S O P H E O N 2 0 0 3 The Knowledge To Compete ® A N N U A L R E P O R T Sopheon's mission is to give our clients the power to more effectively create, capture and share knowledge – and use it to compete. 4 Group Profile 21 Auditors’ Report ––––––––––––––––––––––– ––––––––––––––––––––––– 5 Chairman’s & Chief Executive Officer’s Statement ––––––––––––––––––––––– 10 Market & Product Overview 22 Group Profit & Loss Account ––––––––––––––––––––––– 22 Group Statement of Total Recognised Gains and Losses ––––––––––––––––––––––– ––––––––––––––––––––––– Directors & Advisers Group Balance Sheet 14 23 contents 15 24 Report on Directors’ Remuneration Company Balance Sheet ––––––––––––––––––––––– ––––––––––––––––––––––– 16 Directors’ Report ––––––––––––––––––––––– 20 Statement of Directors’ Responsibilities 25 Group Statement of Cash Flows ––––––––––––––––––––––– 26 Notes to the Financial Statements 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 process and strategic decision support to G r o u p P r o f i l e reduce product development spending waste and accelerate time to market. The Sopheon group has operating bases in the United Kingdom, the Netherlands and the United States. Its clients are R&D-intensive companies in the high tech, life sciences and healthcare industry sectors. STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 5 Statement from the Chairman and Chief Executive Officer December 2003 marked the close to a year of progress and change for Sopheon, as well as disappointments and challenges in its pursuit of strategic business objectives. During the year we transformed the shape of the group, successfully divesting our Information Management divisions in both North America and Germany, at the same time as making several changes to the group’s financial structure.This has enabled us to focus on our core software business, based around our flagship product Accolade. In conjunction with these changes, LBITDA was more than halved to £4.1m (2002: £8.9m).We are recognized as a leading supplier of solutions that improve the financial return on innovation and product development investments, areas that continue to receive increasing attention and focus from corporations and commentators alike. RESULTS AND FINANCE Sopheon’s consolidated revenues were £6.7m (2002: £12.4m) and the consolidated LBITDA was £4.1m (2002: £8.9m).The reported LBITDA does not include the profit on disposal of the divested businesses. Goodwill charges amounted to £4.6m (2002: £5.9m) for the year, offset by gains on divestment amounting to £3.6m (2002: £nil) and research and development tax credits amounting to £0.3m (2002: £0.1m).The resultant retained loss for the year was £5.5m (2002: £16.1m) reducing the loss per ordinary share to 6.3p (2002: 19.4p).This continues the trend of reduction from the 2001 retained loss of £34.6m. In addition to securing funds from divestment activity, the company raised £1.5m during the year by way of private equity placing to meet ongoing working capital requirements and the costs of restructuring the group. In addition, the board secured approval for the extension of the maturity of the group’s £2.6m convertible loan to June 2005. At the year-end, after deducting the convertible 6 STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER loan, the group reported consolidated net liabilities of £1.9m. Net current assets stood at £41,000 and gross cash resources £878,000.The directors are considering a range of options to propose to the holders of the convertible loan in the event that some or all of it remains unconverted at the time of maturity.The loan note has a conversion price of 12p per ordinary share, compared with market prices of 16p and 35p on 31 December 2003 and 30 March 2004 respectively. Alternatives include further extension of the maturity date and redemption at par. A change to the terms of the loan stock instrument would need to be put to a meeting of its holders. At this time it is not anticipated that the alternatives under consideration would require modification of the loan stock conversion price. In addition, in December 2003 Sopheon concluded an agreement for a 10 million equity line of credit facility with GEM Global Yield Fund Limited, securing access to a source of equity-based funding over which the company retains a substantial degree of control. In the first quarter of 2004 £1.4m before expenses has been raised, with over £0.6m raised through the equity line in March, in addition to a market-driven placing for £0.8m in January.The board is well aware of shareholder concerns over potential dilution arising from use of the equity line and will remain controlled in its use of the instrument. Further issues of shares through the equity line facility may require shareholder approval for an increase in the directors' authority to issue and allot shares.This will be dependent on existing authorities held by the board at the time, the market price of Sopheon's shares and the amount being raised. 2003 TRADING SUMMARY Our announcements through the third quarter of 2003 highlighted the unpredictable commercial environment and the tough trading conditions that continued to restrict business. In the fourth quarter we noted our perception that the investment climate in our market was at last improving, and in that quarter we set a record with 9 new license orders for Accolade, accompanied by an encouraging pick-up in interest for our Monitor module. Delays in converting certain substantial opportunities precluded us from reaching our stated year-end goal to be generating revenues in excess of our monthly cost base. Nevertheless, in 2003 Sopheon did business with over 50 customers, compared to just over 30 in the previous year, excluding the activities of its divested units. This total also excludes the users of our small-scale laboratory solution in the Netherlands. Accolade software is now being used in 11 countries, reflecting its appeal to our global clients. Sales cycle times have improved, dropping from 9 months as we entered 2003 to just over 6 months as the year came to a close. Approximately 60% of revenues relate to businesses that were divested during the year, with the balance of 40% relating to our continuing software based business.Within this element, the proportion of revenue relating to Sopheon’s own packaged products as opposed to bespoke and resold products, has grown from 40% in 2001 to over 90% in 2003. STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 7 On a consolidated basis, costs contracted by over twice the reduction in revenue, resulting in the substantial fall in consolidated LBITDA. Headcount was reduced to approximately 60 from 180 coming into the year, partly through divestment but also through rationalisation of resources across all parts of our business, implemented in the third quarter of 2003. Coupled with overhead controls, these actions brought the monthly cost base below £0.5m by the end of the year, before depreciation and amortization charges. 2003 was a very busy time with efforts focused on developing an emerging market. We expect that the market momentum resulting from industry’s escalating recognition of the strategic importance of product life cycle management will bring a number of new competitors to our space. In our brief history, we have competed with a range of suppliers and have won with consistency. Going forward, we will need to work hard at maintaining a value proposition that differentiates Sopheon from other solutions providers and allows us to perpetuate Accolade’s impressive historic success rates in competitive situations. MARKET The market for Accolade continues to show growing acceptance by businesses and industry analysts alike, of the need for software that addresses automation and decision-support in product life cycle management ("PLM"). Accolade-specific validation has included best-of-breed designations from analyst firms Gartner, META Group, AMR Research and ARC Research. Accolade was also recently named a "Technology to Watch" by IT advisory group Collaborative Strategies and "Product of the Week" by Product Design and Development magazine, further attesting to market recognition of the significant value and growing market momentum of our solution. We are continuing to see the positive impact of our strategy of tailoring our solutions to the unique process and decision-support needs of vertical industry segments. For example, during the past year we have captured market share in the specialty chemicals market. Approximately a third of our customers are in this sector, including some of the world’s leading chemical producers.These provide an outstanding reference base and a solid foundation for future growth within this key market segment. In December we were awarded an enterprise-level commitment by one of the top-ten companies from this segment. Another area of progress for Sopheon has been its growing involvement with partners. These relationships, which entail the provision of complementary products and services to support our clients’ innovation and product development objectives, include work we have announced with organizations such as the Product Development Institute (PDI), Siemens Business Services and Deloitte Consulting.This is in addition to sales representation in Singapore and Germany, which have each made contributions to revenues.We plan to develop further the level of Sopheon partnership activity in 2004, in line with an anticipated increase in Accolade demand. 8 STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER One of the principal reasons for Sopheon’s confidence in the growth prospects for its business is the way in which our clients have accepted and adopted Accolade. Our product development solution continues to enjoy unusually high adoption and client satisfaction rates. We attribute this to the ease-of-use and embedded process guides that are among Accolade’s most important differentiators. PRODUCT DEVELOPMENT AND IPR Sopheon Accolade version 5.0 was released in October 2003. It offers more than three dozen new or enhanced features, including industry-specific research centres that support assessment of product ideas and increase the quality of critical portfolio management decisions; tools that aid in project prioritization and corresponding alignment of resources; and new document routing and tracking features that enable compliance with Food and Drug Administration regulation 21 CFR Part 11 and other regulatory standards. Sopheon holds patents relating to presentation of large domain search results, profiling, and the application of IT to language- intensive processes. All three areas benefit from US patent protection. In line with our vision of underpinning complex business processes such as product development with relevant knowledge management tools, planning is underway for integration of Sopheon’s language-intensive capabilities into a future release of Accolade, where it will enhance cross-functional product development, helping teams in global companies create, publish and reuse deliverables and content. BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT TEAM Sopheon’s group management and governance structure is divided between a Sopheon plc board of directors and an executive management board responsible for business operations.The Sopheon plc board remains unchanged with four non-executive directors and three executive directors, being the Executive Chairman, the CEO and the CFO.The executive management board is a team of six, which includes the three executive directors. OUTLOOK Our assessment of the economic environment for Sopheon’s products and services is more optimistic than in the past. Our products are generating good levels of interest, have an expanding installed and referenceable client base, and enjoy increased STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER 9 validation by the market. Accolade has demonstrated consistently that it is a valuable solution in which clients are prepared to invest. Success remains dependent upon meeting sales targets, and accordingly we continue to exercise balance and caution in our planning approach.The cost base remains under tight control, and the board is striving to protect the high degree of focus that our divestment strategy has achieved. The board believes that prospects for the company are positive in the current year and beyond, 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. Overall, we are encouraged by the direction, focus and momentum of our business, and we look forward to a successful 2004. Barry Mence Executive Chairman 5 April 2004 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 products 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 supply 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 solutions are likely to be measured. The value 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’s solutions 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 top- and bottom-line results. "Sopheon has distinguished itself in delivering a process-industry product lifecycle management offering that improves the quality of portfolio management decision-making and reduces administrative burden and other impediments to product development efficiency." Our History Ken Amann, Director of Research, CIMdata 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 within manufacturing environments. MARKET AND PRODUCT OVERVIEW 11 In the mid and late 90’s PolyDoc continued to grow its knowledge management and implementation capabilities, while extending its market presence to the U.K. In 1999 the company changed its name to Sopheon. In 2000, Sopheon followed an acquisition strategy to establish a foothold in U.S. markets. That same year, the company began to focus on the development of software and service solutions that could help technology-driven organizations strengthen innovation and improve the business results from new products. In 2001 Sopheon introduced its flagship solution, the Accolade product development system. 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. Sopheon's solutions model and automate the steps of these processes, integrating best-practices with access to market, technical and competitive intelligence to support and inform process decisions. "We looked at a range of product life cycle and portfolio management offerings that claimed to increase product development speed and efficiency. We chose to partner with Sopheon because Accolade communicates and reinforces [product development] best practices at every step of the development process, while promoting adherence and supporting individual and team success. We concluded that Accolade could help us drive innovation and development-to-market excellence. It has exceeded our expectations." Tim Albright, Product Development Manager, Unifi B Y 2 0 0 5 , M O R E T H A N 8 5 P E R C E N T O F F O RT U N E 1 0 0 0 M A N U FAC T U R E R S W I L L I N C R E A S E T H E I R I N V E S T M E N T S I N C A PA B I L I T I E S T H AT H E L P T H E M M A N AG E P RO D U C T I N N OVAT I O N A N D P RO D U C T P O RT F O L I O S B E YO N D 2 0 0 3 L E V E L S . – G a r t n e r, I n c . “ P re d i c t s 2 0 0 4 : P ro d u c t L i f e C y c l e M a n age m e n t ,” M . H a l p e r n , 2 5 , N ove m b e r 2 0 0 3 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 Dr. Robert Cooper, founder of the Product Development Institute (PDI) and creator of the Stage-Gate™ product development methodology used by more than 60 percent of the technology-driven companies in the US. Accolade’s principal components organise documents, resources and metrics, facilitate 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.The software system provides a process backbone 12 MARKET AND PRODUCT OVERVIEW and embedded best-practice manuals that guide users in ensuring that each step of the process is successfully executed. Available 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, cross-functional teams are able to more efficiently and cost-effectively bring products to market. Leading IT research and advisory regard Sopheon’s product development solution as best-of-breed within its class. "Sopheon’s portfolio management software provides decision-making support that helps us ensure we’re investing resources in the right product ideas. It also makes sure that we have the right balance of product development risk and reward within and across our brands. We’ve seen significant improvement in our ability to access and apply data for strategic decision-making related to our project portfolio." Rosemary Grabowski,VP of Value Development, Cadbury Schweppes Evidence Monitor. Hospitals and clinics are increasingly turning to software-based systems for the management of both medical and non-medical processes. Sopheon’s Evidence Monitor solution 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. MARKET AND PRODUCT OVERVIEW 13 Compliance Monitor. Nearly all companies are faced with the challenge of complying with an expanding number of ever- changing federal, state and local regulatory directives, legal requirements and industry technical standards. Sopheon’s Compliance Monitor adapts Evidence Monitor technology to support compliance by proactively alerting engineers and other professionals in product development to changes in relevant standards and to new regulatory directives. "Sopheon’s technology helps us harness not only internal information, but critical information from outside our walls. We are benefiting through efficiency gains, heightened process adherence, and increased overall organizational excellence. Sopheon’s technology is a vital ingredient in the implementation of our strategies for becoming a highly profitable commercial leader in medical, biotechnology and pharmaceutical markets." Jan Carpay, former chairman and CEO, azM 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 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 Surrey Technology Centre 40 Occam Road, Surrey Research Park Guildford, Surrey GU2 7YG Registered name and number Sopheon plc Registered in England and Wales No. 3217859 Auditors Principal bankers Solicitors AIM Nominated Adviser and Broker Euronext Paying Agent Registrars Financial PR Consultants Lloyds TSB Bank plc 77 High Street Southend-on-Sea Essex SS1 1HT Briggs and Morgan 2400 IDS Center, 80 South Eighth Street Minneapolis Minnesota 55402 United States Ernst & Young LLP Apex Plaza Reading RG1 1YE Silicon Valley Bank 3003 Tasman Drive Santa Clara California CA 95054 United States Hammond Suddards Edge 7 Devonshire Square Cutlers Gardens London EC2M 4YH 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, B. P. F. Al, as chairman, and S. A. Silcock, together with B. K. 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. B. Davis D. Metzger (1) J. M. Shuster (2) Salary and fees 2003 £ 110,969 107,507 82,500 Benefits 2003 £ Total 2003 £ Contributions to Pension 2003 £ Contributions to Pension 2002 £ Total 2002 £ 4,790 5,973 943 115,759 113,480 83,443 111,560 123,461 78,591 4,875 2,145 3,556 7,475 2,267 3,504 18,000 18,000 18,000 18,000 - ________ 372,976 ________ ________ - - - - - ________ 11,706 ________ ________ 18,000 18,000 18,000 18,000 - ________ 384,682 ________ ________ 18,000 18,000 18,000 4,500 15,117 ________ 387,229 ________ ________ - - - - - _______ 10,576 _______ _______ - - - - 320 _______ 13,566 _______ _______ (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. 16 DIRECTORS’ REPORT Directors’ Report Financial Results The loss for the year ended 31 December 2003 before interest, tax, depreciation and amortisation (LBITDA – see Note 1 for full definition) was £4,066,000 (2002 - £8,910,000) on a turnover of £6,734,000 (2002 - £12,353,000).The retained loss after tax for the year is £5,501,000 (2002 - £16,053,000).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 Sopheon’s consolidated revenues were £6.7m (2002: £12.4m) and the consolidated LBITDA was £4.1m (2002: £8.9m). Goodwill charges amounted to £4.6m (2002: £5.9m) for the year, offset by gains on divestment amounting to £3.6m (2002: £nil) and research and development tax credits amounting to £0.3m (2002: £0.1m).The retained loss for the year was £5.5m (2002: £16.1m) reducing the loss per ordinary share to 6.3p (2002: 19.4p).This continues the trend of reduction from the 2001 retained loss of £34.6m. Approximately 60% of revenues relate to businesses that were divested during the year, with the remaining 40% relating to our continuing software based business.The proportion of revenue relating to Sopheon’s own packaged products, as opposed to bespoke and resold products, has grown from 40% in 2001 to over 90% in 2003. On a consolidated basis, costs contracted by over twice the reduction in revenue, resulting in the substantial fall in consolidated LBITDA. Headcount was reduced to approximately 60 from 180 coming into the year, partly through divestment but also through rationalisation of resources across all parts of our business, implemented in the third quarter of 2003. Coupled with overhead controls, these actions brought the monthly cost base below £0.5m by the end of the year, before depreciation and amortization charges. During the year the company, in addition to funds secured from divestment activity, raised £1.5m by way of private equity placing to meet ongoing working capital requirements and the costs of restructuring the group. In addition, the board successfully sought to extend the maturity of the group’s £2.6m convertible loan to June 2005.The directors are considering a range of options to propose to the holders of the convertible loan in the event that some or all of it remains unconverted at the time of maturity.These alternatives include further extension of maturity date, and redemption at par. Any change to the terms of the loan stock instrument would need to be put to a meeting of its holders. At the time of preparing this report, it is not anticipated that the alternatives under consideration would require modification of the loan stock conversion price. At the end of 2003 Sopheon concluded an agreement for a 10 million equity line of credit facility with GEM Global Yield Fund Limited by securing access to a source of equity based funding over which the company retains a substantial degree of control. In the first quarter of 2004 a further £1.4m before expenses has been raised, with over £0.6m raised through the equity line in March 2004, in addition to a market driven placing for £0.8m in January 2004.The board is well aware of shareholder concerns over potential dilution arising from use of the equity line and will remain controlled in its use of the instrument. The financial statements have been prepared on a going concern basis, the validity of which depends on the eventual terms under which the convertible loan stock is redeemed or converted, the achievement of significantly increased sales targets which represent substantial growth over 2003, and the ability to raise finance if required through the company’s equity line facility. If these objectives are not achieved, 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 to the financial statements, which includes an explanation of the basis of preparation of the financial statements. DIRECTORS’ REPORT 17 Research and Development Accolade 5.0 was released in October 2003 with more than three dozen new or enhanced features that further reduce administrative tasks, help to avoid project delays, and strengthen team productivity by Accolade linking more tightly to components of Microsoft® Office. Sopheon’s development team, based in Denver, 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. Sopheon holds patents relating to presentation of large domain search results, profiling, and the application of IT to language-intensive processes. All three areas benefit from US patent protection. Future Developments The board’s assessment of the economic environment for Sopheon’s products and services is more optimistic than it has been for a long time, however balance and caution remain a key element of the planning approach. Accordingly Sopheon’s cost base remains under tight control, and the board believes it is critical not to disrupt the high degree of focus that our divestment strategy has achieved. Accolade is generating strong interest, has an expanding installed client base, and enjoys increased validation by the market. Accolade has demonstrated, consistently, that it is a valuable solution in which clients are prepared to invest.The board believes that prospects for the company are positive in the current year and beyond, 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. 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 B. K. Mence A. L. Michuda A. Karimjee S. A. Silcock S. A. Silcock* B.P.F. Al A.B. Davis D. Metzger Share Options 2003 2002 Ordinary Shares 2003 2002 122,500 2,998,607 562,500 - - 25,000 - - 122,500 773,607 262,500 - - 25,000 - - 10,997,277 41,855 - 181,383 98,077 393,000 494,520 - 10,997,277 41,855 - 181,383 98,077 393,000 494,520 - Of the 10,997,277 ordinary shares mentioned above B. K. Mence beneficially owns and is the registered holder of 4,848,657 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. Listed below are the holdings of the directors of Sopheon Convertible Loan Stock (the "Stock"), which have remained unchanged during the year. On 30 June 2003 at an Extraordinary General Meeting of Stockholders the conversion rate was amended, in accordance with the terms of the Stock, to 12p per share and the maturity of the Stock was extended to 19 June 2005. Further details of the Stock are given in Note 15.The Stock was issued with detachable warrants to subscribe for Sopheon shares at 70p per share, all of which expired unexercised on 19 June 2003. Name B. K. Mence A.L. Michuda A. Karimjee S.A. Silcock B.P.F. Al Nominal amount of Stock £390,000 £28,000 £17,000 £100,000 £25,000 18 DIRECTORS’ REPORT 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 At 31 December 2002 Granted during year Exercised during year 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.L. Michuda (3)(4) A. Karimjee (1) A. Karimjee (1) A. Karimjee (1) A. Karimjee (1)(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 5 November 2003 22 November 1999 2 May 2001 30 April 2002 5 November 2003 2 May 2001 77.5p 14.75p 184p 230p 322p 368p 427.5p 160p 77.5p 14.75p 16.25p 150p 77.5p 14.75p 16.25p 77.5p 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 - - - - - - - - - - 2,225,000 - - - 300,000 - - - - - - - - - - - - - - - - - At 31 December 2003 22,500 100,000 187,600 7,846 12,501 1,756 16,280 5,030 54,662 487,932 2,225,000 100,000 12,500 150,000 300,000 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) Options issued at market price.Vesting of a proportion of these options is subject to performance conditions related to the achievement of positive EBITDA in two successive quarters. The mid-market price of Sopheon ordinary shares at 31 December 2003 was 16p. During the financial year the mid- market price of Sopheon ordinary shares ranged from 25p to 8p. 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 The Directors are aware of the following persons who as at 19 March 2004 were interested directly or indirectly in three per cent or more of the company’s issued ordinary shares: Name No. of Ordinary Shares B. K. Mence (Director) P.J. Korpershoek Aventis Research & Technologies GmbH & Co KG 10,997,277 4,000,000 3,471,191 % issued Ordinary Shares 11.4 4.1 3.6 Mr. Mence’s interest represents direct beneficial holdings as well as those of his family. In addition, the following holders of 6% Convertible Loan Stock 2005 are entitled to exercise conversion rights into ordinary shares as follows: Nominal Value No. of shares issuable on full conversion of Loan Stock Active Capital Trust plc Norman Nominees Limited £1,000,000 £650,000 8,333,333 5,416,666 Share Option Schemes Details of options granted are shown in note 18. DIRECTORS’ REPORT 19 Supplier 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 2003, the company had approximately 50 days’ purchases outstanding. Financial instruments The group’s principal financial instruments comprise the 6% Convertible Loan Stock 2005, 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 2002 and 2003. Interest rate risk The group has lines of credit denominated in US Dollars bearing interest at floating rates. 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 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. Corporate Governance The Sopheon board is committed to high standards of corporate governance and aims to follow appropriate governance practice, although as a company incorporated in the UK and listed on AIM and Euronext, the company is not subject to the requirements of the new UK Combined Code and the Netherlands Tabaksblat Committee.The board currently comprises three executive directors and four independent non-executive directors.Their biographies appear on the inside back cover of this annual report, and demonstrate a range of experience and calibre to bring the right level of independent judgement to the board. The board as a whole is responsible for identifying the major business risks faced by the group and for determining the appropriate course of action to manage those risks. Formal meetings are held quarterly to review strategy, management and performance of the group, with additional meetings between these dates convened as necessary.The audit committee, which comprises all the non-executive directors and is chaired by Stuart Silcock, considers and determines actions in respect of any control or financial reporting issues they have identified or that are raised by the auditors.The board has a formal schedule of matters specifically reserved to it for decision. Details of the constitution of the remuneration committee are provided on page 15. 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 5 April 2004 and signed on its behalf by A. Karimjee Director 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 2003 which comprise the Group Profit and Loss Account, Group Balance Sheet, Company Balance Sheet, Group Statement of Cash Flows, Group Statement of Total Recognised 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 The directors are responsible for preparing the Annual Report, including the financial statements which are required to be prepared in accordance with United Kingdom law and accounting standards as set out in the Statement of Directors' Responsibilities in relation to the financial statements. 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 other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. This other information comprises the Directors' Report, and Chairman's and Chief Executive Officer’s Statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. 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 eventual terms under which the convertible loan stock is redeemed or converted, the achievement of significantly increased sales targets which represent substantial growth over 2003, or the ability of the company to raise additional finance if required, through its equity line facility or by other means. In view of the significance of the uncertainties to which these matters are subject, 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 2003 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 5 April 2004 22 GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2003 Group Profit And Loss Account For The Year Ended 31 December 2003 Notes Continuing Discontinued operations operations 2003 2003 £’000 £’000 Total 2003 £’000 2002 £’000 2001 £’000 TURNOVER Cost of sales 2 2,669 (627) _________ 4,065 (3,490) _________ 6,734 (4,117) _________ 12,353 (9,002) _________ 13,963 (10,186) _________ GROSS PROFIT Sales and marketing expenses Research and development expenditure Amortisation and impairment charges in respect of goodwill 2,042 (2,868) (1,237) 575 (574) 2,617 3,351 3,777 (3,442) (5,437) (7,281) - (1,237) (2,331) (3,010) (503) (4,083) (4,586) (5,922) (21,431) Other administrative expenses (1,703) (874) (2,577) (5,727) (6,792) Total administrative expenses (3,443) (4,957) (8,400) (13,980) (31,233) GROUP OPERATING LOSS 3 (4,269) (4,956) (9,225) (16,066) (34,737) Share of operating loss of associated undertaking - _________ - _________ - _________ (46) _________ (63) _________ TOTAL OPERATING LOSS (4,269) (4,956) (9,225) (16,112) (34,800) Profit on disposal of operations 11 - _________ 3,568 _________ 3,568 _________ - _________ - _________ LOSS ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAXATION 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) 5 6 8 LOSS ON AN EBITDA BASIS (LBITDA) 1 (4,269) (1,388) (5,657) (16,112) (34,800) 76 260 373 (225) _________ (327) _________ (204) _________ (5,806) (16,179) (34,631) 305 _________ 126 _________ - _________ (5,501) _________ _________ (16,053) _________ _________ (34,631) _________ _________ (6.3p) _________ _________ (19.4p) _________ _________ (76.2p) _________ _________ (4,066) _________ _________ (8,910) _________ _________ (11,757) _________ _________ GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2003 Loss on ordinary activities after taxation Exchange difference on retranslation of net assets of subsidiary undertakings Total recognised losses relating to the year 2003 £‘000 2002 £‘000 2001 £‘000 (5,501) (16,053) (34,631) 88 _______ (5,413) ––––––– ––––––– 75 _______ (15,978) ––––––– ––––––– 31 _______ (34,600) ––––––– ––––––– GROUP BALANCE SHEET AT 31 DECEMBER 2003 23 Group Balance Sheet At 31 December 2003 FIXED ASSETS Intangible assets Goodwill Less: Negative goodwill Tangible Fixed Assets CURRENT ASSETS Debtors Cash at bank and in hand CREDITORS: amounts falling due within one year NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES CREDITORS: amounts falling due after more than one year 6% Convertible Unsecured Loan Stock 2005 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’ (deficit)/funds (all equity interests) Approved by the Board on 5 April 2004 Barry K. Mence Director Notes 2003 £’000 2002 £’000 9 9 10 12 13 14 15 16 18 19 19 19 19 19 440 - ––––––– 440 195 ––––––– 635 1,159 878 ––––––– 2,037 (1,996) ––––––– 41 ––––––– 676 5,091 (166) ––––––– 4,925 900 ––––––– 5,825 2,660 3,355 ––––––– 6,015 (6,332) ––––––– (317) ––––––– 5,508 (2,561) (2,569) - ––––––– (1,885) ––––––– ––––––– 4,821 - 46,420 17,944 4,164 (75,234) ––––––– (1,885) ––––––– ––––––– (513) ––––––– 2,426 ––––––– ––––––– 4,147 465 45,380 18,384 4,445 (70,395) ––––––– 2,426 ––––––– ––––––– Arif Karimjee Director 24 COMPANY BALANCE SHEET AT 31 DECEMBER 2003 Company Balance Sheet At 31 December 2003 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 2005 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 5 April 2004 Barry K. Mence Director Notes 2003 £’000 2002 £’000 11 12 14 15 18 19 19 19 19 19 6,119 6.119 116 670 ––––––– 786 (441) ––––––– 345 ––––––– 6,464 (2,561) ––––––– 3,903 ––––––– ––––––– 4,821 - 46,420 10,179 4,164 (61,681) ––––––– 3,903 ––––––– ––––––– 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 ––––––– ––––––– Arif Karimjee Director GROUP STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2003 25 Group Statement Of Cash Flows For The Year Ended 31 December 2003 Notes 2003 £’000 2002 £’000 2001 £’000 NET CASH OUTFLOW FROM OPERATING ACTIVITIES 3 RETURN ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid 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 Net proceeds from disposal of operations Net cash disposed of on disposal of operations 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 11 11 13 INCREASE/(DECREASE) IN CASH 13 (4,332) ––––––– (10,268) ––––––– (11,224) ––––––– 76 (225) ––––––– (149) _______ 260 (327) ––––––– (67) _______ 373 (204) ––––––– 169 _______ 305 _______ 126 _______ - _______ (27) - _______ (27) _______ - - 1,680 (649) _______ 1,031 (104) 18 _______ (86) _______ - - - - _______ - (201) - _______ (201) _______ (668) 13,705 - - _______ 13,037 1,934 _______ (1,238) 8,186 _______ (2,109) (3,512) _______ (1,731) 1,480 - - - _______ 1,480 _______ 242 _______ _______ 39 - (51) - _______ (12) _______ 1,567 2,553 (36) (1) _______ 4,083 _______ (2,121) _______ _______ 2,352 _______ _______ 26 NOTES TO THE FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Accounting convention and basis of preparation The financial statements are prepared under the historical cost convention on the going concern basis, and in accordance with applicable accounting standards. During the year the company divested its loss-making IM operations in North America and Germany, and has significantly reduced the cost-base in its continuing operations. Nevertheless, following these actions, the group has continued to make trading losses, albeit at a much reduced level. At the year-end, after deducting convertible loans of £2.6m, the group reported consolidated net liabilities of £1.9m. Net current assets stood at £41,000 and gross cash resources £878,000. The directors are considering a range of options to propose to the holders of the company’s £2.6m convertible loan, which falls due in June 2005, in the event that some or all of it remains unconverted at the time of maturity.The loan note has a conversion price of 12p per ordinary share, compared with market prices of 16p and 35p on 31 December 2003 and 30 March 2004 respectively. Alternatives include further extension of maturity date, and redemption at par. A change to the terms of the loan stock instrument would need to be put to a meeting of its holders. At the time of preparing this report, it is not anticipated that the alternatives under consideration would require modification of the loan stock conversion price. On 23 December 2003 the company announced that it had entered into a definitive agreement with GEM Global Yield Fund Limited (“GEM Global”) for a 10 million equity line of credit facility.The agreement takes the form of a subscription and share lending agreement (“the Agreement”) such that the company may, at its option within the terms of the Agreement, require GEM Global to subscribe for Sopheon shares at a 10% discount to the average market bid price for the 15 days preceding the issue, up to an aggregate of 10 million over the two year life of the Agreement. GEM Global’s obligation to subscribe for shares is subject to certain restrictions including the prevailing trading volumes of Sopheon shares on the Euronext stock exchange. On 3 March 2004, the company made a first call on the equity line of credit facility raising £620,000 before expenses by way of a placing of 2,000,000 new ordinary shares for cash. Further issues of shares through the equity line facility may require shareholder approval for an increase in the directors' authority to issue and allot shares.This will be dependent on existing authorities held by the board at the time, the market price of Sopheon's shares and the amount being raised. In addition to its use of the equity line, the company also raised £828,000 before expenses by way of a placing of 3,600,000 new ordinary shares for cash at 23p per share on 24 January 2004. 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 also depends upon meeting the sales targets on which the trading forecasts for the group are based, which represent substantial growth over 2003.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 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 the IM division of Sopheon Corporation Minnesota and Sopheon GmbH (formerly the Technology and Information Services Division of Aventis Research & Technologies) have been included up to the dates of disposal, which were respectively 1 July 2003 and 15 August 2003. 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. NOTES TO THE FINANCIAL STATEMENTS 27 Tangible fixed assets Tangible fixed assets are stated at historical cost, less accumulated depreciation.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 costs of registering patents and trademarks are written off as incurred. Subsidies received from the European Union and other state agencies are credited to the profit and loss account over the period to which they relate. Goodwill Goodwill arising on consolidation is capitalised and amortised on a straight line basis over its estimated useful economic life, which in all cases is 3 years. Goodwill is reviewed for impairment at the end of the first full financial year after acquisition and in other periods if events or changes in circumstances indicate that carrying values may not be recoverable. If a subsidiary, associate or business is subsequently sold or closed, any goodwill arising on acquisition that has not been 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. Leasing Rentals payable under operating leases are charged in the profit and loss account on a straight line basis over the lease term. LBITDA LBITDA represents loss before interest, tax, depreciation and amortisation and also excludes non-recurring equity-based costs incurred in connection with acquisitions and profits on disposed operations. International Financial Reporting Standards (“IFRS”) As a European listed company, Sopheon will be required to adopt IFRS in respect of its financial statements for the year to 31 December 2005. Sopheon is continuing to monitor the impact of adopting IFRS and to prepare for the transition. 28 NOTES TO THE FINANCIAL STATEMENTS 2.TURNOVER AND SEGMENTAL INFORMATION Turnover (excluding valued added tax) represents the amounts derived from the group’s principal activity which comprises the design, development, marketing of software products with associated implementation and consultancy services and, decreasingly, the provision of bespoke software solutions. Discontinued activities comprise the provision of bespoke software solutions and research services, by Sopheon GmbH and the IM division of Sopheon Corporation Minnesota up to the relevant dates of disposal.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 services - continuing Software and consultancy services - discontinued Information and research services - discontinued Analysis of operating loss by area of activity 2003 £’000 2,669 252 3,813 ––––––– 6,734 ––––––– ––––––– Total 2003 £’000 2002 £’000 2,854 453 9,046 ––––––– 12,353 ––––––– ––––––– 2001 £’000 2,829 825 10,309 ––––––– 13,963 ––––––– ––––––– 2002 £’000 2001 £’000 Continuing Discontinued operations operations 2003 2003 £’000 £’000 Continuing operations – software and consultancy Discontinued operations Gross margin Sales and marketing expenses Administrative expenses (including goodwill amortisation and impairment charge) Operating loss 2,042 - ––––––– 2,042 (2,868) (3,443) ––––––– (4,269) _______ _______ - 575 ––––––– 575 (574) 2,042 575 ––––––– 2,617 (3,442) 1,135 2,216 ––––––– 3,351 (5,437) 719 3,058 ––––––– 3,777 (7,281) (4,957) ––––––– (4,956) _______ _______ (8,400) ––––––– (9,225) _______ _______ (13,980) ––––––– (16,066) _______ _______ (31,233) ––––––– (34,737) _______ _______ Analysis of turnover by geographical destination United Kingdom Rest of Europe North America Rest of World Continuing operations United Kingdom Rest of Europe North America Rest of World Discontinued operations 2003 £’000 551 942 1,069 107 ––––––– 2,669 ––––––– - 1,712 2,349 4 ––––––– 4,065 ––––––– 6,734 ––––––– ––––––– 2002 £’000 820 835 1,095 104 ––––––– 2,854 ––––––– 9 3,177 6,296 17 ––––––– 9,499 ––––––– 12,353 ––––––– ––––––– 2001 £’000 2,026 375 201 227 ––––––– 2,829 ––––––– - 2,864 8,270 - ––––––– 11,134 ––––––– 13,963 ––––––– ––––––– NOTES TO THE FINANCIAL STATEMENTS 29 Analysis of turnover and operating loss by geographical origin United Kingdom Rest of Europe United States Continuing operations Rest of Europe United States Discontinued operations Operating loss 2003 £’000 (1,755) (270) (2,244) ––––––– (4,269) ––––––– (456) (4,500) ––––––– (4,956) ––––––– (9,225) ––––––– ––––––– 2002 £’000 (4,687) (273) (2,608) ––––––– (7,568) ––––––– (872) (7,626) ––––––– (8,498) ––––––– (16,066) ––––––– ––––––– 2001 £’000 (9,018) (1,667) (2,935) ––––––– (13,620) ––––––– 17 (21,134) ––––––– (21,117) ––––––– (34,737) ––––––– ––––––– Analysis of net assets/(liabilities) by geographical origin United Kingdom Rest of Europe United States Unallocated cash and loans at group level Continuing operations Rest of Europe United States Discontinued operations 3. OPERATING LOSS (a) This is stated after charging/(crediting): Auditors’ remuneration Audit services to UK group companies Audit services to non-UK group companies Auditors’ remuneration – non-audit services Taxation advisory services to UK group companies Taxation advisory services to non-UK group companies Transaction support relating to corporate disposals Research and development expenditure Grants and subsidies Foreign exchange losses/(gains) Amortisation of goodwill Impairment charge on goodwill Depreciation of owned tangible fixed assets Operating lease rentals - land and buildings Operating lease rentals - equipment and vehicles Turnover 2002 £’000 994 815 1,045 ––––––– 2,854 ––––––– 3,217 6,282 ––––––– 9,499 ––––––– 12,353 ––––––– ––––––– 2002 £’000 162 76 (170) (721) ––––––– (653) ––––––– 16 3,063 ––––––– 3,079 ––––––– 2,426 _______ _______ 2002 £’000 66 29 46 6 - 2,331 (69) 15 5,922 - 1,280 1,015 135 ––––––– ––––––– 2001 £’000 2,253 375 201 ––––––– 2,829 –––––– 2,864 8,270 ––––––– 11,134 ––––––– 13,963 ––––––– ––––––– 2001 £’000 602 (104) 187 8,229 ––––––– 8,914 ––––––– 1,137 8,314 ––––––– 9,451 ––––––– 18,365 _______ _______ 2001 £’000 66 29 20 6 - 3,010 (19) (20) 12,288 9,143 1,175 916 191 ––––––– ––––––– 2003 £’000 550 789 1,330 ––––––– 2,669 ––––––– 1,712 2,353 ––––––– 4,065 ––––––– 6,734 ––––––– ––––––– 2003 £’000 (87) 6 94 (1,898) ––––––– (1,885) ––––––– - - ––––––– - ––––––– (1,885) _______ _______ 2003 £’000 69 6 31 10 24 1,237 - 23 4,586 - 573 537 63 ––––––– ––––––– During 2003 £nil (2002 £nil and 2001 £95,000) 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 in debtors Decrease in creditors and provisions Net cash outflow from operating activities 2003 £’000 (9,225) 573 4,586 - 36 (302) ––––––– (4,332) ––––––– ––––––– 2002 £’000 (16,066) 1,280 5,922 - 948 (2,352) ––––––– (10,268) ––––––– ––––––– 2001 £’000 (34,737) 1,175 12,288 9,143 1,669 (762) ––––––– (11,224) ––––––– ––––––– 30 NOTES TO THE FINANCIAL STATEMENTS 4. STAFF COSTS Wages and salaries Social security costs Other pension costs The average monthly number of employees during the year was made up as follows: Development and operations Sales and management 2003 £’000 5,632 557 96 ––––––– 6,285 ––––––– ––––––– 2003 £’000 75 48 ––––––– 123 ––––––– ––––––– 2002 £’000 10,580 960 231 ––––––– 11,771 ––––––– ––––––– 2002 £’000 151 81 ––––––– 232 ––––––– ––––––– 2001 £’000 12,506 1,082 299 ––––––– 13,887 ––––––– ––––––– 2001 £’000 164 94 ––––––– 258 ––––––– ––––––– The above staff costs and the number of employees during the year include the executive directors. The fees and emoluments of all directors were as follows: Fees and emoluments Pension contributions 2003 £’000 385 11 ––––––– 396 ––––––– ––––––– 2002 £’000 2001 £’000 388 16 ––––––– 404 ––––––– ––––––– 409 10 ––––––– 419 ––––––– ––––––– Pension contributions are to personal defined contribution schemes and have been made for three directors who served during the year.The emoluments of the highest paid director were as follows: Emoluments Benefits Pension contributions to defined contribution scheme Total 5. INTEREST PAYABLE AND SIMILAR CHARGES Bank loans and overdrafts Convertible loan stock 2003 £’000 111 5 5 ––––––– 121 ––––––– ––––––– 2003 £’000 54 171 _______ 225 _______ _______ 2002 £’000 2001 £’000 118 6 2 ––––––– 126 ––––––– ––––––– 136 4 2 ––––––– 142 ––––––– ––––––– 2002 £’000 2001 £’000 155 172 _______ 327 _______ _______ 115 89 _______ 204 _______ _______ NOTES TO THE FINANCIAL STATEMENTS 31 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 2003 £’000 2002 £’000 2001 £’000 305 _______ _______ 126 _______ _______ - _______ _______ The differences between the group's expected tax credit, using the group's standard corporation tax rate of 39% (2002: 38% and 2001: 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: Loss on ordinary activities before tax Expected tax credit on loss on ordinary activities before tax Amortisation and impairment charges in respect of goodwill Shortfall of tax depreciation compared to book depreciation Utilisation of tax losses against profit on disposal of operations Losses in year not relievable against current tax Research & development tax credits in respect of prior years Actual current tax credit (see Note 6(a)) (c) Deferred taxation 2003 £’000 2002 £’000 2001 £’000 (5,806) _______ _______ 2,264 (1,789) (52) 1,339 (1,762) 305 _______ 305 _______ _______ (16,179) _______ _______ 6,148 (2,250) (102) - (3,796) 126 _______ 126 _______ _______ (34,631) _______ _______ 13,506 (8,358) (80) - (5,068) - _______ - _______ _______ 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 of tax depreciation compared to book depreciation Unrelieved trading losses Unrecognised deferred tax asset 2003 £’000 156 20,311 _______ 20,467 _______ _______ 2002 £’000 2001 £’000 104 20,888 _______ 20,992 _______ _______ 2 17,923 _______ 17,925 _______ _______ At 31 December 2003, tax losses estimated at £52.7 million were available to carry forward by the Sopheon plc group, arising from historic losses incurred.These losses represent a potential deferred tax asset of £20.3 million. £13.3 million of the tax losses, and £5.8 million 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. 32 NOTES TO THE FINANCIAL STATEMENTS 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 2003 was £2,013,000 (2002 - loss £15,509,000 and 2001 - loss £54,411,000). The loss in 2003 included a net provision of £1,181,000 (2002 - £15,245,000 and 2001 - £54,670,000) 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 £5,501,000 (2002 - £16,053,000 and 2001 - £34,631,000), and on 87,274,941 (2002 - 82,669,430 and 2001 - 45,471,220) 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 2005 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 2003 Disposal of subsidiary undertaking At 31 December 2003 Amortisation At 1 January 2003 Provided during the year Disposal of subsidiary undertaking At 31 December 2003 Net book value At 31 December 2003 At 31 December 2002 Goodwill £'000 38,260 - _______ 38,260 _______ 33,169 4,651 - _______ 37,820 _______ Negative goodwill £’000 (332) 332 _______ - _______ (166) (65) 231 _______ - _______ 440 _______ _______ - _______ _______ 5,091 _______ _______ (166) _______ _______ 10.TANGIBLE FIXED ASSETS Group only Cost At 1 January 2003 Additions Disposals Disposal of operations Exchange adjustments At 31 December 2003 Depreciation At 1 January 2003 Provided during the year Disposals Disposal of operations Exchange adjustments At 31 December 2003 Net book value At 31 December 2003 At 31 December 2002 11. INVESTMENTS Company Investment in subsidiary undertakings Cost: At 1 January 2003 Disposal of subsidiary undertaking At 31 December 2003 Amounts provided: At 1 January 2003 Release of provision on disposal of subsidiary undertaking At 31 December 2003 Net book value of equity investments at 31 December 2003 Amounts due to subsidiary undertakings Net book value of equity investments at 31 December 2002 Amounts due to subsidiary undertakings NOTES TO THE FINANCIAL STATEMENTS 33 Computer equipment £’000 Furniture & fittings £’000 2,644 19 (78) (1,027) (1) _______ 1,557 _______ 2,051 402 (78) (968) (6) _______ 1,401 _______ 156 _______ _______ 593 _______ _______ 462 8 (12) (123) (2) _______ 333 _______ 366 51 (12) (110) (1) _______ 294 _______ 39 _______ _______ 96 _______ _______ Internet portals £’000 761 - - (737) (24) _______ - _______ 550 120 - (649) (21) _______ - _______ - _______ _______ 211 _______ _______ Total £’000 3,867 27 (90) (1,887) (27) _______ 1,890 _______ 2,967 573 (90) (1,727) (28) _______ 1,695 _______ 195 _______ _______ 900 _______ _______ £’000 53,545 (1,026) __________ 52,519 __________ 36,467 (1,026) __________ 35,441 __________ 17,078 (10,959) __________ 6,119 __________ __________ 17,078 (10,959) __________ 6,119 __________ __________ 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%. 34 NOTES TO THE FINANCIAL STATEMENTS Disposals of operations a) On 1 July 2003 the group completed the disposal of the IM division of Sopheon Corporation Minnesota.The disposal is analysed as follows: Net liabilities disposed of: Fixed assets Debtors Creditors and accruals Deferred revenue Profit on disposal Satisfied by: Cash Further amounts due from purchaser £’000 50 857 (832) (1,117) __________ (1,042) 3,042 __________ 2,000 __________ __________ 1,750 250 __________ 2,000 __________ __________ In the period to 1 July 2003, the IM division of Sopheon Corporation Minnesota contributed £265,000 to the group’s operating loss and £145,000 to the group’s net operating cash outflow.The tax effect of disposals is set out in note 6. The further amounts due from the purchaser are subject to final agreement of terms reached in principle regarding payment of earn-outs and escrow balances that comprise securities subject to fluctuations in market value, including 388,350 Sopheon shares, which were issued to the purchaser, FIND/SVP Inc., on 4 July 2003 as referred to in note 18. b) On 15 August 2003 the group completed the disposal of Sopheon GmbH. The disposal is analysed as follows: Net liabilities disposed of: Fixed assets Debtors Cash Creditors and accruals Pension provision Deferred revenue Profit on disposal Satisfied by: Release of contingent deferred consideration Release of unamortised negative goodwill Cash contribution on disposal £’000 110 956 649 (859) (497) (389) __________ (30) 526 __________ 496 __________ __________ 465 101 (70) __________ 496 __________ __________ In the period to 15 August 2003, Sopheon GmbH contributed £521,000 to the group’s operating loss and £195,000 to the group’s net operating cash outflow.The tax effect of disposals is set out in note 6. NOTES TO THE FINANCIAL STATEMENTS 35 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 Sopheon NV The Netherlands Lessenger BV The Netherlands Sopheon UK Ltd United Kingdom Orbital Software Holdings plc United Kingdom Orbital Software Inc.† Delaware, USA Sopheon Edinburgh Ltd† United Kingdom Orbital Software Europe Ltd† United Kingdom Network Managers (UK) Ltd* United Kingdom AppliedNet Ltd* United Kingdom Future Tense Ltd* United Kingdom Polydoc Ltd United Kingdom Holding Proportion of voting rights Nature of Business Common Stock 100% Software sales and services Common Stock 100% Software development Ordinary Shares 100% Software sales and services Ordinary Shares 100% Software sales and services Ordinary Shares 100% Software sales and services Ordinary Shares 100% Holding company Common Stock 100% Dormant Ordinary Shares 100% Dormant 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 36 NOTES TO THE FINANCIAL STATEMENTS 12. DEBTORS Group Trade debtors Other debtors Prepayments and accrued income Company Other debtors Prepayments 2003 £’000 2002 £’000 589 320 250 _______ 1,159 _______ 1,683 202 775 _______ 2,660 _______ 2003 £’000 2002 £’000 - 116 _______ 116 _______ _______ 7 10 _______ 17 _______ _______ A full provision has been made against amounts totalling £35,655,000 (2002: £33,448,000) 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 (debt)/ funds. (Decrease)/increase in cash Decrease/(increase) in overdrafts and lines of credit Net increase/(decrease) 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 Allocation of convertible loan stock issue costs Movement in net (debt)/ funds Net (debt)/ funds at 1 January Net (debt)/ funds at 31 December 2003 £’000 2002 £’000 2001 £’000 (543) 785 _______ 242 - - - (1,934) _______ (1,692) - 26 5 (18) _______ (1,679) (189) _______ (1,803) (318) _______ (2,121) - 51 - (8,186) _______ (10,256) - - 80 (16) _______ (10,192) 10,003 _______ 1,907 445 _______ 2,352 (2,553) 36 1 3,512 _______ 3,348 (63) - (27) - _______ 3,258 6,745 _______ (1,868) _______ _______ (189) _______ _______ 10,003 _______ _______ NOTES TO THE FINANCIAL STATEMENTS 37 (b) Analysis of changes in net funds At 1 January 2002 Cashflow Exchange difference Allocation of issue costs At 31 December 2002 Cashflow Conversion of loan stock Exchange difference Allocation of issue costs At 31 December 2003 Cash at Bank £’000 2,561 (1,803) - - _______ 758 (543) - - - _______ 215 _______ _______ Short Term Deposits/ Liquid Resources £’000 10,783 (8,186) - - _______ 2,597 (1,934) - - - _______ 663 _______ _______ Overdrafts and Lines of Credit Convertible Loan Stock Term Loans Total £’000 £’000 £’000 £’000 (709) (318) 80 - _______ (947) 785 - 5 - _______ (157) _______ _______ (2,553) - - (16) _______ (2,569) - 26 - (18) _______ (2,561) _______ _______ (79) 51 - - _______ (28) - - - - _______ (28) _______ _______ 10,003 (10,256) 80 (16) _______ (189) (1,692) 26 5 (18) _______ (1,868) _______ _______ 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 2003 £’000 157 28 404 94 1,147 166 _______ 1,996 _______ _______ 2002 £’000 947 28 1,280 320 3,527 230 _______ 6,332 _______ _______ The bank line of credit is secured against the trade debtors of Sopheon Corporation Minnesota and bears interest at a rate of 2% above US prime rate. The bank loan comprises 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. Company Bank overdraft Trade creditors Other creditors Other taxes and social security costs Accruals Amount owing to subsidiary undertaking 2003 £’000 2 101 78 - 260 - _______ 441 _______ _______ 2002 £’000 - 103 97 52 296 115 _______ 663 _______ _______ 38 NOTES TO THE FINANCIAL STATEMENTS 15. CREDITORS: amounts falling due after more than one year Group and company 6% Convertible Unsecured Loan Stock 2005 2003 £’000 2002 £’000 2,561 ––––––– ––––––– 2,569 ––––––– ––––––– £2.6 million nominal of 6% Convertible Unsecured Loan Stock 2005 ("the Stock"), with 557,143 detachable warrants to subscribe for Sopheon shares, was issued at par on 20 June 2001.The detachable warrants expired unexercised on 19 June 2003.The Stock is redeemable on 19 June 2005 or earlier at the company's option and is convertible into Sopheon shares at the rate of 12p nominal of Stock per share. As at 31 December 2003 £26,000 nominal of the Stock had been converted and the nominal amount outstanding was £2,574,000 (2002: £2,600,000). Issue costs allocated to future periods amounting to £13,000 (2002: £31,000) have been deducted from the nominal amounts outstanding. 16. PROVISIONS FOR LIABILITIES AND CHARGES Group only Pension provision At 1 January 2003 (Decrease)/increase in provision during year Exchange difference Disposal of subsidiary undertaking At 31 December 2003 2003 £’000 2002 £’000 513 (53) 37 (497) _______ - ––––––– ––––––– 461 21 31 - _______ 513 ––––––– ––––––– The pension provision represented the commitment of Sopheon GmbH, which was divested during the year, to provide certain employees with pensions based upon final pensionable salary. As a result of the disposal, the group no longer has any liabilities to provide future pensions. 17. OBLIGATIONS UNDER LEASES The company and group had no amounts due under finance leases and hire purchase contracts. At 31 December 2002 and 2003 the group had annual commitments under operating leases as set out below. Group only Operating leases which expire: within one year in two to five years Totals Land & Buildings 2003 £’000 102 261 _______ 363 ––––––– ––––––– Other 2003 £’000 45 36 _______ 81 ––––––– ––––––– Land & Buildings 2002 £’000 417 328 _______ 745 ––––––– ––––––– Other 2002 £’000 26 99 _______ 125 ––––––– ––––––– 18. SHARE CAPITAL Authorised Ordinary shares of 5p each Allotted, called up and fully paid Ordinary shares of 5p each NOTES TO THE FINANCIAL STATEMENTS 39 2003 Number 2003 £ 2002 Number 2002 £ 125,000,000 ––––––––– ––––––––– 6,250,000 125,000,000 ––––––––– ––––––––– ––––––––– ––––––––– 6,250,000 ––––––––– ––––––––– 2003 Number 2003 £ 2002 Number 2002 £ 96,410,019 _________ _________ 4,820,501 _________ _________ 82,933,309 _________ _________ 4,146,665 _________ _________ 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. On 5 March 2003 15,344 ordinary shares were issued for cash at 6.193p per share pursuant to the exercise of a share option. On 17 March 2003 7,672 ordinary shares were issued for cash at 6.193p per share pursuant to the exercise of a share option. On 16 June 2003 4,500,000 ordinary shares were issued for cash at 12p per share by way of a share placing to raise £520,000 net of expenses. On 4 July 2003 388,350 ordinary shares were issued to FIND/SVP Inc pursuant to the agreement for the sale of Sopheon’s North American IM business, representing an amount of $100,000 (£59,880) satisfied by the issue of Sopheon shares. On 11 August 2003 15,344 ordinary shares were issued for cash at 6.193p per share pursuant to the exercise of a share option. On 3 September 2003 116,666 ordinary shares were issued on conversion of £14,000 nominal of 6% Convertible Loan Stock 2005. On 22 October 2003 8,333,334 ordinary shares were issued for cash at 12p per share by way of a share placing to raise £960,000 net of expenses. On 20 November 2003 100,000 ordinary shares were issued on conversion of £12,000 nominal of 6% Convertible Loan Stock 2005. On 23rd December 2003 the company announced that it had entered into a definitive agreement with GEM Global Yield Fund Limited ("GEM Global") for a Euro 10 million equity line of credit facility.The agreement takes the form of a subscription and share lending agreement ("the Agreement") such that the company may, at its option within the terms of the Agreement, require GEM Global to subscribe for Sopheon shares at a 10% discount to the average market bid price for the 15 days preceding the issue, up to an aggregate of Euro 10 million over the two year life of the Agreement. GEM Global’s obligation to subscribe for shares is subject to certain restrictions including the prevailing trading volumes of Sopheon shares on the Euronext stock exchange. In all other respects the company will remain in control of the amount and timing of any subscription under the equity line and is under no obligation to use the facility at any point during the term. 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. In accordance with the terms of the Stock, on 30 June 2003 the conversion rate was adjusted to 12p per share, following the cash placing of new shares in the market at 12p per share on 16 June 2003. The warrants expired unexercised on 19 June 2003. 40 NOTES TO THE FINANCIAL STATEMENTS Employee share option schemes On 28 August 1996 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. On the same date 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. 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 30 July 2003 shareholders approved a maximum of 8,500,000 Sopheon ordinary shares over which options could be granted under any employee share option scheme. A summary of options granted under the share option schemes at 31 December 2003 is set out below. Year of grant 1996 1998 (1) 1999 1999 1999 (2) 1999 (2) 1999 1999 2000 (2) 2000 2000 (2) 2000 (2) 2000 (2) 2000 2000 (2) 2000 (2) 2000 2000 (2) 2001 2001 (2) 2001 (4) 2002 2002 2002 (2) 2003 (2) 2003 (3) 2003 (2) (3) 2003 (3) Exercise Price (£) Exercise Period From To 21-07-06 28-08-96 0.2000 29-12-08 29-12-01 0.0860 20-01-09 20-01-02 1.4150 28-04-04 28-04-99 1.4250 28-04-09 28-04-00 1.5000 03-11-09 03-11-00 1.5000 03-11-09 03-11-02 1.5000 22-11-09 22-11-02 1.5000 24-01-10 24-01-01 5.7900 25-01-10 25-01-01 6.0725 08-02-10 08-02-01 9.6000 28-06-10 28-06-01 4.9500 26-06-10 26-06-01 5.0000 28-06-10 28-06-03 4.9500 02-10-10 02-10-01 4.2750 15-11-10 15-11-01 3.7250 31-12-10 31-12-03 1.6000 1.6000 31-12-10 31-12-01 0.7750 02-05-04 02-05-11 0.7750 02-05-02 02-05-11 14-09-01 14-09-08 0.0619 30-04-12 30-04-05 0.1475 30-04-07 30-04-02 0.1475 30-04-12 30-04-03 0.1475 07-07-13 07-07-03 0.1475 05-11-08 05-11-03 0.1625 05-11-13 05-11-04 0.1625 05-11-13 05-11-06 0.1625 Number 40,000 21,800 12,500 35,000 42,500 52,500 10,000 100,000 12,000 3,000 10,000 9,500 25,000 14,000 31,183 10,000 5,000 108,862 74,500 119,829 11,508 330,000 239,750 1,330,551 30,000 585,000 4,345,000 515,000 _________ 8,123,983 _________ _________ NOTES TO THE FINANCIAL STATEMENTS 41 (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 performance conditions related to the achievement of positive EBITDA in two seccessive quarters, or to the achievement of individual sales 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 2003 345,900 of such options had lapsed, 1,500 had been exercised, and 370,892 remained outstanding, in respect of which the aggregate exercise price was £0.8 million. 19. SHAREHOLDERS’ FUNDS Group At 1 January 2002 Arising on share issues Lapsing of share options Retained loss for the year Exchange differences At 31 December 2002 Arising on share issues Exercise of share options and conversion of loan stock Lapsing of share options Disposal of subsidiary Retained loss for the year Exchange differences At 31 December 2003 Company At 1 January 2002 Arising on share issues Lapsing of share options Retained loss for the year At 31 December 2002 Arising on share issues Exercise of share options and conversion of loan stock Lapsing of share options Disposal of subsidiary Retained loss for the year At 31 December 2003 Share Capital £’000 4,116 31 - - - _______ 4,147 661 13 - - - - _______ 4,821 ––––––– ––––––– Share Capital £’000 4,116 31 - - _______ 4,147 661 13 - - - _______ 4,821 _______ _______ Shares to be Issued £’000 465 - - - - _______ 465 - - - (465) - - _______ - ––––––– ––––––– Shares to be Issued £’000 465 - - - _______ 465 - - - (465) - _______ - _______ _______ Share Premium Account £’000 45,372 8 - - - _______ 45,380 878 162 - - - - _______ 46,420 ––––––– ––––––– Share Premium Account £’000 45,372 8 - - _______ 45,380 878 162 - - - _______ 46,420 _______ _______ Merger Reserve £’000 18,384 - - - - _______ 18,384 - - - (440) - - _______ 17,944 ––––––– ––––––– Merger Reserve £’000 10,619 - - - _______ 10,619 - - - (440) - _______ 10,179 _______ _______ Other Reserves £’000 5,455 - (1,010) - - _______ 4,445 - (147) (134) - - - _______ 4,164 ––––––– ––––––– Other Reserve £’000 5,455 - (1,010) - _______ 4,445 - (147) (134) - - _______ 4,164 _______ _______ Profit & Loss Account £’000 (55,427) - 1,010 (16,053) 75 _______ (70,395) - - 134 440 (5,501) 88 _______ (75,234) ––––––– ––––––– Profit & Loss Account £’000 (45,743) - 1,010 (15,509) _______ (60,242) - - 134 440 (2,013) _______ (61,681) _______ _______ 42 NOTES TO THE FINANCIAL STATEMENTS Other reserves comprise (for both Group and Company): Capital redemption reserve Reserve arising from issues of share options in connection with acquisitions 2003 £’000 2002 £’000 2,884 2,884 1,280 _______ 4,164 _______ _______ 1,561 _______ 4,445 _______ _______ The reserve arising from issue of share options in connection with acquisitions has reduced during 2003 by £147,000 as a result of the exercise of share options and by £134,000 as a result of the lapsing of share options due to the option- holders ceasing to be employed by the Group. 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 Floating rate loans – Sterling Fixed rate 6% convertible unsecured loan stock 2005 2003 £'000 2002 £'000 155 2 28 2,561 _______ 2,746 ––––––– ––––––– 917 29 28 2,569 _______ 3,543 ––––––– ––––––– Other than the 6% Convertible Loan Stock 2005, 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 2003 £'000 2002 £'000 663 - _______ 663 38 150 27 _______ 215 _______ 878 ––––––– ––––––– 1,848 749 _______ 2,597 161 379 218 _______ 758 _______ 3,355 ––––––– ––––––– NOTES TO THE FINANCIAL STATEMENTS 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. Net foreign currency monetary assets 2002 Sterling 2003 Sterling US dollar £'000 123 9 ––––––– ––––––– Maturity of financial liabilities The maturity profile and interest rates of the group's financial liabilities at each relevant year-end is as set out in Notes 14 and 15. Borrowing facilities The group had no undrawn committed borrowing facilities available at each relevant year-end, apart from the bank line of credit referred to in Note 14. 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 instalments on bank loans Convertible Unsecured Loan Stock 2005 Book value and fair value 2003 £'000 2002 £'000 878 (157) (28) (2,561) _______ _______ 3,355 (946) (28) (2,569) _______ _______ 21. POST BALANCE SHEET EVENTS On 24 January 2004 the company issued 3,600,000 new ordinary shares by way of a placing for cash at 23p per share to raise £828,000 before expenses. On 3 March 2004, the company raised £620,000 before expenses by way of a placing of 2,000,000 new ordinary shares for cash under its equity line of credit arrangement with GEM Global Yield Fund Limited. 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 financial statements of Sopheon NV to the Trade Register in the Netherlands. Directors and Senior Management Barry Mence, Executive Chairman. Barry Mence has served as executive chairman, and as a director and substantial shareholder of Sopheon, since its inception in 1993 when he was one of the founding members. From 1976 to 1990, Mr. Mence was the major shareholder and group managing director of the Rendeck Group of Companies, a software and services group based in the Netherlands. Andrew Michuda, Executive Director. Andrew Michuda was appointed chief executive officer of Sopheon in September 2000. From 1997 to 2000 he served as chief executive officer and an executive director of Teltech Resource Network Corporation, which was acquired by Sopheon. He earlier held senior leadership positions at Control Data, including general manager of the business that evolved into Decision Data, the world's largest independent computer services provider. Arif Karimjee, ACA, Executive Director. Arif Karimjee has served as chief financial officer of Sopheon since February 2000. Mr. Karimjee was previously an accountant and auditor with Ernst & Young from August 1988 until joining Sopheon. Stuart Silcock, FCA, Non-executive Director. Stuart Silcock has served as a director of Sopheon from its inception in 1993. Since 1982, Mr. Silcock has been a principal partner of Lawfords & Co. and a director of Lawfords Ltd., chartered accountants. Mr. Silcock has been a non-executive director of Brown & Jackson plc since June 2001, and also holds a number of other UK directorships. Bernard Al, Non-executive Director. Bernard Al was appointed as director of Sopheon in January 2001. He is a former chief executive officer of Wolters Kluwer in the Netherlands and has a background in science and linguistics. Andrew Davis, Non-executive Director. Andrew Davis was a founder of Spider Systems Limited in 1983 and held the post of chief technology officer for 12 years. He left Spider Systems Limited in 1995 when it was sold to Shiva Corporation. Since then he has been an investor and director in a number of companies, including Orbital Software Holdings plc. Daniel Metzger, Non-executive Director. Daniel Metzger was until 1998 an executive vice president of Lawson Software, a leading ERP provider, where he was responsible for corporate strategy and marketing. Since then he has held similar roles at Parametric Technologies, where he led the business strategy and marketing around collaborative product development technologies and at nQuire Software, which was subsequently sold to Siebel. J. Christian Hawver, Chief Marketing Officer. Chris Hawver was appointed chief marketing officer in November 2000. He was previously involved with business and channel development for international information technology businesses including Achieve Healthcare, Medical Documenting Systems and Data General. Paul Heller, Chief Technology Officer. Paul Heller was appointed chief technology officer in June 1999. He was previously vice president of product management for Baan Company. Huub Rutten, Vice President of Product Research and Design. Huub Rutten is responsible for Sopheon’s healthcare business in the Netherlands and also has responsibility for product research. A founder of Sopheon, he was a director until September 2000 when he assumed a more operational role. www.sopheon.com
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