S O P H E O N 2 0 0 0 The Knowledge To Compete ® A N N U A L R E P O R T “Sopheon's mission is to give our clients the power to more effectively create, capture, share and use knowledge – to compete.” 4 Group Profile ––––––––––––––––––––––– 5 Chairman’s Statement 21 Auditor’s Report ––––––––––––––––––––––– ––––––––––––––––––––––– 8 Market & Product Overview 22 Group Profit & Loss Account ––––––––––––––––––––––– ––––––––––––––––––––––– Directors & Advisers Group Balance Sheet 14 23 contents Company Balance Sheet 24 15 Report on Directors’ Remuneration ––––––––––––––––––––––– 16 Directors’ Report ––––––––––––––––––––––– 25 Group Statements of Cash Flows ––––––––––––––––––––––– ––––––––––––––––––––––– 20 Statement of Directors’ Responsibilities 26 Notes to the Accounts 4 GROUP PROFILE G r o u p P r o Sopheon is a leading international provider of information and knowledge solutions that enable companies to access internal and external information more efficiently and to turn it into the knowledge to compete. Sopheon’s experience in integrating information process and content is the foundation for a combination of pre-loaded, industry-specific software applications, expert services and specialized l i e f content. Its comprehensive solutions can enhance business processes ranging from product development and customer relationship management to R&D and quality management. Sopheon has operating bases in the United Kingdom, the Netherlands and the United States. Its clients are companies in the life sciences, high tech and healthcare industry sectors, and include nearly half of the technology-driven companies on the Fortune 500. STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 5 Statement from the Chairman and Chief Executive Officer Introduction The year 2000 was eventful for Sopheon, with substantial progress made towards our objective of becoming a major global company in the emerging knowledge management market. During the first half year, AppliedNet, acquired in late November 1999, was successfully integrated into the group. In early March, the proposed acquisition of Teltech Resource Network Corporation (“Teltech”) was announced; this transaction was completed on 15 September 2000 following filing of Sopheon’s registration statement with the Securities Exchange Commission at the end of August. In the last fifteen months Sopheon has developed beyond recognition. From a small research and development business in late 1999 with a base in Amsterdam, 40 people and revenues under £1m, Sopheon ended the year 2000 with significant operations in the UK, the Netherlands and Minnesota and Colorado in the USA, 250 staff and a pro-forma turnover of £15.2m for 2000. Results and Finance In line with revised expectations, Sopheon’s consolidated revenues for 2000 showed a five-fold increase over 1999 rising from £1.5m to £7.8m.This included a contribution of £3.2m from Teltech for the three and a half months after completion of the acquisition. Our consolidated EBITDA losses increased from £1.7m to £6.7m, reflecting very significant investment in product development, sales and marketing and the implementation capability required to get our solutions rapidly accepted in the market. On a pro-forma basis, revenue stood at £15.2m and EBITDA was a loss of £8.4m. Close on the heels of our £8m acquisition of AppliedNet and the associated £8m fundraising in November 1999, in March 2000 £20m was raised through the placing of 2.6m shares to support the proposed acquisition of Teltech.The total cost recorded for the acquisition of Teltech was £26m in cash and shares. With the rapid increase in our critical mass, our customer base and the geographic reach of our business activities, we are now a leading provider of content, research and on-demand expertise.This new dimension provides a stable revenue stream based on outsourcing and subscription models for information services. We would have hoped for even more substantial development within the business during 2000. However, as indicated in previous announcements, as a consequence of softness in the application development and consulting markets together with product and commercial integration delays arising from the extended completion of the Teltech acquisition, 2000 pro-forma growth was restricted. Significantly, the information services business acquired with Teltech (now trading as Sopheon-Teltech) continued to give strong recurring revenue, underlining the value of this acquired business. On the back of our corporate developments we have created our integrated software-services-content strategy, described below in the Business Development section, building on the strengths of our component businesses and concentrating on clear market opportunities for our combined solutions. The first products arising from our investment effort are Accolade for new product development and our new portal Intota.com which provides online access to Sopheon-Teltech’s unique expert network. Looking forward, 2001 will clearly be a significant year for Sopheon in terms of the growth we plan to drive from our recently combined organization. In line with sound business practice we are taking active steps to manage our cost base and are looking to strengthen our balance sheet. 6 STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Business Development Our strategy is to develop software applications integrated with specialized content and expert services, to help organizations manage specific knowledge-intensive business processes. In practical terms this means: • Customers require business solutions to business problems, not technology for its own sake.This realization has driven us to develop applications that map our customers’ processes and information in a structured way with control over terminology and search. • Professionals are looking for tools that not only automate and leverage the knowledge and processes they have within their organizations, but also incorporate relevant literature, research or expertise from outside their organization. Our research analysts, our network of independent leading experts, and our information and research portals meet this need. • Enterprise-level, business-critical applications need both strategic and IT consulting skills to facilitate sale and implementation. Our teams of knowledge management and integration experts on both sides of the Atlantic serve this requirement. Bringing together these three elements is what makes Sopheon unique. Our new integrated product, Accolade, is the first example of this potential, built for the automation of New Product Development (NPD). Since the late 1980’s – thanks largely to the development of the Stage-Gate methodology authored by our business partners at the Product Development Institute (PDI) and used by 60% of North American manufacturers, the NPD process has benefited from structure and formalization; the next stage of development relates to automation. Accolade embodies the PDI process. It builds in best practices, benchmarks and research portals, and can be mapped to, and integrated with, an organization’s existing infrastructure. We believe Accolade will increase speed to market, focus effort on winning products, and maximize use of distributed resources – in short, it should have a significant return-on- investment impact for customers.The market response is encouraging. Since announcing the launch of Accolade in October 2000 at the premier NPD exhibition in New Orleans, we have signed Pennzoil, Cargill and Sabic as launching customers. In June 2000, our research portal Teltech.com was awarded CIO magazine’s prestigious international Web Business 50/50 award as a premier online site.Version 2 was released in April 2001. Recently we have also launched Intota.com, a second- generation portal that delivers our expert network as an online resource, allowing customers to find a specialist, and engage him/her on an assignment through the portal.To date, Sopheon has signed syndication agreements with eFunda.com,Yet2.com, enviroXchange.com, BioSpace.com, Northern Light, GlobalSpec, and FabricatorMarket.com.Traffic is starting to build on the Intota website and we have a number of additional syndication agreements in the pipeline. Hewlett-Packard has appointed Sopheon its preferred provider of knowledge management and business process solutions.This significant global relationship will drive a program of joint marketing activities for our products and services. Our sales and marketing efforts continue to gather pace, Sopheon is participating in conferences and trade shows in 2001, and making keynote presentations at seven of these. Product Development Our core technical capabilities in content creation, terminology management and advanced search are key to the successful development of business solutions that effectively support knowledge-intensive business processes. Increasingly, we can build applications on scaleable technology platforms to provide solutions in a variety of customizable forms. For example, Accolade will be available as either an enterprise solution, which would be resident inside a customer’s firewall, or as a secure online product accessible via the emerging ASP mechanism. New versions of our research portals will incorporate content capture and enhanced terminology management, and will make available transaction based payment mechanisms on the back of our Intota developments. Following customer demand, we extended our healthcare offering with an automated agent that reads and forwards relevant information to support evidence-based medicine. In these ways Sopheon is ensuring that its technology is capable of meeting the increasingly sophisticated requirements of its customers as they adapt to the growing demands of a global e-business economy. We are also seeing an expanding range of opportunities to create more focused variants of Accolade for specific market sectors.The most important of these sectors is Life Sciences, which we expect to approach with more speed after we take on the Aventis team referred to ahead. STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 7 Acquisition Strategy Our acquisitions of Lessenger and AppliedNet signalled our intent to move Sopheon decisively towards commercial maturity. Last year’s acquisition of Teltech in the USA was our most substantial to date. It brought us a mature organization with strong management and over 100 professionals, a customer base that includes half of the technology- driven Fortune 500 companies, a substantial revenue base with a strong recurring element, and complementary technology in the form of the Teltech.com portal and related taxonomy structures.This together with our existing base in Denver gave us a firm footprint into the North American market, which we are building upon. In line with our objectives of developing our commercial focus and achieving global reach, we have continued to look for mature businesses to partner with or, where the circumstances and strategic fit are compelling, to acquire. As announced, we have agreed in principle to purchase a profitable German business, currently a division of the Aventis Group, in an all- paper transaction with a significant profit driven earn-out element.The major attractions of this business to Sopheon are its synergistic product and service offerings, an impressive team of people rooted in the Life Sciences who should accelerate Sopheon’s planned penetration of that sector, its relationship with Aventis and other substantial companies, its annual revenues of over £6m, and a balance sheet that will provide sufficient strength and working capital for an independent future outside the Aventis group. Board of directors and executive management team Last year we divided our management structure into a Sopheon plc Board with at least half its directors being non-executive, and an executive management board responsible for operations. It gave me great pleasure last year to announce the appointment of Andy Michuda of Teltech as our CEO and as an executive director of Sopheon plc. We have been delighted by the energy and vision Andy has brought to the role. As previously announced, we have a great team of people leading our organization on both sides of the Atlantic. Our only gap was in the marketing area, which we have filled with the appointment of Chris Hawver as our Chief Marketing Officer. Chris is a respected software executive with a successful track record in business and channel development for international information technology businesses and channel development including Achieve Healthcare, Medical Documenting Systems and Data General. Most recently, we announced the appointment of Bernard Al, former CEO of Wolters Kluwer Netherlands as a non- executive director. Bernard brings invaluable experience and perspective on the information services market and has a science and linguistics background which is a perfect match for Sopheon. Outlook With our principal strategies in implementation and the recently announced further acquisition, I believe that 2001 will be another year of substantial progress toward our goal of becoming a profitable international company.With an expanding customer base on both sides of the Atlantic and a product and service offering that we believe has a significant “first to market” advantage, we have confidence that we are well positioned for considerable growth in a rapidly developing market. Given the early success we have experienced with Accolade and the strong pipeline we are building for this new product, we are planning for a significant transition in growth and revenue mix in the second half of 2001. are continuing to maintain emphasis on our component businesses, both in terms of their individual performance and with respect to positioning them effectively for the anticipated pull-through from Accolade implementations. In the meanwhile we The path before us is a challenging one, given the indication of a potential global economic slowdown. Our prospects and customers are dealing with many of the same influences and are looking for ways to reduce cost and accelerate speed to market to compete more effectively. Our products and services deliver rapid return on investment; they automate knowledge-intensive processes and deliver relevant content effectively and economically.They are well positioned to benefit from this environment. Barry Mence Executive Chairman 11 May 2001 Andy Michuda Chief Executive Officer 8 MARKET AND PRODUCT OVERVIEW Market and Product Overview Information and Knowledge Today In the race to get ahead, knowledge has become the great equalizer.The winner simply finds ways to use internal and external knowledge better. The corporate enterprise requires information to achieve and maintain competitive advantage. But in many cases, today’s companies struggle with information overload and resultant inability to access critical information when it’s needed. Corporate knowledge workers are deluged each day with information from email, their peers, intranets and other internal sources. Information from external sources adds to the information excess. More generally, knowledge workers are bombarded with information from the Internet, suppliers and customers. The fact is, today’s knowledge workers receive more information in one month’s time (via email, post, industry reports, company communications and so on), than their grandparents received in a lifetime. Sopheon understands that knowledge and information are essential to the success of any business. We also know the challenges companies face in creating, capturing, using and sharing information. This is particularly true when it comes to supporting knowledge-intensive business process such as research and development and healthcare protocol management. “In our environment, time is precious - both staff time and time to market.We find Sopheon to be a great tool to leverage our time.” Tim Alho, Manager Snap-On, Inc. Our History The company began in 1993 as Holland-based PolyDoc. Building on unique competencies in linguistics and language management, Sopheon created software applications that allowed organizations to capture knowledge through structured authoring tools, terminology management and thesauri.This technology was focused on specific processes such as hospital protocol management and the sharing of quality standards. In November of 1999, Sopheon added to its knowledge harvesting and content dissemination competencies by acquiring AppliedNet, a leading UK supplier of knowledge management solutions and products with particular skills in search and portal technologies. As well as extending the intellectual property of the group, this acquisition brought real strength in implementation services and significantly expanded Sopheon’s market presence in the UK. With innovative, commercially promising software tools in place, Sopheon next looked for an opportunity to gain a foothold in the U.S. market and to integrate content into its solutions. In September 2000, Sopheon completed the acquisition of Teltech Resource Network Corporation, a leading U.S. knowledge management and research services organization. With a 16-year history,Teltech immediately gave Sopheon a diversified, blue chip U.S. client base. MARKET AND PRODUCT OVERVIEW 9 Investing in Solutions for Knowledge- Intensive Business Processes Based on its experience in structuring, managing and delivering information, Sopheon is uniquely able to provide solutions that integrate internal and external information. Sopheon’s experience is the foundation for a powerful combination of software applications, expert services and specialized content focused on specific, knowledge-intensive business process for clearly identified vertical applications. Content-loaded, software applications. Sopheon’s process and content expertise is embodied in its software applications. Unlike other knowledge management software, Sopheon’s software has industry and process-specific content built in. This differentiating concept was first introduced through Sopheon’s Qualiflow system that enables hospitals and healthcare organizations to create, maintain and publish medical protocols and quality documents. More recently, it was delivered through the introduction of Sopheon’s Accolade solution for new product development. Sopheon’s software applications include: “Sopheon has helped us to give patients the very best care.Their solution enables our medical and nursing staff to access clinical protocols easily and quickly.” Dr. Jan Carpay,Chairman of the Management Board and CEO, Academic Hospital, Maastricht Structured Authoring that provides the framework for capturing, organizing and publishing content based on predefined categories and corresponding terminology. Terminology Management acts as a central function for harmonizing, storing and maintaining terminology for specific business processes. It offers interactive navigation of terminology relationships, glossaries and dictionaries. Decision Support Facilitation that provides the framework for automating and streamlining knowledge-intensive business processes. to support and inform process decisions. It is a flexible, web-based tool that models an organization’s existing process and integrates research services Once installed, Sopheon software builds a knowledge base by collecting information from internal and external sources. Captured information is filtered, categorized and restructured for easy, time-efficient access.The software also allows for publishing of usable knowledge.Terminology is extracted from authored documents and marked to the glossary where corporate knowledge workers can explore the context for terms. “A Sopheon expert provided excellent assistance to our company in the area of electronic circuit board manufacturing and plating. His knowledge, experience and willingness to go the extra mile helped us overcome a critical electrical contact problem.” David Allen, Engineer Lexmark International Expert services. Sopheon expert knowledge and integration management consultants listen to, research and analyze an organization’s needs and then design, implement and support tailored solutions to that organization’s specific business process requirements. Using our full complement of software applications, best-practice tools and content resources, Sopheon consultants work with an organization to design knowledge solutions that simplify and streamline a business process. Sopheon excels at mapping process and content architecture and creating content structures that enable precise, easy transfer and retrieval of relevant knowledge and information. Our knowledge integration planning includes recommendations for systems maintenance, content management procedures, impact measurement processes and more. Sopheon consultants assist with the installation of the solutions we develop and their integration into the client’s existing systems infrastructure.With a 10 MARKET AND PRODUCT OVERVIEW wealth of experience in the implementation of search engines, content management software and other tools for filtering and structuring content, they regularly design and build internal and external portals and other knowledge management applications. Sopheon also applies its experience and proven practices to address organizational and cultural factors that might otherwise impede successful adoption of a solution. “Sopheon’s expertise in content management technology played a part in building FT.com into the world’s leading global business portal.” Paul Waddington, Marketing Services Director FT.com Sopheon supplies its clients with market, competitive and technical intelligence.Through Sopheon’s services, organizations seeking quick answers to everyday questions or complex market, competitive and technical analyses can access thousands of technical and industry authorities, researchers and analysts representing virtually every facet of science and technology. Sopheon knowledge and research analysts provide personalized service to sort out specific client research needs, deliver custom, in-depth research projects, conduct research, and synthesize, analyze and deliver findings. Backed by tens of thousands of primary and secondary sources around the globe, as well as by leading-edge technology and methodologies, these experts are uniquely positioned to enable corporations to innovate and solve problems faster than the competition. “Access to Sopheon’s experts is like having an unlimited staff to keep me abreast of current and new technologies and to act as sounding boards for discussions in areas that fall outside my area of expertise.” William Ryszytiwskyj, Development Associate Corning, Inc. Specialized content. With 16 years of experience, Sopheon has strong, proven competencies in the development of content to support the creation and application of knowledge. Sopheon has created large repositories of reusable technical and business information. of highly viable, fully customized solutions. Sopheon’s specialized content includes: Its software applications come preloaded with this content, enabling fast deployment Teltech.com - Research and Knowledge Portal. Teltech.com serves as a gateway to the subscription-based research services offered by Sopheon. This state-of-the-art, do-it- yourself research tool blends the speed and economy of a powerful portal with the skills and experience of Sopheon’s unmatched research staff. Recognized by CIO and R&D magazines as a best-of-breed research platform,Teltech.com integrates high-value content from the Internet and fee-based databases to provide one-stop access to technology, market and competitive intelligence. Designed specifically for technical and business professionals, Sopheon’s portals reduce unproductive Internet search time by more than 50 percent. In addition to serving as a comprehensive gateway to information outside a company’s walls, Sopheon’s portal offering can also be configured to provide integrated access to internal information and expertise. The solution can be specifically tailored to support knowledge-intensive business processes such as product development, merger and acquisition procedures, strategic business planning and technology portfolio management. MARKET AND PRODUCT OVERVIEW 11 “Sopheon’s research portal for Armstrong is a state-of-the-art way for our employees to find answers to business and technical questions. Sopheon research staff and network of experts.” It blends the speed and economy of a ‘search-on-your-own,’Web-based portal with the skills and know-how of the Jo Tyler,Vice President of Organizational Development Armstrong Intota.com provides online, expert knowledge services created Intota.com - Sopheon’s Online Expert Resource. specifically to serve technical and scientific business-to-business markets. need quickly and efficiently by providing access to leading authorities in virtually every area of science and technology.The Intota service is transaction-based, available on a “pay as you need” basis via credit card, making the service cost-effective and efficient for a wide audience of users. Traffic to the site is promoted through co-marketing and co-branding relationships with a growing number of strategic affiliates. During 2001, Intota will be rebranded and fully integrated into the Teltech.com offering. Intota helps professionals get answers they Thesaural system. Sopheon’s dynamic thesaural system covers more than 30,000 areas of science and technology. Created from real business subjects and issues, this content structure grows daily based on usage. Library of taxonomies. The value derived from knowledge applications depends largely upon how quickly and efficiently an organization can use them. Sopheon has developed an expansive library of content taxonomies, pre- established content structures organized to expedite the retrieval of relevant information. Industry-specific guidelines and standard operating procedures (SOP’s). Sopheon has created and captured numerous guidelines and SOP’s that are business-critical to specific industry sectors. Sopheon embeds this content in applications for these sectors, helping organizations strengthen risk management and reduce liability. “By working with Sopheon, our scientists have a much clearer perspective of market and scientific trends.” Adrian Dale, Former Head of Knowledge Management Unilever Alliance Strategies To quickly capture maximum market share within an industry sector, Sopheon believes it is necessary to align with companies having an established presence. Teaming with companies that provide complementary products and services will allow Sopheon to meet client demands and more rapidly deliver integrated solutions within specific markets. Sopheon is pursuing alliances with organizations supplying complementary products and services. Initial alliances include companies such as the Product Development Institute, Northern Light, enviroXchange, BioSpace.com, yet2.com, Montreal Informatica and Hewlett Packard. Vertical Software Solutions Sopheon sees an increasing number of opportunities to create more focused variants of our solutions within specific vertical markets.These solutions will integrate software, expert services and specialized content to support strategic decision-making and satisfy the information needs of the knowledge worker contributing to the business process. Sopheon Accolade for New Product Development An example of the integrated Sopheon vision is embodied in our Accolade solution for new product development (NPD). Sopheon has entered into an exclusive partnership with the Product Development Institute (PDI) founded by Drs. Robert Cooper and Scott Edgett, authors of the Stage-Gate product development methodology, to develop Sopheon Accolade In 1999, excluding government spending, companies spent nearly £500 billion globally on scientific research and for NPD. developing new products (Industry Standard: 179, November 13, 2000. ISSN: 1098-9196). Recent studies show that nearly 50 percent of all product development resources are wasted on projects that are losers...while top companies only spend 20 percent on losers. (Booz, Allen, Hamilton). Companies with integrated development grow 50 percent faster than those with only project management expertise. Sixty-seven percent of companies with integrated development average 10 percent or higher profitability than average companies. (Performance Measurement Group) 12 MARKET AND PRODUCT OVERVIEW Sopheon Accolade integrates application software, expert services and specialized content to improve a company’s ability to deliver new products more effectively to the market. Accolade converts PDI’s proven Stage-Gate system from paper to computer and stores all relevant project data in a central repository for viewing. Accolade provides flexible, web-based software that models an organization’s existing new product development process. It integrates research services to support and inform NPD decisions from concept to launch. Through these services Sopheon provides access to knowledge analysts and leading experts who assess markets, review trends and evaluate product concepts. Sopheon experts map Accolade to the client’s internal process and then integrate it into existing systems infrastructures. “With Accolade, Sopheon has raised the bar on what can be done to manage the product development process, offering a way to accelerate it, cut costs and help focus resources on winning products.” Ahmed Alim, Senior Vice President of Research and Development and Chief Technology Officer Pennzoil-Quaker State Company Benefits of Sopheon Accolade • Increases product launch success. Accolade integrates research to help the client make informed process stage and gate decisions, benchmark progress and invest in products that will win in the marketplace. • Saves time managing portfolio activities. Accolade’s online dashboard allows client decision-makers to quickly assess their organization’s complete portfolio, including a project’s status within their process. • Automates the NPD process. Accolade provides a flexible framework to accommodate the NPD process already operating within the client organization. As a web-based tool, it supports virtually any structured process including Stage-GateTM, PaceTM, waterfall and spiral. • Accelerates time to market. Accolade supports critical decision-making within each process stage and gate, so the adopting organization can make fast, informed decisions and spend time on products that can win in the marketplace. MARKET AND PRODUCT OVERVIEW 13 • Enhances quality of execution. Accolade manages all related process activities to make sure deadlines are met. It also electronically monitors process adherence and consistent execution of each step as a measure of accountability for the process deliverables. • Validates product development decisions. Accolade integrates a full range of research services, including a custom research portal that supplies market, competitor and technology intelligence on demand to support the client’s new product initiatives. • Reduces NPD spending. Accolade captures project learnings, helping to avoid duplication of work effort, and repetition of developmental mistakes, as well as strengthen processes and build intellectual property for use in future NPD efforts. • Maximizes portfolio value. Accolade allows the client to monitor, prioritize and allocate resources appropriate to projects, and ensure that projects are aligned with the latest business plans or changing market conditions. The solution’s central database of key process metrics lets the adopting organization instantaneously analyze its portfolio. • Improves cycle time and process adherence. Accolade organizes predefined project deliverables and activities so users can monitor their success at each decision. • Leverages product development experience. Accolade is preloaded with Cooper & Edgett best-practice NPD projects and processes content, so users benefit from the expertise of leading NPD authorities. • Advances project team communication. With Accolade, all product development team members have a clear understanding of their roles, responsibilities and actions within the NPD process, resulting in enhanced project collaboration. • Decreases time spent reporting project status. Accolade collects critical information throughout the project, providing consistent formats for fast, easy generation of project status reports and presentations. detailed project planning through an interface to software such as Microsoft Project®. It also supports 14 DIRECTORS AND ADVISERS Directors and Advisers Directors Barry K. Mence, Andrew Michuda, Arif Karimjee ACA Stuart A. Silcock FCA Joseph Shuster Bernard Al Executive Chairman Chief Executive Officer Finance Director Non-executive Director Non-executive Director Non-executive Director Secretary Arif Karimjee Registered office Stirling House, Surrey Research Park Guildford Surrey GU2 5RF Registered number Registered in England and Wales: 3217859 Auditors Principal bankers Solicitors AIM Nominated Adviser and Broker Euronext Paying Agent Ernst & Young Apex Plaza Reading RG1 1YE Silicon Valley Bank 3003 Tasman Drive Santa Clara California 95054 United States Lloyds TSB Bank Plc 77 High Street, Southend-on-Sea Essex SS1 1HT Briggs and Morgan 2400 IDS Center, 80 South Eighth Street Minneapolis Minnesota 55402, United States Hammond Suddards Edge 7 Devonshire Square Cutlers Gardens London EC2M 4YH Nauta Dutilh Prinses Irenestraat 59 1077 WV Amsterdam The Netherlands HSBC Investment Bank plc Thames Exchange 10 Queen Street Place London EC4R 1BL Kempen & Co NV Herengracht 182 1001 GJ Amsterdam The Netherlands Registrars Financial PR Consultants Capita IRG Plc Bourne House, 34 Beckenham Road Beckenham Kent BR3 4TU Buchanan Communications Ltd 107 Cheapside London EV2V 6DN Citigate First Financial BV Assumburg 152A 1081 GC Amsterdam The Netherlands REPORT ON DIRECTORS’ REMUNERATION 15 Report On Directors’ Remuneration The remuneration committee of Sopheon plc is responsible for oversight of the contract terms, remuneration and other benefits for executive directors, including performance related bonus schemes.The committee comprises the non- executive directors together with Barry Mence.The committee makes recommendations to the board, within agreed parameters, on an overall remuneration package for executive directors and other senior executives in order to attract, retain and motivate high quality individuals capable of achieving the group’s objectives.The package for each director consists of a basic salary, benefits and pension contributions, together with performance related bonuses and share options for certain directors on a case by case basis. Consideration is given to pay and employment policies elsewhere in the group, especially when considering annual salary increases. From time to time the remuneration committee may take advice from appropriate remuneration consultants. Contracts Service contracts between the company and the executive directors are terminable on 6 months’ notice. Fees for Non-executive Directors The fees for non-executive directors are determined by the board.The non-executive directors are not involved in any discussions or decisions about their own remuneration. Directors Remuneration Set out below is a summary of the fees and emoluments received by all directors during the year, or (where applicable) period of office. Details of directors’ interests in shares and options are set out in the Directors’ Report. Executive directors B. K. Mence A. Michuda (1) A. Karimjee (2) H. J. M. Rutten (3) J. M. Macfarlane (3) R.V. Maddocks (3) E. R. E. I.Wiebenga (4) Non-executive directors J. M. Shuster (1) S. A. Silcock M. J. Brooke (5) H. Coltof (3) Salary and fees £ 107,428 40,212 72,952 47,785 71,069 66,883 2,403 4,842 28,949 12,000 2,931 ––––––– 457,454 ––––––– ––––––– Benefits £ Contributions to Pension £ 3,128 1,394 659 8,288 6,928 9,982 728 1,265 - - - ––––––– 32,372 ––––––– ––––––– 3,600 668 2,708 2,206 5,229 5,001 111 94 - - - ––––––– 19,617 ––––––– ––––––– Total 2000 £ 114,156 42,274 76,319 58,279 83,226 81,866 3,242 6,201 28,949 12,000 2,931 ––––––– 509,443 ––––––– ––––––– Total 1999 £ 82,164 - - 72,262 13,694 101,007 40,450 - 31,818 1,000 6,200 ––––––– 348,595 ––––––– ––––––– (1) Appointed on 18 September 2000 (2) Appointed on 1 February 2000 (3) Resigned on 18 September 2000 (4) Resigned on 1 February 2000 (5) Resigned on 8 January 2001 (6) Pension contributions are made to individual directors’ personal pension schemes. The emoluments of S. A. Silcock and M. J. Brooke are paid respectively to Lawfords Limited, of which Mr. Silcock is a director, and Coinshire Limited, of which Mr. Brooke is a director. Included in Mr Silcock’s emoluments are fees of £10,949 paid to Lawfords Limited for professional services rendered by that firm. Mr Michuda is eligible to participate in an incentive scheme established at the time of the acquisition of Teltech Resource Network Corporation whereby he will receive 41,666 Sopheon ordinary shares on 15 September 2001, the anniversary of the completion of the acquisition. 16 DIRECTORS’ REPORT Directors’ Report Financial Results The loss for the year ended 31 December 2000 before interest, tax, depreciation and amortization (LBITDA) was £6,655,000 (1999 - £1,654,000) on a turnover of £7,763,000 (1999 - £1,510,000).The result for the year both before and after taxation was a loss of £11,945,000 (1999 - £2,072 000).The directors do not propose to declare a dividend. Principal Activities The group’s principal activities during the year continued to focus on the development and provision of knowledge management software, solutions and services.The acquisition of Teltech Resource Network Corporation (“Teltech”), now trading as Sopheon-Teltech, has significantly extended the scope of the business. In addition to widening the critical mass, customer base and geographic reach of the group’s traditional activities, Sopheon-Teltech is a leading provider of content, research and on-demand expertise which has added a new dimension to Sopheon’s offering and provides a stable revenue stream based on outsourcing and subscription models for information services. Review of the Business On a consolidated basis, Sopheon’s revenues show a five-fold increase over 1999 rising from £1.5million to £7.8million. This includes a contribution of £3.2million from Sopheon-Teltech since acquisition. LBITDA losses have increased four- fold, reflecting the significant investment being made in product development, sales and marketing and the implementation capability that will be required to get our solutions rapidly accepted in the market. Early fruits of this investment are the Accolade software application for New Product Development (NPD), developed with the backing of PDI, the world’s leading experts on NPD, and the new research portal Intota.com which provides on-line access to Sopheon-Teltech’s unique expert network of leading specialists with expertise in more than 30,000 areas of science, technology and business. In the last fifteen months the Sopheon group has changed beyond recognition. From a small research and development business in late 1999 with a base in Amsterdam and around 30 staff, through the acquisitions of AppliedNet and Teltech, Sopheon ended the year 2000 with significant operations in the UK, Netherlands, Minnesota and Colorado and in excess of 250 staff. This is reflected in revenues which have increased from £0.9m for the former PolyDoc business in 1999 to a pro-forma turnover (including the results of Teltech as though it had been included throughout the year) of £15.2m for 2000.The directors had hoped for even more substantial development within the business last year. However, the softer state of the application development and consulting markets started to bite in the second half of last year, compounded by the longer than expected buying cycles of our original healthcare market in the Netherlands.This, together with delays in the integration and development of our new combined strategy and products arising from the extended completion of the Teltech acquisition, restricted 2000 pro forma growth. While the uncertainty in the business environment has continued into early 2001, the board believes that Sopheon has entered the year with a combination of strategy, products and people that the market will find attractive. The acquisition of Teltech was announced in March 2000 but was not completed until 15 September 2000, due to lengthy registration procedures with the US Securities and Exchange Commission.The total consideration recorded for the Teltech acquisition was £26million, comprising £11million in cash and acquisition costs, and £15million in equity (in the form of 2.1 million Sopheon shares and options to subscribe for a further 0.7 million Sopheon shares).The consideration for the Teltech acquisition is described in detail in Note 11. Future Developments Sopheon will continue its strategy of building content-loaded software solutions for specific vertical markets, and offering appropriate strategy, implementation and research services around and within the solution. Following the launch of Accolade for new product development in the manufacturing sector in October 2000, the next major product launch area for Accolade will be the life sciences market.This is a sector where the recently announced acquisition of the AIT division of Aventis will bring great strength, both in terms of customer relationships and the vertical expertise needed to build the solution for the life sciences market. Subject to due diligence procedures, we would expect the acquisition of AIT to complete in the summer of 2001. Research & Development The significant investment in research and development will continue with over 40 people devoted to our aggressive plans in this area. Our Chief Technology Officer, Paul Heller, is based in Denver, where our main software development is located. Complementing this central team of developers and reflecting the particular strengths of our acquired businesses, we have smaller groups as centers of excellence for search technology in Guildford, and for research portals in Minneapolis. Our pure research and design team in Maastricht remains in place under the direction of Huub Rutten. DIRECTORS’ REPORT 17 Directors and their interests The interests of the directors who held office at the end of the year in the share capital of the Company (all beneficially held except those marked with an asterisk (*), which are held as trustee), were as follows: Share Options Ordinary Shares 2000 1999 2000 1999 Director B. K. Mence A. Michuda (appointed on 18 September 2000) A. Karimjee (appointed on 1 February 2000) S. A. Silcock S. A. Silcock* M. J. Brooke (resigned on 8 January 2001) - 209,703 100,000 - - - J.M. Shuster (appointed on 18 September 2000) 44,974 - - - - - - - 8,696,457 8,337,800 189 - 181,383 98,077 691,724 76,186 - - 192,450 107,010 691,724 - Of the 8,696,457 ordinary shares mentioned above B. K. Mence beneficially owns and is the registered holder of 4,848,657 ordinary shares. He is, or his wife or children are, potential beneficiaries under trusts holding an aggregate of 3,847,800 ordinary shares, of which trusts directors of Lawfords Ltd., in the Isle of Man, are trustees and are registered as the holders of such shares. S.A. Silcock is a shareholder in Lawfords Ltd. At 31 December 2000 and 1999 Mr. Mence also held warrants to subscribe for 300,000 ordinary shares at 146p per share.The warrants expired unexercised on 31 March 2001. On 31 December 1999 Mr Mence held £523,640 5% Convertible Loan Stock, which was converted into 358,657 ordinary shares on 31 July 2000. Since the year end, Bernard Al, who was appointed as a director on 8 January 2001, has acquired 25,000 Sopheon ordinary shares. The following table provides summary information for each of the directors who held office during the year and who held options to subscribe for Sopheon ordinary shares. All options were granted without monetary consideration. Date of Grant Exercise price A. Michuda (1) 15 September 2000 A. Michuda (1) 15 September 2000 A. Michuda (1) 15 September 2000 A. Michuda (1) 15 September 2000 A. Michuda 2 October 2000 A. Karimjee (2) 22 November 1999 J. Shuster (1) 15 September 2000 J. Shuster (1) 15 September 2000 J. Shuster (1) 15 September 2000 J. Shuster (1) 15 September 2000 J. Shuster 2 October 2000 R.V. Maddocks (3) 8 August 1996 184p 230p 322p 368p 427.5p 150p 184p 230p 276p 368p 427.5p 20p At 31 December 1999 - - - - - 100,000 - - - - - 400,000 Granted during year 187,600 7,846 12,501 1,756 16,280 - 24,779 1,502 1,502 17,191 5,263 - Exercised during year - - - - - - - - - - - (400,000) At 31 December 2000 187,600 7,846 12,501 1,756 16,280 100,000 24,779 1,502 1,502 17,191 5,263 Nil (1) These options are fully vested options, which were granted to vendors as part of the acquisition of Teltech Resource Network Corporation. (2) The vesting of Mr Karimjee’s options is subject to agreed performance criteria. (3) Mr Maddocks resigned as a director on 18 September 2000. The mid-market price of Sopheon ordinary shares at 29 December 2000 was 160p. During the financial year the mid- market price of Sopheon ordinary shares ranged from 155p to £17.62. Save as disclosed above, and as detailed on page 19, no director (or member of his family) or connected persons within the meaning of Section 346 of the Companies Act 1985 has any interest, beneficial or non-beneficial, in the share capital of the company. 18 DIRECTORS’ REPORT Substantial Shareholdings The Directors are aware of the following persons who as at 11 May 2001 are interested directly or indirectly in three per cent or more of the company’s issued ordinary shares: Name B. K. Mence (director) J. M. Macfarlane No. of Ordinary Shares 8,696,457 1,719,716 % issued Ordinary Shares 22.5 4.4 Mr Mence’s interest represents direct beneficial holdings as well as those of his family. Share Option Schemes Details of options granted are shown in note 17. Creditor Payment Policy and Practice It is the company’s policy that payments to suppliers are made in accordance with those terms and conditions agreed between the company and its suppliers, provided that all trading terms and conditions have been complied with. At 31 December 2000, the group had an average of 60 days’ purchases outstanding in trade creditors. Derivatives and Other Financial Instruments The group’s principal financial instruments comprise bank loans, cash and short-term deposits.The main purpose of these financial instruments is to secure funds and manage cash flow for the group’s operations. The group has various other financial instruments such as trade debtors and trade creditors that arise directly from its operations. Details of financial instruments as required by FRS13 are disclosed in note 19.The disclosures exclude short term debtors and creditors. It is, and has been throughout the period under review, the group’s policy that no trading in derivatives shall be undertaken. The main risks arising from the group’s financial instruments are interest rate risk, liquidity risk and foreign currency risk as summarized below. The board reviews and agrees policies for managing each of these risks. These policies have remained unchanged during 1999 and 2000. Interest rate risk The group has overdraft facilities and lines of credit in UK Sterling, US Dollar and Dutch Guilder at floating rates of interest. Where the group has significant cash resources available that are in excess of the short term needs of the business, such funds are maintained in sterling and are placed on short and medium term bank deposit at the best interest rate available. Liquidity risk The group’s objective is to maintain a balance between continuity of funding and flexibility through the use of overdrafts and bank loans. Short term flexibility is achieved by overdraft facilities and lines of credit. Foreign currency risk As a result of having significant operating units in the United States and the Netherlands, which give rise to short term creditors, debtors and cash balances in US Dollars and Dutch Guilders, the group’s balance sheet can be affected by movements in the US Dollar/Sterling and Dutch Guilder/Sterling exchange rates. Events since the balance sheet date On 29 March 2001 the Company announced that it had signed a letter of intent to acquire the Technology and Information Services division (“AIT”) of Aventis Research & Technologies, Frankfurt, Germany. Its activities are complementary to Sopheon’s existing operations and will give a strong service and product presence in Germany and in the life sciences market, and a relationship with one of the world’s leading pharmaceutical companies. Like Sopheon, AIT is focused on providing technology-based solutions that integrate software applications, expert services and specialized content to improve knowledge-intensive business processes. DIRECTORS’ REPORT 19 Sopheon anticipates that the consideration for the proposed acquisition will comprise the issue of new ordinary shares to the vendor (subject to a twelve month lock-in period) with a value approximately equal to the net assets being acquired. At the time the transaction is completed, it is anticipated that AIT will have sufficient working capital for it to operate as an independent entity outside Aventis Research & Technologies.The consideration will also incorporate an earnout component, also in the form of Sopheon equity, linked to profits in 2001 through 2003. AIT has annual revenues of DM 20 million (£6.5 million) and generates an operating profit.The transaction will be subject to completion of due diligence, execution of a definitive agreement, respective board and regulatory approvals, amongst other requirements. On 2 May 2001 the Company announced that it granted options over Sopheon ordinary 5p shares to certain directors as part of a wider 2001 incentive award of up to 743,781 options to its staff.The options were granted at a price of 77.5p per ordinary share and in the case of staff and executive directors, the ultimate number of options granted depends on meeting certain performance criteria for 2001. As part of this award, Andrew Michuda (Chief Executive) was granted up to 77,162 options, Barry Mence (Chairman) up to 45,000 options, and Arif Karimjee (Chief Financial Officer) up to 25,000 options. In addition to the 2001 incentive grant, Bernard Al, who joined the board as a non-executive director earlier this year, was granted 25,000 options. Auditors A resolution to reappoint Ernst & Young as auditors will be put to the members at the Annual General Meeting. Ernst & Young has stated that, during 2001, it intends to transfer its business to a limited liability partnership incorporated under the Limited Liability Partnerships Act 2000. If this happens, it is the current intention of the Directors to use their statutory powers to treat the appointment of Ernst & Young as extending to Ernst & Young LLP. By the order of the Board A. Karimjee Secretary 11 May 2001 20 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ACCOUNTS Statement of Directors’ Responsibilities In Respect Of The Accounts Company law requires the directors to prepare accounts for each financial year which give a true and fair view of the state of affairs of the company and of the group and of the profit or loss of the group for that year. In preparing those accounts, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; • prepare the accounts on a going concern basis unless it is inappropriate to presume that the company will continue in business; The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the accounts comply with the Companies Act 1985.They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. AUDITOR’S REPORT TO THE SHAREHOLDERS OF SOPHEON PLC 21 Auditor’s Report To The Shareholders Of Sopheon plc We have audited the accounts on pages 22 to 43 which have been prepared under the historical cost convention and the accounting policies set out on page 26. Respective Responsibilities of Directors and Auditors The directors are responsible for preparing the annual report. As described on page 20, this includes responsibility for preparing the accounts in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board and by our profession’s ethical guidance. We report to you our opinion as to whether the accounts give a true and fair view and are properly prepared in accordance with the Companies Act. We also report to you if, in our opinion, the directors’ report is not consistent with the accounts, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if the information specified by law regarding directors’ remuneration and transactions with the group is not disclosed. We read the other information contained in the Annual Report and consider whether it is consistent with the audited accounts. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. Basis of Audit Opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. Opinion In our opinion the accounts give a true and fair view of the state of affairs of the company and of the group at 31 December 2000 and of the loss of the group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Ernst & Young Registered Auditor Reading 11 May 2001 22 GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2000 Group Profit And Loss Account For The Year Ended 31 December 2000 Notes 2 Continuing Operations 2000 £’000 Acquisitions 2000 £’000 4,573 (3,281) ––––––– 1,292 (2,431) (7,112) ––––––– 3,190 (2,121) ––––––– 1,069 (1,019) (4,529) ––––––– Total 2000 £’000 7,763 (5,402) ––––––– 2,361 (3,450) (11,641) ––––––– 1999 £’000 1,510 (983) ––––––– 527 (760) (1,783) ––––––– Restated 1998 £’000 891 (608) ––––––– 283 (502) (884) ––––––– 3 (8,251) (4,479) (12,730) (2,016) (1,103) (76) 950 (89) ––––––– (11,945) ––––––– ––––––– - 62 (118) ––––––– - 13 (52) ––––––– (2,072) ––––––– ––––––– (1,142) ––––––– ––––––– (33.4p) ––––––– ––––––– (10.1p) ––––––– ––––––– (6.1p) ––––––– ––––––– (6,655) ––––––– ––––––– (1,654) ––––––– ––––––– (1,031) ––––––– ––––––– TURNOVER Cost of sales GROSS PROFIT Sales and marketing expenses Administrative expenses OPERATING LOSS Share of operating loss of associated undertaking Interest receivable Interest payable and similar charges LOSS ON ORDINARY ACTIVITIES BEFORE AND AFTER TAXATION Loss per share - basic and diluted (pence) 8 LOSS ON AN EBITDA BASIS EBITDA is defined in Note 1 to the Accounts on page 26. GROUP STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2000 Loss on ordinary activities after taxation Exchange difference on retranslation of net assets of subsidiary undertakings Total recognized gains and losses relating to the year 2000 £‘000 1999 £‘000 Restated 1998 £‘000 (11,945) (2,072) (1,142) 100 ––––––– (11,845) ––––––– ––––––– (45) ––––––– (2,117) ––––––– ––––––– 47 ––––––– (1,095) ––––––– ––––––– GROUP BALANCE SHEET AT 31 DECEMBER 2000 23 Group Balance Sheet At 31 December 2000 FIXED ASSETS Intangible assets Tangible assets Investments CURRENT ASSETS Debtors Cash at bank and in hand CREDITORS: amounts falling due within one year NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS: amounts falling due after more than one year CAPITAL AND RESERVES Called up share capital Shares to be issued Share premium account Merger reserve Other reserve Profit and loss account Shareholders’ funds (all equity interests) Approved by the Board on 11 May 2001 B. K. Mence Director Notes 2000 £’000 1999 £’000 9 10 11 12 13 14 15 17 18 18 18 18 18 30,945 2,387 260 ––––––– 33,592 4,610 7,925 ––––––– 12,535 7,809 ––––––– 4,726 ––––––– 38,318 22 ––––––– 38,296 ––––––– ––––––– 4,816 630 43,320 7,940 2,417 (20,827) ––––––– 38,296 ––––––– ––––––– 7,605 386 - ––––––– 7,991 1,362 7,751 ––––––– 9,113 3,570 ––––––– 5,543 ––––––– 13,534 55 ––––––– 13,479 ––––––– ––––––– 4,491 10 10,020 7,940 - (8,982) ––––––– 13,479 ––––––– ––––––– A. Karimjee Director 24 COMPANY BALANCE SHEET AT 31 DECEMBER 2000 Company Balance Sheet At 31 December 2000 FIXED ASSETS Investments CURRENT ASSETS Debtors Cash at bank and in hand CREDITORS: amounts falling due within one year NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES CAPITAL AND RESERVES Called up share capital Shares to be issued Share premium account Merger reserve Other reserve Profit and loss account Shareholders’ funds (all equity interests) Approved by the Board on 11 May 2001 B. K. Mence Director Notes 2000 £’000 1999 £’000 11 12 14 17 18 18 18 18 18 39,422 13,211 14,545 7,318 ––––––– 21,863 1,259 ––––––– 20,604 ––––––– 60,026 ––––––– ––––––– 4,816 630 43,320 7,940 2,417 903 ––––––– 60,026 ––––––– ––––––– 4,216 6,984 ––––––– 11,200 1,955 ––––––– 9,245 ––––––– 22,456 ––––––– ––––––– 4,491 10 10,020 7,940 - (5) ––––––– 22,456 ––––––– ––––––– A. Karimjee Director GROUP STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2000 25 Group Statements Of Cash Flows For The Year Ended 31 December 2000 Notes 2000 £’000 1999 £’000 1998 £’000 NET CASH OUTFLOW FROM OPERATING ACTIVITIES 3 RETURN ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid Interest element of finance lease rental payments CAPITAL EXPENDITURE & FINANCIAL INVESTMENT Payments to acquire tangible fixed assets ACQUISITIONS AND DISPOSALS Purchase of subsidiary undertaking Net cash acquired with subsidiary undertaking Purchase of investment in associated undertaking MANAGEMENT OF LIQUID RESOURCES (Increase) in short term deposits NET CASH OUTFLOW BEFORE FINANCING FINANCING Issues of ordinary share capital New long-term loan Repayment of long-term loans Repayment of capital element of finance lease (8,793) ––––––– (1,278) ––––––– (946) ––––––– 950 (88) (1) ––––––– 861 62 (116) (2) ––––––– (56) 13 (50) (2) ––––––– (39) (954) ––––––– (52) ––––––– (52) ––––––– (11,962) (155) (164) ––––––– (12,281) (267) ––––––– (21,434) 20,222 - (30) (8) ––––––– 20,184 ––––––– (179) 389 - ––––––– 210 (6,602) ––––––– (7,778) 8,265 4 - (16) ––––––– 8,253 ––––––– (95) 2 - ––––––– (93) (401) ––––––– (1,531) 110 1,571 (299) (12) ––––––– 1,370 ––––––– (DECREASE)/INCREASE IN CASH 13 (1,250) ––––––– ––––––– 475 ––––––– ––––––– (161) ––––––– ––––––– 26 NOTES TO THE ACCOUNTS 1. ACCOUNTING POLICIES Accounting Convention The accounts are prepared under the historical cost convention and in accordance with applicable accounting standards. Basis of Consolidation The consolidated accounts include the results of the company and its subsidiary undertakings.The results of Teltech Resource Network Corporation have been included, using the acquisition method of accounting, since the date of acquisition, 15 September 2000. Tangible Fixed Assets Tangible fixed assets are stated at historical cost, less accumulated depreciation.The costs of developing portals used to deliver products and services are capitalized as tangible fixed assets in accordance with UITF29.Tangible fixed assets are depreciated on a straight line basis over their expected useful lives over the following periods. Computer equipment Fixtures and fittings Internet portals 3 years 4 to 5 years 3 years Research and Development Research and development expenditure is written off as incurred.The cost of registering patents and trademarks are written off as incurred. Subsidies received from the European Union and other state agencies are credited to the profit and loss account over the period to which they relate. Goodwill Goodwill arising on consolidation is capitalized and amortized on a straight line basis over its estimated useful economic life, which in the case of AppliedNet Limited and Teltech Resource Network Corporation is 3 years. Goodwill is reviewed for impairment at the end of the first full financial year after acquisition and in other periods if events or changes in circumstances indicate that carrying values may not be recoverable. If a subsidiary, associate or business is subsequently sold or closed, any goodwill arising on acquisition that has not been amortized is taken into account in determining the profit or loss on sale or closure. Foreign Currencies Company Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction or at the contracted rate if the transaction is covered by a forward exchange contract. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date or if appropriate at the forward contract rate. All differences are taken to the profit and loss account. Group The assets and liabilities of the subsidiary undertakings are translated at the rate of exchange ruling at the balance sheet date.The profit and loss account is translated at the average rate of exchange.The exchange differences arising on the retranslation of subsidiary undertakings are, together with differences arising on the translation of long term intra-group funding loans which are not intended to be repaid in the foreseeable future, taken directly to reserves. All other differences are taken to the profit and loss account. Long Term Contracts Profit on long term contracts is taken as the work is carried out if the outcome can be assessed with reasonable certainty. The profit included is calculated on a prudent basis to reflect the proportion of the work carried out at the year end, by recording turnover and related costs as contract activity progresses. Turnover is calculated as that proportion of total contract value which costs incurred to date bear to total expected costs for that contract. Revenues derived from variations on contracts are recognized only when the customer has accepted them. Full provision is made for losses on all contracts in the year in which they are first foreseen. Pensions Sopheon contributes to the personal pension arrangements of employees, the costs of which are charged in the profit and loss account as incurred. Leasing Assets held under finance leases, which are leases where substantially all risks and rewards of ownership of the assets have passed to the group are capitalized in the balance sheet and are depreciated over their useful lives. The capital elements of future obligations under financial leases are included as liabilities in the balance sheet. The interest elements of the rental obligations are charged to the profit and loss account over the period of the lease and represent a constant proportion of the balance of capital repayments outstanding. Rentals payable under operating leases are charged in the profit and loss account on a straight line basis over the lease term. Ebitda EBITDA represents earnings before interest, tax depreciation and amortization and also excludes non-recurring equity-based costs incurred in connection with acquisitions. NOTES TO THE ACCOUNTS 27 2.TURNOVER AND SEGMENTAL INFORMATION Turnover (excluding valued added tax) represents the amounts derived from the group’s principal activities which comprise (a) the design, development, production and marketing of knowledge management software and solutions together with associated implementation and consultancy services and (b) (following the acquisition of Teltech) the provision of information and research services.The group has operations in three geographical markets, the United States, the United Kingdom and the rest of Europe. Analysis of turnover by area of activity Software and consultancy Information and research services Analysis of operating loss and net assets by area of activity Software and consultancy Information and research services Gross profit Sales and marketing expenses Administrative expenses Operating loss Net assets Software and consultancy Information and research services Unallocated cash and loans at group level Analysis of turnover by geographical destination United Kingdom Rest of Europe North America Analysis of turnover and operating loss by geographical origin United Kingdom Rest of Europe United States of America Operating loss 2000 £’000 4,934 1,735 6,061 ––––––– 12,730 ––––––– ––––––– 1999 £’000 346 1,414 256 ––––––– 2,016 ––––––– ––––––– Restated 1998 £’000 - 1,103 - ––––––– 1,103 ––––––– ––––––– Analysis of net assets by geographical origin United Kingdom Rest of Europe United States of America Unallocated cash and loans at group level 2000 £’000 4,912 2,851 ––––––– 7,763 ––––––– ––––––– 2000 £’000 1,406 955 ––––––– 2,361 (3,450) (11,641) ––––––– (12,730) ––––––– ––––––– 8,338 22,640 7,318 ––––––– 38,296 ––––––– ––––––– 2000 £’000 2,965 1,339 3,459 ––––––– 7,763 ––––––– ––––––– 2000 £’000 3,942 500 3,321 ––––––– 7,763 ––––––– ––––––– 2000 £’000 5,182 476 25,320 7,318 ––––––– 38,296 ––––––– ––––––– 1999 £’000 1,510 - ––––––– 1,510 ––––––– ––––––– 1999 £’000 527 - ––––––– 527 (760) (1,783) ––––––– (2,016) ––––––– ––––––– 8,067 - 5,412 ––––––– 13,479 ––––––– ––––––– 1999 £’000 693 777 40 ––––––– 1,510 ––––––– ––––––– Turnover 1999 £’000 636 874 - ––––––– 1,510 ––––––– ––––––– 1999 £’000 8,054 89 (76) 5,412 ––––––– 13,479 ––––––– ––––––– 1998 £’000 891 - ––––––– 891 ––––––– ––––––– Restated 1998 £’000 283 - ––––––– 283 (502) (884) ––––––– (1,103) ––––––– ––––––– 707 - (1,571) ––––––– (864) ––––––– ––––––– Restated 1998 £’000 166 722 3 ––––––– 891 ––––––– ––––––– 1998 £’000 - 891 - ––––––– 891 ––––––– ––––––– Restated 1998 £’000 - 707 - (1,571) ––––––– (864) ––––––– ––––––– 28 NOTES TO THE ACCOUNTS 3. OPERATING LOSS (a) This is stated after charging/(crediting): Auditors’ remuneration - audit services Auditors’ remuneration - non audit services Research and development expenditure written off Eureka subsidies Foreign exchange (gains)/losses Amortization of goodwill Depreciation of owned assets Depreciation of assets held under finance leases Operating lease rentals - land and buildings Operating lease rentals - equipment and vehicles 2000 £’000 1999 £’000 67 19 3,321 (78) (645) 5,561 405 4 411 173 ––––––– ––––––– 34 13 878 (315) 16 323 74 9 103 84 ––––––– ––––––– Restated 1998 £’000 20 3 815 (304) (29) - 63 9 94 79 ––––––– ––––––– During 2000 £114,000 (1999 £64,000 and 1998 £Nil) was charged by the auditors in respect of work associated with due diligence and fund raising which has been capitalized or written off to share premium as appropriate. (b) Reconciliation of operating loss to net cash outflow from operating activities Operating loss Depreciation Amortization (Increase)/decrease in debtors Increase/(decrease) in creditors and provisions Net cash outflow from operating activities 2000 £’000 1999 £’000 1998 £’000 (12,730) 409 5,561 (453) (1,580) ––––––– (8,793) ––––––– ––––––– (2,016) 83 323 (338) 670 ––––––– (1,278) ––––––– ––––––– (1,103) 72 - 9 76 ––––––– (946) ––––––– ––––––– 4. STAFF COSTS Wages and salaries Social security costs Other pension costs The fees and emoluments of all directors were as follows: Fees and emoluments Pension contributions NOTES TO THE ACCOUNTS 29 2000 £’000 6,834 579 173 ––––––– 7,586 ––––––– ––––––– 2000 £’000 490 19 ––––––– 509 ––––––– ––––––– 1999 £’000 1998 £’000 1,231 124 42 ––––––– 1,397 ––––––– ––––––– 857 74 29 ––––––– 960 ––––––– ––––––– 1999 £’000 1998 £’000 333 15 ––––––– 348 ––––––– ––––––– 333 15 ––––––– 348 ––––––– ––––––– Pension contributions are to personal defined contribution schemes and have been made for eight directors who served during the year.The emoluments of the highest paid director were as follows: Basic Salary Benefits Pension contributions to defined contribution scheme Total The average monthly number of employees during the year was made up as follows: Development and operations Sales and management 2000 £’000 107 3 4 ––––––– 114 ––––––– ––––––– 2000 Number 79 71 ––––––– 150 ––––––– ––––––– 1999 £’000 1998 £’000 78 16 7 ––––––– 101 ––––––– ––––––– 79 16 7 ––––––– 102 ––––––– ––––––– 1999 Number 1998 Number 26 14 ––––––– 40 ––––––– ––––––– 21 10 ––––––– 31 ––––––– ––––––– 30 NOTES TO THE ACCOUNTS 5. INTEREST PAYABLE AND SIMILAR CHARGES Bank loans and overdrafts Convertible loan stock Finance charges on finance leases 2000 £’000 49 39 1 ––––––– 89 ––––––– ––––––– 1999 £’000 1998 £’000 39 78 1 ––––––– 118 ––––––– ––––––– 16 34 2 ––––––– 52 ––––––– ––––––– 6.TAXATION There was no tax charge for 2000, 1999 or 1998. Tax losses are available for carry forward by the Group the amount of which is under discussion with the relevant authorities in the UK, US and the Netherlands. group’s policy, no provision has been made for the potential deferred tax asset on these losses. In accordance with the 7. PROFIT ATTRIBUTABLE TO MEMBERS OF THE PARENT COMPANY The profit dealt with in the accounts of the parent company for the year ended 31 December 2000 was £908,000 (1999 - £nil and 1998 - £nil). Advantage has been taken of Section 230 of the Companies Act 1985 not to present a profit and loss account for the parent company. 8. LOSS PER ORDINARY SHARE The calculation of basic loss per ordinary share is based on a loss of £11,945,000 (1999 - £2,072,000 and 1998 £1,142,000 as restated), and on 35,732,477 (1999 - 20,565,985 and 1998 - 18,730,633) ordinary shares, being the weighted average number of ordinary shares in issue during the year. The loss attributable to ordinary shareholders and the weighted average number of ordinary shares for the purpose of calculating the diluted loss per ordinary share are identical to those used for calculating the basic loss per ordinary share. This is because the exercise of share options would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of Financial Reporting Standard 14. 9. INTANGIBLE FIXED ASSETS Group only Cost At 1 January 2000 Additions At 31 December 2000 Amortization At 1 January 2000 Provided during the year At 31 December 2000 Net book value At 31December 2000 At 31December 1999 Goodwill £’000 7,928 28,823 ––––––– 36,751 ––––––– 323 5,483 ––––––– 5,806 ––––––– 30,945 ––––––– ––––––– 7,605 ––––––– ––––––– NOTES TO THE ACCOUNTS 31 10.TANGIBLE FIXED ASSETS Group only Cost At 1 January 2000 Acquired with subsidiary undertaking Additions Exchange adjustments At 31 December 2000 Depreciation At 1 January 2000 Provided during the year At 31 December 2000 Net book value At 31 December 2000 At 31 December 1999 Computer Equipment £’000 Furniture & Fittings £’000 Internet Portals £’000 - 640 224 (44) ––––––– 820 ––––––– ––––––– - 23 ––––––– 23 ––––––– Total £’000 807 1,546 954 (90) ––––––– 3,217 ––––––– ––––––– 421 409 ––––––– 830 ––––––– 164 112 168 (6) ––––––– 438 ––––––– ––––––– 77 68 ––––––– 145 ––––––– 293 ––––––– 797 ––––––– 2,387 ––––––– 87 ––––––– ––––––– - ––––––– ––––––– 386 ––––––– ––––––– 643 794 562 (40) ––––––– 1,959 ––––––– ––––––– 344 318 ––––––– 662 ––––––– 1,297 ––––––– 299 ––––––– ––––––– The net book value of furniture and fittings above includes an amount of £9,000 (1999: £18,000) in respect of assets held under finance leases. 32 NOTES TO THE ACCOUNTS 11. INVESTMENTS Group Investment in associated undertaking At 1 January 2000 Addition at cost Share of retained loss Amortization of goodwill Exchange difference At 31 December 2000 Share of net tangible assets £’000 - 174 (76) - 5 ––––––– 103 ––––––– ––––––– Goodwill £’000 - 236 - (79) - ––––––– 157 ––––––– ––––––– Total £’000 - 410 (76) (79) 5 ––––––– 260 ––––––– ––––––– In February 2000 the group acquired a 25% interest in Pro-GRAM BV, a joint venture with three leading Dutch teaching hospitals, involved in the provision of software solutions for the medical and healthcare market.The group has subscribed £164,000 in cash, and the balance of the £410,000 investment is included in creditors. Goodwill is being amortized over three years, in line with group policy. Company Investment in subsidiary undertakings Cost At 1 January 2000 Additions at cost At 31 December 2000 £’000 13,211 26,211 ––––––– 39,422 ––––––– ––––––– On 15 September 2000 the group completed the acquisition of Teltech Resource Network Corporation.The consideration for the entire share capital of Teltech Resource Network Corporation comprised $15,163,000 in cash (equivalent to £10,775,000 at the exchange rate prevailing on 15 September 2000), 2,094,105 ordinary shares of Sopheon plc and options to acquire 718,292 ordinary shares in Sopheon plc with an aggregate exercise price of £1,641,000, as well as attributed costs of £1,187,000.The market value of ordinary shares in Sopheon plc on 15 September 2000 was 565p. Accordingly, the total cost recorded in respect of the acquisition was £26,211,000.The value of the consideration has been calculated on the basis of the Sopheon share price of 565p and the exchange rate of £1=US$1.41 prevailing on the completion date of 15 September 2000, compared with the share price of 549p and exchange rate of £1=US$1.45 used to compute the consideration under the deal terms. 11. INVESTMENTS (continued) Analysis of the acquisition of Teltech Resource Network Corporation: Net assets at the date of acquisition: Tangible fixed assets Debtors Cash Borrowings under line of credit Creditors falling due within one year Deferred subscription income Creditors falling due in more than one year Net deficit Goodwill arising on acquisition Discharged by: Fair value of shares issued Fair value of options issued Attributable costs Cash NOTES TO THE ACCOUNTS 33 Book value and fair value £’000 1,546 2,572 893 ––––––– 5,011 (1,048) (3,244) (1,956) (1,375) ––––––– (2,612) 28,823 ––––––– 26,211 –––––––– –––––––– 11,832 2,417 1,187 10,775 ––––––– 26,211 ––––––– ––––––– In the view of the directors there were no fair value adjustments required. Teltech Resource Network Corporation contributed £2,474,000 to the group’s net operating outflow and utilized £302,000 for capital investment. Teltech Resource Network Corporation had turnover of $15,892,000 (£10,595,000) and a loss before tax of $5,501,000 (£3,667,000) in the year ended 31 December 2000 (year ended 31 December 1999 turnover of $16,199,000 (£10,799,000) and loss before tax of $92,000 (£61,000)). The Sopheon-Teltech results for the year ended 31 December 2000 reflect the implementation of management’s strategy, with effect from the third quarter 2000, to refocus the business on the new products of the Sopheon group and to accelerate significantly the rate of sales and marketing and product development expenditure.The summarized profit and loss account for the period from 1 January 2000 to 15 September 2000 (the effective date of acquisition) is as follows: Turnover Operating loss Other interest income/(expense) Loss before and after tax There were no recognized gains and losses other than the loss for the period. £’000 7,405 ––––––– (1,775) (176) ––––––– (1,951) ––––––– ––––––– 34 NOTES TO THE ACCOUNTS 11. INVESTMENTS (continued) Details of the investments in which the group or company holds more than 20% of the nominal value of any class of share capital are set out below. Companies marked with an asterisk* are held via Sopheon UK Limited. Holding Proportion of voting rights Nature of Business Name of Company Country of incorporation Sopheon Corporation Minnesota USA (trading as Sopheon-Teltech) Sopheon Corporation Delaware USA Sopheon NV The Netherlands Lessenger BV The Netherlands Sopheon UK Ltd United Kingdom Common Stock 100% Common Stock 100% Ordinary Shares 100% Ordinary Shares 100% Ordinary Shares 100% Research services, knowledge management software and services Knowledge management software and services Knowledge management software and services Document management software and services Knowledge management software and services Network management software and services Network Managers (UK) Ltd* United Kingdom Ordinary Shares 100% Future Tense UK Ltd* United Kingdom Future Tense Ltd* United Kingdom Ordinary Shares 100% Dormant Ordinary Shares 100% Dormant Applied Network Technology Ltd* United Kingdom Ordinary Shares 100% Employee Share Ownership Trust 12. DEBTORS Group Trade debtors Other debtors Prepayments and accrued income Company Amounts owed by subsidiary undertakings Other debtors Prepayments 2000 £’000 1999 £’000 3,162 62 1,386 ––––––– 4,610 ––––––– ––––––– 1,104 86 172 ––––––– 1,362 ––––––– ––––––– 2000 £’000 1999 £’000 14,107 - 438 ––––––– 14,545 ––––––– ––––––– 4,200 16 - ––––––– 4,216 ––––––– ––––––– * Amounts owed by subsidiary undertakings are due after more than one year, and are subordinated to the claims of all other creditors. 13. NOTES TO STATEMENT OF CASH FLOWS (a) Reconciliation of net cash flow to movement in net funds. Increase/(decrease) in cash (Increase) in overdrafts and lines of credit Net increase/(decrease) in cash Repayment of term loans New loans Repayments of capital elements of finance leases Cash inflow/(outflow) from change in liquid resources Change in net debt resulting from cash flows Loans and finance leases acquired with subsidiary Conversion of convertible loan stock Exchange difference Movement in net funds/(debt) Net funds/(debt) at 1 January Net funds/(debt) at 31 December (b) Analysis of changes in net funds NOTES TO THE ACCOUNTS 35 2000 £’000 1999 £’000 1998 £’000 (93) (1,157) ––––––– (1,250) 39 - 8 267 ––––––– (936) - 1,571 30 ––––––– 665 ––––––– 6,080 ––––––– 6,745 ––––––– ––––––– 475 - ––––––– 475 4 (8) 16 6,602 ––––––– 7,089 (92) - - ––––––– 6,997 ––––––– (917) ––––––– 6,080 ––––––– ––––––– (161) - ––––––– (161) 299 (1,571) 12 401 ––––––– (1,020) - - - ––––––– (1,020) ––––––– 103 ––––––– (917) ––––––– ––––––– Cash at Bank £’000 272 475 - ––––––– 747 (93) - - ––––––– 654 ––––––– ––––––– Short Term Deposits/ Liquid Resources £’000 402 6,602 - ––––––– 7,004 267 - - ––––––– 7,271 ––––––– ––––––– Overdrafts and Lines of Credit Convertible Loan Stock Term Loans/ Finance Leases Total £’000 £’000 £’000 £’000 - - - ––––––– - (1,157) 30 - ––––––– (1,127) ––––––– ––––––– (1,571) - - ––––––– (1,571) - - 1,571 ––––––– - ––––––– ––––––– (20) 12 (92) ––––––– (100) 47 - - ––––––– (53) ––––––– ––––––– (917) 7,089 (92) ––––––– 6,080 (936) 30 1,571 ––––––– 6,745 ––––––– ––––––– At 1 January 1999 Cashflow Acquisitions At 1 January 2000 Cashflow Exchange difference Conversion of convertible loan stock At 31 December 2000 Details of the conversion of the Convertible Loan Stock are described in Note 17. 36 NOTES TO THE ACCOUNTS 14. CREDITORS: amounts falling due within one year Group Overdrafts and bank lines of credit 5% convertible loan stock Current installments due on bank loan Obligations under finance leases and hire purchase contracts Trade creditors Other taxes and social security costs Accruals and deferred income Other creditors 2000 £’000 1999 £’000 1,127 - 30 1 2,190 177 3,951 333 ––––––– 7,809 ––––––– ––––––– - 1,571 28 8 619 241 708 395 ––––––– 3,570 ––––––– ––––––– The holders of the £1,570,920 convertible loan stock exercised their conversion rights on 31 July 2000 resulting in the issue of 1,075,971 Sopheon ordinary shares.The mid-market price of Sopheon shares on the conversion date was 427p. The loan stock was held in equal amounts by B.K.Mence, and two investment funds, each of whom was allotted 358,657 Sopheon ordinary shares on conversion. Interest was paid at the rate of 5% per annum up to the conversion date. Each of the subscribers to the convertible loan stock also held 300,000 warrants to subscribe for Sopheon shares at 146p, which expired unexercised on 31 March 2001. Company 5% convertible loan stock Other creditors Other taxes and social security costs Accruals Amounts owed to subsidiary undertakings 15. CREDITORS: amounts falling due after more than one year Group Obligations under finance leases and hire purchase contracts Bank loan: amounts falling due From one to two years From two to three years 2000 £’000 1999 £’000 - 70 12 306 871 ––––––– 1,259 ––––––– ––––––– 1,571 373 10 1 - ––––––– 1,955 ––––––– ––––––– 2000 £’000 1999 £’000 - 1 22 - ––––––– 22 ––––––– ––––––– 32 22 ––––––– 55 ––––––– ––––––– The bank loan is a sterling asset purchase facility at an implicit rate of 8.8% and is repayable in 36 equal installments from October 1999. 16. OBLIGATIONS UNDER LEASES Amounts due under finance leases and hire purchase contracts: Group only Amounts payable: Within one year In two to five years Less finance charges allocated to future periods NOTES TO THE ACCOUNTS 37 2000 £’000 1999 £’000 1 - ––––––– 1 - ––––––– 1 ––––––– ––––––– 8 1 ––––––– 9 - ––––––– 9 ––––––– ––––––– The company had no amounts due under finance leases and hire purchase contracts. At 31 December 1999 and 2000 the group had annual commitments under operating leases as set out below. Group Operating leases which expire: within one year in two to five years Totals Other 2000 £’000 12 119 ––––––– 131 ––––––– ––––––– Land & Buildings 2000 £’000 69 719 ––––––– 788 ––––––– ––––––– Other 1999 £’000 64 97 ––––––– 161 ––––––– ––––––– Land & Buildings 1999 £’000 176 51 ––––––– 227 ––––––– ––––––– The company had commitments under operating leases as at 31 December 2000 amounting to £Nil (1999 - £12,000) expiring within one year and £nil expiring within two to five years (1999 - £nil). 38 NOTES TO THE ACCOUNTS 17. SHARE CAPITAL Authorized Ordinary shares of 5p each Deferred shares of 15p each Allotted, called up and fully paid Ordinary shares of 5p each Deferred shares of 15p each 2000 Number 2000 £ 1999 Number 1999 £ 60,000,000 19,228,885 –––––––– –––––––– 3,000,000 2,884,333 –––––––– –––––––– 42,902,961 19,228,885 –––––––– –––––––– 2,145,148 2,884,333 –––––––– –––––––– 2000 Number 2000 £ 1999 Number 1999 £ 38,624,913 19,228,885 32,131,846 19,228,885 1,931,246 2,884,333 –––––––– 4,815,579 –––––––– –––––––– 1,606,592 2,884,333 –––––––– 4,490,925 –––––––– –––––––– On 20 January 1999 5,000 ordinary shares were issued for cash to an exercising holder of share options at 20p each. On 10 March 1999 340,000 ordinary shares were issued to institutions for cash at a price of £1.47 per share. On 28 April 1999 20,000 ordinary shares were issued for cash to an exercising holder of share options at 20p each. On 22 November 1999 in an Extraordinary General Meeting of the Shareholders the share capital of Sopheon plc was restructured such that each ordinary share of 20p was converted into one ordinary share of 5p and one deferred share of 15p.The deferred shares carry no rights as to dividend, voting or return of capital on liquidation, and are not listed on any exchange.The number of ordinary shares in issue did not change as a consequence of the restructuring. Similarly, the number, exercise price and other terms of any share options over ordinary shares of 20p each remained unchanged as a consequence of the restructuring. On the same date 6,500,000 ordinary shares of Sopheon plc were placed with institutions at a price of 125p per share, realizing net proceeds after attributed costs of £7,699,000. and a further 6,402,961 ordinary shares of Sopheon plc were issued as consideration for the acquisition of 100% of the ordinary share capital of AppliedNet Limited (renamed Sopheon UK Limited), at a price of 129p per share. On 18 January 2000 25,000 ordinary shares were issued for cash to exercising holders of share options at 20p each and 30,000 ordinary shares were issued at 145p per share in consideration for the provision of marketing services together with a payment of 20p per share in cash. On 1 February 2000 400,000 ordinary shares were issued for cash to an exercising holder of share options at 20p each. On 9 March 2000 2,500,000 ordinary shares of Sopheon plc were placed with institutions at a price of 800p per share, realizing net proceeds of £18,953,000 after attributed costs of £1,047,000. On 22 March 2000 a further 122,500 ordinary shares were issued for cash at a price of 800p per share to certain of the company’s advisers from their commissions or fees arising from the placing. On 25 April 2000 20,000 ordinary shares were issued for cash to an exercising holder of share options at 20p each, and 45,000 ordinary shares were issued at 145p per share in consideration for the provision of marketing services together with a payment of 20p per share in cash. On 25 May 2000 10,000 ordinary shares were issued for cash to an exercising holder of share options at 89.5p each. At the AGM held on 30 June 2000 the authorized share capital of the company was increased to £5,884,333 by the creation of an additional 17,097,039 ordinary shares of 5p each. On 31 July 2000 1,075,971 ordinary shares were issued pursuant to the exercise of conversion rights attaching to the £1,570,920 5% convertible loan stock. NOTES TO THE ACCOUNTS 39 17. SHARE CAPITAL (continued) On 15 September 2000 2,094,105 ordinary shares were issued as part consideration for the acquisition of Teltech Resource Network Corporation and on 12 December 2000 a further 491 ordinary shares representing fractional entitlements were placed for cash at 180p per share. On 10 October 2000 170,000 ordinary shares were issued for cash to exercising holders of share options, comprising 120,000 shares at 120p each, 30,000 shares at 150p each and 20,000 shares at 177.5p each . Warrants to subscribe for Sopheon shares At 31 December 2000 there were outstanding 900,000 warrants to subscribe for Sopheon shares at a price of 146p per share. In December 2000 the latest date for exercise of the warrants was extended from 31 December 2000 to 31 March 2001.The warrants were issued in July 1998 to the subscribers of £1,570,920 5% Convertible Loan Stock referred to above.The warrants expired unexercised on 31 March 2001. Employee share option schemes At the AGM held on 30 June 2000 shareholders approved a maximum of 3,000,000 Sopheon ordinary shares over which options could be granted under any employee share option scheme. Share options are granted by the Board of directors on a discretionary basis under the terms of the share option schemes summarized below. On 28 August 1996 the directors adopted, and the company in general meeting approved, a share option scheme to provide for the grant to certain directors and employees of PolyDoc NV (renamed Sopheon NV) of options over Sopheon ordinary shares in exchange for the surrender by such directors and employees of their existing options over shares in PolyDoc NV, and to provide for further grants of share options to employees of the Sopheon group subject to Dutch tax. On the same date the directors adopted, and the company in general meeting approved, an executive share option scheme in a form approved by the Inland Revenue. Subsequently an unapproved executive share option scheme was established with terms similar to the approved scheme. Since the establishment of these schemes, a number of option grants have been made, all of which have been made under the unapproved scheme. Pursuant to the acquisition of AppliedNet Limited in November 1999, share options granted under the AppliedNet unapproved share option scheme were released in exchange for the grant of new options over Sopheon ordinary shares. These share options remain subject to the rules of the AppliedNet unapproved scheme. On 29 September 2000, following the acquisition of Teltech Resource Network Corporation, the directors adopted the Sopheon plc 2000 (USA) Stock Option Plan, under which share options can be granted either as qualifying Incentive Stock Options (ISOs) or as Non-Qualifying Options (NQOs) 40 NOTES TO THE ACCOUNTS 17. SHARE CAPITAL (continued) A summary of outstanding options granted under the share option schemes at 31 December 2000 is set out below. Year of grant 1996 1997 1998 1998 1998 (1) 1999 1999 1999 (1) 1999 1999 (2) 1999 (1) 1999 (1) 1999 (2) (3) 1999 1999 (3) 2000 (2) 2000 2000 (2) 2000 (2) 2000 (2) 2000 (2) 2000 (2) 2000 2000 2000 (2) 2000 (2) 2000 2000 (2) Number 60,000 1,000 36,500 30,000 191,847 7,500 10,000 87,209 35,000 42,500 13,080 52,320 62,500 50,000 100,000 12,000 4,360 3,000 2,000 20,000 33,500 25,000 104,000 15,000 185,541 10,000 13,500 112,500 Exercise Price (£) Exercise Period From To 0.2000 1.9750 1.7000 1.7000 0.0860 1.4150 1.4150 0.0860 1.4250 1.5000 0.8732 0.8732 1.5000 1.5000 1.5000 5.7900 6.9250 6.0725 7.1800 9.6000 4.9500 5.0000 4.9500 4.2750 4.2750 3.7250 1.6000 1.6000 28-08-96 01-06-00 29-06-98 29-06-01 29-12-01 20-01-02 20-01-99 04-03-02 28-04-99 28-04-00 01-06-02 01-10-02 03-11-00 03-11-02 22-11-02 24-01-01 31-01-03 25-01-01 31-01-01 08-02-01 28-06-01 26-06-01 28-06-03 02-10-03 02-10-01 15-11-01 31-12-03 31-12-01 21-07-01 01-06-07 29-06-03 29-06-08 29-12-08 20-01-09 20-01-04 04-03-09 28-04-04 28-04-09 01-06-09 01-10-09 03-11-09 03-11-09 22-11-09 24-01-10 31-01-10 25-01-10 31-01-10 08-02-10 28-06-10 26-06-10 28-06-10 02-10-10 02-10-10 15-11-10 31-12-10 31-12-10 (1) Arising from options held by employees of AppliedNet and rolled over into Sopheon options. (2) One fourth of these options become exercizable each year starting on the date indicated. All other options become exercizable in full from the date indicated. (3) Includes options which are contingent upon certain performance targets. Other share options Fully vested options to subscribe for 718,292 Sopheon ordinary shares at prices between £1.84 and £5.15 were granted on 15 September 2000 as part of the consideration payable in respect of the acquisition of Teltech Resource Network Corporation.These options, with exercise dates between 7 June 2001 and 31 July 2010, are held by the vendors of Teltech. At 31 December 2000 8,286 of such options had lapsed and 710,006 remained outstanding, in respect of which the aggregate exercise price was £1,617,000. NOTES TO THE ACCOUNTS 41 18. SHAREHOLDERS’ FUNDS Group At 1 January 1998 Arising on share issues Shares to be issued Retained loss for the year Exchange differences At 31 December 1998 Prior year adjustment At 31 December 1998 Arising on share issues Adjustment to earn out Retained loss for the year Exchange differences At 31 December 1999 Reclassification of share premium to merger reserve (See below) At 31 December 1999 (restated) Arising on share issues Shares to be issued Reserve for issue of share options Retained loss for the year Exchange differences At 31 December 2000 Share Capital £’000 3,743 30 - - - ––––––– 3,773 - ––––––– 3,773 718 - - - ––––––– 4,491 - ––––––– 4,491 325 - - - - ––––––– 4,816 ––––––– ––––––– Shares to be Issued £’000 - - 15 - - ––––––– 15 - ––––––– 15 - (5) - - ––––––– 10 - ––––––– 10 - 620 - - - ––––––– 630 ––––––– ––––––– Share Premium Account £’000 2,076 137 - - -. ––––––– 2,213 - ––––––– 2,213 15,747 - - -. ––––––– 17,960 (7,940) ––––––– 10,020 33,300 - - - - ––––––– 43,320 ––––––– ––––––– Merger Reserve £’000 - - - - - ––––––– - - ––––––– - - - - - ––––––– - 7,940 ––––––– 7,940 - - - - ––––––– 7,940 ––––––– ––––––– Other Reserve £’000 - - - - - ––––––– - - ––––––– - - - - - ––––––– - - ––––––– - - - 2,417 - - ––––––– 2,417 ––––––– ––––––– Profit & Loss Account £’000 (5,558) - - (981) 47 ––––––– (6,492) (373) ––––––– (6,865) - - (2,072) (45) ––––––– (8,982) - ––––––– (8,982) - - - (11,945) 100 ––––––– (20,827) ––––––– ––––––– The adjustment to earn out represents an adjustment to contingent consideration payable in respect of Lessenger Associates BV, acquired in December 1998. The exchange differences arise on the retranslation of net assets and the results of subsidiary undertakings. The premium on the shares issued as consideration for the acquisition of AppliedNet has been reclassified from share premium to merger reserve under the provisions of section 131 Companies Act 1985-merger relief. Company At 1 January 1999 Arising on share issues Adjustment to earn out At 31 December 1999 Reclassification of share premium to merger reserve (See above) At 31 December 1999 (restated) Arising on share issues Shares to be issued Reserve for issue of share options Retained profit for the year At 31 December 2000 Share Capital £’000 3,773 718 - ––––––– 4,491 - ––––––– 4,491 325 - - - ––––––– 4,816 ––––––– ––––––– Shares to be Issued £’000 15 - (5) ––––––– 10 - ––––––– 10 - 620 - - ––––––– 630 ––––––– ––––––– Share Premium Account £’000 2,213 15,747 - ––––––– 17,960 (7,940) ––––––– 10,020 33,300 - - - ––––––– 43,320 ––––––– ––––––– Merger Reserve £’000 - - - ––––––– - 7,940 ––––––– 7,940 - - - - ––––––– 7,940 ––––––– ––––––– Other Reserve £’000 - - - ––––––– - - ––––––– - - - 2,417 - ––––––– 2,417 ––––––– ––––––– Profit & Loss Account £’000 (5) - - ––––––– (5) - ––––––– (5) - - - 908 ––––––– 903 ––––––– ––––––– 42 NOTES TO THE ACCOUNTS 19. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS The group’s approach to managing financial risk is described in the Directors’ Report. Interest rate risk profile of financial liabilities Excluding the Convertible Loan Stock which bore a fixed rate of 5% on a nominal value of £1,570,920 and was converted into ordinary shares on 31 July 2000, the financial liabilities of the group at each year end are set out below. 2000 £ ‘000 1999 £ ‘000 Floating rate line of credit - US Dollar Floating rate overdraft - Sterling Fixed rate loans - Sterling Fixed rate loans and leases - Dutch Guilder 1,011 116 53 - ––––––– 1,180 ––––––– ––––––– - - 82 9 ––––––– 91 ––––––– ––––––– These financial liabilities bear interest rates that are based on local bank rates. Interest rate risk profile of financial assets The financial assets of the group at each year end comprise cash or cash deposits on money market deposit at call and monthly rates.The amounts were as follows Floating rate Sterling Non-interest bearing Sterling US Dollar Dutch Guilder Total financial assets Currency exposures 2000 £ ‘000 1999 £ ‘000 7,271 ––––––– 7,271 198 217 239 ––––––– 654 ––––––– 7,925 ––––––– ––––––– 7,004 ––––––– 7,004 496 97 154 ––––––– 747 ––––––– 7,751 ––––––– ––––––– The table below shows the group’s transactional currency exposures that give rise to the net currency gains and losses recognized in the profit and loss account. Such exposures comprise the monetary assets and monetary liabilities of the group that are not denominated in the operating currency of the operating unit involved, and have arisen only in operating units with a functional currency of Sterling. 1999 Sterling 2000 Sterling Net foreign currency monetary assets US dollar £’000 97 101 ––––––– ––––––– Dutch Guilder £ ‘000 - 25 ––––––– ––––––– Total £ ‘000 97 126 ––––––– ––––––– NOTES TO THE ACCOUNTS 43 Maturity of financial liabilities The maturity profile and interest rates of the group’s financial liabilities at each relevant period or year end is as set out in Notes 14 and 15. Borrowing facilities The group had no undrawn committed facilities available at each relevant period or year end, apart from overdraft facilities and lines of credit. Fair values of financial assets and liabilities The fair values of financial assets and liabilities are set out below. Finance leases are included in the analysis of long term borrowings.The directors consider that there were no material differences between the book values and fair values of all the group’s financial assets and liabilities at each year end. Cash and short term deposits Bank overdrafts and lines of credit Convertible Loan Stock Current portion of long-term borrowings Long-term borrowings 20. CONTINGENT LIABILITIES Book value 2000 £ ‘000 1999 £ ‘000 7,925 (1,127) - (31) (22) ––––––– ––––––– 7,751 - (1,571) (36) (55) ––––––– ––––––– In accordance with Article 403, Paragraph 1, Subsection b, Book 2 of the Dutch Civil Code (B.W.), Sopheon plc guarantees the liabilities of Sopheon NV and agrees with the departure from the regulations in Title 9 Book 2 of the Dutch Civil Code (B.W.), that prescribes the submission of the accounts of Sopheon NV to the Trade Register in Holland. As a consequence Sopheon NV need not file its accounts at the Trade Register. 21. EVENTS SINCE THE BALANCE SHEET DATE On 29 March 2001 the Company announced that it had signed a letter of intent to acquire the Technology and Its activities are Information Services division (“AIT”) of Aventis Research & Technologies, Frankfurt, Germany. complementary to Sopheon’s existing operations and will give a strong service and product presence in Germany and in the life sciences market, and a relationship with one of the world’s leading pharmaceutical companies. Like Sopheon, AIT is focused on providing technology-based solutions that integrate software applications, expert services and specialized content to improve knowledge-intensive business processes. Sopheon anticipates that the consideration for the proposed acquisition will comprise the issue of new ordinary shares to the vendor (subject to a twelve month lock-in period) with a value approximately equal to the net assets being acquired. At the time the transaction is completed, it is anticipated that AIT will have sufficient working capital for it to operate as an independent entity outside Aventis Research & Technologies.The consideration will also incorporate an earnout component, also in the form of Sopheon equity, linked to profits in 2001 through 2003. AIT has annual revenues of DM 20 million (£6.5 million) and generates an operating profit.The transaction will be subject to completion of due diligence, execution of a definitive agreement, respective board and regulatory approvals, amongst other requirements. On 2 May 2001 the Company announced that it granted options over Sopheon ordinary 5p shares to certain directors as part of a wider 2001 incentive award of up to 743,781 options to its staff.The options were granted at a price of 77.5p per ordinary share and in the case of staff and executive directors, the ultimate number of options granted depends on meeting certain performance criteria for 2001. As part of this award, Andrew Michuda (Chief Executive) was granted up to 77,162 options, Barry Mence (Chairman) up to 45,000 options, and Arif Karimjee (Chief Financial Officer) up to 25,000 options. In addition to the 2001 incentive grant, Bernard Al, who joined the board as a non-executive director earlier this year, was granted 25,000 options. Sopheon (USA) Sopheon (NV) Sopheon (UK) 2850 Metro Drive Minneapolis, Minnesota 55425-1566 USA Tel.: +1 952 851 7500 Fax: +1 952 851 7744 “De Gelder” A.J. Ernststraat 595-G 1082 LD Amsterdam The Netherlands Tel.: +31 (0) 20 301 3900 Fax: +31 (0) 20 301 3999 Stirling House, Stirling Road Surrey Research Park Guildford, Surrey GU2 7RF UK Tel.: +44 (0) 1483 88 3000 Fax: +44 (0) 1483 88 3050 E-mail: info_us@sopheon.com E-mail: info_nl@sopheon.com E-mail: info_uk@sopheon.com www.sopheon.com
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