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The Knowledge To Compete ®
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Sopheon's mission is to give our clients the power
to more effectively create, capture and share
knowledge – and use it to compete.
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Group Profile
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Auditors’ Report
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Chairman’s & Chief Executive
Officer’s Statement
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Market & Product Overview
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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
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contents
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Report on Directors’
Remuneration
Company
Balance Sheet
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Directors’ Report
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Statement of Directors’
Responsibilities
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Group Statement of
Cash Flows
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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
reduce product development spending
G
r
o
u
p
P
r
o
f
i
l
e
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 manufacturing,
chemicals, food and beverage, and
healthcare industry sectors.
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
5
Statement from the Chairman and Chief Executive Officer
Introduction
Sopheon entered 2004 tightly focused on the market potential of its software solutions, following the successful divestment of
information management divisions in the USA and Germany.This left a core business with a substantially reduced cost base, but an
international presence geared to build on the promise of our flagship product, the Accolade product portfolio and process
management system. During the year we delivered substantial operational, financial and strategic achievements. Revenues for the
continuing software business nearly doubled in dollar terms, EBITDA loss was reduced by more than 70% and the balance sheet
was strengthened. Our market presence in terms of sales, industry recognition and partnership development continued to gather
pace. We are a recognized leader in a new enterprise software sector that is focused on helping organizations improve the
business impact of product development.
Results
Sopheon’s consolidated turnover from continuing activities grew to £4.3m (2003: £2.7m for the continuing software business and
£4.1m from businesses divested in the year) and the consolidated EBITDA loss was reduced to £1.1m (2003: £4.1m). Goodwill
charges amounted to £0.4m (2003: £4.6m) for the year, in addition to net interest of £0.3m (2003: £0.2m). After factoring in
research and development tax credits amounting to £0.1m (2003 - £0.3m) the retained loss for the year was £1.8m (2003: £5.5m)
reducing the loss per ordinary share to 1.6p (2003: 6.3p).This continues the trend of improvement since 2001, when the group
recorded a retained loss of £34.6m.
Revenues in Sopheon’s core software business almost doubled in US Dollar terms, and grew over 70% in Pound Sterling terms.The
weakening dollar had significant effect on reported turnover, but because a large portion of Sopheon’s costs are dollar denominated
Sopheon’s EBITDA performance was in line with broker forecasts.
Viewed broadly, Sopheon’s revenue mix in 2004 was 60:20:20 among license, maintenance and consulting services respectively.The
management team is very conscious of the importance of building the recurring revenue base of maintenance contracts, and
Sopheon enters 2005 with an annualised run rate of more than £1m in such revenue.
Sopheon implemented a controlled expansion in R&D resources in the final weeks of 2004, recruiting into our Denver
development center. Other overheads remained stable during the year and our plans for 2005 include limited expansion of sales
and services resources, dependent on performance. Incentive payments for staff as a whole also remain tightly linked to achieving
financial objectives.
6
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Financing
Cash resources as of 31 December 2004 totaled £1.2m (2003 - £0.9m) and net current assets amounted to £1.1m (2003: £0.1m).
The trebling of trade debtors compared to 2003 appears high relative to total turnover, but is due to the substantial license sales
achieved in December.
During 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. More than
90% of the equity line facility, the term of which extends to 23 December 2005, remains available.The board is considering whether
to seek an extension to the instrument.
During 2004 the company raised £2.4m in cash through private equity placement. Of that sum, £0.6m was secured through the
equity line. In addition, the board secured a resolution from holders of its £2.6 million 6% Convertible Loan Stock to reconstitute
the instrument such that, in return for a one-off payment of 7% and subject to the Sopheon group continuing to meet key solvency
tests, the Loan Stock will automatically convert into ordinary shares rather than be repayable on maturity in December 2005.This
change also eliminated the annual interest coupon. Due to the modifications of the terms of the instrument it has been reclassified
as equity shareholders’ funds in the balance sheet.These actions, coupled with the improved trading performance, enabled Sopheon
to end 2004 with consolidated net assets of £1.2m compared to a net deficit of £1.9m at the end of 2003.
Market
Overall, we continued to see high rates of adoption of Accolade within our installed base, with the largest single client implemen-
tation at 2200 seats. We also signed our first contracts extending the use of Accolade to automate and improve business processes
beyond the area of product development. Another priority in 2004 was to generate additional business with existing customers.
BASF is an excellent example. Developed as a customer through one of Sopheon’s distribution partners, BASF began
implementation of Accolade a year ago. Our relationship with this chemicals industry leader has grown rapidly since then, and BASF
is now one of four Sopheon clients that have contracted for 2000 or more Accolade seat-licenses. Another market development of
note was expansion of the Accolade platform to use by hospitals in the management of clinical trials. We have signed three such
contracts in the past twelve months, affording us an important opportunity to learn more about this market segment.
Our recurring maintenance base was reinforced during the year by two new offerings: hosting services for our license customers,
and subscriptions for our Monitor system.The former offers a low total-cost-of-ownership model to license customers and
attracted attention from both small and large prospects.To date, four Accolade customers have contracted for a hosted
environment.The Monitor subscription is underpinned by a business partnership with Siemens. Supported by Airbus and Boeing,
this partnership introduces a web-based application to the aviation industry to promote standardization around Radio Frequency
Identification (RFID) use.
Sopheon made important progress in 2004 in positioning itself for the longer term by securing distribution partners in geographical
areas outside the Company’s existing sphere of operations, and strategic alliances in key markets.The first area is a key priority for
further expansion in 2005, augmenting existing partner presence in continental Europe and the Asia Pacific.The second bore fruit in
the final quarter of 2004, when we announced that we had become part of Microsoft’s Collaborative Product Development (CPD)
initiative, building significantly on our existing Gold Partnership status. The CPD initiative is designed to help companies leverage
investments in Microsoft technology by using it to improve product development success rates. Microsoft and Sopheon are
teaming to develop, promote and deliver solutions based on integrated technologies. Other CPD participants include Hewlett
Packard, UGS, and Dassault Systems.
Product Development
In conjunction with the launch of the Microsoft CPD initiative, Sopheon announced that it would integrate Microsoft Project Server
2003 and SharePoint Portal Server 2003 into Accolade, to further enhance collaborative, information-sharing and enterprise
deployment capabilities. During the first quarter of 2005, with support from Microsoft, resources have been expanded to
accelerate these developments. Accolade is built on Microsoft technology and since inception, has leveraged tools such as Office,
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
7
NetMeeting and Project to facilitate information sharing, ease-of-use and fast implementation. The expanded integration of
Microsoft technologies will increase Accolade’s capacity to leverage work repositories and will strengthen its ability to scale to
enterprise-wide implementation.
At Parker Hannifin Corporation, Sopheon assisted with the rollout of Accolade under an enterprise-wide license agreement
concluded in June. Parker reviewed three lifecycle management software solutions and selected Accolade based on such
considerations as its ease-of-use, speed of deployment, built-in best-practices content, capacity to scale, and ability to further
leverage Microsoft technologies already prevalent in their business - a good example of the combined value proposition of
Accolade and Microsoft technology.
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, we have applied much of this intellectual
property in Sopheon’s healthcare compliance solutions in the Netherlands, and look to integrate such technologies into our
Accolade roadmap where appropiate.
Board of Directors and 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 five, which includes the three executive directors. Further details on members of the board and the management team
can be found on page 43.
Outlook
The past year was earmarked by steady improvements in the performance of our business and significant progress in key areas of
strategy. Revenues in our business do however continue to be sensitive to the timing and value of individual sales events, which are
challenging to predict with precision. Accordingly, we continue to exercise balance and caution in our planning approach. Our cost
base remains under tight control, and the board continues to believe in the importance of not disrupting the high degree of focus
achieved in the business since our divestiture activity in 2003. Accolade is generating strong interest, has an expanding installed
client base, and enjoys increased validation by the market. It has demonstrated, consistently, that it is a valuable solution in which
clients are prepared to invest, reflected in the fact that four of our customers have each made license investments of US$600,000
or more.
Overall, we are encouraged by the direction, focus and momentum of our business, and look forward to a successful 2005.
Barry Mence
Executive Chairman
4 April 2005
Andy Michuda
Chief Executive Officer
8
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 Accolade® is used by today’s largest global companies for process and product
portfolio management. Accolade is being used in over 45 countries worldwide as represented by
the darker shaded areas on the above map.
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 is 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, chemicals, food and beverage, and
healthcare – by enabling them to achieve specific business objectives, and important top- and bottom-line results.
"To maintain our market-leading position, we have outlined an organic growth strategy that relies upon our ability to innovate well
and achieve high levels of return on our innovation investments. Sopheon’s Accolade will give us the process uniformity and
performance consistency we need to enable the sharing of knowledge and expertise across a common process and system
platform, ensuring faster time-to-market and winning products."
Christine Connelly, Chief Information Officer, Cadbury Schweppes
Our History
Sopheon began in 1993 as Netherlands-based PolyDoc. Building on unique competencies in linguistics and language
management, the company created software applications that allowed organizations to capture, organize and access
knowledge through structured authoring tools, terminology management and thesauri. Use of this technology was
focused on specific processes such as hospital protocol management and the sharing of quality standards within
manufacturing environments.
MARKET AND PRODUCT OVERVIEW
9
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, enabling collaboration and integrating best-practices with access to market, technical and competitive
intelligence to support and inform process decisions.
Innovation and Product Development To achieve and sustain success in today’s economic order, many companies
are striving to generate more revenue from new products. Sopheon’s flagship offering, Sopheon 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 70 percent of the technology-
driven companies in the US.
S E V E N T Y- T H R E E P E R C E N T O F C O M PA N I E S WO R L DW I D E W I L L I N C R E A S E
S P E N D I N G O N I N N OVAT I O N I N 2 0 0 5 , U P F RO M 6 4 P E R C E N T I N 2 0 0 4 .
" R a i s i n g t h e R e t u r n o n I n n ov a t i o n : I n n ov a t i o n - t o - C a s h S u r vey 2 0 0 4 , " D e c e m b e r 2 0 0 4
– T h e B o s t o n C o n s u l t i n g G ro u p ( B C G )
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 conception-to-commercialisation-to-retirement cycle.The software system provides a process backbone and
embedded best-practice manuals that guide users and help to ensure that each step of the process is successfully
executed. Available modules include an idea management system, a portfolio management tool, a benchmarking module
that identifies product-development process strengths and weaknesses, a research center that enables access to external
market and technology intelligence and a module that supports cross-functional collaboration. By applying Accolade's
capabilities, adopting organizations 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.
Advanced technology developed by Sopheon prior to the creation of Accolade is now being brought into the Accolade
suite to enhance its capacity to support specific aspects of product development and expand its use in healthcare
applications.
"Sopheon’s Accolade gives us a best-practices communication network with a common, business-driven language for design-
engineering. For the first time, we have the ability to collaborate simultaneously across all eight Parker operating groups, located
throughout 46 countries and in multiple time zones. We’re confident that this tool will help leverage our ability to provide customers
with higher-value systems solutions."
Craig Maxwell,Vice President of Technology and Innovation, Parker Hannifin
10
MARKET AND PRODUCT OVERVIEW
Compliance Management. For a growing number of companies, one of the central challenges of successful
innovation is to ensure that new products comply with ever-changing federal, state and local regulatory directives, legal
requirements and industry technical standards. The Accolade suite is being expanded to include monitoring technology
that supports compliance by proactively alerting engineers and other professionals in product development to changes in
relevant standards and to new regulatory directives.These new Accolade capabilities have been incorporated, for
example, into a service supported by Airbus and Boeing that supports compliance with standards for the use of radio
frequency identification (RFID) technology in the development of new commercial aircraft.
”Boeing and Airbus recognize that continuous conformity assessment is of critical importance to their industry.The service that we
have developed in partnership with Sopheon greatly reduces the complexity of staying up-to-date with the multitude of current and
evolving RFID standards and regulations. It will allow Airbus and Boeing to extend their best practices in compliance throughout
their supply chain.”
Winfried Holz, Director of Global IT Solutions, Siemens Business Services
Clinical Trials Management. Clinical trial management is a
critical step in the cycle that moves new pharmaceutical
products from conception and development to safe adoption in
the marketplace. It is estimated that, in the United States alone,
approximately 80,000 clinical trials are being conducted at any
one time. In Europe, clinical trial regulations recently enacted by
the European Union (EU) have escalated the importance of
optimizing organization and execution of trial activities. Sopheon
Accolade is being used today by some of the largest teaching
and general hospitals in the Netherlands to enhance the
structure of their clinical-trials processes and improve the quality
MARKET AND PRODUCT OVERVIEW
11
and efficiency of trial management. The software is also being used by healthcare institutions to prioritize and manage
innovation projects such as the installation of new processes for treating patients and the updating of research and care
facilities.
"Sopheon’s software will integrate our processes for managing clinical trials and innovation projects, making these processes more
stable, predictable and efficient. As a consequence, we will be able to deliver high-quality results to our pharmaceutical clients more
rapidly and with reduced paperwork, while making certain that the innovation projects we choose to support and implement are
the ones that will most greatly benefit those who turn to us with their healthcare needs."
Dr. Graham Ramsay, Atrium Medical Center, Board of Directors
Healthcare Provision. Hospitals and clinics are increasingly turning to software-based systems for the management of
both medical and non-medical processes. Sopheon’s evidence monitoring technology 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.
F RO M 2 0 0 4 TO 2 0 1 0 , G L O B A L 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 I N P O RT F O L I O M A N AG E M E N T B Y AT L E A S T A FAC TO R O F F I V E TO
I M P ROV E R & D P E R F O R M A N C E .
– Po r t f o l i o M a n age m e n t A d d s S t r a t e g y a n d P ro c e s s t o P L M , " M . H a l p e r n , 2 3 Ju n e 2 0 0 4
– G a r t n e r, I n c .
Partnership Strategy
Partnerships are a central aspect of Sopheon’s plans for continued growth. During 2004, the Company made important
progress in developing relationships with strategic partners who can assist Sopheon both in enhancing the capabilities of
its core Accolade solution and in accelerating business expansion within targeted accounts and markets. A principal
example of our progress in this area is our emerging relationship with Microsoft. Late last year we announced that we
had become part of Microsoft’s Collaborative Product Development (CPD) go-to-market strategy. The CPD initiative is
designed to help companies leverage investments in Microsoft technology by using it to improve product development
success rates. Microsoft and Sopheon are teaming to develop, promote and deliver solutions based on integrated
technologies. This relationship was instrumental, for instance, to our recent sales success at Parker Hannifin, where
Accolade’s ability to further leverage Microsoft technologies already in prevalent use within the client environment was a
significant factor in Parker’s choice of our solution.
In another example of strategic partnering, we established a
relationship with Siemens that will allow us to test the viability of our compliance management technology in new
markets.
Sopheon also continues to expand its global network of distribution and implementation partners with a goal of
maximizing market coverage and providing local support to multinational clients wherever they may be operating. These
efforts have recently resulted in the establishment of new partnerships in such areas as Northern Europe, Portugal,
Australia, New Zealand, and Southeast Asia
"Sopheon has developed a reputation as a domain expert in product portfolio and product development process management. By
combining their advanced software solution and industry-specific knowledge with Microsoft’s proven, easy-to-use technology
solutions, Sopheon has responded to the industry’s demand for tools that provide the collaboration and communication capabilities
needed to help manufacturers deliver products to market faster."
Don Richardson, Director, Manufacturing Industry Unit, Microsoft
12
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
Hammonds
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 Registrars
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
13
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, an executive director, 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 for B. K. Mence
and A. Karimjee, and 9 months' notice for A. L. Michuda.
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. Details of directors’
interests in shares and options are set out in the Directors’ Report.
Executive directors
B. K. Mence
A. L. Michuda
A. Karimjee
Non-executive directors
S. A. Silcock
B. P. F. Al
A. M. Davis
D. Metzger
Pay
and fees
2004
£
112,824
98,722
79,246
Benefits
2004
£
Total
2004
£
Contributions
to Pension
2004
£
Contributions
to Pension
2003
£
Total
2003
£
5,374
5,295
842
118,198
104,017
80,088
115,759
113,480
83,443
4,875
1,921
3,655
4,875
2,145
3,556
18,000
18,000
18,000
18,000
________
362,792
________
________
-
-
-
-
________
11,511
________
________
18,000
18,000
18,000
18,000
________
374,303
________
________
18,000
18,000
18,000
18,000
________
384,682
________
________
-
-
-
-
_______
10,451
_______
_______
-
-
-
-
_______
10,576
_______
_______
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. Lawfords Limited also
received fees of £2,695 in respect of advisory services to the Company.
14
DIRECTORS’ REPORT
Directors’ Report
Financial Results
The loss for the year ended 31 December 2004 before interest, tax, depreciation and amortisation (LBITDA) was
£1,140,000 (2003 - £4,066,000) on a turnover of £4,323,000 (2003 - £6,734,000).The retained loss after tax for the year
is £1,821,000 (2003 - £5,501,000).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 from continuing activities grew to £4.3m (2003: £2.7m for the continuing software
business and £4.1m from information management businesses divested in the year) and the consolidated EBITDA loss
was reduced to £1.1m (2003: £4.1m). Goodwill charges amounted to £0.4m (2003: £4.6m) for the year, in addition to net
interest of £0.3m (2003: £0.2m).The resultant retained loss for the year was £1.8m (2003: £5.5m) reducing the loss per
ordinary share to 1.6p (2003: 6.3p).This continues the trend of improvement since 2001, which recorded a retained loss
of £34.6m.
In its continuing activity, sales growth over the prior year achieved in Sopheon’s core software business was almost 100%
in US Dollar terms, and almost 75% in Pound Sterling terms. Notwithstanding the significant effect of the weakening
dollar on reported revenues, due to the fact that a large portion of Sopheon’s costs are dollar denominated Sopheon’s
EBITDA performance did not suffer.
In broad terms, revenue mix recorded in 2004 was 60:20:20 between license, maintenance and consulting services.The
management team is very conscious of the importance of building the recurring revenue base of maintenance contracts,
and Sopheon enters 2005 with an annualised run rate of over £1m of such revenue.
Cash resources at 31 December 2004 were £1.2m (2003 - £0.9m) and net current assets £1.1m (2003: £0.1m).Trade
receivables have nearly trebled compared with the prior year and appear high relative to total revenues, due to the
substantial license sales achieved in December.
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. Approximately 90% of the equity line facility, the term of which extends to 23 December 2005, remains
available.The board is considering whether to seek an extension to the instrument.
During the first half of 2004 the company raised £2.4m in cash by way of private equity placing, of which £0.6m was
secured through the equity line. In addition, the board secured a resolution from holders of its £2.6 million Convertible
Loan Stock to reconstitute the instrument such that, in return for a one off payment of 7% and subject to the Sopheon
group continuing to meet key solvency tests, the Loan Stock will automatically convert into ordinary shares rather than
be repayable on maturity in December 2005.The change also eliminated the annual interest coupon.The modifications of
the terms of the instrument enable it to be reclassified as equity shareholders’ funds in the group balance sheet. As a
consequence of these actions and the improved trading performance, Sopheon ended 2004 with consolidated net assets
of £1.2m compared to a net deficit of £1.9m at the end of 2003.
Research and Development
In October 2004, Sopheon announced that it would integrate Microsoft Project Server 2003 and SharePoint Portal Server
2003 into Accolade, to further enhance collaborative, information-sharing and enterprise deployment capabilities. With
support from Microsoft, external resources have been brought in to accelerate these developments during the first
quarter of 2005. Accolade is built on Microsoft technology and since inception, has leveraged tools such as Office,
NetMeeting and Project to facilitate information sharing, ease-of-use and fast implementation.
Sopheon’s development team, based in Denver, continues to apply high quality standards, designed to deliver world class,
enterprise strength software, resulting in the high customer satisfaction ratings that Accolade enjoys. Sopheon
implemented a controlled expansion in R&D resources in the final weeks of 2004, in order to ensure delivery of our
product development roadmap.
The group 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.
DIRECTORS’ REPORT
15
Future Developments
The past year was earmarked by steady improvements in the performance of our business and significant progress in key
areas of strategy. We continue to exercise balance and caution in our planning approach. Accordingly our cost base
remains under tight control, and the board continues to believe in the importance of not disrupting the high degree of
focus achieved in the business since our divestiture activity in 2003. Accolade is generating strong interest, has an
expanding installed client base, and enjoys increased validation by the market. It has demonstrated, consistently, that it is a
valuable solution in which clients are prepared to invest. Overall, we are encouraged by the direction, focus and
momentum of our business, and look forward to a successful 2005.
International Financial Reporting Standards
As an AIM listed UK group Sopheon is not required to adopt IFRS until the financial statements for the year 2007 and
would expect to continue to report under UK GAAP for 2005 and 2006. At this stage the group has performed a
preliminary review of the key areas where Sopheon’s financial statements are likely to be affected.These are expected
to be share based compensation, accounting for research and development costs, and financial instruments.
The board has considered the merits of early adoption of IFRS and has concluded that for the time being, the costs of
early conversion outweigh the benefits. In any event, Sopheon will be required under UK GAAP to recognise as an
expense in its financial statements the fair value of share-based payments (FRS 20) from 2006, and to provide additional
presentation and disclosure regarding the financial instruments it has issued (FRS 25) from 2005.
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
2004
2003
Ordinary Shares
2004
2003
122,500
2,998,607
562,500
-
-
25,000
-
-
122,500
2,998,607
562,500
-
-
25,000
-
-
11,173,847
41,855
-
181,383
98,077
650,000
494,520
-
10,997,277
41,855
-
181,383
98,077
393,000
494,520
-
Of the 11,173,847 ordinary shares mentioned above B. K. Mence beneficially owns and is the registered holder of
5,025,227 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"). Details of the terms of
the Stock, which is now classified as part of equity shareholders’ funds, are given in Note 15.
Director
B. K. Mence
A. L. Michuda
A. Karimjee
S. A. Silcock
B. P. F. Al
Nominal amount
of Stock
Number of Sopheon
shares issuable
on full coversion
2004
2003
2004
2003
£390,000 £390,000
£28,000
£17,000
£100,000
Nil
£28,000
£17,000
£100,000
£25,000
3,250,000
233,333
141,667
833,333
Nil
3,250,000
233,333
141,667
833,333
208,333
16
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
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 (4)
A. L. Michuda (4)(5)
A. Karimjee (1)
A. Karimjee (1)
A. Karimjee (1)
A. Karimjee (5)(6)
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
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
Granted
during
year
Exercised
during
year
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
At 31
December
2004
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) One third of these options are exercisable from the date of grant, one third from the first anniversary of the date of
grant and one third from the second anniversary of the date of grant.
(5) Vesting of a proportion of these options is subject to performance conditions relating to the achievement of
positive EBITDA in two successive quarters.
(6) 93,846 of these options are exercisable between the third and tenth anniversary of grant and 206,154 options are
exercisable as to one third immediately and one third on each of the first and second anniversaries of grant.
The mid-market price of Sopheon ordinary shares at 31 December 2004 was 23.75p. During the financial year the mid-
market price of Sopheon ordinary shares ranged from 39.5p to 15.5p.
Save as disclosed above, no director (or member of his family) or connected persons within the meaning of Section 346
of the Companies Act 1985 has any interest, beneficial or non-beneficial, in the share capital of the company.
Substantial Shareholdings
The Directors are aware of the following persons at 31 March 2005 that 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)
Norman Nominees Limited
P.J. Korpershoek
Aventis Research & Technologies GmbH & Co KG
11,173,847
4,474,595
4,000,000
3,471,191
% issued
Ordinary
Shares
9.6
3.9
3.5
3.0
Mr Mence’s interest represents direct beneficial holdings as well as those of his family.
In addition, Norman Nominees Limited has a holding of £650,000 nominal value of Convertible Loan Stock, which on
conversion would result in the issue of 5,416,666 ordinary shares.
Share Option Schemes
Details of options granted are shown in note 17.
DIRECTORS’ REPORT
17
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 2004 the company had approximately 47 days’ purchases outstanding.
Financial instruments
The group’s principal financial instruments comprise bank loans, cash and short-term deposits.The main purpose of these
financial instruments is to secure funds and manage cash flow for the group’s operations. The group has various other
financial instruments such as trade debtors and trade creditors that arise directly from its operations.
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 2003 and 2004.
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 UK Combined Code issued in 2003 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 those dates convened as necessary.The audit
committee, which comprises all of 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 in the Report on Directors’ Remuneration on page 13.
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 4 April 2005 and signed on its behalf by
A. Karimjee
Director
18
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
19
Independent Auditors’ Report To The Members Of
Sopheon plc
We have audited the group's financial statements for the year ended 31 December 2004, which comprise the Group
Profit and Loss Account, Group Balance Sheet, Company Balance Sheet, Group Statement of Cash Flows, Group
Statement of Total Recognized Gains and Losses and the related notes 1 to 20. 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, Chairman's and Chief Executive Officer’s
Statement, Market and Product Overview, Report on Directors' Remuneration, and Directors and Senior Management.
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
Emphasis of matter – going concern
In forming our opinion we have considered the adequacy of the disclosures made in note 1 to the financial statements
concerning the uncertainties associated with the preparation of the accounts on a going concern basis.The financial
statements have been prepared on a going concern basis, the validity of which depends on continued growth in the
business, or, in the absence of such growth, the ability to secure funding through the company’s facilities or other sources.
In view of the significance of these uncertainties we consider 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 2004 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
4 April 2005
20
GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2004
Group Profit And Loss Account For The Year Ended
31 December 2004
Notes
2
TURNOVER
Cost of sales
GROSS PROFIT
Sales and marketing expenses
Research and development expenditure
Amortisation and impairment
charges in respect of goodwill
Other administrative expenses
Total administrative expenses
GROUP OPERATING LOSS
Share of operating loss
of associated undertaking
TOTAL OPERATING LOSS
Profit on disposal of operations
discontinued activities
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)
3
3
11
5
6
8
LOSS ON AN EBITDA BASIS (LBITDA) 1
2004
£’000
2003
£’000
2002
£’000
4,323
(993)
_________
6,734
(4,117)
_________
12,353
(9,002)
_________
3,330
2,617
3,351
(2,588)
(3,442)
(5,437)
(890)
(1,237)
(2,331)
(440)
(4,586)
(5,922)
(1,111)
(2,577)
(5,727)
(2,441)
(8,400)
(13,980)
(1,699)
(9,225)
(16,066)
-
_________
-
_________
(46)
_________
(1,699)
(9,225)
(16,112)
-
_________
3,568
_________
-
_________
(1,699)
(5,657)
(16,112)
83
76
260
(348)
_________
(225)
_________
(327)
_________
(1,964)
(5,806)
(16,179)
143
_________
305
_________
126
_________
(1,821)
_________
_________
(5,501)
_________
_________
(16,053)
_________
_________
(1.6p)
_________
_________
(6.3p)
_________
_________
(19.4p)
_________
_________
(1,140)
_________
_________
(4,066)
_________
_________
(8,910)
_________
_________
GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED
31 DECEMBER 2004
Loss on ordinary activities after taxation
Exchange difference on retranslation
of net assets of subsidiary undertakings
Total recognised losses relating to the year
2004
£‘000
2003
£‘000
2002
£‘000
(1,821)
(5,501)
(16,053)
(61)
_______
88
_______
75
_______
(1,882)
_________
_________
(5,413)
_________
_________
(15,978)
_________
_________
GROUP BALANCE SHEET AT 31 DECEMBER 2004
21
Group Balance Sheet At 31 December 2004
FIXED ASSETS
Intangible assets
Goodwill
Tangible fixed assets
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
Convertible Unsecured Loan Stock 2005
CAPITAL AND RESERVES
Called up share capital
Share premium account
Shares to be issued
Merger reserve
Other reserves
Profit and loss account
Shareholders’ funds/(deficit) (all equity interests)
Approved by the Board on 4 April 2005
Notes
2004
£’000
2003
£’000
9
10
12
13
14
15
17
18
18
18
18
18
-
110
440
195
1,901
1,211
–––––––
3,112
(1,978)
–––––––
1,134
–––––––
1,244
1,159
878
–––––––
2,037
(1,996)
–––––––
41
–––––––
676
-
_______
1,244
–––––––
–––––––
(2,561)
_______
(1,885)
–––––––
–––––––
5,794
48,949
1,509
17,944
4,157
(77,109)
–––––––
1,244
–––––––
–––––––
4,821
46,420
-
17,944
4,164
(75,234)
–––––––
(1,885)
–––––––
–––––––
Barry K. Mence
Director
Arif Karimjee
Director
22
COMPANY BALANCE SHEET AT 31 DECEMBER 2004
Company Balance Sheet At 31 December 2004
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
Convertible Unsecured Loan Stock 2005
CAPITAL AND RESERVES
Called up share capital
Share premium account
Shares to be issued
Merger reserve
Other reserves
Profit and loss account
Shareholders’ funds (all equity interests)
Approved by the Board on 4 April 2005
Notes
2004
£’000
2003
£’000
11
12
14
15
17
18
18
18
18
18
6,119
6,119
73
934
–––––––
1,007
(405)
–––––––
602
–––––––
6,721
116
670
–––––––
786
(441)
–––––––
345
–––––––
6,464
-
_______
6,721
–––––––
–––––––
(2,561)
_______
3,903
–––––––
–––––––
5,794
48,949
1,509
10,179
4,157
(63,867)
–––––––
6,721
–––––––
–––––––
4,821
46,420
-
10,179
4,164
(61,681)
–––––––
3,903
–––––––
–––––––
Barry K. Mence
Director
Arif Karimjee
Director
GROUP STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2004
23
Group Statement Of Cash Flows For The Year
Ended 31 December 2004
Notes
2004
£’000
2003
£’000
2002
£’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
Net proceeds from disposal of operations
Net cash disposed of on disposal of operations
(1,813)
–––––––
(4,332)
–––––––
(10,268)
–––––––
83
(348)
–––––––
(265)
_______
76
(225)
–––––––
(149)
_______
260
(327)
–––––––
(67)
_______
62
_______
305
_______
126
_______
(42)
-
_______
(42)
_______
-
-
_______
-
(27)
-
_______
(27)
_______
1,680
(649)
_______
1,031
(104)
18
_______
(86)
_______
-
-
_______
-
MANAGEMENT OF LIQUID RESOURCES
(Increase)/decrease in short term deposits
NET CASH OUTFLOW BEFORE FINANCING
13
(271)
_______
(2,329)
1,934
_______
(1,238)
8,186
_______
(2,109)
FINANCING
Issues of ordinary share capital
Repayment of long-term loans
INCREASE/(DECREASE) IN CASH
13
2,437
(11)
_______
2,426
_______
97
_______
_______
1,480
-
_______
1,480
_______
39
(51)
_______
(12)
_______
242
_______
_______
(2,121)
_______
_______
24
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Accounting convention and basis of preparation
The financial statements are prepared under the historical cost convention and in accordance with applicable accounting
standards, and on the going concern basis.
During 2004 the group’s revenues from continuing operations grew by 60%, which together with the cost restructuring
and divestments completed in 2003 reduced its total losses on an EBITDA (earnings before interest, tax, depreciation and
amortisation) basis by over 70%.
At the year end the group reported consolidated net current assets of £1,134,000 and gross cash resources of
£1,211,000.The group has access to a $1,000,000 (£522,000) bank line of credit with Silicon Valley Bank, which is secured
against the trade debtors of Sopheon Corporation Minnesota. At 31 December 2004, $207,000 (£108,000) was drawn
against this facility.The facilities with Silicon Valley Bank have been in place since 1999, and are renewable annually in
October.
The directors are encouraged by the direction, focus and momentum of the business and believe that this, together with
the group’s resources provide it with adequate funding to support its activities through to the point at which they
anticipate that trading will become cash generative on a sustained basis.This is in turn dependent on the group
maintaining the substantial sales growth achieved in 2004.
Should this not be the case, or should the group require additional funding for other operational or investment purposes,
Sopheon continues to have access to its equity line of credit facility from GEM Global Yield Fund Limited (“GEM”) for an
aggregate of 10 million over the two year life of the instrument, which comes to an end on 22 December 2005. GEM’s
obligation to subscribe for shares is subject to certain conditions linked to the prevailing trading volumes and prices of
In March 2004, Sopheon made a first call on the equity line of credit
Sopheon shares on the Euronext stock exchange.
9 million available under the instrument.
facility, raising just under 1 million before expenses and accordingly, leaving
The directors are considering whether it is appropriate to seek an extension to the life in order to provide continued
access to the facility for the foreseeable future.
The directors believe that together, the points above will enable the group to continue as a going concern. However,
uncertainties remain as to the achievement of the expected sales growth and the continued availability of facilities to the
group.The financial statements do not reflect any adjustments which would be required if the going concern assumption
was not appropriate.The precise extent and quantification of such adjustments has not been determined but these could
include the reclassification of any unconverted element of the group’s convertible unsecured loan stock to creditors
falling due within one year, and provision for additional liabilities.
Basis of consolidation
The consolidated financial statements include the results of the company and its subsidiary undertakings.The results of
Sopheon’s former IM division (comprising the information and research services business 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 consultancy services are recognised as the services are performed. Revenues relating to maintenance
and post contract support agreements are deferred and recognised over the period of the agreements.
Revenues and associated costs under long term contracts are recognised on a percentage basis as the work is completed
and any relevant milestones are met, using latest estimates to determine the expected duration and cost of the project.
Tangible fixed assets
Tangible fixed assets are stated at historical cost, less accumulated depreciation.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
NOTES TO THE FINANCIAL STATEMENTS
25
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 disposal of operations.
26
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 primarily comprise the provision of research
services by the IM division of Sopheon Corporation Minnesota and by Sopheon GmbH, 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
Continuing operations - software and consultancy
Discontinued operations
Gross margin
Sales and marketing expenses
Administrative expenses (including goodwill amortisation)
Operating loss
2004
£’000
4,323
-
-
–––––––
4,323
–––––––
–––––––
2004
£’000
3,330
-
–––––––
3,330
(2,588)
(2,441)
–––––––
(1,699)
_______
_______
2003
£’000
2,669
252
3,813
–––––––
6,734
–––––––
–––––––
2002
£’000
2,854
453
9,046
–––––––
12,353
–––––––
–––––––
2003
£’000
2002
£’000
2,042
575
–––––––
2,617
(3,442)
(8,400)
–––––––
(9,225)
_______
_______
1,135
2,216
–––––––
3,351
(5,437)
(13,980)
–––––––
(16,066)
_______
_______
Sales and marketing expenses in 2003 include £574,000 in respect of discontinued operations. Administration expenses in
2003 include £4,957,000 in respect of discontinued operations.
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
Total
2004
£’000
811
1,535
1,977
-
–––––––
4,323
–––––––
-
-
-
-
–––––––
-
–––––––
4,323
–––––––
–––––––
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
–––––––
–––––––
NOTES TO THE FINANCIAL STATEMENTS
27
Analysis of turnover and operating loss by geographical origin
United Kingdom
Rest of Europe
United States of America
Continuing operations
Rest of Europe
United States of America
Discontinued operations
Operating loss
2004
£’000
(845)
(16)
(838)
–––––––
(1,699)
–––––––
-
-
–––––––
-
–––––––
(1,699)
–––––––
–––––––
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)
–––––––
–––––––
Analysis of net assets/(liabilities) by geographical origin
United Kingdom
Rest of Europe
United States of America
Unallocated cash and loans at group level
Continuing operations
Rest of Europe
United States of America
Discontinued operations
Total
3. OPERATING LOSS
(a) This is stated after charging/(crediting):
Auditors’ remuneration - audit services
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 (gains)/losses
Amortisation of goodwill
Depreciation of owned tangible fixed assets
Operating lease rentals - land and buildings
Operating lease rentals - equipment and vehicles
(b) Reconciliation of operating loss to net cash outflow from operating activities
Operating loss
Depreciation
Amortisation of goodwill
(Increase)/decrease in debtors
Decrease in creditors and provisions
Net cash outflow from operating activities
Turnover
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
116
–––––––
–––––––
2003
£’000
(9,225)
573
4,586
36
(302)
–––––––
(4,332)
–––––––
–––––––
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
–––––––
–––––––
2002
£’000
(16,066)
1,280
5,922
948
(2,352)
–––––––
(10,268)
–––––––
–––––––
2004
£’000
811
1,111
2,401
–––––––
4,323
–––––––
-
-
–––––––
-
–––––––
4,323
–––––––
–––––––
2004
£’000
(67)
66
265
980
–––––––
1,244
–––––––
-
-
–––––––
-
–––––––
1,244
_______
_______
2004
£’000
75
10
25
11
-
890
-
(24)
440
119
292
96
–––––––
–––––––
2004
£’000
(1,699)
119
440
(659)
(14)
–––––––
(1,813)
–––––––
–––––––
28
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
2004
£’000
2,717
221
66
–––––––
3,004
–––––––
–––––––
2004
£’000
28
30
–––––––
58
–––––––
–––––––
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
–––––––
–––––––
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
2004
£’000
374
11
–––––––
385
–––––––
–––––––
2003
£’000
2002
£’000
385
11
–––––––
396
–––––––
–––––––
388
16
–––––––
404
–––––––
–––––––
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 schemes
5. INTEREST PAYABLE AND SIMILAR CHARGES
Bank loans and overdrafts
Convertible loan stock
2004
£’000
113
5
5
–––––––
123
–––––––
–––––––
2004
£’000
54
294
_______
348
_______
_______
2003
£’000
2002
£’000
111
5
5
–––––––
121
–––––––
–––––––
118
6
2
–––––––
126
–––––––
–––––––
2003
£’000
2002
£’000
54
171
_______
225
_______
_______
155
172
_______
327
_______
_______
The interest payable in respect of the convertible loan stock includes a compensation payment of 7% of its nominal
amount made pursuant to the reconstitution of the stock as referred to in Note 15.
NOTES TO THE FINANCIAL STATEMENTS
29
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
2004
£’000
2003
£’000
2002
£’000
143
_______
_______
305
_______
_______
126
_______
_______
The differences between the group's expected tax credit, using the group's standard corporation tax rate of 38% (2003:
39% and 2002: 38%), 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 year
Actual current tax credit (see Note 6(a))
(c) Deferred taxation
2004
£’000
2003
£’000
2002
£’000
(1,964)
_______
_______
746
(167)
(6)
-
(573)
143
_______
143
_______
_______
(5,806)
_______
_______
2,264
(1,789)
(52)
1,339
(1,762)
305
_______
305
_______
_______
(16,179)
_______
_______
6,148
(2,250)
(102)
-
(3,796)
126
_______
126
_______
_______
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
2004
£’000
162
20,072
_______
20,234
_______
_______
2003
£’000
2002
£’000
156
20,311
_______
20,467
_______
_______
104
20,888
_______
20,992
_______
_______
At 31 December 2004, tax losses estimated at £53 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 £20.2 million. £12.4 million of
the tax losses, and £5.4 million of the potential deferred tax asset, relate to pre-acquisition tax losses of Sopheon
Corporation (Minnesota) and of 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.
30
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 2004 was £2,193,000
(2003 - loss £2,013,000 and 2002 - loss £15,509,000). The loss in 2004 included a net provision of £1,789,000 (2003 -
£1,181,000 and 2002 - £15,245,000) 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 £1,821,000 (2003 - £5,501,000 and 2002 - £16,053,000),
and on 114,882,751 (2003 - 87,274,941 and 2002 - 82,669,430) ordinary shares, being the weighted average number of
ordinary shares in issue during the year, including 8,085,249 ordinary shares representing the weighted average effect of the
reconstitution of the group’s convertible loan note (see Note 15).
The loss attributable to ordinary shareholders and the weighted average number of ordinary shares for the purpose of
calculating the diluted loss per ordinary share are identical to those used for calculating the basic loss per ordinary share.This
is because the exercise of share options would have the effect of reducing the loss per ordinary share and is therefore not
dilutive under the terms of Financial Reporting Standard 14.
9. INTANGIBLE FIXED ASSETS
Group only
Cost
At 1 January 2004
Amortisation
At 1 January 2004
Provided during the year
At 31 December 2004
Net book value
At 31 December 2004
At 31 December 2003
Goodwill
£’000
17,546
_______
17,106
440
_______
17,546
_______
Nil
_______
_______
440
_______
_______
NOTES TO THE FINANCIAL STATEMENTS
31
Computer
Equipment
£’000
Furniture &
fittings
£’000
1,557
39
(27)
_______
1,569
_______
1,401
113
(19)
_______
1,495
_______
74
_______
_______
156
_______
_______
333
3
(6)
_______
330
_______
294
6
(6)
_______
294
_______
36
_______
_______
39
_______
_______
Total
£’000
1,890
42
(33)
_______
1,899
_______
1,695
119
(25)
_______
1,789
_______
110
_______
_______
195
_______
_______
10.TANGIBLE FIXED ASSETS
Group only
Cost
At 1 January 2004
Additions
Exchange adjustments
At 31 December 2004
Depreciation
At 1 January 2004
Provided during the year
Exchange adjustments
At 31 December 2004
Net book value
At 31 December 2004
At 31 December 2003
11. INVESTMENTS
Company
Investment in subsidiary undertakings
Cost
At 1 January 2004 and 31 December 2004
Amounts provided
At 1 January 2004 and 31 December 2004
£’000
52,519
_______
35,441
_______
17,078
(10,959)
__________
6,119
__________
__________
Net book value of equity investments at 31 December 2004 and 31 December 2003
Amounts due to subsidiary undertakings
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
__________
__________
32
NOTES TO THE FINANCIAL STATEMENTS
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
33
Details of the investments in which the group or company holds more than 20% of the nominal value of any class of share
capital are set out below. Companies marked with an asterisk* are held via Sopheon UK Limited and those marked with an
obelus† are held via Orbital Software Holdings plc.
Name of Company
Country of incorporation
Sopheon Corporation
Minnesota, USA
Sopheon Corporation
Delaware, USA
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
34
NOTES TO THE FINANCIAL STATEMENTS
12. DEBTORS
Group
Trade debtors
Other debtors
Prepayments and accrued income
Company
Other debtors
Prepayments
2004
£’000
2003
£’000
1,594
153
154
_______
1,901
_______
589
320
250
_______
1,159
_______
2003
£’000
2002
£’000
20
53
_______
73
_______
_______
-
116
_______
116
_______
_______
A full provision has been made against amounts totalling £37,444,000 (2003: £35,655,000) owed to the company by
subsidiary undertakings, which are due after more than one year, and are subordinated to the claims of all other creditors.
13. NOTES TO STATEMENT OF CASH FLOWS
(a) Reconciliation of net cash flow to movement in net funds/(debt).
Increase/(decrease) in cash
Decrease/(increase) in overdrafts and lines of credit
Net increase/(decrease) in cash and cash equivalents
Repayment of term loans
Cash inflow/(outflow) from change in liquid resources
Change in net funds/(debt) resulting from cash flows
Conversion of convertible loan stock
Reclassification of convertible loan stock as equity
Exchange difference
Allocation of convertible loan stock issue costs
Movement in net funds/(debt)
Net funds at 1 January
Net funds/(debt)/ at 31 December
2004
£’000
2003
£’000
2002
£’000
62
35
_______
97
11
271
_______
379
1,065
1,509
10
(13)
_______
2,950
_______
(1,868)
_______
1,082
_______
_______
(543)
785
_______
242
-
(1,934)
_______
(1,692)
26
-
5
(18)
_______
(1,679)
_______
(189)
_______
(1,868)
_______
_______
(1,803)
(318)
_______
(2,121)
51
(8,186)
_______
(10,256)
-
-
80
(16)
_______
(10,192)
_______
10,003
_______
(189)
_______
_______
NOTES TO THE FINANCIAL STATEMENTS
35
(b) Analysis of changes in net funds
At 1 January 2003
Cashflow
Conversion of loan stock
Exchange difference
Allocation of issue costs
At 31 December 2003
Cashflow
Conversion of loan stock
Reclassification of loan stock
as shareholders’ funds
Exchange difference
Allocation of issue costs
At 31 December 2004
Cash at
Bank
£’000
758
(543)
-
-
-
_______
215
62
-
-
-
-
_______
277
_______
_______
Short Term
Deposits/
Liquid
Resources
£’000
2,597
(1,934)
-
-
-
_______
663
271
-
-
-
-
_______
934
_______
_______
Overdrafts
and Lines
of Credit
Convertible
Loan Stock
Term Loans
Total
£’000
£’000
£’000
£’000
(947)
785
-
5
-
_______
(157)
35
-
-
10
-
_______
(112)
_______
_______
(2,569)
-
26
-
(18)
_______
(2,561)
-
1,065
1,509
-
(13)
_______
-
_______
_______
(28)
-
-
-
-
_______
(28)
11
-
-
-
-
_______
(17)
_______
_______
(189)
(1,692)
26
5
(18)
_______
(1,868)
379
1,065
1,509
10
(13)
_______
1,082
_______
_______
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
2004
£’000
112
17
234
176
1,325
114
_______
1,978
_______
_______
2003
£’000
157
28
404
94
1,147
166
_______
1,996
_______
_______
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
Accruals
2004
£’000
2
46
77
280
_______
405
_______
_______
2003
£’000
2
101
78
260
_______
441
_______
_______
36
NOTES TO THE FINANCIAL STATEMENTS
15. CREDITORS: amounts falling due after more than one year
Group and company
Convertible Unsecured Loan Stock 2005
2004
£’000
2003
£’000
Nil
–––––––
–––––––
2,561
–––––––
–––––––
£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. During 2004 the holders of £1,065,000 nominal of the Stock exercised rights of conversion into Sopheon ordinary
shares.The nominal amount outstanding at 31 December 2003 is shown net of issue costs of £13,000 allocated to future
periods.
On 14 July 2004 the holders of the Stock approved a resolution to reconstitute the Stock such that, subject to the
Sopheon group continuing to meet key solvency tests, the Stock is no longer repayable at par at maturity on 19 June 2005,
but will automatically convert on 31 December 2005 into Sopheon ordinary shares at the conversion rate of 12p nominal
of the Stock per Sopheon share.The resolution also provided that the Stock is no longer interest bearing. On
reconstitution, the Stock was renamed “Interest Free Mandatory Convertible Loan Stock”.The solvency tests include the
Company being unable, for the purposes of Section 123 of the Insolvency Act 1986, to pay its debts as they fall due; the
appointment of an administrator, receiver, liquidator, trustee or similar officer; or the Company ceasing to carry on
business as a going concern. As consideration for the forgoing of interest and repayment rights, stockholders received a
compensation payment of 7% of the nominal value of the Stock on 2 August 2004. Following the modifications to the
Stock, the instrument has been reclassified as part of equity shareholders’ funds in Sopheon’s balance sheet. Accordingly, an
amount of £1,509,000, representing the nominal amount of the Stock outstanding at 31 December 2004, has been
reclassified as equity shareholders’ funds as shown in Note 18.
In the event that prior to the date of conversion of the stock the company makes an offer of shares by way of rights issue,
placing, open offer or similar issue at a price less than its conversion rate of 12p per share, the conversion rate shall be
adjusted to the offer price or to the par value of 5p per share, whichever is the greater.
16. OBLIGATIONS UNDER LEASES
The company and group had no amounts due under finance leases and hire purchase contracts.
At 31 December 2003 and 2004 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
2004
£’000
210
120
_______
330
–––––––
–––––––
Other
2004
£’000
17
81
_______
98
–––––––
–––––––
Land &
Buildings
2003
£’000
102
261
_______
363
–––––––
–––––––
Other
2003
£’000
45
36
_______
81
–––––––
–––––––
17. SHARE CAPITAL
Authorised
Ordinary shares of 5p each
Allotted, called up and fully paid
Ordinary shares of 5p each
NOTES TO THE FINANCIAL STATEMENTS
37
2004
Number
2004
£
2003
Number
2003
£
175,000,000
–––––––––
–––––––––
8,750,000 125,000,000
–––––––––
–––––––––
–––––––––
–––––––––
6,250,000
–––––––––
–––––––––
2004
Number
2004
£
2003
Number
2003
£
115,871,082
_________
_________
5,793,554
_________
_________
96,410,019
_________
_________
4,820,501
_________
_________
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 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 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.
On 23 January 2004 70,000 ordinary shares were issued on conversion of £8,400 nominal of Convertible Loan Stock 2005.
On 26 January 2004 3,600,000 ordinary shares were issued for cash at 23p per share by way of a share placing to raise
£810,000 (net of expenses).
On 18 February 2004 17,440 ordinary shares were issued for cash at 8.6p per share pursuant to the exercise of share options
and 130,000 ordinary shares were issued on conversion of £15,600 nominal of Convertible Loan Stock 2005.
On 3 March 2004 2,000,000 ordinary shares were issued for cash at 31p per share under the equity line of credit arrangement
with GEM Global Yield Fund Limited to raise £578,000 (net of expenses).
On 10 March 2004 4,360 ordinary shares were issued for cash at 8.6p per share pursuant to the exercise of a
share option.
38
NOTES TO THE FINANCIAL STATEMENTS
On 30 April 2004 125,820 ordinary shares were issued for cash at 14.75p per share and 66,500 at 16.25p per share pursuant to
the exercise of share options and 136,006 ordinary shares were issued on conversion of £16,321 nominal of 6% Convertible
Loan Stock 2005.
On 25 June 2004 4,651,163 ordinary shares were issued for cash to Norman Nominees at 21.5p per share by way of a share
placing to raise £1,000,000 in working capital. On the same day at the Annual General Meeting of the company shareholders
approved a resolution to increase the authorised share of capital of the company to £8,750,000 by the creation of 50,000,000
new ordinary shares of 5p each.
On 22 July 2004 4,166,667 ordinary shares were issued on conversion of £500,000 nominal of Convertible Loan Stock 2005.
On 3 September 2004 208,333 ordinary shares were issued on conversion of £25,000 nominal of Convertible Loan Stock
2005.and 45,941 ordinary shares were issued for cash at 14.75p per share and 33,000 at 16.25p per share pursuant to the
exercise of share options.
On 8 October 2004 17,500 ordinary shares were issued for cash at 14.75p per share and 21,666 at 16.25p per share pursuant
to the exercise of share options.
On 11 November 2004 4,166,667 ordinary shares were issued on conversion of £500,000 nominal of Convertible Loan Stock
2005.
Contingent rights to subscribe for Sopheon shares
On 19 June 2001 Sopheon issued £2.6 million of Convertible Unsecured Loan Stock with 557,143 detachable warrants to
subscribe for Sopheon shares. Details of the terms of the Stock, which have been modified, are given in Note 15. At 31
December 2004 £1,509,000 nominal value of the stock remained outstanding, which on full conversion would result in the issue
of 12,572,326 Sopheon ordinary shares.
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.
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 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 25 June 2004 shareholders approved a maximum of 10,000,000 Sopheon ordinary shares
over which options could be granted under any employee share option scheme.
NOTES TO THE FINANCIAL STATEMENTS
39
A summary of options granted under the share option schemes at 31 December 2004 is set out below.
Year of grant
1996
1999
1999 (1)
1999 (1)
1999
1999
2000 (1)
2000
2000 (1)
2000 (1)
2000 (1)
2000
2000 (1)
2000 (1)
2000
2000 (1)
2001
2001 (1)
2001 (4)
2002
2002
2002 (2)
2003 (2)
2003 (3)
2003 (2) (3)
2003 (3)
2004 (2) (3)
2004
Exercise
Price (£)
Exercise Period
From
To
0.2000
1.4150
1.5000
1.5000
1.5000
1.5000
5.7900
6.0725
9.6000
4.9500
5.0000
4.9500
4.2750
3.7250
1.6000
1.6000
0.7750
0.7750
0.0619
0.1475
0.1475
0.1475
0.1475
0.1625
0.1625
0.1625
0.2150
0.2150
21-07-06
28-08-96
20-01-09
20-01-02
28-04-09
28-04-00
03-11-09
03-11-00
03-11-09
03-11-02
22-11-09
22-11-02
24-01-10
24-01-01
25-01-10
25-01-01
08-02-10
08-02-01
28-06-10
28-06-01
26-06-10
26-06-01
28-06-10
28-06-03
02-10-10
02-10-01
15-11-10
15-11-01
31-12-10
31-12-03
31-12-10
31-12-01
02-05-11
02-05-04
02-05-02
02-05-11
14-09-01 14-09-08
30-04-12
30-04-05
30-04-07
30-04-02
30-04-12
30-04-02
07-07-13
07-07-03
05-11-08
05-11-03
05-11-13
05-11-03
05-11-13
05-11-06
16-09-14
16-09-04
16-09-14
16-09-07
Number
40,000
10,000
42,500
52,500
10,000
100,000
7,000
3,000
10,000
8,500
25,000
14,000
30,196
5,000
5,000
8,996
72,500
92,604
11,508
320,000
239,750
1,032,110
20,000
585,000
3,630,000
440,000
180,000
100,000
_________
7,095,164
_________
_________
(1) 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.
(2) One third of these options are exercisable from the date of grant, one third from the first anniversary of the date of
grant and one third from the second anniversary of the date of grant
(3)
Includes options which are contingent upon performance conditions related to the achievement of positive EBITDA in
two successive quarters, or to the achievement of individual 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 2004, 349,654 of such options had lapsed, 1,500 had been exercised, and 367,138 remained outstanding, in
respect of which the aggregate exercise price was £0.8 million.
40
NOTES TO THE FINANCIAL STATEMENTS
18. SHAREHOLDERS’ FUNDS
Group
Shares
Share
Capital
£’000
4,116
31
-
-
-
______
4,147
661
At I 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
Arising on share issues
Exercise of share options
13
-
-
-
-
_______
4,821
512
Share
to be
Issued
£’000
465
-
-
-
-
_______
465
-
-
-
(465)
-
-
_______
-
-
Premium
Account
£’000
45,372
8
-
-
-
_______
45,380
878
162
-
-
-
-
_______
46,420
1,875
Merger
Reserve
£’000
18,384
-
-
-
-
_______
18,384
-
-
-
(440)
-
-
_______
17,944
-
Profit &
Other
Reserves
£’000
5,455
-
(1,010)
-
-
_______
4,445
-
(147)
(134)
-
-
-
_______
4,164
-
Loss
Account
£’000
(55,427)
-
1,010
(16,053)
75
_______
(70,395)
-
-
134
440
(5,501)
88
_______
(75,234)
-
Total
£’000
18,365
39
-
(16,053)
75
_______
2,426
1,539
28
-
(465)
(5,501)
88
_______
(1,885)
2,387
and conversion of loan stock
Lapsing of share options
Reclassification of convertible
461
-
-
-
654
-
-
-
-
(7)
-
7
1,115
-
loan stock as equity
Retained loss for the year
Exchange differences
At 31 December 2004
-
-
-
_______
5,794
–––––––
–––––––
1,509
-
-
_______
1,509
–––––––
–––––––
Company
At 1 January 2003
Arising on share issues
Exercise of share options
Share
Capital
£’000
4,147
661
and conversion of loan stock
Lapsing of share options
Disposal of subsidiary
Retained loss for the year
At 31 December 2003
Arising on share issues
Exercise of share options
13
-
-
-
_______
4,821
512
Shares to
be Issued
£’000
465
-
-
-
(465)
-
_______
-
-
-
-
-
_______
48,949
–––––––
–––––––
Share
Premium
Account
£’000
45,380
878
162
-
--
-
_______
46,420
1,875
-
-
-
_______
17,944
–––––––
–––––––
-
-
-
_______
4,157
–––––––
–––––––
-
(1,821)
(61)
_______
(77,109)
–––––––
–––––––
1,509
(1,821)
(61)
_______
1,244
–––––––
–––––––
Merger
Reserve
£’000
10,619
-
-
-
(440)
-
_______
10,179
-
Other
Reserve
£’000
Profit &
Loss
Account
£’000
4,445
-
(60,242)
-
Total
£’000
4,814
1,539
(147)
(134)
-
-
_______
4,164
-
-
134
440
(2,013)
_______
(61,681)
-
28
-
(465)
(2,013)
_______
3,903
2,387
and conversion of loan stock
Lapsing of share options
Reclassification of convertible
461
-
-
-
654
-
-
-
-
(7)
-
7
1,115
-
loan stock as equity
Retained loss for the year
At 31 December 2004
-
-
_______
5,794
–––––––
–––––––
1,509
-
_______
1,509
–––––––
–––––––
-
-
_______
48,949
–––––––
–––––––
-
-
_______
10,179
–––––––
–––––––
-
-
_______
4,157
–––––––
–––––––
-
(2,193)
_______
(63,867)
–––––––
–––––––
1,509
(2,193)
_______
6,721
–––––––
–––––––
NOTES TO THE FINANCIAL STATEMENTS
41
Other reserves comprise (for both Group and Company):
Capital redemption reserve
Reserve arising from issues of share options
in connection with acquisitions
2004
£’000
2003
£’000
2,884
2,884
1,273
_______
4,157
_______
_______
1,280
_______
4,164
_______
_______
The reserve arising from issue of share options in connection with acquisitions has reduced during 2004 by £7,000 as a result
of the lapsing of share options.
19. 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
2004
£'000
2003
£'000
108
4
17
-
_______
129
–––––––
–––––––
155
2
28
2,561
_______
2,746
–––––––
–––––––
Other than the 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
2004
£'000
2003
£'000
638
342
_______
980
1
186
44
_______
231
_______
1,211
–––––––
–––––––
663
-
_______
663
38
150
27
_______
215
_______
878
–––––––
–––––––
42
NOTES TO THE FINANCIAL STATEMENTS
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.
2003 Sterling
2004 Sterling
Net foreign currency monetary assets
US dollar
£'000
9
-
_______
_______
Euro
£'000
Total
£'000
-
342
_______
_______
9
342
_______
_______
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
2004
£'000
2003
£'000
1,211
(112)
(17)
-
_______
_______
878
(157)
(28)
(2,561)
_______
_______
20. 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 auditor and consultant with Ernst & Young in London, Brussels and Reading,
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.
Ronald Helgeson, Vice President of Corporate Communications. Ronald Helgeson has served as vice president of
corporate communications for Sopheon since 2000. He previously held senior marketing-management roles with
Teltech Resource Network Corporation and 3M Company.
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.
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