Interim Results

MICROGEN PLC 26 August 1999 MICROGEN plc ('Microgen') Interim Results for the Six months ended 30 June 1999 HIGHLIGHTS * Operating profit before goodwill amortisation of £1.2 million (1998 : loss of £1.4 million). Profit before tax and goodwill amortisation of £1.7 million. * EPS before goodwill amortisation of 2.5 p (1998 : 0.4p) * Dividend per share of 0.5p (1998 : nil) * All operating divisions profitable. * Following the restructuring in 1998, the performance of the Document Processing Services division was particularly strong and well ahead of Board expectations. Substantial bureau productivity and service delivery improvements. * The Kaisha acquisition was completed in April 1999 and is now integrated into the enlarged Group. Growth in business intelligence services was strong with reduced dependence on the historic IT support contracts. * Microgen Axess achieved the bureau break-even milestone with continued expansion of the blue-chip customer base producing an 88% growth in on-line revenue, compared with the second half of 1998. * Launched pilot Business-to-Business outsourced e-billing service in June with an operational service on schedule for launch later this year. The development of a Business-to-Consumer outsource service continues to make progress with considerable interest from potential partners and customers. Martyn Ratcliffe, Executive Chairman, commented : ' The success of the restructuring of the Group in 1998 and the subsequent repositioning of Microgen plc as an outsource IT services provider is starting to show positive results, with a return to operating profit. As a result, despite the potential effects of the millennium, the strong first half performance means that the Group is well-positioned to achieve its financial objectives for the full year. Looking further ahead, the three operating divisions now provide a good foundation to pursue growth opportunities in their sectors and the launch of Microgens outsource e-billing service offers a unique opportunity to combine the skills from the operating businesses to position Microgen at the forefront of this rapidly developing market.' Contacts : Martyn Ratcliffe, Executive Chairman ) 01753-847177 Mike Phillips, Group Finance Director ) www.microgen.co.uk Steve Liebmann or Isabel Petre, Buchanan Communications 0171- 466-5000 CHAIRMAN'S STATEMENT The first half of 1999 has shown positive results from the actions taken to restructure the company during 1998 with both the Document Processing Services Division and the Managed Information Services Division making considerable progress. In addition, the acquisition of Kaisha Technology was completed in April and has now been successfully integrated to form a third operating division, Microgen-Kaisha. In the first half of 1999, all operating divisions were profitable with the future strategy in each division focused on developing business opportunities in growth sectors of the IT services market. Financial Performance In the six months ended 30 June 1999, Microgen generated operating profit before goodwill amortisation from continuing operations of £1,171,000 (1998 : operating loss of £1,361,000 from continuing operations) from revenue of £15,472,000 (1998 : £15,626,000 from continuing operations). Profit before tax and goodwill amortisation in the period was £1,724,000 (1998 : £1,285,000, which included an operating contribution of £2,397,000 from the discontinued Nordic and German operations). Adjusted earnings per share before goodwill amortisation for the period were 2.5p (1998 : 0.4p). (Given the restructuring of the Group and the change in the accounting period during 1998, prior year comparisons at a consolidated Group level should be interpreted with caution. The 1999 figures refer to the six months ended 30 June 1999 and include two months contribution from Microgen-Kaisha while the 1998 figures refer to the six months ended 30 April 1998 and Group level figures include the contribution from the discontinued Nordic and German operations. In order to provide guidance on the performance of the continuing business operations relative to prior year, a break-down is provided in note 1.) The Group continues to have a robust balance sheet with net cash of £16.4 million at 30 June 1999, compared with net borrowings of £4.0 million at 30 April 1998. As a reflection of the performance of the business during the period, the Board has declared an interim dividend of 0.5 p per share (1998 : nil). This dividend will be paid on 1 October 1999 to shareholders on the register at the close of business on 10 September 1999. Document Processing Services Division ('DPS') Following the substantial restructuring and repositioning of the DPS division in 1998, the business has had a strong start to the year, ahead of Board expectations. Revenue of £9.1 million produced an operating profit of £941,000 (1998 : revenue of £10.1 million produced a loss of £1.3 million). This strong performance was primarily due to a significant improvement in bureau productivity and an increase in the average revenue per unit related to the repositioning of the services, compared with the six months ended 30 April 1998. During the period, the DPS division launched Microgen On-Line Information providing customers with status and audit information on the outsourced service application through internet access. This service enhancement has proven popular with our customers and has enabled Microgen to continue to differentiate its service offerings and reaffirm its position as one of the leading outsource document processing service providers in the UK. The increase in process efficiency in the bureaux has also produced a substantial improvement in service delivery with increasing customer satisfaction and stability of the business. The stated strategy of improving profitability and enhancing service levels in the DPS division, through elimination of unprofitable customers and reducing the number of small jobs, has delivered a strong turnaround in operating performance. Revenue growth from this more stable, profitable base is now anticipated during 2000. Managed Information Services Division ('MIS') The MIS division produced an operating profit of £104,000 on revenue of £5.1million for the six month period ended 30 June 1999. (1998 : revenue of £5.5 million produced a loss of £91,000.) Microgen Axess achieved the major milestone during the period in passing through the bureau-level break-even point, in-line with the Boards expectations, and should provide a positive bureau contribution in the future. The blue-chip customer base continued to expand and produced an 88% growth in on-line (recurring) revenue over the six month period ended 31 December 1998. This progress has been achieved despite a number of significant challenges during the period, including the successful implementation of a scaleable datacommunications infrastructure (outsourced wide area network and internet), the development/transitioning of the sales force and millennium- related project deferrals. The customer data/image storage mix has been different from that originally anticipated, with greater emphasis on computer output/outsourced database management and reduced storage/viewing of scanned images. This trend towards the higher value-add services is consistent with the strategic development of Microgen Axess, with data analysis tools now in testing phase, enabling customers to interrogate and analyse the data within their outsourced, managed database. As forecast, the decline in the COM market has continued during the period and the Board anticipates that this decline will continue in the future, reaffirming the validity of the strategic decisions taken on this business in the second half of 1998 to outsource the production of microfiche. Microgen-Kaisha The acquisition of Kaisha Technology ('Kaisha') was completed on 23 April 1999, following the approval by Microgen shareholders, for an initial consideration of £18.2 million. Further details on the total consideration for the acquisition are given in note 4. Microgen-Kaisha is a leading vendor-independent business intelligence consultancy, providing independent advice and consultancy services centred on data mining, data warehousing and related skills, in order to enable customers to realise the commercial advantages from Customer Relationship Management and Knowledge Management. For the period from completion of the acquisition until 30 June 1999, Microgen-Kaisha produced an operating profit of £126,000 on revenue of £1.2 million. It is encouraging to note that the mix of the business has continued to develop favourably with reducing dependence on the historic IT support contracts, which now account for just 26% of the revenue of the division. Revenue from the business intelligence services grew significantly compared with the same period in 1998. The integration of Kaisha is now almost complete, with resources realigned to support the growth in the high demand sectors and a management structure compatible with a divisional operation within a larger Group. IT systems and financial/operational control procedures have been implemented in line with Microgen policies. The repositioning of Microgen-Kaisha into higher value-add sectors of the market is already starting to show progress with increasing average daily fee rates. E-Billing In June 1999, Microgen launched an outsource e-billing service for Business-to-Business document distribution and live pilots are in operation. This outsource service integrates the processing and distribution expertise of the DPS division with the on-line storage and viewing capabilities of Microgen Axess, positioning Microgen as a leading service provider in this potentially high growth sector. A full service should be operational in the current year, although the revenue generated is unlikely to be material in the near term. While Business-to-Business e-billing provides a growth opportunity and demonstrates Microgens market-leading capability, the greater potential lies in the Business-to-Consumer sector. The company continues to explore strategies in conjunction with potential partners to position Microgen at the forefront of this developing market. Prospects While it is difficult to anticipate fully the impact of the millennium on each of the operating businesses, the distraction created within our existing and potential customers is anticipated to reduce growth prospects in the second half of the year. Nevertheless, the Board believes that the strong first half performance means that the Group is well positioned to achieve its financial objectives for the full year. The restructuring and repositioning of the Group is now complete with a return to profitability. The three operating divisions are well-positioned in high growth sectors of the IT services market and the prospects for Microgen are encouraging. Martyn Ratcliffe 26 August 1999 Executive Chairman MICROGEN PLC Group Profit and Loss Account for the Six Months ended 30 June 1999 Unaudited Unaudited Audited 6 months 6 months 14 months ended ended ended 30 June 30 April 31 Dec 1999 1998 1998 Notes £000 £000 £000 Turnover - continuing operations 14,259 15,626 35,709 - acquisitions 1,213 - - - discontinued operations - 16,934 34,396 1 15,472 32,560 70,105 Operating costs (14,509) (31,524) (72,981) Operating profit/(loss): Continuing operations - trading profit/(loss) - continuing 1,045 (1,361) (3,477) - trading profit - acquisition 126 - surplus property costs provision - - (2,550) - re-structuring costs - - (970) Operating profit/(loss) before goodwill amortisation 1,171 (1,361) (6,997) Goodwill amortisation - acquisition (208) - - Operating profit/(loss) after goodwill amortisation 963 (1,361) (6,997) Discontinued operations - 2,397 4,121 Operating profit/(loss) 1 963 1,036 (2,876) Loss on disposal of Fixed Assets - Continuing operations - - (1,552) Exceptional profit on disposals - Discontinued operations - 474 12,981 963 1,510 8,553 Net interest 553 (225) (61) Profit on ordinary activities before tax 1,516 1,285 8,492 Tax on profit on ordinary activities 2 (555) (1,131) (7,569) Profit on ordinary activities after taxation 961 154 923 Dividends (254) - (435) Retained profit transferred to reserves 707 154 488 Basic and diluted earnings per share (after goodwill amortisation) 3 2.1p 0.4p 2.2p Adjusted earnings per share (before goodwill amortisation) 3 2.5p 0.4p 2.2p Dividend per share 0.5p - 1.0p MICROGEN PLC Consolidated Balance Sheet Unaudited Unaudited Audited as at as at 30 as at 31 30 April Dec 1998 June 1999 1998 Notes £000 £000 £000 Fixed Assets - Tangible 5,251 13,641 5,381 - Intangible 4 24,853 - - - Investment in own shares 4 432 - - 30,536 13,641 5,381 Current assets - Stocks - raw materials 130 1,027 388 - Debtors 7,182 16,552 9,641 - Cash at bank and in hand 22,252 2,254 26,695 29,564 19,833 36,724 Creditors: due within one year 5(a) (20,709) (14,163) (16,077) Net current assets 8,855 5,670 20,647 Total assets less current liabilities 39,391 19,311 26,028 Creditors: due after more 5(b) than one year (1,620) (4,465) (997) Provisions for liabilities and charges (2,285) (903) (2,550) Net assets 35,486 13,943 22,481 Equity capital and reserves - Called up share capital 6 2,539 1,978 2,173 - Share premium account 7 16,650 1,477 4,748 - Other reserves 7 100 377 50 - Profit and loss account 7 16,197 10,111 15,510 Equity Shareholders funds 35,486 13,943 22,481 MICROGEN PLC Consolidated Cash Flow Summary for the Six Months Ended 30 June 1999 Unaudited Unaudited Audited 6 months 6 months 14 months ended ended ended 30 June 30 April 31 Dec 1999 1998 1998 Notes £000 £000 £000 Net cash flow from operating activities 8(i) 2,866 566 5,136 Returns on investments and servicing of finance 553 (238) (163) Taxation (792) (525) (871) Capital expenditure and financial (678) (2,228) (3,080) investment Acquisitions and disposals (5,614) 947 22,717 Equity dividends paid to shareholders (435) (1,029) (1,029) Cash (outflow)/ inflow before use of liquid resources (4,100) (2,507) 22,710 Financing (343) (190) (248) (Decrease)/increase in cash in the period 8(ii) (4,443) (2,697) 22,462 Notes: 1. Turnover and Operating profit/(loss) by division Unaudited Unaudited Audited 6 months 6 months 14 months ended ended ended 30 June 30 April 31 Dec 1999 1998 1998 Turnover £000 £000 £000 Continuing operations - Managed Information 5,148 5,481 12,842 Services - Document Processing 9,111 10,145 22,867 Services Acquisition - - Microgen Kaisha 1,213 - - 15,472 15,626 35,709 Discontinued - 16,934 34,396 operations 15,472 32,560 70,105 Operating profit/(loss) Continuing operations - Managed Information 104 (91) (386) Services - Document Processing 941 (1,270) (3,091) Services Acquisition - - Microgen Kaisha 126 - - 1,171 (1,361) (3,477) Goodwill amortisation - acquisition (208) Surplus property - provision - - (2,550) Restructuring costs - - (970) 963 (1,361) (6,997) Discontinued operations - 2,397 4,121 Operating profit/(loss) 963 1,036 (2,876) 2. Taxation The tax charge for the period was £555,000 (1998 :£1,131,000) based on the estimated effective tax rate for the year ending 31 December 1999 and includes a prior year adjustment charge of £20,000. 3. Earnings per share Earnings Basic Diluted EPS EPS £'000 Pence Pence Profit on ordinary activities after tax 963 2.1 2.1 Goodwill amortisation 208 0.4 0.4 Profit on ordinary activities after tax but before goodwill 1,171 2.5 2.5 The above basic earnings per share calculations are based on the weighted average number of shares in issue during the period of 46,253,994 (1998: 39,565,819). Diluted earnings per share calculations are based on 46,915,716 (1998:39,565,819) ordinary shares calculated as the basic weighted average number of ordinary shares plus 661,722 (1998: Nil) dilutive share options. The figures for 1998 have been restated in accordance with FRS 14. 4. Acquisition of Kaisha Group On 29 March 1999 the Company announced the acquisition, subject to shareholders approval, of the Kaisha Group, a leading independent business intelligence consultancy. Shareholders approval was obtained at an EGM on 22 April 1999 and the acquisition of Kaisha Group was formally completed on 23 April 1999. The key financial details in respect of the acquisition are scheduled below. Notes £000 Consideration and costs in respect of acquisition: Cash 5,965 Loan Notes 4,600 Ordinary shares 7,615 Initial consideration 18,180 Shares issued in respect of (i) 1,048 replacement options Increase in fair value of (ii) 3,137 consideration Deferred consideration 2,430 Fees and costs in respect of the acquisition 885 Total consideration and costs 25,680 (i) At the time of the transaction the Company established The Microgen Employee Share Participation Scheme 1999 to facilitate the issue of replacement options over Microgen plc shares to Kaisha employees in exchange for their options in Kaisha Technology Limited. 1,200,000 shares were issued to the MESPS 1999 and options over approximately 838,000 Microgen shares have been issued to Kaisha employees represented by £1,048,000 shown above. The balance of 362,000 shares are shown as investment in own shares in the consolidated balance sheet of the Group. It is intended that an option over 280,000 of these shares is granted to an employee of Kaisha at nil subscription and that this option will be subject to performance criteria. The costs of these shares is being written off over the three year vesting period in accordance with UITF 17. (ii) The increase in fair value of consideration represents the increase in value of the ordinary shares in Microgen plc between exchange of contracts for the transaction and completion. Kaisha Group (at date of acquisition) Preliminary provisional Net Balance Fair Assets Balance value Acquired Sheet Adjustment £000 £000 £000 Fixed assets 378 (37) 341 Debtors 1,495 (52) 1,443 Cash at bank 856 - 856 Creditors (1,151) (227) (1,378) Taxation (644) - (644) Net assets 934 (316) 618 Goodwill on acquisition 25,062 The provisional fair value adjustments relate to (i) a reduction in the net book value of fixed assets to a directors estimate of their value (£37,000); (ii) adjustment to accounting policies to bring them in line with those of Microgen plc (£52,000) and (iii) an accrual in respect of liabilities not recognised in the preliminary balance sheet (£227,000). The Goodwill on acquisition has been capitalised in accordance with FRS 10 and is being amortised over 20 years. 5. Creditors: Unaudited as Unaudited Audited at 30 June as at as a 1999 30 April 31 Dec 1998 1998 (a) due within £000 £000 £000 one year - Bank loans overdrafts - (982) - - Finance leases (279) (837) (638) - Creditors (7,523) (10,325) (9,154) - Corporate taxation (6,246) (2,019) (5,850) - Deferred consideration (1,807) - - - Loan Notes (4,600) - - - Proposed dividend (254) - (435) (20,709) (14,163) (16,077) (b) due after more than one year - Bank loans - (3,000) - - Finance leases (997) (1,465) (997) - Deferred consideration (623) - (1,620) (4,465) (997) 6. Share Capital The movement in authorised and issued Ordinary Share Capital of 5 pence each during the period is detailed below. Issued and Authorised fully paid Number Amount Number Amount At 1 January 1999 61,420,000 £3,071,000 43,469,137 £2,173,457 Increase in authorised share capital at EGM held on 22 April 1999 on 22 April 1999 8,580,000 £429,000 Shares issued to the shareholders of the Kaisha Group 6,091,866 £304,593 Shares issued to the Microgen Employee Share Participation Trustees Limited 1,200,000 £60,000 Issued under savings related option schemes 14,925 £746 At 30 June 1999 70,000,000 £3,500,000 50,775,928 £2,538,796 7. Movement on reserves ---Profit and Loss Share Account----- Premium Revenue Goodwill Account Other Reserve Reserve Total reserves £'000 £'000 £'000 £'000 £'000 At 31 December 1998 4,748 50 27,254 (11,744) 15,510 Retained profit 707 707 for the period Exchange rate adjustments (20) (20) Shares issued during the period 11,902 Other adjustment 50 At 30 June 1999 16,650 100 27,941 (11,744) 16,197 8. Notes to the Consolidated Cash Flow Statement (i) Reconciliation of operating profit/(loss) to net cash inflow from operating activities Unaudited Unaudited Audited 6 6 14 months months months ended ended ended 30 June 30 April 31 Dec 1999 1998 1998 £000 £000 £000 Operating profit / (loss) 963 1,036 (2,876) Depreciation 1,104 2,944 6,283 (Profit)/loss on sale of fixed assets (24) 167 236 Other non-cash movements 258 - 50 Decrease/(increase) in stocks 258 (55) 220 Decrease/(increase) in debtors 801 (668) (2,466) (Decrease)/increase in creditors (494) (2,858) 3,689 Net cash inflow from 2,866 566 5,136 operating activities (ii)Reconciliation of net cash flow to movement in funds/(debt) Unaudited Unaudited Audited 6 6 14 months months months ended ended ended 30 June 30 April 31 Dec 1999 1998 1998 £000 £000 £000 (Decrease)/Increase in cash in the period (4,443) (2,697) 22,462 Cash outflow from decrease in debt - - 3,000 Cash outflow from decrease in lease financing 359 47 845 Change in net funds/(debt) resulting from cash flows (4,084) (2,650) 26,307 Issue of loan note (4,600) - - New finance leases - - (131) Translation difference - - 264 Movement in net funds/(debt) in the period (8,684) (2,650) 26,440 Net funds/(debt) at beginning of the period 25,060 (1,380) (1,380) Net funds/(debt) at end of period 16,376 (4,030) 25,060 (iii) Analysis of net funds Other At Non 1 Jan Cash Cash 30 June 1999 Flow Changes 1999 £000 £000 £000 £000 Cash at bank and in hand 26,695 (4,443) - 22,252 Debt due within 1 year - - (4,600) (4,600) Finance leases (1,635) 359 - (1,276) Total 25,060 (4,084 (4,600) 16,376 9. Year 2000 Microgen has developed a Year 2000 Strategic Plan that assesses the likely impact and extent of the Year 2000 problem on the business. The Groups systems are being reviewed with the intention that any non-compliant elements are replaced or updated. The Group is also working with key business suppliers to review their readiness for the Year 2000 and is detailing contingency plans in the event of failure. As a result of the Strategic Plan the Group believes that it has taken reasonable steps to minimise the risks and uncertainties associated with the Year 2000 problem. The general expectation by those who have studied best practice in managing the Year 2000 problem is that the best run projects will face some Year 2000 compliance failures. There can be no assurance that Year 2000 projects will be successful or that the date change from 1999 to 2000 will not adversely affect the Groups operations and financial results. The Group may also be adversely affected by the inability of third parties to manage the Year 2000 problem. 10. Statement by the directors The figures in the consolidated Profit and Loss Account and Balance Sheet do not amount to full accounts within the meaning of Section 254 of the Companies Act 1985. Full accounts of Microgen plc for the 14 month period ended 31 December 1998, on which the auditors gave an unqualified report, have been delivered to the Registrar of Companies. This interim statement has neither been audited nor reviewed by the Companys Auditors. Copies of this statement are being posted to shareholders and is also available on the investor relations page of our web site (www.microgen.co.uk). Further copies are available on request and free of charge from the Company Secretary at 11 Park Street, Windsor, Berkshire SL4 1LU.

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