S O P H E O N 2 0 0 2 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 and share knowledge – and use it to compete. c 4 Group Profile ––––––––––––––––––––––– 5 Chairman’s & Chief Executive Officer’s Statement 21 Auditor’s Report ––––––––––––––––––––––– ––––––––––––––––––––––– 10 Market & Product Overview 22 Group Profit & Loss Account ––––––––––––––––––––––– ––––––––––––––––––––––– Directors & Advisers Group Balance Sheet 23 14 contents 24 15 Report on Directors’ Remuneration Company Balance Sheet ––––––––––––––––––––––– ––––––––––––––––––––––– 16 Directors’ Report ––––––––––––––––––––––– 20 Statement of Directors’ Responsibilities 25 Group Statements of Cash Flows ––––––––––––––––––––––– 26 Notes to the Accounts 4 GROUP PROFILE Sopheon is an international provider of software and services that enable organizations to improve their return on investments in innovation and product development. Sopheon’s software applications integrate technology and human-based decision support to reduce product development spending waste and G r o u p P r o f i l e accelerate time to market. The Sopheon group has operating bases in the United Kingdom, the Netherlands, Germany and the United States. Its clients are R&D-intensive 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 During 2002 we focused on operational development of the business and in particular on Accolade, Sopheon’s flagship software solution for product development.The year saw the full integration of technology acquired in 2001 as part of the merger with Orbital Software, coupled with the release of Accolade version 4.0 and a substantial increase in Accolade sales activity compared to the year before. Sopheon is now recognised as a leading supplier of solutions that improve the financial return on innovation and product development investments within research and development (R&D), a market that is receiving increasing attention and focus from the business community. Notwithstanding these positive developments, during the year we realised that our operating plans for 2002 were more ambitious than the economic environment permitted. Consequently in the second half of the year we took further cost reduction measures, resulting in an EBITDA loss in line with broker expectations in spite of considerable pressure on revenues. RESULTS AND FINANCE Sopheon’s consolidated revenues were £12.4m (2001: £14.0m) and consolidated EBITDA was a loss of £8.9m (2001: £11.8m). Approximately 73% of the total revenues came from the Company’s Information Management (IM) divisions, representing research analyst services, portal subscriptions and information provision.The Business Process Solutions (BPS) division, representing software applications and related consultancy services, contributed 27% of revenue during the year. As noted above, the mix of business within BPS delivered a substantially increased proportion of revenues relating to Sopheon’s own solutions as opposed to bespoke developments and third-party products. IM represented the bulk of the fall in consolidated revenue with a reduction of £1.3m.The BPS reduction of £0.3m is made up of an increase in revenues relating to Accolade and other proprietary products of £1.1m offset by a reduction in sales of third-party products and bespoke project revenues of £1.4m. On a consolidated basis costs were down by over twice the revenue reduction, resulting in a decrease in consolidated EBITDA loss to £8.9m. Of this loss, £5.3m was recorded in the first half of 2002, reflecting the sharp reductions in cost base referred to above. Following the impairment charge taken in 2001, goodwill charges totalled £5.9m (2001: £21.4m) for the year, leading to a loss before tax of £16.2m (2001: £34.6m) and a loss of 19.4p per ordinary share (2001: 76.2p). 6 STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER At 31 December 2002, Sopheon had gross cash resources of £3.4m (2001: £13.3m) before overdrafts and lines of credit drawn totalling £0.9m (2001: £0.7m). Coming into 2003 the board took the view that a stronger cash position was required for a responsible continuation of our development strategy for the business. After consulting during March with Sopheon’s brokers and key institutional investors, the board came to the conclusion that a restructuring of the business was the most pragmatic approach that could be taken to improve the balance sheet in the current market environment. Accordingly, during April the group entered into a letter of intent with a potential purchaser to divest Sopheon’s US-based IM business.The proposed transaction is progressing well, and subject to certain conditions and events including the completion of due diligence by the purchaser’s financial partners, is expected to complete by mid July. As a backup in the event that the transaction protracts or is otherwise not completed, the board has accepted a letter of intent from an alternative purchaser that is also undertaking due diligence. Consistent with its strategy of imbedding external human-based decision support capabilities within its software solutions, Sopheon expects to continue to provide information management services following closure of either transaction, through an exclusive outsourcing arrangement with the purchaser. Separately, the directors will be seeking the extension of the maturity date of the group’s £2.6m of 6% convertible unsecured loan stock, by up to two years from June 2004. It is proposed that this would be coupled with modification of other terms of the loan stock, which might include a reduction in the loan stock conversion price.This in turn, depending on the level of any revised conversion price, might require shareholders to approve an increase in the directors' authority to issue and allot shares. Any changes to the terms of the stock would also need to be put to a meeting of its holders, which is expected to take place before the end of June 2003. The directors believe that their restructuring objectives will be achieved, and accordingly the financial information set out in this preliminary announcement is prepared on the going concern basis.The board is also considering other complementary measures, and will keep shareholders informed of developments. Nevertheless, in the event that the IM disposal is not completed, the maturity of loan stock not extended, or the directors’ future sales targets are not met, and in the absence of any other measures that might be available to the board, the going concern basis would cease to be appropriate.Your attention is drawn to the Note 1 Accounting Policies on page 26, which include an explanation of the basis of preparation of the financial statements and to the auditors' report on page 21. 2002 TRADING SUMMARY General economic uncertainty remained through 2002. In our interim statement we noted continuing pressure on our IM division, which was particularly hard hit in Germany. Employment conditions there mean that the cost base is relatively rigid, and therefore, as a number of clients reduced their level of business with us following their own restructuring and M&A activity, our German business suffered higher financial losses than might be expected in a more flexible environment. As a consequence of this, the Board has been assessing Sopheon’s German subsidiary with a view to restructuring its activities, also by the end of June in line with the planned disposal of the US-based IM business.The US operations of the IM division responded to the difficult climate with further reductions in staff, and towards the end of the year by reorganisation around client-focused teams. In our BPS division, activity related to Accolade accelerated, with 30 transactions in 2002 compared to only 4 in 2001. Progress with Accolade at the end of 2002 can be summarised as follows: • We ended 2002 with a total of 34 paying Accolade-related transactions achieved since launch, across 28 clients; STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 7 • The total of 34 transactions was made up of 10 initial licences, 6 additional licences either following on from an assessment or extending the user base at an existing client, 3 ancillary modules sold without the core Accolade system, and 15 assessments. Sopheon defines an assessment as when a client is paying for a trial installation or a consulting engagement which could lead to an Accolade order; • 30 of these transactions were sold in 2002, compared to 4 in 2001 Transactions occurred in each of the geographies in which Sopheon operates – the US, the UK, Germany and the Netherlands – and also in Southeast Asia, where Sopheon has an active distribution relationship in Singapore. Accolade customers are highly referenceable. We are pleased with the level of user acceptance and benefit Accolade is bringing our clients. Also in BPS, the division continued to develop and expand its Dutch healthcare solutions business. These developments mean that during 2002, 65% of the total BPS revenues were related to Sopheon’s proprietary products and services as opposed to third party and bespoke solutions. This compares to 30% in 2001. Nevertheless, our integration teams continued to work on bespoke projects, at a reducing level, as we continued the transition to supporting our own products. The board has been conscious of the need to balance cost reduction with maintaining business effectiveness and delivery of our strategy. During 2002 fixed costs were reduced by 35%, bringing the cumulative reduction since Sopheon’s acquisition of Orbital Software in late 2001 to 55%.These reductions are reflected in headcount down to 184 at the end of 2002, compared to 264 in January 2002 and 349 in late 2001. In particular, following the release of Accolade 4.0, R&D resources were scaled back and concentrated; marketing expenditure has been focused on short-term lead generation and on third-party validation of our products; property and IT infrastructure were rationalised. UPDATE OF FIRST QUARTER OF 2003 Beset with continued economic turmoil and the uncertainties of war, the market in the first quarter of 2003 remained sluggish. Despite these conditions, Sopheon continued to grow its proprietary software business, focused around Accolade. Specific aspects of Sopheon’s business performance during the first quarter included the following: • Ten Accolade transactions were completed in the first quarter; 5 sales of assessments, 3 initial license sales and 2 extensions of ancillary module licenses. • We continued our record of 100% satisfaction among installed Accolade clients. A number of clients expressed interest in increasing the value they derive from Accolade by expanding its application beyond product development to areas such as Six Sigma quality improvement initiatives, mergers and acquisitions and the management of information technology (IT) projects • An organisation involved in clinical trials for hospitals and their partners installed Accolade as a way of automating and strengthening clinical trials management procedures. The system also includes users from the hospitals and their pharmaceutical and biotech corporate partners. • A major University Hospital in the Netherlands committed to a five-year agreement valued at 0.9m, for use of a Sopheon software solution that automatically updates staff members on scientific and medical advances in their areas of specialization. • The US IM business finished the quarter with an 84% renewal rate among contracts that came due during the quarter, and continued to concentrate on its strategy of optimising client utilization of contracts. The impact of the latter was evident in the fact that contract utilization rates rose during the period to the 94% level, an encouraging indicator of the probable value of future renewals. 8 STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Another important first-quarter development related to Sopheon’s software business was Gartner Group’s publication of its first "Magic Quadrant" for the product lifecycle management (PLM) market. The Quadrant is a proprietary analytical tool used by the IT research and advisory firm to assess and profile the leading suppliers in a given market space. Sopheon’s Accolade was one of only three process automation/portfolio management solutions selected for inclusion, reflecting Gartner’s judgement that our offering has proven its viability and is among those having the greatest impact on the market. MARKET During 2002, Sopheon was referenced or profiled in 37 reports from firms such as Gartner, Giga, META Group, IDC and AMR Research that advise end-users on which products they should use and with which suppliers they should do business. Research has identified a number of challenges facing the product development (PD) process in major corporations. Notably, 47% of PD resources are spent on products that are financially unsuccessful, and 41% of launched products fail in the market. Accolade addresses these and other issues by creating an automated process environment in which to implement standardised innovation and product development methodologies. The most widely used process is Stage-GateTM, implemented by over 60% of technology- driven companies in North America.Typically, use of the methodology is paper-based, leading to lack of adherence, administrative burden, and weak decision support. Accolade solves these problems through automation and control of the process. PRODUCT DEVELOPMENT AND IPR Accolade was first launched in the second quarter of 2001. In September 2002, Sopheon released version 4.0, which is recognised by our clients as being feature rich, stable and high quality software. A key achievement in Version 4.0 is the creation of the Knowledge Network module, representing the full integration of the former Orbital Software’s Organik technology with Accolade, providing on-demand support for critical process, business and technical decisions.The Knowledge Network module links users to internal and external experts, repositories of information on current and past projects, thousands of sources of published information, and to Sopheon’s IM services, which in the future are expected to be provided by Sopheon through an exclusive outsoucing arrangement with the acquirer of this business. The version 4.0 release also included an idea management and screening module to help generate, manage and evaluate product ideas, and a built-in, customisable library of templates for key process deliverables such as product definition records, project reports, operational plans, supply plans and detailed business and financial analyses. Sopheon holds patents in three key areas, relating to profiling technology, presentation of large domain search results by category or type, and application of information technology to language-intensive processes. BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT TEAM Sopheon’s group management and governance structure is divided between a Sopheon plc Board of Directors with more than half its directors being non-executive, and an executive management board responsible for operations. During 2002 Dan Metzger, a former executive of Lawson Software joined the board following the retirement of Joe Shuster, the founder of Teltech Resource Network Corporation, one of Sopheon’s predecessor companies. Dan brings many years of enterprise software business experience to the group.The Sopheon plc Board otherwise remains unchanged with four non-executive directors and three executive directors, being the Executive Chairman, the CEO and the CFO. STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 9 The executive management board is a team of seven, which includes the three executive directors. Andy Michuda, our CEO, continues to have day-to-day responsibility for driving the Accolade growth strategy. During the year, Dave Magnani assumed responsibility as VP of the US-based IM business. Chris Hawver and Paul Heller are chief marketing officer and chief technology officer respectively, and Huub Rutten remains VP of research and leader of our Dutch healthcare unit. OUTLOOK Although we expect that tough economic conditions will persist in 2003 in all geographies, we entered 2003 with a substantially reduced cost base and rationalised infrastructure, a flagship software product that is generating a high level of interest and sales activity compared to 12 months earlier, an expanding installed client base, and increased validation of the market. Accolade has demonstrated, consistently, that it is a valuable solution in which clients are prepared to invest. Sopheon is very focused on converting this asset into a viable high-growth business. The planned divestiture of our US-IM business will reduce complexity and sharpen that focus. Since the beginning of 2003, the pipeline for our software products has continued to develop.This progress supports the board’s belief that there is a positive outlook for Accolade in the current year, and that we are well-positioned to continue to advance toward our goal of becoming a leading international supplier of software and services that improve the financial return on innovation and product development investments. In addition to driving the commercial development of Accolade, management is focusing its attention on the successful conclusion of the planned divestiture of Sopheon’s US-based IM business. As we go forward, the board will continue to assess the financial resources available to implement our strategy against the operational progress of the business. Barry Mence Executive Chairman 12 June 2003 Andy Michuda Chief Executive Officer 10 MARKET AND PRODUCT OVERVIEW Market and Product Overview The need for precisely relevant decision-making and problem-solving support is central to the successful execution of today’s business processes. As the quantity of internal and external information and knowledge grows, the ability to quickly organize it, access it, gain insight from it and apply it has become an increasingly critical necessity.This requirement, in turn, is driving more and more demand for high-performance tools and solutions that effectively enable such gathering and use. Sopheon’s product and services are uniquely capable of facilitating information and knowledge access and application. The primary reason is that they integrate technology and human expertise. People can provide answers and context that document-centric software offerings simply cannot. Sopheon’s solutions provide cost-effective access to both documented information and human knowledge sources within one application environment, a standard by which future software- based business process applications are likely to be measured. The utility of Sopheon’s products and services is further enhanced by their tight integration with workflow inside critical business processes. From pivotal research and development to product creation and commercialisation, from assessment of business opportunities to management of intellectual property and optimisation of patient care, organisations depend upon Sopheon’s solutions to cope with their greatest challenges. Today, the utility of Sopheon technology, information management services and expertise is redefining the capacity of technical professionals to access and apply needed information and know-how.This is true whether such information resides in the mind of a nearby colleague, or that of a world-class technical authority on the other side of the globe; whether it’s to be found in the knowledgebase of another operating unit within the same company, or the document database of a far-off technical publisher. Our solutions empower individuals. In turn, entire teams and organisations are empowered, making them more innovative and productive. Sopheon’s capabilities are helping organisations in high-tech manufacturing, life sciences and healthcare – by enabling them to achieve specific business objectives, and important bottom-line results. "Companies cannot afford to ignore the reality that product development is one of today’s most critical business processes. The capacity of Sopheon’s Accolade to provide advanced decision support across the product ideation and development processes can be a key contributor to driving revenue from new products." Ken Amann, Director of Research, CIMdata Our History Sopheon began in 1993 as Netherlands-based PolyDoc. Building on unique competencies in linguistics and language management, the company created software applications that allowed organizations to capture, organize and access knowledge through structured authoring tools, terminology management and thesauri. Use of this technology was focused on specific processes such as hospital protocol management and the sharing of quality standards. In November of 1999, PolyDoc 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. Besides extending the intellectual property of the group, this acquisition added strength in implementation services and significantly expanded PolyDoc's market presence in the UK. Coincidental with its acquisition of AppliedNet, PolyDoc changed its name to Sopheon. With innovative, commercially promising software tools in place, Sopheon next looked for an opportunity to integrate content into its solutions and to gain a foothold in the US market. In September of 2000, Sopheon completed the acquisition of Teltech Resource Network Corporation, a leading US knowledge management and research services organization.With a 16-year history,Teltech immediately gave Sopheon a diversified, blue-chip US client base. As a part of MARKET AND PRODUCT OVERVIEW 11 the strategy for globalizing its research services, in July of 2001 Sopheon acquired the Technology and Information Services division ("AIT") of Aventis Research & Technologies, Frankfurt, Germany. In November of 2001 Sopheon acquired UK-based Orbital Software and its Organik technology. Organik captures the questions and answers of knowledge workers within an organization and locates internal and external experts that can address the user’s information needs.The acquisition of Orbital expanded Sopheon's ability to enable access to both documented information and human expertise. Organized for Fast, Effective Response to Market Needs One widely accepted maxim in today’s rapidly evolving, knowledge-based economy is that business success depends upon speed and precision in identifying and responding to market needs. In order to optimize the focus and efficiency of its solutions development, marketing and sales efforts, Sopheon has divided its organization into two global operating divisions: Business Process Solutions (BPS) and Information Management (IM). The BPS division includes a thriving Dutch healthcare solutions business. T H E P RO D U C T L I F E C Y C L E M A N AG E M E N T ( P L M ) M A R K E T W I L L E X C E E D $ 4 . 8 B I L L I O N G L O B A L LY I N 2 0 0 2 A N D I N C R E A S E AT A C O M P O U N D A N N UA L G ROW T H R AT E O F 2 5 % T H RO U G H 2 0 0 6 . – C I M d a t a Business Process Solutions – Helping Organizations Move from Strategy to Results Sopheon's solutions blend the richness of human expertise and specialized content with the efficiencies of technology to support strategic, knowledge-intensive business processes such as R&D and product development. Sopheon's solutions model and automate the steps of these processes, integrating market, technical and competitive research to support and inform process decisions. "Accolade will get the most from the stage gate process we have recently adopted and, in particular, will give all involved with that process a clearer and more complete view of the project portfolio details critical to setting priorities, making project funding decisions and maximizing return on investment. Accolade is the ideal tool for capturing, sharing and leveraging the learning that occurs throughout the product development process." John Miller, Chief Technology Office, Pall Corp. Sopheon Accolade® To achieve and sustain success in today’s economic order, many companies are striving to generate more revenue from new products. Sopheon's Accolade is a software system that automates the product development process and strengthens it with strategic decision-making support. Sopheon developed Accolade in partnership with Drs. Robert Cooper and Scott Edgett, founders of the Product Development Institute (PDI) and creators of the Stage-Gate™ product development methodology used by more than 60 percent of the technology-driven companies in the US. 12 MARKET AND PRODUCT OVERVIEW Accolade’s principal components – a process engine and a just-in-time knowledge network – organise documents, resources and metrics, facilitate team communication, and provide access to the internal and external information and human expertise necessary to inform decision making throughout the product concept-to-commercialisation cycle. System modules include an idea management system, a portfolio management tool, screening software that predicts the probability of a product concept’s commercial success, and a benchmarking module that identifies product-development process strengths and weaknesses. By applying Accolade's capabilities, R&D teams are able to more efficiently and cost-effectively bring products to market. "Our team had no shortage of ideas for product, service and manufacturing process innovations but sought a more efficient and disciplined way of evaluating, processing and realizing the potential of those ideas. Accolade creates the structure that makes our team and its processes more effective in achieving our strategic objectives." John Mixon, General Director, Development, National Gypsum Healthcare Solutions. Hospitals and clinics are increasingly turning to software-based systems for the management of both medical and non-medical processes, including the implementation of procedures and guidelines that directly impact life or death clinical prognoses, liability claims and issues surrounding budgetary control. The QualiFlow suite enables healthcare providers to comply with the demanding requirements of evidence- based medicine by providing tailored procedural instructions at the point of care and by helping doctors, nurses and other medical practitioners keep up-to-date with the latest medical news and best practices. The NormFlow suite of products adapts Qualiflow technology to help manufacturers in the hi tech and life sciences industry sectors more effectively produce, control and distribute documents containing standards and product information that are critical to meeting requirements for compliance management and conformity assessment. MARKET AND PRODUCT OVERVIEW 13 "The Accolade system joins our seven mills with three central offices across five countries, enabling us to streamline the coordination of our product development. It also boosts our ability to manage the assessment of ideas using Web scorecards to standardize the screening process, reducing the amount of time it takes to collect objective feedback from our evaluation team, prioritizing those ideas with the greatest commercial potential and moving them into our project pipeline." Math Jennekens, Director of Research and Development, SAPPI Fine Paper Europe Information Management – A Trusted Source of Actionable Information Sopheon’s Information Management services are designed to improve the effectiveness of information delivery, analysis, and use across organizations. Client’s turn to Sopheon for quick answers to everyday questions as well as complex market, competitive and technical analyses. Sopheon provides personalised service to help knowledge workers sort out their information needs. It then satisfies those needs by conducting primary and secondary research, including custom, in-depth research projects that synthesize and analyze findings. Backed by thousands of information sources around the globe, a propietary network of technical and industry authorities, and by leading-edge technology and methodologies, Sopheon’s analysts and experts are uniquely positioned to enable corporations to innovate and solve problems faster than their competitors. Sopheon’s information management services can be accessed through the company’s award-winning, web-based research portal, Teltech.com. Research support can also take on the form of custom portals that integrate access to Web content, published literature and proprietary information collections backed by the services of Sopheon’s analysts and experts. C E O s R A N K P RO D U C T D E V E L O P M E N T S E C O N D I N I M P O RTA N C E O N LY TO I N N OVAT I O N A S A S O U R C E O F C O M P E T I T I V E A DVA N TAG E . – P r i c ew a t e r h o u s e C o o p e r s S t u d y "Sopheon provides us with the timely information and insight required to manage product development risk and accelerate the concept-to-commercialization cycle. Its specialized team of analysts and experts offers a range and quality of decision support no other solutions provider can equal." David Egberg,Vice President of R&D, Novartis Association Strategy During 2002, Sopheon accelerated efforts to build strategic relationships with industry associations. The goal of this initiative is to further leverage client acceptance in the company's key vertical markets by offering association members educational, online seminars, and by facilitating knowledge exchange within the membership through the implementation of the company's Organik technology on an associations website. Initial success with this program includes relationships with such associations as the Knowledge and Innovation Management Professionals Society (KMPro), the Institute of Electrical and Electronics Engineers (IEEE), and Technical Association for the Pulp and Paper Industry (TAPPI). 14 DIRECTORS AND ADVISERS Directors and Advisers Directors Barry K. Mence Andrew L. Michuda Arif Karimjee ACA Stuart A. Silcock FCA Bernard P. F. Al Andrew B. Davis Daniel Metzger Executive Chairman Chief Executive Officer Finance Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Secretary Arif Karimjee Registered office Stirling House, Surrey Research Park Guildford Surrey GU2 7RF Registered name and number Registered in England and Wales No. 3217859 Auditors Principal bankers Solicitors Ernst & Young LLP Apex Plaza Reading RG1 1YE Silicon Valley Bank 3003 Tasman Drive Santa Clara California CA 95054 United States Lloyds TSB Bank plc 77 High Street Southend-on-Sea Essex SS1 1HT Hammond Suddards Edge 7 Devonshire Square Cutlers Gardens London EC2M 4YH Briggs and Morgan 2400 IDS Center, 80 South Eighth Street Minneapolis Minnesota 55402, United States AIM Nominated Adviser and Broker Euronext Paying Agent Registrars Financial PR Consultants Nauta Dutilh Prinses Irenestraat 59 1077 WV Amsterdam The Netherlands Seymour Pierce Limited Bucklersbury House 3 Queen Victoria Street London EC4N 8EL Kempen & Co Beethovenstraat 300 1077 WZ Amsterdam The Netherlands Capita IRG plc The Registry 34 Beckenham Road Beckenham, Kent BR3 4TV Hansard Communications Limited 14 Kinnerton Place South London SWIX 8EH 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 two non- executive directors together with Barry Mence, other than in respect of his own remuneration.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. L. Michuda A. Karimjee Non-executive directors S. A. Silcock B.P.F. Al A.M. Davis D. Metzger (1) J. M. Shuster (2) Salary and fees £ 108,403 117,333 77,500 Benefits £ Total 2002 £ Contributions to Pension 2002 £ Contributions to Pension 2001 £ Total 2001 £ 3,157 6,128 1,091 111,560 123,461 78,591 125,027 139,703 86,600 7,475 2,267 3,504 3,600 2,349 3,504 18,000 18,000 18,000 4,500 12,000 ________ 373,736 ________ ________ - - - - 3,117 ________ 13,493 ________ ________ 18,000 18,000 18,000 4,500 15,117 ________ 387,229 ________ ________ 18,000 18,000 1,500 - 20,299 ________ 409,129 ________ ________ - - - - 320 _______ 13,566 _______ _______ - - - - 332 _______ 9,785 _______ _______ (1) Appointed on 30 September 2002 (2) Resigned 30 September 2002 (3) Pension contributions are made to individual directors’ personal pension schemes. The emoluments of S. A. Silcock are paid to Lawfords Limited, of which Mr. Silcock is a director. Mr Michuda was eligible to participate in an incentive scheme established at the time of the acquisition of Teltech Resource Network Corporation whereby he received 41,666 Sopheon ordinary shares on 28 December 2001. 16 DIRECTORS’ REPORT Directors’ Report Financial Results The loss for the year ended 31 December 2002 before interest, tax, depreciation and amortisation (LBITDA) was £8,910,000 (2001 - £11,757,000) on a turnover of £12,353,000 (2001 - £13,963,000).The result for the year, after allowing for the amortisation of goodwill, and after taxation, is a loss of £16,053,000 (2001 - £34,631,000).The directors do not propose to declare a dividend. Principal Activities The group’s principal activities during the year continued to focus on the provision of software and services that improve the return on investment of product development, within the rapidly emerging product lifecycle management (PLM) market. Review of the Business As is well known the general economic uncertainty has remained volatile. Sopheon’s consolidated revenues for the year are £12.4m (2001: £14.0m) and consolidated EBITDA was a loss of £8.9m (2001: £11.8m). Approximately 73% of the total revenues came from the IM (Information Management) division representing research analyst services, portal subscriptions and information provision.The BPS (Business Process Solutions) division, representing software applications and related consultancy services, contributed 27% of revenue during the year. The mix of business within BPS delivered a substantially increased proportion of revenues relating to Sopheon’s own solutions as opposed to bespoke developments IM represented the bulk of the fall in consolidated revenue with a reduction of £1.3m with our and third party products. German operation experiencing a particularly difficult period.The BPS reduction of £0.3m is made up of an increase in own-product revenues of £1.1m offset by a reduction in third party and bespoke revenues of £1.4m. On a consolidated basis costs were down by over twice the revenue reduction, reflecting sharp reductions in cost base implemented by the board mid-year, and resulting in a fall in consolidated EBITDA loss to £8.9m. Of this loss, £5.3m was recorded in the first half of 2002 compared with £3.6m in the second half. Following the accelerated write down of goodwill in 2001, we have continued to amortise remaining goodwill in over 3 years, in line with our historic policy.This has resulted in a total goodwill charge of £5.9m (2001: £21.4m) for the year, leading to a loss before tax of £16.2m (2001: £34.6m) and a loss of 19.4p per ordinary share (2001: 76.2p). At 31 December 2002, Sopheon had gross cash resources of £3.3m (2001: £13.3m) before overdrafts and lines of credit drawn totalling £0.9m (2001: £0.7m). During April 2003 the group entered into a letter of intent with a potential purchaser to divest Sopheon’s US based IM business. Subject to certain conditions and events including the completion of due diligence by the purchaser’s financial partners, the proposed transaction is expected to complete by mid July 2003. If concluded the sale would give rise to a profit on disposal after charging goodwill, with consideration consisting mainly of cash and net liabilities to be assumed by the purchaser. As a potential backup in the event that the transaction protracts or is otherwise not completed, the board has accepted a letter of intent from an alternative purchaser that is also undertaking due diligence. Consistent with its strategy of imbedding external human-based decision support capabilities within its software solutions, Sopheon expects to continue to provide information management services following closure of either transaction, through an exclusive outsourcing arrangement with the purchaser. Separately, the directors will be seeking the extension of the maturity date of the group’s £2.6m of 6% convertible It is proposed that this would be coupled with modification of unsecured loan stock, by up to two years from June 2004. other terms of the loan stock, which might include a reduction of the loan stock conversion price.This in turn, depending on the level of any revised loan stock conversion price, might require shareholders to approve an increase in the directors’ authority to issue and allot shares. The directors believe that their restructuring objectives will be achieved, and accordingly the accounts have been prepared on the going concern basis.The board is also considering other complementary measures. Nevertheless, in the event that the IM disposal is not completed, the maturity of loan stock not extended, or the directors’ future sales targets are not met, and in the absence of any other measures that might be available to the board, the going concern basis would cease to be appropriate.Your attention is drawn to Note 1 of the accounts, which includes an explanation of the basis of preparation of the financial statements. DIRECTORS’ REPORT 17 Research and Development As planned, Accolade 4.0 was released during the summer of 2002, incorporating knowledge management features which facilitate the process of creating, publishing and re-using content from knowledge bases and communities of interest built up by an organisation during the product development life cycle. Accolade 4.0 also incorporated better integration with Sopheon’s information management services and added an idea management module. Following this release, Sopheon’s development team was consolidated into the Denver location which continues to apply the high quality standards, designed to deliver world-class, enterprise strength software, that have resulted in the high customer satisfaction ratings Accolade enjoys. Future Developments Although the board expects that tough economic conditions will persist in 2003 in all geographies, Sopheon entered 2003 with a substantially reduced cost base and rationalised infrastructure, a flagship software product that is generating a high level of interest and sales activity compared to 12 months earlier, an expanding installed client base, and increased validation of the market. Accolade has demonstrated, consistently, that it is a valuable solution in which clients are prepared to invest. Sopheon is very focused on converting this asset into a viable high-growth business. The planned divestiture of the US IM business will reduce complexity and sharpen that focus. Since the beginning of 2003, the pipeline for the group’s software products has continued to develop.This progress supports the board’s belief that there is a positive outlook for Accolade in the current year, and that Sopheon is well-positioned to continue to advance toward its goal of becoming a leading international supplier of software and services that improve the financial return on innovation and product development investments. In addition to driving the commercial development of Accolade, management is focusing its attention on the successful conclusion of the planned divestiture of Sopheon’s North American IM business. As we go forward the board will continue to assess the financial resources available to implement our strategy against the operational progress of the business. 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: Director Share Options 2002 2001 Ordinary Shares 2002 2001 B. K. Mence A. Michuda A. Karimjee S. A. Silcock S. A. Silcock* B. P .F. Al A. M. Davis Daniel Metzger (appointed on 30 September 2002) 122,500 773,607 262,500 - - 25,000 - - 22,500 285,675 112,500 - - 25,000 - - 10,997,277 41,855 - 181,383 98,077 393,000 494,520 - 8,696,457 41,355 - 181,383 98,077 25,000 494,520 - Of the 10,997,277 ordinary shares mentioned above B. K. Mence beneficially owns and is the registered holder of 4,846,657 ordinary shares. A further 2,300,820 ordinary shares are held by Inkberrow Limited, a company in which his family trust is the major shareholder. In addition 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. and is a minority Shareholder in Inkberrow Limited. On 19 June 2001 the directors listed below subscribed for Sopheon Convertible Loan Stock (the "Stock") with detachable warrants.When issued, the Stock was convertible into Sopheon shares at 70p per share. On 7 November 2001, at an Extraordinary General Meeting of holders of the Stock, the conversion rate of the Stock was amended to 46p per share, the price prevailing immediately before the announcement of the offer for Orbital Software Holdings plc. Further details of the Stock are given in Note 15. 18 DIRECTORS’ REPORT The exercise price for the Sopheon warrants is 70p per share. Name B. K. Mence A. L. Michuda A. Karimjee S. A. Silcock B. P. F. Al Nominal amount of Stock subscribed No.of warrants £390,000 £28,000 £17,000 £100,000 £25,000 83,571 6,000 3,643 21,429 5,357 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 B. K. Mence (1) B. K. Mence (1) A. L. Michuda (2) A. L. Michuda (2) A. L. Michuda (2) A. L. Michuda (2) A. L. Michuda (3) A. L. Michuda (3) A. L. Michuda (3) A. L. Michuda (3) A. Karimjee (1) A. Karimjee (1) A. Karimjee (4) B. P. F. Al (1) 2 May 2001 30 April 2002 15 September 2000 15 September 2000 15 September 2000 15 September 2000 2 October 2000 1 January 2001 2 May 2001 30 April 2002 22 November 1999 2 May 2001 30 April 2002 2 May 2001 77.5p 14.75p 184p 230p 322p 368p 427.5p 160p 77.5p 14.75p 150p 77.5p 14.75p 77.5p At 31 December 2001 22,500 - 187,600 7,846 12,501 1,756 16,280 5,030 54,662 - 100,000 12,500 - 25,000 Granted during year - 100,000 - - - - - - - 487,932 - - 150,000 - Exercised during year At 31 December 2002 - - - - - - - - - - - - - - 22,500 100,000 187,600 7,846 12,501 1,756 16,280 5,030 54,662 487,932 100,000 12,500 150,000 25,000 (1) Exercisable between the third and tenth anniversary of the date of grant. (2) Fully vested options, which were granted as part of the acquisition of Teltech Resource Network Corporation. (3) One fourth of these options becomes exercisable on each of the first four anniversaries of the date of grant and they expire on the tenth anniversary of the date of grant. (4) Exercisable as to 100,000 between the third and tenth anniversary of the date of grant and the balance exercisable immediately. The mid-market price of Sopheon ordinary shares at 31 December 2002 was 13p. During the financial year the mid-market price of Sopheon ordinary shares ranged from 30.5p to 4.5p. Save as disclosed above, 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. Substantial Shareholdings As of 12 June, 2003 the Directors are aware of the following persons who are interested directly or indirectly in three percent or more of the company’s issued ordinary shares: Name No. of Ordinary Shares B. K. Mence (director) Aventis Research & Technologies GmbH & Co KG 10,997,277 3,471,191 % issued Ordinary Shares 13.3 4.2 Mr. Mence’s interest represents direct beneficial holdings as well as those of his family. DIRECTORS’ REPORT 19 Share Option Schemes Details of options granted are shown in note 18. 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 2002, the group had an average of 55 days’ purchases outstanding in trade creditors. Financial instruments The group’s principal financial instruments comprise the 6% Convertible Loan Stock 2004, together with 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. It is, and has been throughout the period under review, the group’s policy that no trading in derivatives and other financial instruments shall be undertaken. However, the group is considering the use of forward exchange contracts to assist with management of foreign exchange exposures. 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 2001 and 2002. Interest rate risk The group has overdraft facilities and lines of credit in UK Sterling, US Dollar and Euros 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, US Dollars or Euros 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 USA, Germany and the Netherlands, which give rise to short term creditors, debtors and cash balances in US Dollars and Euros, the group’s balance sheet can be affected by movements in the US Dollar/Sterling and Euro/Sterling exchange rates. Auditors A resolution to reappoint Ernst & Young LLP as auditors will be put to the members at the Annual General Meeting. Approved by the Board on 12 June 2003 and signed on its behalf by A. Karimjee Secretary 20 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF FINANCIAL STATEMENTS Statement of Directors’ Responsibilities In Respect Of The Financial Statements Company law requires the directors to prepare financial statements 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 period. In preparing those financial statements, 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 financial statements; • prepare the financial statements 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 financial statements 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. INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC 21 Independent Auditors’ Report To The Members Of Sopheon plc We have audited the group's financial statements for the year ended 31 December 2002, which comprise the Consolidated Profit and Loss Account, Consolidated Balance Sheet, Company Balance Sheet, Consolidated Cash Flow Statement, Consolidated Statement of Total Recognized Gains and Losses and the related notes 1 to 22. These financial statements have been prepared on the basis of the accounting policies set out therein. This report is made solely to the company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As described in the Statement of Directors' Responsibilities the company's directors are responsible for the preparation of the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, 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 information specified by law regarding directors' remuneration and transactions with the group is not disclosed. We read the Directors' Report and consider the implications for our report if we become aware of any apparent misstatements within it. Basis of audit opinion We conducted our audit in accordance with United Kingdom 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 financial statements. preparation of the financial statements, and of whether the accounting policies are appropriate to the group's circumstances, consistently applied and adequately disclosed. It also includes an assessment of the significant estimates and judgements made by the directors in the 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 financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. the overall adequacy of the presentation of information in the financial statements. In forming our opinion we also evaluated Fundamental uncertainty – going concern In forming our opinion we have considered the adequacy of the disclosures made in note 1 to the financial statements concerning their preparation on a going concern basis.The financial statements have been prepared on a going concern basis, the validity of which depends on the completion of the proposed disposal of the US-based Information Management business, the extension of the maturity date of the convertible loan stock and the achievement of significantly increased sales targets which represent substantial growth over 2002, which are subject to significant uncertainties. In view of the significance of these uncertainties, we consider that they should be drawn to your attention but our opinion is not qualified in this respect. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the company and of the group as at 31 December 2002 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 LLP Registered Auditor Reading 12 June 2003 22 GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2002 Group Profit And Loss Account For The Year Ended 31 December 2002 TURNOVER Cost of sales GROSS PROFIT Sales and marketing expenses Notes 2 2002 £’000 2001 £’000 2000 £’000 12,353 (9,002) ––––––– 3,351 (5,437) 13,963 (10,186) ––––––– 3,777 (7,281) 7,763 (5,402) ––––––– 2,361 (3,450) Research and development expenditures (2,331) (3,010) (3,321) Amortisation and impairment charges in respect of goodwill (5,922) (21,431) (5,561) Other administrative expenses (5,727) (6,792) (2,759) Total administrative expenses OPERATING LOSS Share of operating loss of associated undertaking Interest receivable Interest payable and similar charges LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION Tax on ordinary activities RETAINED LOSS FOR THE YEAR Loss per share - basic and diluted (pence) LOSS ON AN EBITDA BASIS 3 5 6 8 (13,980) ––––––– (31,233) ––––––– (11,641) ––––––– (16,066) (34,737) (12,730) (46) 260 (327) ––––––– (63) 373 (204) ––––––– (76) 950 (89) ––––––– (16,179) (34,631) (11,945) 126 _______ (16,053) ––––––– ––––––– - _______ (34,631) ––––––– ––––––– - _______ (11,945) ––––––– ––––––– (19.4p) (76.2p) (33.4p) ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– (8,910) ––––––– ––––––– (11,757) ––––––– ––––––– (6,655) ––––––– ––––––– EBITDA is defined in Note 1 to the Financial Statements. GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2002 Loss on ordinary activities after taxation Exchange difference on retranslation of net assets of subsidiary undertakings Total recognised losses relating to the year 2002 £‘000 2001 £‘000 2000 £‘000 (16,053) (34,631) (11,945) 75 _______ (15,978) ––––––– ––––––– 31 _______ (34,600) ––––––– ––––––– 100 _______ (11,845) ––––––– ––––––– GROUP BALANCE SHEET AT 31 DECEMBER 2002 23 Group Balance Sheet At 31 December 2002 FIXED ASSETS Intangible assets Goodwill Less: Negative goodwill Tangible Assets Investments CURRENT ASSETS Debtors Cash at bank and in hand CREDITORS: amounts falling due within one year NET CURRENT (LIABILITIES)/ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS: amounts falling due after more than one year 6% Convertible Unsecured Loan Stock 2004 PROVISIONS FOR LIABILITIES AND CHARGES CAPITAL AND RESERVES Called up share capital Shares to be issued Share premium account Merger reserve Other reserves Profit and loss account Shareholders’ funds (all equity interests) Approved by the Board on 12 June 2003 Barry K. Mence Director Notes 2002 £’000 2001 £’000 9 9 10 11 12 13 14 15 15 16 18 19 19 19 19 19 5,091 (166) ––––––– 4,925 11,124 (277) ––––––– 10,847 900 - ––––––– 5,825 2,660 3,355 ––––––– 6,015 (6,332) ––––––– (317) ––––––– 5,508 2,159 46 ––––––– 13,052 3,592 13,344 ––––––– 16,936 (8,584) ––––––– 8,352 ––––––– 21,404 - (2,569) (25) (2,553) (513) ––––––– 2,426 ––––––– ––––––– 4,147 465 45,380 18,384 4,445 (70,395) ––––––– 2,426 ––––––– ––––––– (461) ––––––– 18,365 ––––––– ––––––– 4,116 465 43,372 18,384 5,455 (55,427) ––––––– 18,365 ––––––– ––––––– Arif Karimjee Director 24 COMPANY BALANCE SHEET AT 31 DECEMBER 2002 Company Balance Sheet At 31 December 2002 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 CREDITORS: amounts falling due after more than one year 6% Convertible Unsecured Loan Stock 2004 CAPITAL AND RESERVES Called up share capital Shares to be issued Share premium account Merger reserve Other reserves Profit and loss account Shareholders’ funds (all equity interests) Approved by the Board on 12 June 2003 Barry K. Mence Director Notes 2002 £’000 2001 £’000 11 12 14 15 15 18 19 19 19 19 19 6,119 23,477 17 1,910 ––––––– 1,927 (663) ––––––– 1,264 ––––––– 7,383 - (2,569) ––––––– 4,814 ––––––– ––––––– 4,147 465 45,380 10,619 4,445 (60,242) ––––––– 4,814 ––––––– ––––––– 14 4,839 ––––––– 4,853 (1,198) ––––––– 3,655 ––––––– 27,132 (4,295) (2,553) ––––––– 20,284 ––––––– ––––––– 4,116 465 45,372 10,619 5,455 (45,743) ––––––– 20,284 ––––––– ––––––– Arif Karimjee Director GROUP STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2002 25 Group Statements Of Cash Flows For The Year Ended 31 December 2002 Notes 2002 £’000 2001 £’000 2000 £’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 TAXATION Research and development tax credit CAPITAL EXPENDITURE & FINANCIAL INVESTMENT Payments to acquire tangible fixed assets Receipts from sales of tangible fixed assets ACQUISITIONS AND DISPOSALS Purchase of subsidiary undertakings Net cash acquired with subsidiary undertakings Purchase of investment in associated undertaking MANAGEMENT OF LIQUID RESOURCES Decrease/(increase) in short term deposits NET CASH OUTFLOW BEFORE FINANCING FINANCING Issues of ordinary share capital Issue of convertible loan stock Repayment of long-term loans Repayment of capital element of finance lease (DECREASE)/INCREASE IN CASH 13 (10,268) ––––––– (11,224) ––––––– (8,793) ––––––– 260 (327) - ––––––– (67) 373 (204) - ––––––– 169 950 (88) (1) ––––––– 861 126 _______ - _______ - _______ (104) 18 _______ (86) _______ - - - _______ - (201) - _______ (201) _______ (668) 13,705 - _______ 13,037 (954) - _______ (954) _______ (11,962) (155) (164) _______ (12,281) 8,186 _______ (2,109) (3,512) _______ (1,731) (267) _______ (21,434) 39 - (51) - _______ (12) _______ (2,121) _______ _______ 1,567 2,553 (36) (1) _______ 4,083 _______ 20,222 - (30) (8) _______ 20,184 _______ 2,352 _______ _______ (1,250) _______ _______ 26 NOTES TO THE ACCOUNTS 1. ACCOUNTING POLICIES Accounting convention and basis of preparation The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards, and on the going concern basis. At the year end the group reported consolidated net current liabilities of £0.3m and gross cash resources of £3.4m.Whilst the cost base has been substantially reduced, the group has continued to incur losses. Since the end of the year the directors have taken steps to restructure the business, initially through the proposed divestiture of its US-based Information Management business.The proposed transaction is progressing well and, subject to certain conditions and events including the completion of due diligence by the purchaser’s financial partners, is expected to complete by mid July 2003. goodwill, with consideration consisting mainly of cash and net liabilities to be assumed by the purchaser. As a potential backup in the event that the transaction protracts or is otherwise not completed, the board has accepted a letter of intent from an alternative purchaser that is undertaking due diligence. If concluded the sale would give rise to a profit on disposal after charging The directors are also seeking the extension of the maturity date of the group’s £2.6m of convertible unsecured loan It is proposed that this would be coupled with modification of other terms of stock, by up to two years from June 2004. the loan stock, which might include a reduction of the loan stock conversion price.This in turn, depending on the level of any revised loan stock conversion price, might require shareholder approval for an increase in the directors’ authority to issue and allot shares. Any changes to the terms of the stock would also need to be put to a meeting of its holders, which is expected to take place before the end of June 2003. The directors believe that these steps will provide the group with adequate funding to support its activities through to the point at which they forecast that trading becomes cash generative. Nevertheless, the ability of the group to continue as a going concern depends upon the completion of the currently contemplated disposal, thereafter on the rescheduling of the convertible loan stock (including the receipt of any necessary shareholder approvals) and on meeting the sales targets on which the trading forecasts for the group are based, which include objectives for the group’s Accolade product that represent substantial growth over 2002.The directors have a reasonable expectation that these outcomes will occur, and that together they will provide adequate resources to enable the group to continue as a going concern. However, these outcomes are not certain. In the event that the disposal is not completed, the maturity of loan stock not extended, or sales targets are not met, and in the absence of any other appropriate measures that might be available to the board, the cash generated from sales would continue to be insufficient to cover the cash outflows of the group, and the going concern basis would cease to be appropriate. The financial statements do not reflect any adjustments which would be required if the going concern assumption was not appropriate. Given the uncertainty described above it is not currently possible to determine the extent and quantification of such adjustments but these would include the reclassification of creditors due in more than one year to less than one year, the write down of the carrying value of goodwill in the balance sheet to the best estimate of net realisable value on disposal, and provision for additional liabilities. Basis of consolidation The consolidated financial statements include the results of the company and its subsidiary undertakings.The results of Sopheon GmbH (formerly the Technology and Information Services Division of Aventis Research & Technologies) and of Orbital Software Holding plc and its subsidiaries have been included, using the acquisition method of accounting, since their respective dates of acquisition, 29 June 2001 and 15 November 2001. Turnover Turnover comprises amounts derived from the sale of goods and services and is stated net of Value Added Tax. Sales of software products are recognised on delivery, and when no significant vendor obligations remain. Revenues from implementation and post contract support services in respect of software sales are recognised as the services are performed. Periodic subscription revenue is recognised rateably over the subscription period.Transaction-based revenue is billed and recognised as the related services are rendered. Revenues relating to significant maintenance and support agreements are deferred and recognised over the period of the agreements. Revenues and associated costs under long term contracts are recognised on a percentage basis as the work is completed and any relevant milestones are met, using latest estimates to determine the expected duration and cost of the project. 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 capitalised 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. NOTES TO THE ACCOUNTS 27 Goodwill Goodwill arising on consolidation is capitalised and amortised on a straight line basis over its estimated useful economic life, which is three years in all cases. 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 amortised is taken into account in determining the profit or loss on sale or closure. Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more, or a right to pay less, tax in the future have occurred at the balance sheet date, with the following exception. Deferred tax assets are recognised only to the extent that the directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. 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. Pensions Sopheon contributes to the personal pension arrangements of employees, the costs of which are charged in the profit and loss account as incurred. One of its subsidiary companies, Sopheon GmbH, is committed to providing certain pensions based on final pensionable salaries of employees. Its pension liabilities were measured when the subsidiary was acquired in 2001 using a projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liabilities. The provision will be used to offset the future payments to those employees. 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 capitalised 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 amortisation and also excludes non-recurring equity- based costs incurred in connection with acquisitions. 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 software products together with associated implementation and consultancy services and (b) the provision of information and research services.The group results are analysed between 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 2002 £’000 3,307 9,046 ––––––– 12,353 ––––––– ––––––– 2001 £’000 3,654 10,309 ––––––– 13,963 ––––––– ––––––– 2000 £’000 4,912 2,851 ––––––– 7,763 ––––––– ––––––– 28 NOTES TO THE ACCOUNTS Analysis of operating loss by area of activity Software and consultancy Information and research services Gross margin Sales and marketing expenses Administrative expenses (including goodwill amortisation and impairment charge) Operating loss Analysis of turnover by geographical destination United Kingdom Rest of Europe North America Rest of World 2002 £’000 1,135 2,216 ––––––– 3,351 (5,437) (13,980) ––––––– (16,066) ––––––– ––––––– 2002 £’000 829 4,012 7,391 121 _______ 12,353 _______ _______ 2001 £’000 2000 £’000 719 3,058 ––––––– 3,777 (7,281) (31,233) ––––––– (34,737) ––––––– ––––––– 2001 £’000 2,026 3,239 8,471 227 _______ 1,406 955 ––––––– 2,361 (3,450) (11,641) ––––––– (12,730) ––––––– ––––––– 2000 £’000 2,965 1,339 3,459 - _______ 13,963 _______ _______ 7,763 _______ _______ Analysis of turnover and operating loss by geographical origin United Kingdom Rest of Europe United States of America Operating loss 2002 £’000 4,686 1,146 10,234 ––––––– 16,066 ––––––– ––––––– 2001 £’000 9,016 1,651 24,070 ––––––– 34,737 ––––––– ––––––– 2000 £’000 4,934 1,735 6,061 ––––––– 12,730 ––––––– ––––––– Analysis of net assets by geographical origin United Kingdom Rest of Europe United States of America Unallocated cash and debt at group level 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 Grants and subsidies Foreign exchange (gains)/losses Amortisation of goodwill Impairment charge on goodwill Depreciation of owned assets Depreciation of assets held under finance leases Operating lease rentals - land and buildings Operating lease rentals - equipment and vehicles Turnover 2001 £’000 2,253 3,239 8,471 ––––––– 13,963 ––––––– ––––––– 2001 £’000 602 1,033 8,501 8,229 ––––––– 18,365 _______ _______ 2000 £’000 3,942 500 3,321 ––––––– 7,763 ––––––– ––––––– 2000 £’000 5,182 476 25,320 7,318 ––––––– 38,296 _______ _______ 2001 £’000 2000 £’000 90 26 3,010 (19) (20) 12,288 9,143 1,175 - 916 191 ––––––– ––––––– 67 19 3,321 (78) (645) 5,561 - 405 4 411 173 ––––––– ––––––– 2002 £’000 945 4,032 7,376 ––––––– 12,353 ––––––– ––––––– 2002 £’000 162 92 2,893 (721) ––––––– 2,426 _______ _______ 2002 £’000 90 51 2,331 (69) 15 5,922 - 1,280 - 1,015 135 ––––––– ––––––– NOTES TO THE ACCOUNTS 29 During 2002 £Nil (2001 £95,000 and 2000 £114,000) was charged by the auditors in respect of due diligence and other work in connection with corporate transactions, which has been capitalised or written off to share premium as appropriate. (b) Reconciliation of operating loss to net cash outflow from operating activities Operating loss Depreciation Amortisation of goodwill Impairment charge in respect of goodwill Decrease/(increase) in debtors Decrease in creditors and provisions Net cash outflow from operating activities 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 2002 £’000 (16,066) 1,280 5,922 - 948 (2,352) ––––––– (10,268) ––––––– ––––––– 2002 £’000 10,580 960 231 ––––––– 11,771 ––––––– ––––––– 2002 £’000 388 16 ––––––– 404 ––––––– ––––––– 2001 £’000 2000 £’000 (34,737) 1,175 12,288 9,143 1,669 (762) ––––––– (11,224) ––––––– ––––––– (12,730) 409 5,561 (453) (1,580) ––––––– (8,793) ––––––– ––––––– 2001 £’000 2000 £’000 12,506 1,082 299 ––––––– 13,887 ––––––– ––––––– 6,834 579 173 ––––––– 7,586 ––––––– ––––––– 2001 £’000 2000 £’000 409 10 ––––––– 419 ––––––– ––––––– 490 19 ––––––– 509 ––––––– ––––––– Pension contributions are to personal defined contribution schemes and have been made for four directors who served during the year.The emoluments of the highest paid director were as follows: Salaries and fees 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 2002 £’000 118 6 2 ––––––– 126 ––––––– ––––––– 2001 £’000 2000 £’000 136 4 2 ––––––– 142 ––––––– ––––––– 107 3 4 ––––––– 114 ––––––– ––––––– 2002 Number 2001 Number 2000 Number 151 81 164 94 79 71 ––––––– 232 ––––––– ––––––– ––––––– 258 ––––––– ––––––– ––––––– 150 ––––––– ––––––– 30 NOTES TO THE ACCOUNTS 5. INTEREST PAYABLE AND SIMILAR CHARGES Bank loans and overdrafts Convertible loan stock Finance charges on finance leases 6.TAXATION (a) Tax on loss on ordinary activities The tax credit is made up as follows: Research and development tax credits in respect of prior years (b) Factors affecting current tax credit 2002 £’000 155 172 - _______ 327 _______ _______ 2001 £’000 2000 £’000 115 89 - _______ 204 _______ _______ 49 39 1 _______ 89 _______ _______ 2002 £’000 2001 £’000 2000 £’000 126 _______ _______ - _______ _______ - _______ _______ The differences between the group's expected tax credit, using the group's standard corporation tax rate of 38% (2001: 39% and 2000: 39%), comprising the weighted average rates of tax payable across the group, and the group's current tax credit in each year are as follows: Expected tax credit on loss on ordinary activities before tax Amortisation and impairment charges in respect of goodwill (Shortfall)/excess of tax depreciation compared to book depreciation Losses in year not relievable against current tax Research & development tax credits in respect of prior year Actual current tax credit (see Note 6(a)) (c) Deferred taxation 2002 £’000 6,148 (2,250) (102) (3,796) 126 _______ 126 _______ _______ 2001 £’000 13,506 (8,358) (80) (5,068) - _______ - _______ _______ 2000 £’000 4,659 (2,169) 17 (2,507) - _______ - _______ _______ The group has an unrecognised deferred tax asset arising from its unrelieved trading losses, which has not been recognised owing to uncertainty as to the level and timing of taxable profits in the future. The unrecognised deferred tax asset is made up as follows: Shortfall/(excess) of tax depreciation compared to book depreciation Unrelieved trading losses Unrecognised deferred tax asset 2002 £’000 104 20,888 _______ 20,992 _______ _______ 2001 £’000 2000 £’000 2 17,923 _______ 17,925 _______ _______ (78) 9,123 _______ 9,045 _______ _______ At 31 December 2002, tax losses estimated at £54,342,000 were available to carry forward by the Sopheon plc group, arising from historic losses incurred.These losses represent a potential deferred tax asset of £20,888,000. £14,712,000 of the tax losses, and £6,455,000 of the potential deferred tax asset, relate to Sopheon Corporation (Minnesota) and to Orbital Software Inc. The future utilisation of these losses may be restricted under section 382 of the US Internal Revenue Code, whereby the ability to utilise net operating losses arising prior to a change of ownership is limited to a percentage of the entity value of the corporation at the date of change of ownership. Under Financial Reporting Standard 19, the unrecognised deferred tax asset in respect of trading losses can only be recognised if future taxable profits can be foreseen with a greater degree of certainty. NOTES TO THE ACCOUNTS 31 7. LOSS ATTRIBUTABLE TO MEMBERS OF THE PARENT COMPANY The loss dealt with in the financial statements of the parent company for the year ended 31 December 2002 was £15,509,000 (2001- loss £54,411,000 and 2000 - profit £908,000). The loss in 2002 included a provision of £15,245,000 (2001- £54,670,000 and 2000 - Nil) against the company's investment in and loans to subsidiary companies. 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 £16,169,000 (2001 - £34,631,000 and 2000 £11,945,000), and on 82,669,430 (2001 - 45,471,220 and 2000 - 35,732,477) 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 and warrants and the conversion of the 6% Convertible Loan Stock 2004 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 2002 and at 31 December 2002 Amortisation At 1 January 2002 Provided during the year At 31 December 2002 Net book value At 31 December 2002 At 31 December 2001 10.TANGIBLE FIXED ASSETS Group only Cost At 1 January 2002 Additions Disposals Exchange adjustments At 31 December 2002 Depreciation At 1 January 2002 Provided during the year Disposals Exchange adjustments At 31 December 2002 Net book value At 31 December 2002 At 31 December 2001 Goodwill £'000 38,260 _______ 27,136 6,033 _______ 33,169 _______ 5,091 _______ 11,124 _______ _______ Computer Equipment £’000 Furniture & fittings £’000 Internet Portals £’000 2,710 91 (89) (68) _______ 2,644 _______ 1,342 836 (80) (47) _______ 2,051 _______ 593 _______ _______ 1,368 _______ _______ 592 13 (129) (14) _______ 462 _______ 328 159 (115) (6) _______ 366 _______ 96 _______ _______ 264 _______ _______ 842 - - (81) _______ 761 _______ 315 285 - (50) _______ 550 _______ 211 _______ _______ 527 _______ _______ Negative goodwill £’000 (332) _______ (55) (111) _______ (166) _______ (166) _______ (277) _______ _______ Total £’000 4,144 104 (218) (163) _______ 3,867 _______ 1,985 1,280 (195) (103) _______ 2,967 _______ 900 _______ _______ 2,159 _______ _______ 32 NOTES TO THE ACCOUNTS 11. INVESTMENTS Group Investment in associated undertaking At 1 January 2002 Share of retained loss At 31 December 2002 Share of net tangible assets £’000 46 (46) _______ - _______ _______ The investment in associated undertaking is a 25% interest in Pro-GRAM BV, the remaining shares being held by three Dutch teaching hospitals, which was set up to promote Sopheon’s software solutions and the hospital’s content to the medical and healthcare market. However, the activity channelled through Pro-GRAM BV was at a low level during the year. Company Investment in subsidiary undertakings Cost At 1 January 2002 and 31 December 2002 Amounts provided: At 1 January 2002 Amounts provided in year At 31 December 2002 Net book value of equity investments at 31 December 2002 Amounts due to subsidiary undertakings Net book value at 31 December 2001 – cost less amounts provided £’000 53,545 _______ 30,068 6,399 _______ 36,467 _______ 17,078 (10,959) _______ 6,119 _______ _______ 23,477 _______ _______ The amounts provided against investment in subsidiary undertakings result from an evaluation of the recoverable value of the investment, carried out in accordance with Financial Reporting Standard 11, and using a discount rate of 15%. Amounts due to subsidiary undertakings have been reclassified during the year and are shown as an offset against related investment in subsidiary undertakings. NOTES TO THE ACCOUNTS 33 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 and those marked with an obelus† are held via Orbital Software Holdings plc. Name of Company Country of incorporation Sopheon Corporation Minnesota, USA Sopheon Corporation Delaware, USA Orbital Software Inc.† Delaware, USA Sopheon GmbH Germany Sopheon NV Netherlands Lessenger BV Netherlands Sopheon UK Ltd United Kingdom Holding Proportion of voting rights Nature of Business Common Stock 100% Information management services, software sales and services Common Stock 100% Software development Common Stock 100% Software sales and services Ordinary Shares 100% Information management services, software sales and services Ordinary Shares 100% Software sales and services The Ordinary Shares 100% Software sales and services The Ordinary Shares 100% Software sales and services Orbital Software Holdings plc United Kingdom Sopheon Edinburgh Ltd† (formerly Orbital Software Group Ltd) United Kingdom Ordinary Shares 100% Holding company Ordinary Shares 100% Dormant Orbital Software Europe Ltd† United Kingdom Network Managers (UK) Ltd* United Kingdom AppliedNet Ltd* (formerly Future Tense UK Ltd) United Kingdom Future Tense Ltd* United Kingdom Polydoc Ltd United Kingdom Ordinary Shares 100% Dormant Ordinary Shares 100% Dormant Ordinary Shares 100% Dormant Ordinary Shares 100% Dormant Ordinary Shares 100% Dormant Applied Network Technology Ltd* United Kingdom Ordinary Shares 100% Employee Share Ownership Trust The businesses and operating assets of Sopheon Edinburgh Limited and Orbital Software Europe Limited were transferred to Sopheon UK Limited on 31 December 2002. 34 NOTES TO THE ACCOUNTS 12. DEBTORS Group Trade debtors Other debtors Prepayments and accrued income Company Other debtors Prepayments 2002 £’000 2001 £’000 1,683 202 775 ––––––– 2,660 ––––––– ––––––– 2,489 121 982 ––––––– 3,592 ––––––– ––––––– 2002 £’000 2001 £’000 7 10 ––––––– 17 ––––––– ––––––– - 14 ––––––– 14 ––––––– ––––––– A full provision has been made against amounts totalling £33,448,000 (2001: £24,602,000) owed to the company by subsidiary undertakings, which 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. (Decrease)/increase in cash (Increase)/decrease in overdrafts and lines of credit Net (decrease)/ increase in cash and cash equivalents Issue of convertible loan stock Repayment of term loans Repayments of capital elements of finance leases Cash (outflow)/ inflow 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 Other Movement in net (debt)/ funds Net funds at 1 January Net (debt)/ funds at 31 December 2002 £’000 2001 £’000 2000 £’000 (1,803) (318) _______ (2,121) - 51 - (8,186) _______ (10,256) - - 80 (16) _______ (10,192) _______ 10,003 _______ (189) _______ _______ 1,907 445 _______ 2,352 (2,553) 36 1 3,512 _______ 3,348 (63) - (27) - _______ 3,258 _______ 6,745 _______ 10,003 _______ _______ (93) (1,157) _______ (1,250) - 39 8 267 _______ (936) - 1,571 30 - _______ 665 _______ 6,080 _______ 6,745 _______ _______ NOTES TO THE ACCOUNTS 35 (b) Analysis of changes in net funds At 1 January 2001 Cashflow Exchange difference Issue of convertible loan stock Acquisitions At 31 December 2001 Cashflow Exchange difference Other At 31 December 2002 Cash at Bank £’000 654 1,907 - - - _______ 2,561 (1,803) - _______ 758 _______ _______ Short Term Deposits/ Liquid Resources £’000 7,271 3,512 - - - _______ 10,783 (8,186) - _______ 2,597 _______ _______ Overdrafts and Lines of Credit Convertible Loan Stock Term Loans/ Finance Leases Total £’000 £’000 £’000 £’000 (1,127) 445 (27) - - _______ (709) (318) 80 _______ (947) _______ _______ - - - (2,553) - _______ (2,553) - - (16) _______ (2,569) _______ _______ (53) 37 - - (63) _______ (79) 51 - _______ (28) _______ _______ 6,745 5,901 (27) (2,553) (63) _______ 10,003 (10,256) 80 (16) _______ (189) _______ _______ 14. CREDITORS: amounts falling due within one year Group Overdrafts and bank lines of credit Current instalments due on bank loan Trade creditors Other taxes and social security costs Accruals and deferred income Other creditors 2002 £’000 947 28 1,280 320 3,527 230 _______ 6,332 _______ _______ 2001 £’000 709 54 2,781 282 4,528 230 _______ 8,584 _______ _______ The bank line of credit is secured against the trade debtors of Sopheon Corporation Minnesota and bears interest at a rate of 3% above US prime rate. Company Trade creditors Other creditors Other taxes and social security costs Accruals Amount owing to subsidiary undertaking 2002 £’000 103 97 52 296 115 _______ 663 _______ _______ 2001 £’000 496 - 12 690 - _______ 1,198 _______ _______ 36 NOTES TO THE ACCOUNTS 15. CREDITORS: amounts falling due after more than one year Group 6% Convertible Unsecured Loan Stock 2004 Bank loan: amounts falling due From one to two years Company Amount owed to subsidiary undertaking 6% Convertible Unsecured Loan Stock 2004 2002 £’000 2,569 - ––––––– 2,569 ––––––– ––––––– 2002 £’000 - 2,569 ––––––– 2,569 ––––––– ––––––– 2001 £’000 2,553 25 ––––––– 2,578 ––––––– ––––––– 2001 £’000 4,295 2,553 ––––––– 6,848 ––––––– ––––––– £2.6 million nominal of 6% Convertible Unsecured Loan Stock 2004 ("the Stock"), with 557,143 detachable warrants to subscribe for Sopheon shares, was issued at par on 20 June 2001.The Stock is convertible at any time prior to redemption at a conversion rate of 46p per Sopheon share. In the event that the Company makes an offer of Sopheon shares by way of rights issue, placing, open offer or similar issue at an issue price of less than 46p per share, the conversion rate will be adjusted to equal the offering price for such Sopheon shares.The instrument currently requires that such conversion rate shall not be reduced below 31.5p per share.The Board is proposing changes to the terms of the Stock, which are being put to its holders for approval and are described in Note 21.The exercise price of the warrants is 70p per Sopheon share.The Stock is redeemable on 20 June 2004 or earlier at the Company's option. The bank loans comprise i) a sterling asset purchase facility at an implicit rate of 8.8% and is repayable in 36 equal instalments from October 1999 and ii) a sterling loan made under the Small Companies Loan Guarantee Scheme, bearing interest at 3% over bank base rate, in respect of which the lender holds a guarantee for 85% of the loan facility from the Department of Trade and Industry. 16. PROVISIONS FOR LIABILITIES AND CHARGES Group Pension provision At 1 January Acquisitions during year Additional amounts provided during year Exchange difference At 31 December 2002 £’000 2001 £’000 461 - 21 31 ––––––– 513 ––––––– ––––––– - 461 - - ––––––– 461 ––––––– ––––––– The pension provision represents the commitment of Sopheon GmbH to provide certain pensions based upon final pensionable salary.The provision represents an actuarial calculation of the pension liabilities, as at the date of acquisition of Sopheon GmbH, based upon the following actuarial assumptions:- Increase in salaries Discount rate Inflation assumption 2.75% 6.25% 1.75% Additional amounts have been provided during the year on a basis consistent with the above actuarial calculation. NOTES TO THE ACCOUNTS 37 17. OBLIGATIONS UNDER LEASES The company and group had no amounts due under finance leases and hire purchase contracts. At 31 December 2001 and 2002 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 18. SHARE CAPITAL Authorised Ordinary shares of 5p each Allotted, called up and fully paid Ordinary shares of 5p each Land & Buildings 2002 £’000 417 328 ––––––– 745 ––––––– ––––––– Other 2002 £’000 26 99 ––––––– 125 ––––––– ––––––– Land & Buildings 2001 £’000 450 684 ––––––– 1,134 ––––––– ––––––– Other 2001 £’000 43 105 ––––––– 148 ––––––– ––––––– 2002 Number 2002 £ 2001 Number 2001 £ 125,000,000 ––––––––– ––––––––– 6,250,000 125,000,000 ––––––––– ––––––––– ––––––––– ––––––––– 6,250,000 ––––––––– ––––––––– 2002 Number 2002 £ 2001 Number 2001 £ 82,933,309 _________ _________ 4,146,665 _________ _________ 82,311,575 _________ _________ 4,115,579 _________ _________ On 1 June 2001 17,441 ordinary shares were issued for cash at 8.6p per share pursuant to the exercise of a share option and 7,114 ordinary shares were issued at 146p by way of deferred consideration to the vendors of Lessenger BV. On 28 June 2001 3,471,191 ordinary shares were issued to Aventis Research & Technologies GmbH & Co. KG, of which 822,598 were issued at 58.5p as consideration for the acquisition of Sopheon GmbH and 2,648,593 were issued for cash at 58.5p per share. On 29 June 2001 at the Annual General Meeting shareholder approved the purchase for cancellation of the issued deferred shares of 15p each in the Company. Following such cancellation, the unissued deferred shares of 15p each were subdivided and re-designated as unissued ordinary shares of 5p each. On 12 September 2001 20,000 ordinary shares were issued for cash at 20p per share pursuant to the exercise of a share option. On 7 November 2001 at an Extraordinary General Meeting convened to approve the acquisition of Orbital Software Holdings plc, the authorised share capital of the Company was increased to £6,250,000 consisting of 125,000,000 ordinary shares of 5p each. On 15 November 2001, the offer to acquire the share capital of Orbital Software Holdings plc ("Orbital") was declared wholly unconditional. On 4 December 2001 Sopheon plc, having received acceptances to the offer in respect of over 90% of the issued share capital of Orbital, initiated the procedure under section 429 of the Companies Act 1985 to acquire compulsorily the remaining Orbital shares. Pursuant to the offer, 40,016,715 ordinary shares were issued at 30p per share as consideration for the acquisition of 100% of the issued share capital of Orbital. On 23 November 2001 18,941 ordinary shares were issued for cash pursuant to the exercise of share options, comprising 1,500 shares at 184p each and 17,441 shares at 8.6p each. 38 NOTES TO THE ACCOUNTS On 11 December 2001 17,441 ordinary shares were issued for cash at 8.6p per share pursuant to the exercise of a share option. On 21 December 2001 8,720 ordinary shares were issued for cash at 8.6p per share pursuant to the exercise of a share option. On 28 December 2001 109,099 ordinary shares were issued at 565p per share by way of incentive payments to certain US members of staff, including 41,666 ordinary shares issued to A. Michuda, a director of Sopheon plc, pursuant to terms agreed at the time of the acquisition of Teltech Resource Network Corporation. On 16 January 2002 39,242 ordinary shares were issued for cash at 8.6p per share and 4,760 ordinary shares were issued at 6.193p per share pursuant to the exercise of share options. On 15 March 2002 4,360 ordinary shares were issued for cash at 8.6p per share pursuant to the exercise of a share option. On 3 May 2002 450,623 ordinary shares were issued for cash at 6.193p per share pursuant to the exercise of a share option. On 26 June 2002 7,672 ordinary shares were issued for cash at 6.193p per share pursuant to the exercise of a share option. On 5 December 2002 115,077 ordinary shares were issued for cash at 6.193p per share pursuant to the exercise of a share option. Contingent rights to subscribe for Sopheon shares On 19 June 2001 Sopheon issued £2.6 million of Convertible Unsecured Loan Stock (the "Stock") with 557,143 detachable warrants to subscribe for Sopheon shares. On 7 November 2001 at an Extraordinary General Meeting of holders of the Stock, the conversion rate of the Stock was reduced to 46p, the market price for Sopheon shares prevailing immediately before the announcement of the offer for Orbital. In the event of any further offering of Sopheon shares taking place prior to conversion, whether by way of rights issue, placing, open offer or similar issue, the conversion rate shall be adjusted to the higher of offering price, if lower than 46p, and 31.5p.The warrants are exercisable at 70p per share during the period 20 June 2002 to 19 June 2003. Employee share option schemes 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, the Sopheon 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. 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 (USA) Stock Option Plan, under which share options can be granted either as qualifying Incentive Stock Options (ISOs) or as Non-Qualifying Options (NQOs). Pursuant to the acquisition of Orbital Software Holdings plc in November 2001, share options granted under the Orbital Software Group Limited Share Option Scheme were released in exchange for the grant of 660,066 new options over Sopheon ordinary shares.These options remain subject to the rules of the Orbital Software Group Limited Share Option Scheme. At the Annual General Meeting held on 29 May 2002 shareholders approved a maximum of 6,000,000 Sopheon ordinary shares over which options could be granted under any employee share option scheme. NOTES TO THE ACCOUNTS 39 A summary of options granted under the share option schemes at 31 December 2002 is set out below. Year of grant 1996 1998 1998 (1) 1999 1999 1999 (2) 1999 (1) 1999 (1) 1999 (2) (3) 1999 1999 (3) 2000 (2) 2000 2000 (2) 2000 (2) 2000 (2) 2000 2000 2000 (2) 2000 (2) 2000 2000 (2) 2001 2001 2001 (2) 2001 (4) 2002 2002 2002 (2) Exercise Price (£) Exercise Period From To 0.2000 1.7000 0.0860 1.4150 1.4250 1.5000 0.8732 0.8732 1.5000 1.5000 1.5000 5.7900 6.0725 9.6000 4.9500 5.0000 4.9500 4.2750 4.2750 3.7250 1.6000 1.6000 1.0000 0.7750 0.7750 0.0619 0.1475 0.1475 0.1475 21-07-06 28-08-96 29-06-03 29-06-98 29-12-08 29-12-01 20-01-09 20-01-02 28-04-04 28-04-99 28-04-09 28-04-00 01-06-09 01-06-02 01-10-09 01-10-02 03-11-09 03-11-00 03-11-09 03-11-02 22-11-09 22-11-02 24-01-10 24-01-01 25-01-10 25-01-01 08-02-10 08-02-01 28-06-10 28-06-01 26-06-10 26-06-01 28-06-10 28-06-03 02-10-10 02-10-03 02-10-10 02-10-01 15-11-10 15-11-01 31-12-10 31-12-03 31-12-10 31-12-01 01-04-03 01-04-02 02-05-04 02-05-11 02-05-02 02-05-11 14-09-01 14-09-08 30-04-12 30-04-05 30-04-12 30-04-02 30-04-12 30-04-03 Number 40,000 12,500 21,800 2,500 35,000 42,500 8,720 8,720 52,500 10,000 100,000 12,000 3,000 10,000 10,500 25,000 48,500 15,000 92,584 10,000 5,000 115,022 18,000 87,000 166,536 79,632 781,000 378,825 1,745,410 ________ 3,937,249 ________ ________ (1) Arising from options held by employees of AppliedNet and rolled over into Sopheon options. (2) One fourth of these options become exercisable each year starting on the date indicated. All other options become exercisable in full from the date indicated. (3) Includes options which are contingent upon certain performance targets. (4) Arising from options held by employees of Orbital Software Holdings plc and rolled over into Sopheon options. 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 2002 311,760 of such options had lapsed, 1,500 had been exercised, and 405,032 remained outstanding, in respect of which the aggregate exercise price was £1.1 million. 40 NOTES TO THE ACCOUNTS 19. SHAREHOLDERS’ FUNDS Group At 1 January 2000 Arising on share issues Shares to be issued Issue of share options Retained loss for the year Exchange differences At 31 December 2000 Purchase and cancellation of deferred shares Arising on share issues Shares to be issued Issue of share options Retained loss for the year Exchange differences At 31 December 2001 Arising on share issues Lapsing of share options Retained loss for the year Exchange differences At 31 December 2002 Share Capital £’000 4,491 325 - - - - ––––––– 4,816 (2,884) 2,184 - - - - ––––––– 4,116 31 - - - ––––––– 4,147 ––––––– ––––––– Shares to be Issued £’000 10 - 620 - - - ––––––– 630 - (630) 465 - - - ––––––– 465 - - - - ––––––– 465 ––––––– ––––––– Share Premium Account £’000 10,020 33,300 - - - - ––––––– 43,320 - 2,052 - - - - ––––––– 45,372 8 - - - ––––––– 45,380 ––––––– ––––––– Merger Reserve £’000 7,940 - - - - ––––––– 7,940 - 10,444 - - - - ––––––– 18,384 - - - - ––––––– 18,384 ––––––– ––––––– Other Reserves £’000 - - - 2,417 - - ––––––– 2,417 2,884 (6) - 160 - - ––––––– 5,455 - (1,010) - - ––––––– 4,445 ––––––– ––––––– Profit & Loss Account £’000 (8,982) - - - (11,945) 100 ––––––– (20,827) - - - - (34,631) 31 ––––––– (55,427) - 1,010 (16,053) 75 ––––––– (70,395) ––––––– ––––––– The reserve arising from issue of share options in connection with acquisitions has reduced by £1,010,000 during 2002 as a result of the lapsing of certain share options, as disclosed in Note 18, due to the option-holders ceasing to be employed by the Group. The amount recorded in respect of "Shares to be issued" represents deferred consideration in respect of the acquisition of Sopheon GmbH, to be satisfied by the issue of Sopheon shares to the vendors, and which is dependant upon the profitability of Sopheon GmbH in the years 2001 to 2003.The maximum amount payable is Euro 1,533,000. NOTES TO THE ACCOUNTS 41 Company At 1 January 2001 Purchase and cancellation of deferred shares Arising on share issues Shares to be issued Issue of share options Retained loss for the year Transfer of impairment loss to merger reserve At 31 December 2001 Arising on share issues Lapsing of share options Retained loss for the year At 31 December 2002 Share Capital £’000 4,816 (2,884) 2,184 - - - - ––––––– 4,116 31 - - ––––––– 4,147 ––––––– ––––––– Shares to be Issued £’000 Share Premium Account £’000 Merger Reserve £’000 Other Reserve £’000 630 43,320 7,940 - (630) 465 - - - ––––––– 465 - - - ––––––– 465 ––––––– ––––––– - 2,052 - - - - ––––––– 45,372 8 - - ––––––– 45,380 ––––––– ––––––– - 10,444 - - - (7,765) ––––––– 10,619 - - - ––––––– 10,619 ––––––– ––––––– 2,417 2,884 (6) - 160 - - ––––––– 5,455 - (1,010) - ––––––– 4,445 ––––––– ––––––– Profit & Loss Account £’000 903 - - - (54,411) 7,765 ––––––– (45,743) - 1,010 (15,509) ––––––– (60,242) ––––––– ––––––– Other reserves comprise (for both Group and Company): Capital redemption reserve Reserve arising from issues of share options in connection with acquisitions 2002 £’000 2001 £’000 2,884 2,884 1,561 ––––––– 4,445 ––––––– ––––––– 2,571 ––––––– 5,455 ––––––– ––––––– 42 NOTES TO THE ACCOUNTS 20. FINANCIAL INSTRUMENTS The group’s approach to managing financial risk is described in the Directors’ Report. Disclosures made in this note, other than currency disclosures, exclude short term debtors and creditors. Interest rate risk profile of financial liabilities The financial liabilities of the group at each year-end are set out below. Floating rate line of credit – US Dollar Floating rate overdraft – Sterling Fixed rate loans – Sterling Fixed rate 6% convertible unsecured loan stock 2004 2002 £'000 2001 £'000 917 29 28 2,569 ––––––– 3,543 ––––––– ––––––– 641 68 78 2,553 ––––––– 3,340 ––––––– ––––––– Other than the 6% Convertible Loan Stock 2004, 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 Euro Non-interest bearing Sterling US Dollar Euro Total financial assets 2002 £'000 2001 £'000 1,848 749 ––––––– 2,597 161 379 218 ––––––– 758 ––––––– 3,355 ––––––– ––––––– 10,511 1,805 ––––––– 12,316 806 115 107 ––––––– 1,028 ––––––– 13,344 ––––––– ––––––– NOTES TO THE ACCOUNTS 43 Currency exposures The table below shows the group's transactional currency exposures that give rise to the net currency gains and losses recognised 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. 2001 Sterling 2002 Sterling Net foreign currency monetary assets US dollar £’000 10 123 ––––––– ––––––– Euro £'000 Total £'000 272 - ––––––– ––––––– 282 1,213 ––––––– ––––––– 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.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 Current portion of long-term borrowings Long-term borrowings Convertible Unsecured Loan Stock 2004 Book value 2002 £'000 2001 £'000 3,355 (946) (28) - (2,569) _______ _______ 13,344 (709) (54) (25) (2,553) _______ _______ 21. POST BALANCE SHEET EVENTS In April 2003, the Company entered into a letter of intent with a potential purchaser to divest its US-based Information Management (IM) business. Further details are set out in the Directors’ Report on page 16. 22. CONTINGENT LIABILITIES 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 the Netherlands. www.sopheon.com
Continue reading text version or see original annual report in PDF format above