S O P H E O N
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The Knowledge To Compete ®
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Sopheon's mission is to give our clients the power
to more effectively create, capture and share
knowledge – and use it to compete.
4
Group Profile
21
Auditors’ Report
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5
Chairman’s & Chief Executive
Officer’s Statement
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10
Market & Product Overview
22
Group Profit & Loss Account
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Group Statement of Total
Recognised Gains and Losses
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Directors & Advisers
Group Balance Sheet
14
23
contents
15
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Report on Directors’
Remuneration
Company
Balance Sheet
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16
Directors’ Report
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Statement of Directors’
Responsibilities
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Group Statement of
Cash Flows
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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