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. This information is provided by RNS The company news service from the London Stock Exchange

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