S O P H E O N
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The Knowledge To Compete ®
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Sopheon's mission is to give our clients the power
to more effectively create, capture and share
knowledge – and use it to compete.
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Group Profile
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Chairman’s & Chief Executive
Officer’s Statement
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Auditor’s Report
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Market & Product Overview
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Group Profit & Loss Account
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Directors & Advisers
Group Balance Sheet
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contents
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Report on Directors’
Remuneration
Company
Balance Sheet
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Directors’ Report
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Statement of Directors’
Responsibilities
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Group Statements of
Cash Flows
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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
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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