Interim Results

microgen Information Management Solutions www.microgen.co.uk 15 July 2004 MICROGEN plc ('Microgen') Interim Results for the Six Months ended 30 June 2004 Microgen plc, the Information Management Solutions company which provides software, services and consultancy, announces strong earnings performance and provides an update on the strategic development of the Group. HIGHLIGHTS Adjusted eps (excl. goodwill amortisation, exceptional items and with normalised taxation) increased by 62% to 2.1p (2003: 1.3p). Net eps of 1.0p (2003: net loss per share 1.8p) Revenue £21.1 million (2003: £11.1 million) and profit before tax, goodwill amortisation and exceptional items of £2.6 million (2003: £1.1 million). Profit before tax of £1.3 million (2003: loss before tax £0.7 million) Operating profit before goodwill amortisation and exceptional items of £2.5 million (2003: £1.0 million). Operating margins increased to 11.9% (2003: 8.8%), with every business unit profitable at the operating level. Operating profit of £1.2 million (2003: Operating loss of £0.8 million) Positive operating cash flow of £2.3 million producing net funds at 30 June 2004 of £9.1 million after investing £2.7 million in shares in Diagonal plc. Two acquisitions made in 2003 successfully integrated. Following the acquisition of 7.46% of Diagonal plc, as announced on 7 June 2004, the Board continues to evaluate whether or not to make an Offer for Diagonal plc. The consideration for such an Offer, should an Offer be made, would either be entirely in new Microgen shares or may include a partial cash alternative or may be a mix of cash and shares. Martyn Ratcliffe, Executive Chairman, commented: 'The strong performance of the Group, producing over 60% eps growth, is confirmation of Microgen's focus on delivering shareholder value. The tangible benefits of Microgen's acquisition integration strategy, together with its disciplined operational management, are readily apparent in these results and position the Group well for the future.' An analyst presentation will commence at 12.15 pm today at the offices of UBS, 4th Floor, 100 Liverpool Street, London EC2M 2RH. Contacts : Martyn Ratcliffe, Executive Chairman 01753-847122 Mike Phillips, Group Finance Director Ed Bridges, Financial Dynamics 020-7831-3113 Ben Way microgen Information Management Solutions www.microgen.co.uk 15 July 2004 MICROGEN plc ('Microgen') Interim Results for the Six Months ended 30 June 2004 Chairman's Statement The integration of both MMT Computing plc and Imago QA Ltd, acquired in the second half of 2003, has been successfully completed and the tangible benefits from the Group's acquisition and integration strategy are being achieved. This strategy has contributed to the strong financial performance in the first six months of the current financial year. While market conditions have improved slightly in the first six months of 2004, the Board still considers the recovery to be erratic and unpredictable. As a result, Microgen is maintaining its disciplined management approach across all operations with a continued focus on profit and cash flow. This conservative approach has delivered consistent performance throughout the past 3 years of market instability and positioned the Group to be able to pursue further expansion. Group Financial Performance In the six months ended 30 June 2004, Microgen generated profit before tax, goodwill amortisation and exceptional items of £2.6 million (2003: £1.1 million) from revenue of £21.1 million (2003: £11.1 million). Profit before tax in the period was £1.3 million (2003: loss before tax was £0.7 million). Adjusted earnings per share increased by 62% to 2.1p (2003: 1.3p) with net earnings per share of 1.0p (2003: loss per share 1.8p). The business delivered a strong operating performance with operating profit before goodwill amortisation and exceptional items of £2.5 million (2003: £1.0 million). Operating margins before goodwill amortisation and exceptional items increased to 11.9% (2003: 8.8%), enabling the Board to consider increasing investment in future organic growth opportunities. Operating profit for the period was £1.2 million (2003: Operating loss of £0.8 million). During the period, the Group produced positive operating cash flow of £2.3 million (2003: £0.8 million) and continues to have a strong balance sheet with net funds of £9.1 million after the investment of £2.7 million in shares in Diagonal plc. The close correlation of operating cash flow and operating profit reflects the Board's conservative revenue recognition policies. Consistent with the Group's acquisition strategy, Microgen does not at present pay a dividend. Operational Overview Microgen is an acquisitive IT services and solutions organisation and continues to seek acquisition opportunities where there is a strategic fit and efficiencies can be realised through a combination. As each acquisition is made, the integration strategy adopted by Microgen focuses the business units on sales, delivery and support for the customer while the internal and administrative functions are consolidated into shared services, the costs of which are charged to the business units. This model retains the emphasis on customer development while minimising the cost of internal administration. The results reported for the period ended 30 June 2004 affirm the effectiveness of this business model. During the first six months of the year, every business unit was profitable at the operating level. In addition, cross-selling opportunities between the business units are actively promoted in order to provide the Group's customers with the benefits of Microgen's multi-disciplinary consultancy-based services. The business units are categorised in three areas, a financial breakdown of which is provided in note 1 to this Interim Statement : * Software Based : Microgen software with maintenance and associated consultancy and services. * Managed Services : Transactional services and applications management * Consultancy : IT consultancy services, not related to Microgen software, together with management consultancy and software testing services. The completion of the acquisition integration has resulted in a significant change in the mix of staff within the Group. Headcount at 30 June 2004 was 439, of which approximately 15% were Associates, Contractors or temporary staff. Fee earning staff account for approximately 54% of the Group headcount, undertaking work on consultancy, application management, support and/or customised development activities. Of the 176 billable consultants in June, approximately two thirds are direct employees and one third are Associates or Contractors. Utilisation has been high throughout the period and average consultancy fee rates have increased by approximately 12% during the 6 months. Microgen continues to invest significantly in new software products. All the Group's software development activities are managed in a single organisation to ensure consistency and quality. Total development headcount is 64, of which over 85% are based at the Group's development centre in Wroclaw, Poland. Prospects The Group's results once again demonstrate the Board's emphasis on profitability and cash flow. The successful integration of the acquisitions made in 2003 positions the Group well for the remainder of the year. The Board continues to explore strategic opportunities for the further development of Microgen, including mergers and acquisitions, that could enhance and/or strengthen the Group's offerings and improve shareholder value. To this end, on 7 June 2004, Microgen announced that it had acquired a strategic shareholding in Diagonal plc equivalent to 7.46% of the issued share capital of Diagonal and was considering whether or not to make an Offer for Diagonal. The Board has noted the announcement by Diagonal on 13 July 2004 of a recommended Offer for the company. As at close of business on 14 July 2004 (considering the value of the shares being offered) this Offer valued each Diagonal share at the lower end of Microgen's potential Offer range set out in its announcement of 7 June 2004. Consequently, the Board of Microgen continues to consider whether or not to make an Offer for Diagonal and will continue to evaluate this potential opportunity. Should such an Offer be made by Microgen, the consideration could either be entirely in new Microgen shares or may include a partial cash alternative or may be a mix of cash and shares. For the avoidance of doubt, this announcement does not constitute an announcement of a firm intention to bid under Rule 2.5 of the City Code on Takeovers and Mergers, or any inducement to accept any Offer and there can be no assurance that any Offer will be forthcoming. In summary, the Board is satisfied with the strong performance of the Group in the first half of the year and continues to explore further opportunities to continue to develop its strategy. Martyn Ratcliffe Executive Chairman Microgen plc Group Profit and Loss Account Unaudited six months to 30 June 2004 Before goodwill Goodwill amortisation amortisation and and exceptional exceptional Note items items Total £000 £000 £000 Turnover 1(a) 21,130 - 21,130 Operating costs (18,626) (1,317) (19,943) Operating profit/(loss) 1(b) 2,504 (1,317) 1,187 Net finance income 138 - 138 Profit/(Loss) on ordinary activities before tax 2,642 (1,317) 1,325 Tax on profit/(loss) on ordinary activities 2 (484) Retained profit/(loss) transferred to reserves 841 Earnings per Share Basic 3 1.0p Diluted 3 1.0p Adjusted earnings per share (before goodwill amortisation, exceptional items and normalisation of tax charge) Basic 3 2.1p Diluted 3 2.1p Dividend per share Nil Microgen plc Group Profit and Loss Account continued Unaudited six months to 30 June 2003 Before goodwill Goodwill amortisation amortisation and and exceptional exceptional Note items items Total £000 £000 £000 Turnover 1(a) 11,058 - 11,058 Operating costs (10,090) (1,789) (11,879) Operating profit/(loss) 1(b) 968 (1,789) (821) Net finance income 104 - 104 Profit/(Loss) on ordinary activities before tax 1,072 (1,789) (717) Tax on profit/(loss) on ordinary activities 2 (337) Retained profit/(loss) transferred to reserves (1,054) Earnings per Share Basic 3 (1.8p) Diluted 3 (1.8p) Adjusted earnings per share (before goodwill amortisation, exceptional items and normalisation of tax charge) Basic 3 1.3p Diluted 3 1.3p Dividend per share Nil Microgen plc Group Profit and Loss Account continued Audited year ended 31 Dec 2003 Before goodwill Goodwill amortisation amortisation and and exceptional exceptional Note items items Total £000 £000 £000 Turnover 1(a) 24,216 2,200 26,416 Operating costs (21,962) (7,078) (29,040) Operating profit/(loss) 1(b) 2,254 (4,878) (2,624) Net finance income 268 - 268 Profit/(Loss) on ordinary activities before tax 2,522 (4,878) (2,356) Tax on profit/(loss) on ordinary activities 2 384 Retained profit/(loss) transferred to reserves (1,972) Earnings per Share Basic 3 (3.2p) Diluted 3 (3.2p) Adjusted earnings per share (before goodwill amortisation, exceptional items and normalisation of tax charge) Basic 3 2.9p Diluted 3 2.9p Dividend per share Nil Microgen plc Group Balance Sheet Unaudited Restated unaudited Restated audited as at as at as at Note 30 June 2004 30 June 2003 31 Dec 2003 £000 £000 £000 Fixed assets - Tangible assets 4,297 1,332 4,088 - Intangible assets 43,458 36,034 44,435 - Investments 5 2,678 - 11 50,433 37,366 48,534 Current assets - Stocks - raw materials 127 127 111 - Debtors 8,628 5,284 10,878 - Cash at bank and in hand 9,083 9,512 10,457 17,838 14,923 21,446 Creditors: amounts falling due within one year (10,964) (7,354) (13,295) Net current assets 6,874 7,569 8,151 Total assets less current liabilities 57,307 44,935 56,685 Provisions for liabilities and charges (2,384) (2,512) (2,604) Net assets 54,923 42,423 54,081 Capital and reserves Called up share capital 4,347 2,920 4,330 Share premium account 40,018 29,011 39,849 Shares to be issued - - 185 Other reserves 334 333 334 Profit and loss account 10,035 10,159 9,226 Equity shareholders' funds 54,734 42,423 53,924 Minority interest 189 - 157 Capital employed 54,923 42,423 54,081 Microgen plc Group Cash Flow Statement Audited Unaudited six months ended Unaudited six months ended year ended 30 June 2004 30 June 2003 31 Dec 2003 Note £000 £000 £000 Net cash inflow from operating activities 6(i) 2,317 787 4,800 Returns on investments and servicing of finance 138 130 318 Taxation 140 (7) (436) Capital expenditure and financial investment (3,268) (341) (589) Acquisitions and disposals - (3) (2,586) Cash (outflow)/inflow before financing (673) 566 1,507 Financing 6(ii) (701) (902) (898) (Decrease)/Increase in cash in the period 6(iii) (1,374) (336) 609 Microgen plc Notes to the interim statement for the six months ended 30 June 2004 1. Turnover and profit Audited year ended 31 Dec 2003 Unaudited Unaudited six six months months ended ended Before 30 June 30 June exceptional Exceptional 2004 2003 items items Total £000 £000 £000 £000 £000 1.(a) Turnover by business category - Software Based 6,195 3,998 7,773 - 7,773 - Managed Services 5,993 5,462 11,080 2,200 13,280 - Consultancy 8,942 1,598 5,363 - 5,363 21,130 11,058 24,216 2,200 26,416 Audited year ended 31 Dec 2003 Unaudited Unaudited six six Before months months goodwill Goodwill ended ended amortisation amortisation and and 30 June 30 June exceptional exceptional 2004 2003 items items Total £000 £000 £000 £000 £000 1.(b) Operating profit/(loss) - Software Based 1,251 508 864 - 864 - Managed Services 1,193 1,188 2,853 1,460 4,313 - Consultancy 1,111 150 201 - 201 3,555 1,846 3,918 1,460 5,378 Group overhead (936) (916) (1,702) (295) (1,997) 2,619 930 2,216 1,165 3,381 Movement in property provisions (115) 38 38 - 38 Operating profit before goodwill amortisation and exceptional items 2,504 968 2,254 1,165 3,419 Goodwill amortisation (1,317) (1,071) - (2,211) (2,211) Exceptional items Exceptional costs - Property provision - (246) - (1,133) (1,133) - Restructuring costs - (472) - (2,699) (2,699) - (718) - (3,832) (3,832) Operating profit/(loss) 1,187 (821) 2,254 (4,878) (2,624) 2. Taxation The tax charge for the period includes a credit of £66,000 related to prior years' tax (2003: charge of £283,000). The remaining tax charge of £550,000 (2003: £54,000) is at an effective rate of 20.8% (2003: 15.2%) of the profit before tax and goodwill amortisation. This lower rate is achieved primarily due to utilisation of tax losses. Earnings per share To provide an indication of the underlying operating performance per share the adjusted profit after tax figure used in the calculation of the adjusted earnings per share excludes goodwill amortisation, exceptional items and has a normalised tax charge. Adjusted and basic earnings per share are based on the share capital of 86,302,670 shares ( 2003: 58,280,260) being the weighted average number of shares in issue during the period. Diluted earnings per share are based on share capital of 86,998,048 (2003: 58,585,240). The Company's authorised share capital at 1 January and 30 June 2004 was 134,000,000 ordinary shares of 5 pence each with a nominal value of £6,700,000. At 1 January 2004 the issued, allotted and fully paid up share capital was 86,592,854 ordinary shares and by 30 June 2004 this number had increased to 86,935,040. At both these dates the issued , allotted and fully paid up share capital included 620,544 shares held by the Microgen Employee Share Participation Scheme Trust. 4 ESOP Shares - early adoption of UITF Abstract 38 The Urgent Issue Task Force has published Abstract 38 'Accounting for ESOP Trusts' which supersedes Abstract 13 and amends Abstract 17. It is effective for periods ending on or after 22 June 2004, but early adoption is encouraged. As we will be adopting UITF 38 in our 2004 Annual Report, we have adopted it in the preparation of these financial statements. The Abstract requires own shares held through an ESOP trust to be deducted in arriving at shareholders' funds and recommends the creation of a separate negative reserve. The Abstract requires this change to be retrospective and therefore comparatives have been restated. The effect of this has been to reduce net assets as at 31 December 2003 and 30 June 2003 by £282,000. Fixed asset investments The investments of £2,678,000 as at 30 June 2004 (2003: £Nil) represent 6,811,000 ordinary shares in Diagonal plc representing 7.46% of the issued share capital of Diagonal. This stake was acquired in the period 27th May to 4th June 2004 and is shown at cost. Based on the mid market price of Diagonal shares as at 30 June 2004 of 46.5 pence, the market value of this investment was £3,167,115. 6. Notes to the group cash flow statement (i) Reconciliation of operating profit/(loss) to net cash inflow from operating activities Unaudited Unaudited Audited six months six months year ended ended ended 30 June 30 June 31 Dec 2004 2003 2003 £000 £000 £000 Operating profit/(loss) 1,187 (821) (2,624) Depreciation 392 357 692 Goodwill amortisation 1,317 1,071 2,211 (Profit)/loss on disposal of tangible fixed assets - (7) 234 Decrease in Debtors 1,627 1,062 4,616 Increase in Stocks (16) (41) (25) Decrease in Creditors (2,190) (834) (304) Net cash inflow from operating activities 2,317 787 4,800 (ii) Analysis of movement in financing Unaudited Unaudited six six months months Audited ended ended year ended 30 June 30 June 2004 2003 31 Dec 2003 £000 £000 £000 Issue of share capital - - 2 Payment of deferred consideration (49) (250) (250) Redemption of loan notes (652) (652) (650) Net cash outflow from financing (701) (902) (898) (iii) Reconciliation of net cash flow to movement in net funds: Unaudited Unaudited six six months months Audited ended ended year ended 30 June 30 June 2004 2003 31 Dec 2003 £000 £000 £000 (Decrease)/Increase in cash in the period (1,374) (336) 609 Redemption of loan notes 652 652 650 Movement in net funds in the period (722) 316 1,259 Net funds at the beginning of the period 9,805 8,546 8,546 Net funds at the end of the period 9,083 8,862 9,805 (iv) Analysis of net funds 1 Jan 2004 Cash flow 30 June 2004 £000 £000 £000 Cash at bank and in hand 10,457 (1,374) 9,083 Debt due within 1 year (652) 652 - Total 9,805 (722) 9,083 7. Statement by the directors The financial information in this interim statement, with the exception of the adoption of UITF 38 as disclosed in note 4, has been prepared on the basis of the accounting policies set out in the statutory accounts of Microgen plc for the year ended 31 December 2003. The financial information does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. This interim statement has not been audited by the company's Auditors. Statutory accounts for Microgen plc for the year ended 2003, on which the Auditors gave an unqualified report, have been delivered to the Registrar of Companies. The directors of Microgen plc accept responsibility for the information contained in this announcement. To the best of their knowledge and belief (having taken all reasonable care to ensure that such is the case) the information contained in this announcement is in accordance with the facts and does not omit anything that is likely to affect the import of such information. Copies of this statement will be posted to shareholders and will also be available on the investor relations page of our website (www.microgen.co.uk). Further copies are available from the company Secretary at 11 Park Street, Windsor, Berkshire SL4 1LU. Independent review report to Microgen plc Introduction We have been instructed by the company to review the financial information set out in the Group Profit and Loss Account, Group Balance Sheet and Group Cash Flow Statement, together with notes 1 to 7. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/ 4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2004. PricewaterhouseCoopers LLP Chartered Accountants London 15 July 2004 Notes: The maintenance and integrity of the Microgen plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.

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