves. The abstract requires this change to be retrospective and therefore the comparatives have been restated. The effect is to reduce net assets as at 31 December 2003 by £282,000. (2) During the year, the Company has taken advice over the accounting treatment with regard to merger relief. The Company has been advised that the acquisitions prior to 2004 qualified for merger relief under section 131 of the Companies Act 1985 and therefore an amount of £30,907,000 originally credited to share premium account has been transferred to the merger reserve in the current year. 10. Notes to the Group Cash Flow Statement (i) Reconciliation of operating profit/(loss) to net cash inflow from operating activities Audited Audited year ended Year ended 31 Dec 2004 31 Dec 2003 £'000 £'000 Operating profit/(loss) 86 (2,624) Depreciation 963 692 Goodwill amortization 2,774 2,211 Loss on disposal of fixed assets 104 234 Decrease/(Increase) in stocks 11 (25) Decrease in debtors 2,068 4,616 Decrease in creditors (645) (304) Net cash inflow from operating 5,361 4,800 activities (ii) Reconciliation of net cash flow to movement in funds Audited Audited Year ended Year ended 31 Dec 2004 31 Dec 2003 £'000 £'000 Increase in cash in the period 4,115 609 Change in net funds resulting from cash 4,115 609 flows Foreign Exchange 28 - Redemption of loan notes 652 650 Movement in net funds in the period 4,795 1,259 Net funds at beginning of the period 9,805 8,546 Net funds at end of period 14,600 9,805 (iii) Analysis of net funds At Other non At 1 Jan 2004 Cash flow Cash chan 31 Dec 2003 ges £'000 £'000 £'000 £'000 Cash at bank and in 10,457 4,115 28 14,600 hand Debt due within 1 (652) 652 - - year Total 9,805 4,767 28 14,600 11. Acquisition of AFA Systems plc On 13 August 2004 the board of Microgen plc and AFA Systems plc announced a recommended offer for the entire issued share capital and loan notes to the value of £1.5 million of AFA Systems Plc, subject to shareholder approval. Shareholders approval was obtained at the Extraordinary General Meeting on 10 September and the offer was declared wholly unconditional on 13 September 2004. The total consideration including transaction fees was £9,389,000. The total adjustments required to the book values of the assets and liabilities acquired in order to present the net assets of the acquired company at fair value was £ 9,246,000 details of which are set out below together with the resulting amount of goodwill arising. The purchase was accounted for as an acquisition. The key financial details in respect of the acquisition are scheduled below: £'000s Consideration and cost in respect of the acquisition Cash 2,172 Ordinary Shares 4,829 Initial consideration 7,001 Purchase of Loan Note Cash 441 Ordinary Shares 1,003 1,444 Fees and costs of the acquisition 944 9,389 -----------------------Fair Value Adjustments-------------------- Net Accounting Assets Policy Provisional Acquired Alignment -----------------Other Fair Adjustments---------------- (1) (2) (3) (4) (5) Values £'000 £'000 £'000 £'000 £'000 £'000 £'000 Fixed Assets - Intangible 8,708 (322) 656 (9,042) - - - - Tangible 300 - - - - - 300 Debtors 1,558 (242) - - (322) - 994 Cash 732 - - - - 732 Creditors (2,807) (323) - - 56 - (3,074) Long Term Creditors - - (1,500) - - 1,500 - Taxation 32 - - - 293 - 325 8,523 (887) (844) (9,042) 27 1,500 (723) Goodwill on Acquisition 10,112 Total consideration and 9,389 costs (1) The alignment of accounting policy adjustments relate to the write off of trademarks (£322,000), revenue recognition (£242,000), and deferred income (£ 323,000). (2) This adjustment relates to the £1.5 million Loan Note issued by AFA Systems plc as part of the consideration for the acquisition of Strategic Asset Management Solutions Limited ('SAMS') which was completed in December 2003. The terms and conditions relating to the £1.5 million Loan Note on a change of control of AFA Systems plc had been incorrectly disclosed in AFA Systems plc accounts for the year ended 31 December 2003. Consequently, the fair value of the £1.5 million Loan Note was understated by £656,000, as was the goodwill arising on the acquisition of SAMS, and the £1.5 million Loan Notes were incorrectly classified as shares to be issued rather than Creditors due after more than 1 year. (3) The goodwill within AFA Systems plc has been assigned a fair value of nil and therefore included within the goodwill arising in the Microgen plc's consolidated balance sheet on acquisition. (4) An adjustment of £322,000 has been made to debtors to state them at their recoverable amounts, £56,000 has been released from accruals and recognition of a deferred tax asset of £293,000 relating to short term timing differences. (5) As Microgen plc acquired the £1.5 million Loan Note from the Loan Note holder as part of the AFA Systems plc acquisition, this has been transferred to the costs of investment of AFA Systems plc. The £1.5 million Loan Notes is repayable in cash by AFA Systems plc by 31 December 2008. From the date of acquisition to 31st December 2004 AFA Systems plc has contributed £1,883,000 to turnover and £2,000 to operating profit before interest, goodwill amortisation and exceptional items. In its last financial year to 31st December 2003, AFA Systems plc made a loss after tax of £3,096,000. Outlined below is a summarised profit and loss account and statement of total recognised gains and losses for the period from 1 January to 13th September 2004 on the basis of the accounting policies of AFA Systems plc prior to the acquisition. Profit and loss account £'000 Turnover 5,167 Operating costs (7,459) Goodwill amortisation (862) Operating loss (3,154) Net finance income 32 Loss on ordinary activities before taxation (3,122) Tax on loss on ordinary activities (67) Retained losses (3,189) Statement of total recognised gains and losses Retained losses for the period (3,189) Exchange rate adjustments 25 Total recognised losses in the period (3,164) 12 Statement by the directors The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the years ended 31 December 2004 or 31 December 2003. The financial information for the year ended 31 December 2003 is derived from the Annual Report for that year which has been delivered to the Registrar of Companies. 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 accounting policies adopted in this preliminary announcement are consistent with the Annual Report for the year ended 31 December 2003 with the exception of the adoption of UITF 38 which requires own shares held through ESOP trusts to be classified as a deduction from reserves. UITF 38 requires this change to be retrospective and therefore comparatives have been restated, the effect of which is to reduce net assets as at 31 December 2003 by £282,000. The Board of Microgen approved the release of this preliminary announcement on 23 February 2005. The Annual Report for the year ended 31 December 2004 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 11 Park Street, Windsor, Berkshire SL4 1LU.

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