S O P H E O N
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A N N U A L
R E P O R T
The Knowledge To Compete ®
Sopheon is an international provider of software and services
that increase the business impact of innovation.
Sopheon’s software applications automate the product development
process and provide strategic decision support that helps
organizations generate more revenue and profit from new products.
Group Profile .............................................................2
Statement of Directors’ Responsibilities...........29
Chairman’s and Chief Executive Officer’s
Statement ..................................................................14
Auditors’ Report.....................................................30
Consolidated Income Statement.........................32
Financial and Operating Review ..........................16
Product and Market Overview ............................18
Directors and Advisors..........................................24
Balance Sheets .........................................................33
Consolidated Statement of
Recognized Income and Expense ........................34
Report on Directors’ Remuneration .................25
Cash Flow Statements ...........................................35
Directors’ Report ...................................................26
Notes to the Financial Statements .....................36
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From break-even EBITDA to substantial growth
in numbers of clients and end-users,
we made important headway throughout the business.
We advanced our products and fortified our market position.
We stayed focused, gained valuable experience, and
continued to refine our strategic direction.
We demonstrated a capacity to scale,
and our disciplined fiscal execution further prepared us
for the exciting opportunities that lie ahead.
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“Having the right systems to support our innovation efforts is essential to our ability to take
advantage of new market opportunities. We are making Sopheon’s solution an integral
component of our innovation infrastructure.”
– Thomas Meyer, Coordinator of Global Research, BASF
I N T H E P A S T F I V E Y E A R S . . .
B Y F O C U S I N G O N C H E M I C A L S A N D C O N S U M E R PA C K A G E D
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T W I C E T H E C U S TO M E R
G RO W T H F RO M T H O S E V E RT I C A L S
T H A N F RO M OT H E R S E G M E N T S
Clients within chemicals and consumer packaged goods markets
Clients within chemicals and consumer packaged goods markets
Clients in other markets
Clients in other markets
“Sopheon’s Accolade® allows us to incorporate input from regulatory affairs, product
stewardship, marketing, and operations – not just R&D. The solution helps us ensure that we
make our highest-value projects our first priority.”
– Wim Vanderpoorten, Innovation Process Director, Cytec Specialty Chemicals
I N T H E P A S T F I V E Y E A R S . . .
T H E N U M B E R O F I N D I V I D U A L A C C O L A D E E N D - U S E R S
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“Innovation is essential to our business success. Accolade will automate our product development
process and assist us in setting project priorities. Its capabilities will help to ensure that the right
new products get to market, and get there on time.”
– Tom Gruetzmacher, Vice President of Research and Development, Land O’Lakes
I N T H E P A S T F I V E Y E A R S . . .
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“Once the Sopheon software was implemented [at Parker Hannifin], about half the projects in
play disappeared overnight. And there’s been a significant financial payoff as well: For the
last two years, Parker Hannifin has achieved 8% organic growth.”
– “Priming the Product Pipeline”
Managing Automation Magazine, October 2006
I N T H E P A S T F I V E Y E A R S . . .
S O P H E O N H A S M O V E D F RO M R E P O RT I N G A N N U A L L O S S E S
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14
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Statement from the Chairman and Chief Executive Officer
A year of operational progress
We achieved much in 2006. In headline terms, we grew revenues to £6.0m from £4.7m in 2005. This was underpinned by 36
license orders and extensions, taking the total number of licensed customers to 87. Full-year revenues were 30% higher
than the prior year, and we achieved breakeven EBITDA (earnings before interest, tax, depreciation and amortization) for the
first time in our history. Coming into 2007 we continue to enjoy high levels of activity in our sales pipeline, reinforcing our
belief that we are the leading independent vendor in the market for Product Portfolio Management (PPM) solutions. This
market is projected to triple in size between 2006 and 2010. Implementing a system like Accolade represents a serious
commitment for any organization and this continues to weigh on our sales cycles. However, as our business matures in scale
we believe that this area, which has always brought unpredictability to our revenues, will show improvement.
A year of strategic extension
At the start of 2006, we made a strategic decision to move beyond the chemicals, materials, and food & beverage markets
that have historically been our focus. In particular, we began to pursue opportunities in non-food & beverage segments of
the consumer packaged goods sector. This effort encompassed marketing programs and targeted business development
activity. It led to our securing a number of new clients, exemplified by Timex, the leading watchmaker in North America,
and Electrolux, the world’s leading international appliance company. Leveraging our partnerships will be critical to achieving
our longer term goals in this area, and we were delighted to announce our first major automobile customer, secured in
collaboration with Hewlett-Packard. Geographical reach was also extended with sales for the first time in Scandinavia,
France, Israel, Portugal and New Zealand. Some of these were secured through our growing reseller channel.
A stable organization
Our ability to deliver value to our customers is a testament to Sopheon people in all parts of our company, many of whom
have been working tirelessly for several years to build the business we have today. We thank them for their contribution to
our growing success.
Sopheon’s executive management team has also been in place for several years and comprises a team of five, which includes
the two of us and our CFO Arif Karimjee, in addition to Paul Heller our CTO and Huub Rutten our head of research. The
Sopheon plc board includes the three executive directors, in addition to three non-executive directors who bring a wealth
of knowledge and experience to our business. Details about each of us are on the inside back cover of this report.
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
15
Outlook
With the achievement of a breakeven EBITDA result, our business crossed a financial milestone during 2006. As we
approach the next milestone of 100 licensees for our software, the scale and maturity for which we have been striving since
the launch of Accolade six years ago is, we believe, finally coming through. This is contributing both to rising revenue stability,
and to rising market recognition. We will build on our achievements by attending to five key areas:
• Secure more business from our existing customer base
• Extend our hold in established chemicals, materials, and food and beverage markets
• Expand the Accolade product in depth, functionality, integration and scalability
• Enter new vertical markets
• Develop and expand our partner network
In addition, we will carefully consider potential acquisitions that offer both strategic and operational benefits. As always, we
recognize the need both to drive Sopheon forward strategically, and to stay focused on financial performance. This challenge
will continue to shape our thinking in the exciting times ahead.
Barry Mence
Executive Chairman
28 March 2007
Andy Michuda
Chief Executive Officer
16
FINANCIAL OVERVIEW
Financial & Operating Review
Trading performance
Sopheon’s consolidated turnover grew to £6.0m (2005: £4.7m). This overall result included a strong new sales
performance by our European business, which grew revenues by 68% in the year. This was offset by a relatively flat
performance in the US, accentuated by the weakening of the US dollar in global currency markets. This growth pattern is
the opposite of what took place in 2005, when we experienced stronger growth in North America. Over the years we
have invested heavily in maintaining a truly international footprint for our business and this is proving to be both a key
differentiator in our business development and implementation efforts, and a source of balance for our revenue
performance. Since the introduction of Accolade six years ago, our average annualized growth in US dollar terms
continued to hold at approximately 50%.
Overall, Sopheon’s revenues for 2006 were 30%, higher than the preceding year. Unlike in 2005, however, revenues were
evenly spread across the first and second half. Although we look forward to strong growth, we believe that our
performance in any particular period will remain relatively unpredictable for some time to come. This is a function of
sales cycle time and of transaction value.
Business mix
During 2006 we closed 16 new license customers and 20 extension orders from existing customers. In past statements
we have noted the growing influence of larger sales, which have the potential to increase revenue volatility, but also
underpin growth. Such transactions also have the effect of pulling through substantial consulting and other service
opportunities due both to the more extensive nature of the implementations in question, and also to a growing trend of
existing customers returning to Sopheon to support expansion efforts through additional configuration and consultancy
work following the initial roll-out. During 2006, we enjoyed £0.6m of such repeat services business.
In addition to license and services revenues, our third major revenue stream is recurring maintenance income which
coming into 2007 has grown to £1.7m, compared to £1.4m a year before. In 2006 our business delivered a 37:25:38 ratio
of license, maintenance, service respectively compared to 40:25:35 in the prior year. We expect our consulting revenues
to continue to grow strongly and to provide another source of stability and maturity to our business. However, we
believe that this will be offset as a proportion of our total revenues by the effect of license business coming through our
expanding reseller network, for which associated services work is unlikely to be performed by Sopheon. We expect
maintenance to hold at approximately a quarter of our overall revenues.
As we first signaled in 2005, the higher proportion of services in our revenue mix has required us to make extensive use
of subcontractor partners. This requirement has increased as the scope of deployments and the geographic spread of
our customers have continued to expand. A recent example was our Accolade installation at Electrolux, where we
contracted with Arthur D Little to perform the bulk of the implementation work. In spite of this we achieved an overall
gross margin, measured after deducting the costs of such partners as well as our own client services resources, of 72%
(2005: 73%).
Research & Development expenditure
During 2006, our R&D effort focused on three different areas. During the year we developed and launched the Accolade
Accelerators, a group of new applications which expand Accolade’s out-of-the-box capabilities in key process automation
areas such as Stage-Gate® implementations, roadmapping and planning, and product portfolio management. The
Accelerators feature built in best-practice content and reports that allow a company to leverage Accolade in these areas
with much reduced configuration effort.
Stage-Gate® is a registered trademark of the Product Development Institute.
FINANCIAL OVERVIEW
17
In addition, we completed the majority of the effort required to transfer our legacy healthcare protocol management
system onto the Accolade platform, and our hospital clients have now started the upgrade process. Finally, we continued
to invest substantial resources in developing the next release of Accolade which is due in late 2007. This release will
bring a host of new features to our flagship offering, enabling Sopheon to maintain its leadership position and expand to
new markets.
As a result of the above, £0.5m (2005: £0.4m) of our 2006 R&D expenditure met the criteria of IAS38 for capitalization.
Operating costs
As noted in the Remuneration Report a bonus was earned by the majority of the group’s employees in respect of the
2006 performance. This has resulted in an increase in payroll costs relative to 2005 in all areas, with the principal
exception of members of Sopheon’s sales teams for whom incentives are tied to individual or territory results.
More specifically, if the effect of the capitalization and amortization of R&D costs is added back, we increased total R&D
expenditure by £0.2m. In particular, this reflects the formation of an internal organization that we call RAD, short for
Research & Application Development. The group is chartered to work with clients to investigate and create new
software applications built on the Accolade platform that would extend the utility and value of the core offering; the
Accelerators described above were developed by the RAD team.
Distribution costs are slightly lower than the previous year in spite of the higher revenues. Some of this apparent
reduction is attributable to the reclassification of certain employees into the RAD team; however, other than the bonus
noted above both administrative and distribution costs remained tightly contained. Although we do not currently plan to
increase direct sales representation in 2007, we do plan to raise investment in channel development and marketing in
order to continue to drive growth.
We achieved a breakeven consolidated EBITDA position (2005: £0.75m loss). This total reflects a deduction of share
based payments of £0.1m (2005: £0.2m). It excludes depreciation and amortization charges of £0.3m (2005: £0.5m) for
the year. Including these items, the resultant retained loss for the year was £0.3m (2005: £1.2m) reducing the loss per
ordinary share to 0.2p (2005: 0.9p).
Financing and balance sheet
Net assets at the end of the year stood at £1.6m (2005: £2m) and include £0.8m (2005: £0.8m) being the net book value
of capitalized research and development arising from the application of IAS38. Cash resources at 31 December 2006
amounted to £1.0m (2005 - £2.0m). A surge of sales at the end of the year resulted in trade receivables of £2.5m
compared to £1.7m at the end of 2005.
At the end of 2005 Sopheon renewed its €10 million equity line of credit facility with GEM Global Yield Fund Limited
until December 2007, securing continued access to a source of equity-based funding over which the company retains a
substantial degree of control. The facility was not used during 2006 and over 90% of the original equity line remains
untapped.
18
PRODUCT AND MARKET OVERVIEW
Product and Market Overview
Sopheon’s Core Solution
Sopheon addresses one of the most universal challenges facing manufacturing companies today. It is the challenge of
operationalizing research and development (R&D) so that results are predictable and can be continuously improved.
Historically R&D has been a “black box” into which manufacturers threw money and hoped for positive outcomes.
Sopheon’s technology application introduces a new working environment for cross-functional teams charged with global
product development. It creates a work environment that demystifies R&D and provides a level of visibility and alignment
across the enterprise that allows R&D, marketing, manufacturing and finance to work together efficiently, in many cases
for the first time.
Sopheon’s Accolade system is used by companies to automate their process for developing new products. The software
provides at-a-glance updates on the status of all projects in the developmental pipeline, and gathers and analyzes data
to support investment decisions.
Sopheon’s flagship solution is called Accolade. It is a modular software system specifically designed to improve work
activity and decision-making within the processes manufacturers use to develop new products. Accolade delivers these
improvements by automating the product development process. The software also provides centralized storage for all
data and information on projects in the adopting organization’s developmental pipeline. This centralization, augmented by
easy access to the stored data, enables executives and product development teams to make quicker, more informed
decisions related to all aspects of a product’s life, from its inception as an idea until its retirement from the marketplace.
Benefits reported by Accolade users include faster time-to-market, reductions in new product failures, and substantial
increases in the financial contribution from the new products that are commercialized. Some Sopheon customers have
credited Accolade with enabling them to grow the amount of profit and revenue they generate from new products by as
much as 20% to 40% over historical performance.
T H E P L M M A R K E T TOTA L E D N E A R LY $ 7 B I L L I O N I N 2 0 0 5 , A N D W I L L N E A R LY
D O U B L E TO M O R E T H A N $ 1 3 B I L L I O N B Y T H E E N D O F 2 0 1 0 ,
R I S I N G AT A C O M P O U N D A N N UA L G ROW T H R AT E ( C AG R ) O F RO U G H LY 1 4 % OV E R T H E
N E X T F I V E - Y E A R P E R I O D.
" P ro d u c t L i fe c y c l e M a n age m e n t S o l u t i o n s Wo r l d w i d e O u t l o o k
M a r ke t A n a l y s i s a n d Fo re c a s t t h ro u g h 2 0 1 0 , " Ju l y 2 0 0 6
– A R C A d v i s o r y G ro u p
PRODUCT AND MARKET OVERVIEW
19
Sopheon
Product Portfolio Management
Business Case, Risk Mgt, Strategic Product Planning
Project Management
Project Schedules, Actuals, Resource Data
ERP/CRM
Sales, Supply Chain, Mfg Costs, Sales Forecasts
PDM
CAD Diagrams, Change Orders, BOMs
Business analysts have placed Accolade in a sub-class of product life cycle management solutions
referred to as product portfolio management systems.
The Market
Sopheon’s Accolade belongs to a major class of software applications that concentrate on supporting product life cycle
management (PLM). The purpose of this applications group is to help companies create and execute their product
strategies.
The PLM market is made of multiple submarkets. Some of these submarkets, such as product data management (PDM),
are mature. Others are new and emerging. One of the emerging submarkets is called “Product Portfolio Management”
(PPM). It is the area where Sopheon is focused. Analyst research indicates that PPM is among the fastest growing
submarkets within PLM. This research also forecasts that its exceptional rate of expansion will continue. While most
facets of product life cycle management concentrate on the engineering or technical challenges involved in developing and
managing a product, PPM addresses the business challenges.
Most companies have tried to build their innovation processes around commonly used methodologies such as Stage-
Gate®, PACE® and waterfall. But studies have shown that, when companies attempt to deploy these methodologies
without the assistance of technology, they fail 48% of the time. That’s because a manual approach is complex and difficult.
The administrative burden imposed on users is excessive. Information supporting the process is almost always out of
date, so portfolio decision-making is slow and poorly supported. In the absence of good information, decisions are often
based upon gut-feel rather than sound business rationale.
Accolade automates the innovation process, enabling companies to strengthen the alignment between their innovation
strategies and operational activity within product development. It provides real-time access to the status, commercial
potential, and other details of product innovation initiatives in progress. This visibility and the resulting insight improve
product-development decision making and increase the revenue and profit returns generated by high-risk R&D
investments.
Analysts have labeled Accolade as best-of-breed among solutions in the product portfolio management sub-class. They
view PPM as a strategically critical applications area. Their research has determined that adoption of PPM methodologies
by cross-functional team members is essential to achieving business impact and success. Companies that implement
their product portfolio management and product development processes using Sopheon’s software system gain a range of
important advantages, including the capacity to continuously measure and track process improvements.
Independent research has confirmed that Accolade users have a significant edge over other companies endeavoring to
implement product portfolio management processes. In late 2006, Aberdeen Group, the IT research and advisory firm,
completed a benchmarking report on PPM best-practices for which they surveyed more than 150 manufacturers.
Sopheon clients participating in the study ranked best-of-class in a variety of key areas. For instance:
20
PRODUCT AND MARKET OVERVIEW
•
•
Sixty-three percent of Accolade customers reported that 75% or more of intended users within their
organizations had adopted their portfolio management processes. Among users of other systems, an average of
only 37% had achieved comparable levels of process use. The exceptionally high process adoption rates that
Accolade produces are a primary reason that its deployment consistently leads to increased process efficiencies
and higher business returns from investments in new products.
Eighty-six percent of the Sopheon clients participating in the study reported being able to gather critical
portfolio management data in less than 2 weeks. Among non-Accolade users, only 45% on average could match
that level of retrieval efficiency. The data-access advantage enjoyed by companies deploying Accolade translates
into faster, more informed portfolio decisions.
• The study also showed that Accolade users excel in process execution, such as meeting product development
cost goals and hitting targeted launch dates.
“Best-in-class companies use more technology to manage product portfolios than their lower performing
competition. Technology allows companies to implement and enforce common processes, helps gather
information required to analyze key performance indicators, facilitates greater collaboration, and increases the
efficiencies of processes.”
Aberdeen Group
“The Product Portfolio Management Benchmark Report
Achieving Maximum Product Value,” August 2006
In 2006 we saw considerable movement in the PLM market among both established suppliers and new entrants. Many of
the more established PLM vendors were involved in mergers and acquisitions. We expect that this will continue in 2007,
as evidenced by the recent high-profile acquisition of UGS by Siemens. These changes are introducing some confusion in
the marketplace, but they are also increasing demand. These factors will continue to challenge Sopheon to sustain its
position of market leadership. Our response to this challenge is set out below.
Growth Strategy
Sopheon will pursue a five-part strategy for growth.
1) Expand Within Client Base
During 2006, we received 20 license orders from existing customers intent on extending the use of our software across
their organizations. This is up from 13 extension orders in 2005, further validating that we have a sticky application with
strong growth potential inside our client base.
“We measure innovation by the amount of business and shareholder value it generates. Our goal is to continue
to lead our industry in revenues and profits from innovation by supplying the market with a steady stream of
premium, new-to-the-world products that consumers want. We chose Sopheon's Accolade because it is the most
complete tool we've found for supporting the business of innovation.”
Johan Hjertonsson, Director of Consumer Innovation, AB Electrolux
2) Expand Within Target Markets
Our primary focus has been on manufacturers of chemicals, paper and, within the consumer packaged goods sector, food
& beverage producers. Sopheon signed sixteen new customers in 2006, seventy-five percent of which were in our target
verticals. We exited the year with 87 clients. In each of the markets we have targeted, our current level of penetration is
minimal, leaving substantial room for additional growth. We will continue to focus on this opportunity in 2007.
PRODUCT AND MARKET OVERVIEW
21
The number of Accolade end-users grew by 30% in 2006. This escalation is traceable partly to the fact that, while early
implementations of Accolade were on the department level, the solution is increasingly being deployed on an enterprise-
wide scale. A number of our customers are using the system throughout their global operations. Accolade users can
now be found in 58 countries worldwide.
“In the past, [innovation] was driven by research and development, so there was lots of disconnect between R&D
and brand managers. That’s a typical problem in many companies because engineers and brand managers talk in
different languages…We now have the numbers about market size, products, and other variables needed to
make intelligent product decisions faster. [Accolade] lets you focus your resources on the biggest opportunities
and on your investments.”
Bernd Becker, SVP Product Development & Innovation, Timex Corporation
3) Expand Product
2006 was a year in which we witnessed the emergence of a substantial number of new applications for Accolade. With
our system operating among an ever-expanding population of users, we found it being tested and applied in ways we had
never imagined. This exposure, even when involving first-time uses, has consistently verified the remarkable versatility,
scalability and efficacy of our solution—a tribute to the high quality work put forth by our own product development
team—resulting in easy adoption, high levels of acceptance and exceptional satisfaction rates among users.
In 2006, Sopheon convened its first Product Advisory Council (PAC) sessions in both North America and Europe. The
PAC group is comprised of executive-level decision-makers from client companies in a mix of industries. The following
companies are currently represented:
North America: Cytec, Hospira, Land O’Lakes, Nautilus, Parker Hannifin, Verizon Wireless, Timex
Europe: BASF, Campina, Cadbury Schweppes, Celanese, Electrolux, Nestle
We are fortunate to have a user community made up of such caring clients. Their input related to such areas as our
product road maps and go-to-market strategies has been extremely valuable.
“In order to realize the benefits of information access, decision-support systems and time-savings, automation
software tools, such as Accolade by Sopheon, are increasingly being adopted by leading businesses…Accolade
integrates strategy, portfolio management, Stage-Gate® and idea management – a business decision support
system for making innovation investment decisions more effectively and efficiently.”
from, Lean, Rapid, and Profitable New Product Development,
authored by Drs. Robert G. Cooper and Scott J. Edgett,
co-founders of the Product Development Institute
In late 2006, Sopheon introduced a set of add-on applications for its Accolade solution. Referred to collectively as
Accolade Accelerators, the new offerings are designed to enable companies to more quickly achieve the next level of
maturity in the governance of their innovation processes and realize the associated higher levels of business performance.
There are three applications in the set, including:
Product Planning and Roadmapping Accelerator: This application makes it easier to develop credible and reliable product
plans, and to ensure successful plan execution. It provides clear short- and long-term views of product development
schedules. It charts interdependencies among projects, allowing the user to see potential bottlenecks far in advance and
eliminate them before they derail launch plans. Users of the Product Planning and Roadmapping Accelerator are able to
better forecast and manage the timing of product introductions, leading to such benefits as improved new product
revenue and margin performance and reduced product cannibalization.
22
PRODUCT AND MARKET OVERVIEW
Innovative Process Accelerator: This application reduces the time required for an organization to put a fully functional
innovation process in place. It supplies the automated structure for multiple process models, including introductory,
traditional, fast-track and post-launch versions. The application can be used to manage a product from the time it is
conceived as an idea until it is retired from the market.
Portfolio Management Accelerator: This application provides the industry’s first software-based process model for portfolio
management. In essence, it provides the best-practice keys to successful product portfolio management implementation,
including answers to such questions as:
What is product portfolio management?
How can we most effectively manage a portfolio of products?
How can we use metrics to improve portfolio performance?
Advanced charts and reports are rooted in metrics and algorithms that allow users to enter what-if inquiries and receive
visual representations of the impact of adding or removing particular projects from the developmental pipeline.
The Accelerator offerings were created by an internal organization formed in 2005 called RAD (Research & Application
Development). The charter of the RAD group is to generate new applications that leverage the strength of the Accolade
platform but don’t require investment in the creation of product code.
In October of 2006, we announced that we would augment the current use of Microsoft tools within Accolade by
integrating the software system with Microsoft Office® Project Server 2007. Adoption of the Microsoft product will
broaden and deepen aspects of Accolade’s capacity to provide governance support for the product innovation process.
The integration will be introduced in the next major version of Accolade, scheduled for commercialization in late 2007.
The Microsoft Office Project 2007 integration initiative is the latest advance in a continuing strategic alliance between
Sopheon and Microsoft. Since its inception, Sopheon’s Accolade software has incorporated Microsoft products such as
Microsoft Office Project Server and other components of the Microsoft Office system, focusing the capabilities of these
horizontal platforms on helping manufacturers increase the business impact of new product innovation. Based on the
strength and success of Sopheon’s business application, the alliance between Sopheon and Microsoft has steadily grown.
Sopheon has earned Microsoft’s designation as a Gold Certified and “managed” partner.
“Sopheon’s position as a leader in helping manufacturers solve business-critical problems in product innovation
and product life cycle management is of particular importance to Microsoft. Sopheon’s solution offers a range
of valuable, differentiating advantages because it was built from the ground up to support the process of
developing and commercializing new products.”
Michael Angiulo, General Manager, Microsoft Office Project, Microsoft Corporation
4) Expand to New Markets
Throughout its history, Sopheon has made ongoing, nominal investments in select new markets as a way of evaluating
opportunities to leverage existing technologies and drive additional business growth.
Consumer Packaged Goods (Non-food & beverage)
In 2006, Sopheon announced its expansion into non-food & beverage areas of the CPG market. Today we have a growing
client base in this vertical, illustrated by such industry leaders as:
Electrolux
Freudenberg Household Products
•
•
• Nautilus
• Reckitt Benckiser, and
• Timex
These customers include several CPG companies that operate in light discrete manufacturing. Our initial experiences in
discrete will dictate the level of investment and effort we undertake towards growing in the large discrete manufacturing
market – which includes the auto, defence and aerospace industries. Leveraging our partnerships will be critical to
achieving our longer term goals in this area, and we were delighted to announce our first major automobile customer,
secured in collaboration with Hewlett-Packard.
PRODUCT AND MARKET OVERVIEW
23
Healthcare
Sopheon continues to support its historic position as a supplier to the healthcare protocol market. Our Qualiflow®
technology is used by healthcare institutions to provide doctors, nurses and other medical practitioners with procedural
guidelines at the point of care. We kicked off a project in 2005 to convert the current Qualiflow code base to the
Accolade platform. The conversion to Accolade is expected to be completed in 2007. Expansion of our protocol
management market activity is on hold until this platform transition has been proven successful. Sopheon will then
readdress its strategies for growing this aspect of our business. A number of organizations in healthcare markets have
also successfully used the Accolade platform to automate their process for conducting clinical trials of pharmaceutical
products. And Sopheon has collaborated with one of the largest general hospitals in the Netherlands to develop an
Accolade configuration that applies the industrial methodologies of new product development and portfolio management
to their capital expenditure projects to improve prioritization, quality management and time-to-completion.
5) Expand Partnerships
Sopheon remains committed to growing its business through partnerships. We also know that it takes time and
investment to develop a strong network of partners that can add value to the company.
In 2006, we concentrated on working with existing reseller partners to deepen their knowledge and understanding of our
value proposition, the dynamics of our markets and the capabilities of our product offerings. Partner relationships
resulted in Sopheon’s signing its first clients in Israel, New Zealand, Portugal and Sweden, providing a critical foundation of
local references to support expansion in these nascent sales territories. We were also active with our consulting
partners, working together on a number of Accolade implementations in the U.S., Europe and Scandinavia.
We expect 2007 to be a year of further collaboration and business development efforts with our partners. Plans call for
a continued focus on our existing network, as well as the addition of a small number of new members.
“Many of today’s manufacturers are looking for ways to increase organic growth. That emphasis has translated
into escalating demand for technology solutions that can improve the process of choosing and developing new
products. There’s a clear connection between Sopheon’s strong business momentum and the capacity of its
software to help manufacturers increase the returns on their investments in product innovation.”
Kevin Parker, Editor, Manufacturing Business Technology Magazine
Accolade® and Qualiflow® are registered trademarks of Sopheon plc.
Stage-Gate® is a registered trademark of the Product Development Institute.
PACE® is a registered trademark of PRTM.
Microsoft Office® is a registered trademark of Microsoft Corporation.
24
DIRECTORS AND ADVISERS
Directors and Advisers
Directors
Secretary
Registered office
Executive Chairman
Chief Executive Officer
Finance Director
Non-executive Director
Non-executive Director
Non-executive Director
Barry K. Mence
Andrew L. Michuda
Arif Karimjee ACA
Stuart A. Silcock FCA
Bernard P. F. Al
Daniel Metzger
Arif Karimjee
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
BDO Stoy Hayward LLP
8 Baker Street
London W1U 3LL
Silicon Valley Bank
3003 Tasman Drive
Santa Clara California
CA 95054 United States
Hammonds
7 Devonshire Square
Cutlers Gardens
London EC2M 4YH
Loyens & Loeff
Fred Roeskestraat 100
1076 ED Amsterdam
The Netherlands
Seymour Pierce Limited
Bucklersbury House
3 Queen Victoria Street
London EC3N 8EL
Kempen & Co.
Beethovenstraat 300
1077 WZ Amsterdam
The Netherlands
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield HD8 0LA
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
25
Report on Directors’ Remuneration
The remuneration committee of Sopheon Plc is responsible for oversight of the contract terms, remuneration and other
benefits for executive directors, including performance related bonus schemes. The committee comprises two non-
executive directors, B.P.F. Al, as chairman, and S.A. Silcock, together with B.K. Mence, other than in respect of his own
remuneration. The committee makes recommendations to the board, within agreed parameters, on an overall remuneration
package for executive directors and other senior executives in order to attract, retain and motivate high quality individuals
capable of achieving the group’s objectives. The package for each director consists of a basic salary, benefits and pension
contributions, together with performance related bonuses and share options on a case by case basis. Consideration is given
to pay and employment policies elsewhere in the group, especially when considering annual salary increases. From time to
time, the remuneration committee may take advice from appropriate remuneration consultants.
Contracts
Service contracts between the company and the executive directors are terminable on 6 months’ notice.
Fees for non-executive directors
The fees for non-executive directors are determined by the board. The non-executive directors are not involved in any
discussions or decisions about their own remuneration.
Directors’ remuneration
Set out below is a summary of the fees and emoluments received by all directors during the year, translated where
applicable into sterling at the average rate for the period. 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 (resigned
on 30 June 2006)
D. Metzger
Pay
and fees
2006
£
113,442
111,104
89,500
18,000
18,000
9,000
18,000
_______
377,046
_______
_______
Benefits
2006
£
2,196
9,093
1,087
Bonus
2006
£
Total
2006
£
Total
2005
£
26,750
27,912
16,480
142,388
148,109
107,067
124,692
118,840
88,126
-
-
-
-
18,000
18,000
18,000
18,000
-
-
_______
12,376
_______
_______
-
-
_______
71,142
_______
_______
9,000
18,000
_______
460,564
_______
_______
18,000
18,000
_______
403,658
_______
_______
The remuneration committee establishes the objectives that must be met for each financial year if a cash bonus is to be
paid. With the principal exception of members of Sopheon’s sales teams, for whom incentives are tied to individual or
territory results, the committee concluded that the cash incentive should be tied to the financial performance of the group
as a whole, and in 2006 objectives were set with regard to both revenue and EBITDA performance. These measures were
applied to, and a bonus was earned by, all members of the executive board and management committee of the group, as
well as the majority of the group’s employees.
In addition, pension contributions are made to individual directors’ personal pension schemes. During 2006 contributions
of £4,875, £2,228 and £4,167 (2005 - £4,875, £1,665 and £3,945) were paid respectively to the pension schemes of B. K.
Mence, A. L. Michuda and A. Karimjee.
The emoluments of S. A. Silcock are paid to Lawfords Limited, of which Mr. Silcock is a director.
26
DIRECTORS’ REPORT
Directors’ Report
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. A review of the development of the business during the year is given in the Statement from the Chairman and
Chief Executive Officer on page 14 and the subsequent Financial Review. This also includes reference to the Group’s future
prospects. An overview of the Group’s products and markets incorporating advances in research and development is
provided on page 18.
Corporate Governance
The Sopheon board is committed to high standards of corporate governance and aims to follow appropriate governance
practice, although as a company incorporated in the UK and listed on AIM and Euronext, the Company is not subject to
the requirements of the new UK Combined Code or the Netherlands Tabaksblat Committee. The board currently
comprises three executive directors and three 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 is responsible for the group’s system of internal control and for reviewing its effectiveness. Such a system can
only provide reasonable, but not absolute, assurance against material misstatement or loss. The board believes that the
group has internal control systems in place appropriate to the size and nature of its business. The board is also 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 25.
Principal risk areas
As with any business at its stage of development Sopheon faces a number of risks and uncertainties. The board monitor
these risks on a regular basis. The key areas of risk identified by the board are summarized below.
Sopheon’s markets continue to be at a relatively early stage of development and it is possible that Sopheon's products may not sell in
the quantities or at the prices required to achieve sustained profitability. The broad market for Sopheon’s software products
continues to emerge and evolve. Sopheon has sought to focus its resources on the sub-segments that it believes offer the
best short term opportunity for growth, and on developing functionality which its research indicates customers in those
segments require. However, determining the potential size, growth rate and needs of a particular market segment remains
challenging.
Sopheon has a history of losses and its prospects of achieving profitability are dependent on meeting sales targets. Sopheon has in
past years experienced substantial net losses due, in part, to its investment in product development and marketing.
Sopheon’s ability to continue to finance its activities through to the point that its operations become cash generative on a
sustained basis is dependent on the group maintaining sales growth, or in the absence of such growth, its ability to secure
funding through the company's facilities or other sources. Details of the resources available to Sopheon and the reasons
why management consider that the company is able to continue as a going concern are set out in Note 2 to the financial
statements.
Some of Sopheon’s competitors and potential competitors have greater financial resources than Sopheon. Sopheon remains a
relatively small organization by global standards. Its resources are dwarfed by those of many larger companies that are
capable of developing competitive solutions and it is difficult to overcome the marketing engine of a large global firm.
Sopheon seeks to compete effectively with such companies by keeping its market communications focused, clear and
consistent with its product and market strategy, and working to deliver first class quality of execution so that
referenceability of the customer base is maximised.
Sopheon is dependent upon skilled personnel, the loss of whom could have a material impact. While service agreements have
been entered into with key executives, retention of key members of staff cannot be guaranteed and departure of such
employees could be damaging in the short term. In addition, as the economic environment has improved, the competition
for qualified employees continues to be difficult and retaining key employees has become accordingly more challenging and
expensive.
DIRECTORS’ REPORT
27
Sopheon will require relationships with partners who are able to market and implement its products. Historically, Sopheon has
devoted substantial resources to the direct marketing of its products, and its strategy to enter into strategic alliances and
other collaborative relationships to widen the customer base and create a broad sales and implementation channel for its
products is not yet mature. The successful implementation of this strategy is crucial to Sopheon’s prospects and its ability
to scale effectively. However, Sopheon cannot be sure that it will select the right partners, or that the partners it does
select will devote adequate resources to promoting, selling and becoming familiar with Sopheon's products.
Sopheon could be subject to claims for damages for errors in its products and services. Sopheon may be exposed to claims for
damages from customers in the event that there are errors in its software products or should support and maintenance
service level agreements fail to meet agreed criteria. Sopheon has sought to protect itself from such risks through its
development methodologies, its contract terms and insurance, and is not aware of any such claims at this time.
The extent to which Sopheon’s research and development effort may be capitalized is not readily predictable. IAS 38 requires that
certain software development expenditure must be capitalized and amortized based on detailed technical criteria, rather
than automatically charging such costs in the profit and loss account as they arise. Sopheon’s annual financial results are
materially affected by such capitalization and amortization. However, the group’s research and development efforts are not
driven by such criteria but by Sopheon’s tactical and strategic business objectives. This could lead to substantial variations
year on year in the amount of R&D which qualifies for capitalization.
Share Option Schemes
Details of options granted are shown in Note 29 to the financial statements.
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 2006 the company had approximately 47 days’ purchases outstanding (2005: 34 days).
Auditors
All of the current directors have taken all the steps that they ought to have taken to make themselves aware of any
information needed by the company’s auditors for the purposes of their audit and to ensure that the auditors are aware of
that information. The directors are not aware of any relevant audit information of which the auditors are unaware.
A resolution to reappoint BDO Stoy Hayward as auditors will be put to the members at the Annual General meeting.
Financial instruments
Details of the group’s financial instruments and its policies with regard to financial risk management are given in Note 23
to the financial statements.
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:
At 31 December
B. K. Mence
A. L. Michuda
A. Karimjee
S. A. Silcock
S. A. Silcock*
B.P.F. Al
D. Metzger
Share Options
2006
2005
Ordinary Shares
2006
2005
285,000
3,248,607
725,000
-
-
25,000
-
185,000
3,148,607
625,000
-
-
25,000
-
14,423,847
155,188
87,667
918,716
98,077
650,000
-
14,423,847
155,188
87,667
918,716
98,077
650,000
-
Of the 14,423,847 ordinary shares mentioned above B. K. Mence beneficially owns and is the registered holder of
8,275,227 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.
28
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
2 May 2001
2 October 2000
1 January 2001
B. K. Mence (1)
B. K. Mence (1)
30 April 2002
B.K. Mence (7) 15 April 2005
B.K. Mence (8) 3 May 2006
15 September 2000
A. L. Michuda (2)
15 September 2000
A. L. Michuda (2)
15 September 2000
A. L. Michuda (2)
A. L. Michuda (2)
15 September 2000
A. L. Michuda (3)
A. L. Michuda (3)
A. L. Michuda (3)
30 April 2002
A. L. Michuda (4)
A. L. Michuda (4)(5)
5 November 2003
A.L. Michuda (7) 15 April 2005
A.L. Michuda (8)
3 May 2006
A. Karimjee (1)
A. Karimjee (1)
A. Karimjee (1)
30 April 2002
5 November 2003
A. Karimjee (5)(6)
A. Karimjee (7) 15 April 2005
A. Karimjee (8) 3 May 2006
2 May 2001
B. P. F. Al (1)
22 November 1999
2 May 2001
2 May 2001
77.5p
14.75p
25.25p
22p
184p
230p
322p
368p
427.5p
160p
77.5p
14.75p
16.25p
25.25p
22p
150p
77.5p
14.75p
16.25p
25.25p
22p
77.5p
At 31
December
2005
22,500
100,000
62,500
-
187,600
7,846
12,501
1,756
16,280
5,030
54,662
487,932
2,225,000
150,000
-
100,000
12,500
150,000
300,000
62,500
-
25,000
Granted
during
year
-
-
-
100,000
-
-
-
-
-
-
-
-
-
-
100,000
-
-
-
-
-
100,000
-
Exercised
during
year
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
At 31
December
2006
22,500
100,000
62,500
100,000
187,600
7,846
12,501
1,756
16,280
5,030
54,662
487,932
2,225,000
150,000
100,000
100,000
12,500
150,000
300,000
62,500
100,000
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.
(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 the date 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
the date of grant.
(7) One third of these options are exercisable from the first anniversary of the date of grant, one third from the second
anniversary, and the remainder from the third anniversary.
(8) Vesting of one half of these options was subject to performance conditions based on the achievement of certain
financial objectives in 2006. The conditions were met.
The mid-market price of Sopheon ordinary shares at 31 December 2006 was 22.5p. During the financial year the mid-
market price of Sopheon ordinary shares ranged from 17p to 25.25p.
Save as disclosed above, no director (or member of his family) or connected persons within the meaning of Section 346 of
the Companies Act 1985 has any interest, beneficial or non-beneficial, in the share capital of the company.
Substantial Shareholdings
The Directors are aware of the following persons who as at 28 March 2007 were interested directly or indirectly in three
per cent or more of the company’s issued ordinary shares:
Name
B. K. Mence (director)
Norman Nominees Limited
No. of
ordinary
Shares
14,423,847
9,691,260
% issued
ordinary
Shares
10.8
7.3
Mr Mence’s interest represents direct beneficial holdings as well as those of his family.
Approved by the Board on 28 March 2007 and signed on its behalf by:
A. Karimjee
Director
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF FINANCIAL STATEMENTS
29
Statement of Directors’ Responsibilities in Respect
of the Financial Statements
Group financial statements
Company law requires the directors to prepare such financial statements in accordance with International Financial
Reporting Standards, the Companies Act 1985 and Article 4 of the IAS Regulation.
International Accounting Standard 1 requires that financial statements present fairly for each financial year the company’s
financial position, financial performance and cash flows. This requires the faithful representation of the effects of
transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities,
income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and
presentation of financial statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all
applicable International Financial Reporting Standards. A fair presentation also requires the Directors to:
• properly select and apply appropriate accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information; and
• provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and conditions on the entity’s financial position and
financial performance.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time
the financial position of the company and of the group and enable them to ensure that the financial statements comply
with the Companies Act 1985 and Article 4 of the IAS Regulation. 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.
30
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
Independent Auditors’ Report to the Members of
Sopheon plc
We have audited the group and parent company financial statements (the ''financial statements'') of Sopheon Plc for the
year ended 31 December 2006 which comprise the Group Income Statement, the Group and Parent Company Balance
Sheets, the Group and Parent Company Cash Flow Statements, the Group and Parent Company Statement of Change in
Shareholders' Equity and the related notes. These financial statements have been prepared under the accounting policies set
out therein.
Respective responsibilities of directors and auditors
The directors' responsibilities for preparing the Annual Report, the Directors' Remuneration Report and the financial
statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the
European Union are set out in the Statement of Directors' Responsibilities.
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and have been properly
prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulations and whether the information
given in the Directors’ Report is consistent with those financial statements. We also report to you if, in our opinion, 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 other transactions is not disclosed.
We read other information contained in the Annual Report and consider whether it is consistent with the audited financial
statements. The other information comprises only the Directors' Report, the Report on Directors' Remuneration, the
Statement from the Chairman and Chief Executive Officer, the Financial Review and the Market and Product Overview. 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.
Our report has been prepared pursuant to the requirements of the Companies Act 1985 and for no other purpose. No
person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and
for the purpose of the Companies Act 1985 or has been expressly authorized to do so by our prior written consent. Save
as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby
expressly disclaim any and all such liability.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) 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. It also includes an assessment of the significant estimates and judgments made by the directors in the
preparation of the financial statements, and of whether the accounting policies are appropriate to the group's and
company's circumstances, consistently applied and adequately disclosed.
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. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the financial statements.
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
31
Opinion
In our opinion:
•
•
•
the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union,
of the state of the group's affairs as at 31 December 2006 and of its loss for the year then ended;
the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the
European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent
company's affairs as at 31 December 2006; and
the financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the
IAS Regulation.
Emphasis of matter – going concern
In forming our opinion, which is not qualified, we have considered the adequacy of the disclosures made in note 2 to the
financial statements regarding the uncertainty over the Group’s ability to continue as a going concern, including the
directors’ assessment of the ability of the Group to achieve its forecasts.
BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London
28 March 2007
32
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
Consolidated Income Statement
for the Year Ended 31 December 2006
Continuing operations
Revenue
Cost of sales
Gross profit
Distribution costs
Research and development expenses
Administrative expenses
Operating loss
Finance revenue
Finance costs
Loss before tax
Income tax
Loss for the year attributable to equity shareholders
of the parent (all from continuing operations)
Loss per share
From continuing operations –
basic and diluted (pence)
EBITDA
Notes
3
8
9
10
12
12
2006
£’000
2005
£’000
6,045
(1,690)
_______
4,664
(1,264)
_______
4,355
3,400
(2,401)
(1,028)
(1,232)
_______
(2,473)
(974)
(1,175)
_______
(306)
(1,222)
39
(36)
_______
(303)
-
_______
53
(67)
_______
(1,236)
-
_______
(303)
_______
_______
(1,236)
_______
_______
(0.2p)
_______
_______
(0.9p)
_______
_______
33
_______
_______
(746)
_______
_______
BALANCE SHEETS AT 31 DECEMBER 2006
33
Balance Sheets at 31 December 2006
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Investments in subsidiaries
Non-current receivables
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Short-term borrowings
Trade and other payables
Obligations under finance leases
Total current liabilities
Non-current liabilities
Obligations under finance leases
Total liabilities
Net assets
Equity and reserves
Capital and reserves
Share capital
Other reserves
Translation reserve
Retained losses
Total equity (all attributable to
equity holders of the parent company)
Group
Company
Notes
2006
£’000
2005
£’000
2006
£’000
2005
£’000
13
14
15
16
17
18
19
20
21
21
24
25
26
26
110
848
-
10
––––––––
968
––––––––
2,484
1,034
––––––––
3,518
––––––––
4,486
101
764
-
10
––––––––
875
––––––––
1,741
1,970
––––––––
3,711
––––––––
4,586
-
-
6,119
-
––––––––
6,119
––––––––
36
741
––––––––
777
––––––––
6,896
-
-
6,119
-
––––––––
6,119
––––––––
38
1,209
––––––––
1,247
––––––––
7,366
414
2,444
3
––––––––
2,861
370
2,253
3
––––––––
2,626
1
332
-
––––––––
333
1
347
-
––––––––
348
5
––––––––
2,866
––––––––
1,620
––––––––
––––––––
9
––––––––
2,635
––––––––
1,951
––––––––
––––––––
-
––––––––
333
––––––––
6,563
––––––––
––––––––
-
––––––––
348
––––––––
7,018
––––––––
––––––––
6,679
72,827
(164)
(77,722)
––––––––
6,665
72,931
(31)
(77,614)
––––––––
6,679
65,062
-
(65,178)
––––––––
6,665
65,166
-
(64,813)
––––––––
1,620
––––––––
––––––––
1,951
––––––––
––––––––
6,563
––––––––
––––––––
7,018
––––––––
––––––––
Approved by the Board and authorized for issue on 28 March 2007
Barry K. Mence
Director
Arif Karimjee
Director
34
CONSOLIDATED STATEMENT OF RECOGNIZED INCOME AND EXPENSE
FOR THE YEAR ENDED 31 DECEMBER 2006
Consolidated Statement of Recognized Income
and Expense for the Year Ended
31 December 2006
Exchange differences on translation
of foreign operations
Net (expense)/income recognized directly in equity
Loss for the year
Total recognized income and expense for the year
(all attributable to equity holders of the parent company)
Group
Company
2006
£’000
2005
£’000
2006
£’000
2005
£’000
(133)
–––––––
(133)
86
–––––––
86
-
–––––––
-
-
–––––––
-
(303)
–––––––
(1,236)
–––––––
(576)
–––––––
(915)
–––––––
(436)
–––––––
–––––––
(1,150)
–––––––
–––––––
(576)
–––––––
–––––––
(915)
–––––––
–––––––
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
35
Cash Flow Statement for the Year Ended
31 December 2006
Operating activities
Loss for the year
Adjustments for:
Investment revenues
Finance costs
Depreciation of property, plant and equipment
Amortization of intangible assets
Share-based payment expense
Intra-group credits and charges
Provisions against intra-group loans
Operating cash flows before
movements in working capital
(Increase)/decrease in receivables
Increase/(decrease) in payables
Cash outflow from operations
Research and development tax credits received
Interest paid
Net cash used in operating activities
Investing activities
Interest received
Purchases of property,
plant and equipment
Recognition of development costs
Intra-group loans
Net cash used in investing activities
Financing activities
Proceeds of issues of shares
Repayment of borrowings
Increase/(decrease) in lines of credit
Net cash from financing activities
Net (decrease)/ increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of the year
Bank balances and cash
Group
Company
Notes
2006
£’000
2005
£’000
2006
£’000
2005
£’000
(303)
(1,236)
(576)
(915)
(39)
36
33
305
62
-
-
––––––––
94
(925)
329
––––––––
(502)
-
(36)
––––––––
(538)
––––––––
(53)
67
74
392
143
-
-
––––––––
(613)
158
307
––––––––
(148)
81
(67)
––––––––
(134)
––––––––
(35)
13
-
-
78
(239)
258
––––––––
(501)
2
(15)
––––––––
(514)
-
(13)
––––––––
(527)
––––––––
(51)
33
-
-
143
(226)
557
––––––––
(459)
69
(56)
––––––––
(446)
-
(33)
––––––––
(479)
––––––––
39
53
35
51
(54)
(495)
-
––––––––
(510)
––––––––
43
(4)
92
––––––––
131
––––––––
(917)
1,211
11
––––––––
(42)
(427)
-
––––––––
(416)
––––––––
1,068
(29)
259
––––––––
1,298
––––––––
748
878
10
––––––––
-
-
(19)
––––––––
16
––––––––
43
-
-
––––––––
43
––––––––
(468)
934
-
––––––––
18
1,034
––––––––
––––––––
1,970
––––––––
––––––––
741
––––––––
––––––––
-
-
(364)
––––––––
(313)
––––––––
1,068
-
(1)
––––––––
1,067
––––––––
275
670
-
––––––––
1,209
––––––––
––––––––
36
NOTES TO THE FINANCIAL STATEMENTS
1. GENERAL INFORMATION
Sopheon plc ("the company") is a public limited company incorporated in England and Wales. The address of its registered
office and principal place of business is set out on page 24. The principal activities of the company and its subsidiaries are
described in Note 3.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with International Financial Reporting Standards and
Interpretations issued by the International Accounting Standards Board as adopted by the European Union and those parts
of the Companies Act 1985 which apply to companies preparing their financial statements under IFRS. The principal
accounting policies are set out below. The policies have been applied consistently to all the years presented, and on the
going concern basis.
The group has elected not to early adopt IFRS 7 Financial Instruments. IFRS 7 will apply to the group for accounting periods
beginning on or after 1 January 2007 and contains provisions relating to the disclosure of the significance of financial
instruments, the risk exposures arising therefrom and the approach taken in managing those risks, replacing the existing
provisions of IAS 32.
IFRS 8 Operating Segments will apply to the group for accounting periods beginning on or after 1 January 2009 and will
replace the existing provisions of IAS 14. The Board will monitor the effect of the standard on the future disclosure of
segment information by the group.
Going Concern
In 2006 the group’s revenues from continuing operations were £6.0 million and it achieved a breakeven financial result on
an EBITDA (earnings before interest, tax, depreciation and amortization) basis. This represented growth of 30% over the
prior year. At the year end the group reported consolidated net assets of £1.6 million and gross cash resources of
£1 million. The group has access to a $1 million (£583,000) bank line of credit with Silicon Valley Bank, which is secured
against the trade debtors of Sopheon Corporation Minnesota. At 31 December 2006, $800,000 (£409,000) was drawn
against this facility. The facilities with Silicon Valley Bank have been in place since 1999, and are renewable annually.
The directors remain positive about the direction, focus and momentum of the business and believe that this, together with
the group’s existing 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 delivering
substantial sales growth.
Should this not be the case, 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. The facility was renewed in December 2005 for a further two year
term, expiring in December 2007. GEM’s obligation to subscribe for shares is subject to certain conditions linked to the
prevailing trading volumes and prices of Sopheon shares on the Euronext stock exchange. To date Sopheon has made just
one call on the equity line of credit facility, raising under €1 million in March 2004, leaving over €9 million (£6 million)
available.
While uncertainties remain as to the achievement of the expected sales growth and the continued availability of facilities,
the directors believe that together, these factors enable the group to continue as a going concern for the foreseeable
future. The financial statements do not include the adjustments that would be required if the company or group were
unable to continue as a going concern.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the company and entities controlled by the
company ("subsidiaries"). Control is achieved where the company has the power to govern the financial and operating
policies of an entity and to obtain benefits from its activities. All intra-group transactions, balances, income and expenses
are eliminated on consolidation.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the
aggregate of the fair values at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments
issued by the group in exchange for control of the entity being acquired, together with any costs directly attributable to
the business combination. The results of the acquired entities are included in the consolidated income statement from the
date on which effective control is obtained. The identifiable assets, liabilities and contingent liabilities of the entity being
acquired that meet the conditions for recognition under IFRS 3 Business Combinations are recognized at their fair values of
the date of acquisition.
Significant accounting estimates and judgements
Management is required to make judgements, estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on
historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates,
and accordingly they are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
NOTES TO THE FINANCIAL STATEMENTS
37
which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if
the revision affects both current and future periods. Assumptions regarding the depreciation of property, plant and
equipment, and the amortization of intangible assets, are set out in notes 13 and 14 respectively. The group's policy with
regard to impairment of such assets is set out below.
Goodwill
Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the group’s interest
in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary at the date of acquisition.
If, after reassessment, the group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of
the entity being acquired exceeds the cost of the business combination, the excess is recognized immediately in profit or
loss. Goodwill is initially recognized at cost and is subsequently measured at cost less any accumulated impairment losses.
For the purposes of impairment testing, goodwill is allocated to those cash-generating units of the group expected to
benefit from the synergies of the business combination. Cash-generating units to which goodwill has been allocated are
tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the
recoverable amount of the cash-generating unit is less than the carrying value of the unit, the impairment loss is allocated
firstly to reduce the carrying cost of any goodwill allocated to the unit and then to any other assets of the unit pro rata to
the carrying value of each asset of the unit. An impairment loss recognized for goodwill is not reversed in a subsequent
period.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for
goods and services provided in the normal course of business, net of discounts and sales related taxes.
Sales of software products are recognized on delivery, and when no significant vendor obligations remain. Revenues relating
to maintenance and post contract support agreements are deferred and recognized over the period of the agreements.
Revenues from implementation and consultancy services are recognized as the services are performed, or in the case of
milestone based or long term contracts, recognized 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.
Leases
Assets held under finance leases are recognized as assets of the group at their fair value at the inception of the lease or, if
lower, at the net present value of the minimum lease payments. The corresponding liability to the lessor is included in the
balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the
lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are
charged to profit or loss.
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant
lease.
Borrowing costs
All borrowing costs are recognized in profit or loss in the period in which they are incurred.
Retirement benefit costs
Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. The group does not
operate any defined benefit retirement benefit plans.
Foreign currencies
The individual financial statements of each group entity are presented in the currency of the primary economic
environment in which the entity operates (its functional currency). For the purpose of the consolidated financial
statements, the results and financial position of each entity are expressed in sterling, which is the functional currency of the
parent company, and the presentation currency for the consolidated financial statements.
In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional
currency (foreign currencies) are recorded at rates approximating to the transaction rates. At each balance sheet date,
monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-
monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on
the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a
foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items are included
in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair
value are included in profit or loss for the period except for differences on the retranslation of non-monetary items in
respect of which gains or losses are recognized directly in equity. For such non-monetary items any exchange component
of that gain or loss is also recognized directly in equity.
38
NOTES TO THE FINANCIAL STATEMENTS
For the purpose of presenting consolidated financial statements, the assets and liabilities of the group’s foreign operations
(including comparatives) are expressed in sterling using exchange rates prevailing on the balance sheet date. Income and
expense items (including comparatives) are translated at the average exchange rates for the period. Exchange differences
arising (including exchange differences on intra-group loans) are classified as equity and transferred to the group’s
translation reserve. Such translation differences are recognized in profit or loss in the period in which the foreign
operation is disposed of.
On disposal of a foreign operation the cumulative exchange differences recognized in the foreign exchange reserve relating
to that operation up to the date of disposal are transferred to the income statement as part of the profit or loss on
disposal.
Deferred tax
Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements
and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet
liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, but deferred tax
assets are recognized only to the extent that it is probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset
realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly
to equity, in which case the deferred tax is also dealt with in equity.
Property, plant and equipment
Computer equipment and fixtures and fittings are stated at cost less accumulated depreciation and any accumulated
impairment losses. Depreciation is charged so as to write off the costs of assets over their estimated useful lives, using the
straight-line method.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets, or,
when shorter, over the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the
difference between the sale proceeds and the carrying amount of the asset and is recognized in profit or loss.
Investments
Investments in subsidiaries are stated at cost less any provision for impairment. Impairment is considered when there is an
indication that there is a permanent reduction in the carrying value of the investment.
Externally acquired intangible assets
Externally acquired intangible assets are initially recognized at cost and subsequently amortized on a straight-line basis over
their useful economic lives. The amortization expense is included in administration costs in the income statement.
Intangible assets are recognized on business combinations if they are separable from the acquired entity or give rise to
other contractual or legal rights. The amounts ascribed to such intangible assets are arrived at using appropriate valuation
techniques.
Internally generated intangible assets (research and development expenditure)
Development expenditure on internally developed software products is capitalized if it can be demonstrated that:
• it is technically feasible to develop the product
• adequate resources are available to complete the development
• there is an intention to complete and sell the product
• the group is able to sell the product
• sales of the product will generate future economic benefits; and
• expenditure on the product can be measured reliably.
Capitalized development costs are amortized over the period over which the group expects to benefit from selling the
product developed.
Development costs not satisfying the above criteria and expenditure on the research phase of internal projects are
recognized in profit or loss as incurred.
Impairment of tangible and intangible assets (excluding goodwill)
At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine
whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is
not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
NOTES TO THE FINANCIAL STATEMENTS
39
Recoverable amount is the higher of the fair value less costs to sell and value in use. In assessing the value in use, the
estimated future cash flows are discounted to their net present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying
amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized
immediately in the administrative expenses line item in the income statement, unless the relevant asset is carried at a
revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying value of the asset or cash-generating unit is increased to the
revised recoverable amount, but so that the increased carrying amount does not exceed the carrying amount which would
have been determined had no impairment loss been recognized in prior years. A reversal of an impairment loss is
recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the
reversal of the impairment loss is treated as a revaluation increase.
Financial instruments
Financial assets and liabilities are recognized on the group’s balance sheet when the group becomes a party to the
contractual provisions of the instrument.
Trade receivables
Trade receivables are measured at initial recognition at fair value. Appropriate allowances for estimated irrecoverable
amounts are recognized in the administrative expenses line item in the income statement when there is objective evidence
that the asset is impaired.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments
that are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.
Financial liabilities and equity instruments
Financial liabilities and equity instruments issued by the group are classified according to the substance of the contractual
arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any
contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The accounting
policies adopted for specific financial liabilities and equity instruments are set out below.
Bank borrowings
Interest-bearing bank loans, overdrafts and lines of credit are initially measured at fair value. Any difference between the
initial fair value and the settlement or redemption of borrowings is recognized over the term of the borrowings in
accordance with the group’s accounting policy for borrowing costs.
Trade payables
Trade payables are initially measured at fair value, and are subsequently measured at amortized cost, using the effective
interest rate method.
Equity instruments
Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs.
Share-based payments
The group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are
measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value
determined at the date of grant is expensed on a straight-line basis over the vesting period, based on the group’s estimate
of the shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.
Fair value is measured by the binomial option-pricing model. The expected life used in the model had been adjusted, based
on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
3. REVENUE
All of the group’s revenue in respect of the years ended 31 December 2006 and 2005 derived from continuing operations
and from the group’s single business segment, the design, development and marketing of software products with associated
implementation and consultancy services.
Continuing operations
Software and associated consultancy services
2006
£’000
2005
£’000
6,045
–––––––
–––––––
4,664
–––––––
–––––––
40
NOTES TO THE FINANCIAL STATEMENTS
4. GEOGRAPHICAL SEGMENTS
The group’s primary reporting format for segment information is geographical segments. Information relating to the group’s
geographical segments, which are the United States, the United Kingdom and the Netherlands, where the group’s
operations are located, is given below.
For management purposes, the group is organised as a single business segment, namely the design, development and
marketing of software products with associated implementation and consultancy services. Therefore, no analysis of the
group’s trading result and balance sheet in terms of a secondary reporting format for business segments is presented in
this note.
The information in following table relating to sales revenue provides an analysis by the location of customer, irrespective of
the origins of the goods and services.
Year ended 31 December 2006
Income Statement
External revenues
Inter-segment revenues
Net loss before interest and tax
Depreciation and amortization
Balance Sheet
Capital expenditure
Total assets
Total liabilities
Year ended 31 December 2005
Income Statement
External revenues
Inter-segment revenues
Net loss before interest and tax
Depreciation and amortization
Balance Sheet
Capital expenditure
Total assets
Total liabilities
North
America
£’000
United
Kingdom
£’000
Rest of
Europe
£’000
2,733
820
(122)
333
––––––––
50
3,106
(1,743)
––––––––
––––––––
682
-
(125)
37
––––––––
-
1,146
(829)
––––––––
––––––––
2,630
315
(59)
3
––––––––
4
234
(294)
––––––––
––––––––
North
America
£’000
United
Kingdom
£’000
Rest of
Europe
£’000
2,693
321
(865)
454
––––––––
473
2,342
(1,444)
––––––––
––––––––
586
10
(340)
5
––––––––
-
1,666
(746)
––––––––
––––––––
1,385
242
(17)
7
––––––––
8
578
(445)
––––––––
––––––––
Total
£’000
6,045
1,135
(306)
373
––––––––
54
4,486
(2,866)
––––––––
––––––––
Total
£’000
4,664
573
(1,222)
466
––––––––
481
4,586
(2,635)
––––––––
––––––––
5. LOSS FOR THE YEAR
The loss for the year has been arrived at after charging/(crediting):
Continuing operations
Net foreign exchange losses/(gains)
Research and development costs including amortization
Depreciation of property, plant and equipment
Operating lease rentals – land and buildings
Operating lease rentals – equipment and vehicles
2006
£’000
2005
£’000
35
1,028
33
298
78
––––––––
––––––––
(1)
974
74
302
80
––––––––
––––––––
NOTES TO THE FINANCIAL STATEMENTS
41
6. AUDITORS’ REMUNERATION
Audit of the financial statements of the group
7. STAFF COSTS
Wages and salaries
Social security costs
Pension contributions
Employee benefits expense
Share-based payments expense (all equity-settled)
The average monthly number of employees during the year was made up as follows:
Development and operations
Sales and management
2006
£’000
2005
£’000
55
––––––––
––––––––
47
––––––––
––––––––
2006
£’000
3,476
270
65
201
62
–––––––
4,074
–––––––
–––––––
2005
£’000
3,236
246
65
171
143
–––––––
3,861
–––––––
–––––––
2006
Number
2005
Number
28
35
––––––––
63
––––––––
––––––––
31
32
––––––––
63
––––––––
––––––––
The above staff costs and the numbers of employees during the year include the executive directors.
The fees and emoluments of all directors were as follows:
Fees and emoluments
Pension contributions
Share-based payments expense (all equity-settled)
2006
£’000
2005
£’000
397
11
21
––––––––
429
––––––––
––––––––
403
10
70
––––––––
483
––––––––
––––––––
No director exercised share options during the year (2005: None).
Pension contributions are to personal defined contribution schemes and have been made for three directors (2005: three)
who served during the year.
The emoluments of the highest paid director were as follows:
Emoluments
Benefits
Pension contributions to defined contribution schemes
Share-based payments expense (all equity-settled)
2006
£’000
2005
£’000
139
9
2
9
––––––––
159
––––––––
––––––––
110
9
2
58
––––––––
179
––––––––
––––––––
42
NOTES TO THE FINANCIAL STATEMENTS
8. FINANCE REVENUE
Interest on bank deposits
9. FINANCE COSTS
Interest on bank loans, overdrafts and finance lease
10. INCOME TAX EXPENSE
Income tax expense for the year
2006
£’000
2005
£’000
39
––––––––
––––––––
53
––––––––
––––––––
2006
£000
2005
£000
36
––––––––
––––––––
67
––––––––
––––––––
2006
£000
2005
£000
-
––––––––
––––––––
-
––––––––
––––––––
The charge for the year can be reconciled to the accounting loss as follows:
Loss before tax
Tax credit at the UK corporation tax rate of 30%
Tax effect of expenses that are not deductible
in determining taxable losses
Temporary differences arising from the capitalisation
and amortization of internally generated development costs
Losses for the year not relievable against current tax
2006
£’000
2006
%
2005
£’000
2005
%
(303)
––––––––
––––––––
(1,236)
––––––––
––––––––
91
(29)
30%
(9%)
371
(65)
30%
(5%)
57
(119)
––––––––
-
––––––––
––––––––
18%
(39%)
––––––––
-
––––––––
––––––––
11
(317)
––––––––
-
––––––––
––––––––
1%
(26%)
––––––––
-
––––––––
––––––––
The group has an unrecognized deferred tax asset arising from its unrelieved trading losses, which has not been recognized
owing to uncertainty as to the level and timing of taxable profits in the future.
The unrecognized deferred tax asset is made up as follows:
Shortfall of tax depreciation compared to book depreciation
Effect of timing differences arising from capitalisation of
internally generated development costs
Unrelieved trading losses
Unrecognized deferred tax asset
2006
£’000
2005
£’000
165
164
(374)
20,329
––––––––
20,120
––––––––
––––––––
(336)
20,483
––––––––
20,311
––––––––
––––––––
At 31 December 2006, tax losses estimated at £50 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 £20.3million, based on the tax
rates currently obtaining in the relevant tax jurisdictions.
Of these tax losses, an aggregate amount of £12.1 million (representing £5.3 million of the potential deferred tax asset)
represents 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.
NOTES TO THE FINANCIAL STATEMENTS
43
11. LOSS DEALT WITH IN THE FINANCIAL STATEMENTS OF THE
PARENT COMPANY
The loss dealt with in the financial statements of the parent company for the year ended 31 December 2006 was £560,000
(2005: £915,000). The loss in 2006 included a net provision of £268,000 (2005: £557,000) 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 an income statement for the parent company.
12. LOSS PER SHARE AND EBITDA
Loss per share (from continuing operations)
Loss for the purpose of basic earnings per share
Weighted average number of ordinary shares for
the purpose of basic earnings per share
2006
£’000
2005
£’000
303
––––––––
––––––––
1.236
––––––––
––––––––
’000s
’000s
133,441
––––––––
––––––––
131,059
––––––––
––––––––
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 in
both 2006 and 2005. This is because the exercise of share options, details of which are set out in Note 29, would have the
effect of reducing the loss per ordinary share and is therefore not dilutive.
EBITDA
EBITDA is defined as earnings before interest, tax, depreciation and amortization.
44
NOTES TO THE FINANCIAL STATEMENTS
13. PROPERTY, PLANT AND EQUIPMENT
Group
Cost
At 1 January 2005
Additions
Exchange differences
At 1 January 2006
Additions
Exchange differences
At 31 December 2006
Accumulated depreciation
At 1 January 2005
Depreciation charge for the year
Exchange differences
At 1 January 2006
Depreciation charge for the year
Exchange differences
At 31 December 2006
Carrying amount
At 31 December 2006
At 31 December 2005
Computer
Equipment
£’000
Furniture &
fittings
£’000
1,569
41
34
––––––––
1,644
50
(109)
––––––––
1,585
––––––––
1,495
43
26
––––––––
1,564
26
(98)
––––––––
1,492
––––––––
330
13
9
––––––––
352
4
(21)
––––––––
335
––––––––
294
31
6
––––––––
331
7
(20)
––––––––
318
––––––––
Total
£’000
1,899
54
43
––––––––
1,996
54
(130)
––––––––
1,920
––––––––
1,789
74
32
––––––––
1,895
33
(118)
––––––––
1,810
––––––––
93
––––––––
17
––––––––
110
––––––––
80
––––––––
––––––––
21
––––––––
––––––––
101
––––––––
––––––––
The following rates are used for the depreciation of property, plant and equipment:
Computer equipment
Furniture and fittings
33% on a straight-line basis
20% to 25% on a straight-line basis
Company
The company has no property, plant and equipment.
14. INTANGIBLE ASSETS
Group
Cost
At 1 January 2005
Additions (internally generated)
Exchange differences
At 1 January 2006
Additions (internally generated)
Exchange differences
At 31 December 2006
Amortization
At 1 January 2005
Charge for the year
Exchange differences
At 1 January 2006
Charge for the year
Exchange differences
At 31 December 2006
Carrying amount
At 31 December 2006
At 31 December 2005
NOTES TO THE FINANCIAL STATEMENTS
45
Development
costs
(internally
generated)
£’000
IPR &
customer
relationships
Goodwill
Total
£’000
£’000
£’000
1,385
427
186
––––––––
1,998
495
(275)
––––––––
2,218
––––––––
734
392
108
––––––––
1,234
305
(169)
––––––––
1,370
––––––––
848
––––––––
––––––––
764
––––––––
––––––––
1,509
-
-
––––––––
1,509
-
-
––––––––
1,509
––––––––
1,509
-
-
––––––––
1,509
-
-
––––––––
1,509
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
17,546
-
-
––––––––
17,546
-
-
––––––––
17,546
––––––––
17,546
-
-
––––––––
17,546
-
-
––––––––
17,546
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
20,440
427
186
––––––––
21,053
495
(275)
––––––––
21,273
––––––––
19,789
392
108
––––––––
20,289
305
(169)
––––––––
20,425
––––––––
848
––––––––
––––––––
764
––––––––
––––––––
Goodwill and IPR & customer relationships represent goodwill and intellectual property rights and customer relationships
arising from acquisitions and have been fully amortized in accordance with the group’s amortization policies.
The amortization period for the internally generated development costs relating to the group’s software products is four
years.
Company
The company has no intangible assets.
46
NOTES TO THE FINANCIAL STATEMENTS
15. SUBSIDIARIES
Company
Cost
At 31 December 2005 and 31 December 2006
Amounts provided
At 31 December 2005 and 31 December 2006
Carrying amount
At 31 December 2005 and 31 December 2006
Amount due to subsidiary undertaking
At 31 December 2005 and 31 December 2006
£’000
52,519
––––––––
35,441
––––––––
17,078
(10,959)
––––––––
6,119
––––––––
––––––––
There are no plans for settlement of the amount due to subsidiary undertaking shown above nor is this likely to occur, and
accordingly it has been accounted for as part of the company’s investment in subsidiaries.
Details of the company’s subsidiaries at 31 December 2006 are set out below. Companies marked with an asterisk* are
held via Sopheon UK Ltd and those with an obelus† are held via Orbital Software Holdings plc.
Name of Company
Place of incorporation
Sopheon Corporation
Minnesota, USA
Sopheon Corporation
Delaware, USA
Sopheon NV
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
Proportion
of ownership
Interest
Proportion of
voting rights
held
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%
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
During 2006, the group invested £35,000 in acquiring minority holdings in companies established to market the group’s
software products in France and New Zealand. Full provision has been made against these investments during the year.
NOTES TO THE FINANCIAL STATEMENTS
47
16. NON-CURRENT RECEIVABLE
Non-current receivable
2006
£’000
Group
2005
£’000
2006
£’000
Company
2005
£’000
10
––––––––
––––––––
10
––––––––
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
The non-current receivable represents a deposit paid in respect of a property leased by the group.
17. TRADE AND OTHER RECEIVABLES
Amounts receivable from the sale of
software and services
Other receivables
Prepayments and accrued income
2006
£’000
2,358
18
108
––––––––
2,484
––––––––
––––––––
Group
2005
£’000
1,621
22
98
––––––––
1,741
––––––––
––––––––
2006
£’000
-
13
23
––––––––
36
––––––––
––––––––
Company
2005
£’000
-
20
18
––––––––
38
––––––––
––––––––
Trade and other receivables are stated net of allowances totalling £41,000 (2005: £4,000) for estimated irrecoverable
amounts. The directors consider that the carrying amount of trade and other receivables approximates to their fair value.
Of the trade receivables £1,627,000 (2005: £868,000), being the trade receivables of Sopheon Corporation Minnesota, are
charged to the Silicon Valley Bank as security for the bank line of credit disclosed in Note 19.
A full provision has been made against amounts totalling £38,270,000 (2005: £38,001,000) 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.
18. CASH AND SHORT-TERM BANK DEPOSITS
Cash at bank
Short-term bank deposits
2006
£’000
310
724
––––––––
1,034
––––––––
––––––––
Group
2005
£’000
980
990
––––––––
1,970
––––––––
––––––––
2006
£’000
17
724
––––––––
741
––––––––
––––––––
Company
2005
£’000
219
990
––––––––
1,209
––––––––
––––––––
Cash and short-term bank deposits comprise cash held by the group, bank current accounts and short-term bank deposit
accounts with maturities of three months or less. The carrying amount of these assets approximates to their fair value.
Included in cash at bank of the group is an amount of £35,000 held by the group’s employee share ownership trust.
48
NOTES TO THE FINANCIAL STATEMENTS
19. BANK OVERDRAFTS AND LOANS
Bank overdrafts
Bank lines of credit
2006
£’000
5
409
––––––––
414
––––––––
––––––––
Group
2005
£’000
8
362
––––––––
370
––––––––
––––––––
2006
£’000
1
-
––––––––
1
––––––––
––––––––
Company
2005
£’000
1
-
––––––––
1
––––––––
––––––––
The borrowings are all repayable on demand or within one year.
The group’s borrowings are denominated in the following currencies:
At 31 December 2006
Bank overdrafts
Bank line of credit
At 31 December 2005
Bank overdrafts
Bank line of credit
The average interest rates paid were as follows:
Bank line of credit
Sterling
£’000
US dollars
£’000
Total
£’000
5
-
––––––––
5
––––––––
-
409
––––––––
409
––––––––
5
409
––––––––
414
––––––––
Sterling
£’000
US dollars
£’000
Total
£’000
8
-
––––––––
8
––––––––
-
362
––––––––
362
––––––––
8
362
––––––––
370
––––––––
2006
£000
2005
£000
8%
––––––––
––––––––
8%
––––––––
––––––––
All the bank borrowings carry interest at floating rates, thus exposing the group to cash flow interest rate risk.
The directors consider that the carrying amounts of bank overdrafts and loans approximate to their fair values.
The bank line of credit is secured against the trade receivables of Sopheon Corporation Minnesota and bears interest at a
rate of 2% above the bank’s prime rate. At 31 December 2006 the group had available £102,000 (2005: £220,000)
notionally available under the line of credit subject to the availability of qualifying trade receivables.
NOTES TO THE FINANCIAL STATEMENTS
49
20. TRADE AND OTHER PAYABLES
Trade payables
Other payables
Accruals
Deferred income
Group
2005
£’000
419
256
731
847
––––––––
2,253
––––––––
––––––––
2006
£’000
34
76
223
-
––––––––
333
––––––––
––––––––
Company
2005
£’000
22
83
242
-
––––––––
347
––––––––
––––––––
2006
£’000
377
229
828
1,010
––––––––
2,444
––––––––
––––––––
Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The directors consider that the carrying amounts of trade and other payables approximate to their fair values.
21. OBLIGATIONS UNDER FINANCE LEASES
The present value of future lease payments is analysed as:
Current liabilities
Non-current liabilities
Group
2005
£’000
Company
2005
£’000
2006
£’000
2006
£’000
3
3
-
-
5
––––––––
8
––––––––
––––––––
9
––––––––
12
––––––––
––––––––
-
––––––––
-
––––––––
––––––––
-
––––––––
-
––––––––
––––––––
The group leases a telephone system with a net carrying value at 31 December 2006 of £8,000 (2005: £12,000).
Future lease payments are due as follows:
At 31 December 2006
Within one year
Due in one to five years
At 31 December 2005
Within one year
Due in one to five years
Minimum
lease
payments
£’000
3
5
––––––––
8
––––––––
––––––––
Minimum
lease
payments
£’000
3
10
––––––––
13
––––––––
––––––––
Interest
£’000
Present
value
£’000
£’000
-
1
––––––––
1
––––––––
––––––––
3
6
––––––––
9
––––––––
––––––––
Interest
£’000
Present
value
£’000
£’000
-
1
––––––––
1
––––––––
––––––––
3
9
––––––––
12
––––––––
––––––––
50
NOTES TO THE FINANCIAL STATEMENTS
22. OPERATING LEASE ARRANGEMENTS
At the balance sheet date the group has outstanding commitments under operating leases in respect of which the total
future minimum lease payments were due as follows:
Land &
buildings
2006
£’000
257
133
––––––––
390
––––––––
––––––––
Other
2006
£’000
214
71
––––––––
285
––––––––
––––––––
Land &
buildings
2005
£’000
232
281
––––––––
513
––––––––
––––––––
Other
2005
£’000
86
158
––––––––
244
––––––––
––––––––
Due within one year
Due after one year and within five years
Company
The company has no operating leases.
23. FINANCIAL INSTRUMENTS
Risk management
The group’s financial instruments at 31 December 2006 primarily comprised cash, overdraft and line of credit balances in
addition to operating items such as trade receivables and payables. These instruments are held in a variety of currencies.
Accordingly the group is exposed to the following financial risks relating to the group’s financial instruments:
• Liquidity risk
• Foreign currency risk
• Credit risk
The group aims to keep a balance of debt and equity finance that will maximize shareholder returns without exposure to
undue risks. The group has established policies and procedures for managing these risks which are summarized below.
Liquidity risk
The liquidity risk of each group entity is managed centrally by the parent company. Budgets are established annually for
each group entity and approved by the parent company, enabling the group’s cash requirements to be anticipated. Certain
group entities have committed overdraft facilities or bank lines of credit. All surplus cash is held centrally to maximise the
returns on deposits.
Foreign currency risk
The group has operations in the United States, Holland and the United Kingdom. Assets and liabilities of group entities
located in the United States and Holland are denominated respectively in US Dollars and Euros and are therefore exposed
to fluctuations in exchange rates giving rise to gains or losses on retranslation into sterling. It is not the group’s policy to
hedge its net investments in foreign operations, because it judges that the necessary hedging techniques would involve risks
to cash flow.
Foreign currency risk also arises where individual group entities enter into transactions denominated in currencies other
than their functional currency, with fluctuations in exchange rates giving rise to gains or losses in the income statement.
Where the foreign currency risk to the group is significant, consideration is given to hedging the risk through the forward
currency market.
Credit risk
The group’s principal financial assets are bank balances and cash and trade and other receivables. The credit risk on liquid
funds is limited because the counter-parties are banks with high credit ratings assigned by international credit-rating
agencies. The group’s credit risk is primarily attributable to its trade receivables. An allowance for impairment is made
where there is an identified loss event, which is evidence of a reduction in the recoverability of the amount receivable. The
group has no significant concentration of credit risk, with exposure spread over a number of customers.
NOTES TO THE FINANCIAL STATEMENTS
51
Interest rate risk profile of financial assets and liabilities
The interest rate profile of the financial assets and liabilities of the group as is as follows:
At 31 December 2006
Floating rate
Cash
Short-term deposits
Bank overdrafts and lines of credit
Fixed rate
Obligations under finance leases
At 31 December 2005
Floating rate
Cash
Short-term deposits
Bank overdrafts and lines of credit
Fixed rate
Obligations under finance leases
Within
1 year
1 to 2
years
2 to 5
years
310
724
(413)
-
-
-
-
-
-
Total
310
724
(413)
(3)
––––––––
(3)
––––––––
(2)
––––––––
(8)
––––––––
Within
1 year
1 to 2
years
2 to 5
years
980
991
(370)
-
-
-
-
-
-
Total
980
991
(370)
(3)
––––––––
(3)
––––––––
(6)
––––––––
(12)
––––––––
Fair values of financial assets and financial liabilities
Set out below is a comparison by category of carrying amounts and fair values of all of the group’s financial instruments
that are carried in the financial statements.
Financial assets
Cash
Short-term deposits
Financial liabilities
Bank overdrafts and lines of credit
Obligations under finance leases
Book values
2005
£’000
980
991
2006
£’000
310
724
2006
£’000
310
724
Fair values
2005
£’000
980
991
(413)
(8)
––––––––
(370)
(12)
––––––––
(413)
(8)
––––––––
(370)
(12)
––––––––
Currency and interest profile of financial assets and liabilities
At 31 December 2006
Floating rate
Cash
Short-term deposits
Bank overdrafts and lines of credit
Fixed rate
Obligations under finance leases
Sterling
US$
Euro
Total
51
724
(4)
172
-
(409)
87
-
-
310
724
(413)
-
––––––––
(8)
––––––––
-
––––––––
(8)
––––––––
52
NOTES TO THE FINANCIAL STATEMENTS
At 31 December 2005
Floating rate
Cash
Short-term deposits
Bank overdrafts and lines of credit
Fixed rate
Obligations under finance leases
Interest rate profile
Sterling
US$
Euro
Total
264
991
(8)
420
-
(362)
296
-
-
980
991
(370)
-
––––––––
(12)
––––––––
-
––––––––
(12)
––––––––
The rates of interest payable on floating rate financial liabilities are disclosed in Note 19. The group has no fixed rate
financial liabilities other than its obligations under the finance lease disclosed in Note 21, where the implied interest rate is
3.5% and instalments are due until June 2010.
Interest on the group’s short-term bank deposits fluctuates in line with sterling money market rates.
24. SHARE CAPITAL
Authorized
Ordinary shares of 5p each
2006
Number
2006
£000
2005
Number
2005
£000
175,000,000
–––––––––
–––––––––
8,750
–––––––––
–––––––––
175,000,000
–––––––––
–––––––––
8,750
–––––––––
–––––––––
Issued and fully paid
2006
Number
2006
£000
2005
Number
2005
£000
At 1 January
133,305,139
6,665
115,871,082
5,793
Issued for cash
Issued on conversion of Convertible Loan Stock
Issued on exercise of share options
At 31 December
-
-
273,888
–––––––––
133,579,027
–––––––––
–––––––––
-
-
14
–––––––––
6,679
–––––––––
–––––––––
4,747,826
12,572,326
113,905
–––––––––
133,305,139
–––––––––
–––––––––
237
629
6
–––––––––
6,665
–––––––––
–––––––––
The company has one class of ordinary shares, which carry no right to fixed income.
During 2006 273,888 new ordinary shares were issued pursuant to the exercise of share options for an aggregate
subscription price of £43,000.
NOTES TO THE FINANCIAL STATEMENTS
53
25. CAPITAL RESERVES
Group
At 1 January 2005
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
At 1 January 2006
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
At 31 December 2006
Company
At 1 January 2005
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
At 1 January 2006
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
At 31 December 2006
Share
premium
£’000
48,949
1,707
-
-
––––––––
50,656
29
-
-
––––––––
50,685
––––––––
––––––––
Share
premium
£’000
48,949
1,707
-
-
––––––––
50,656
29
-
-
––––––––
50,685
––––––––
––––––––
Merger
reserve
£’000
17,944
-
-
-
––––––––
17,944
-
-
-
––––––––
17,944
––––––––
––––––––
Merger
reserve
£’000
10,179
-
-
-
––––––––
10,179
-
-
-
––––––––
10,179
––––––––
––––––––
Capital
redemption
reserve
£’000
2,884
-
-
-
––––––––
2,884
-
-
-
––––––––
2,884
––––––––
––––––––
Capital
redemption
reserve
£’000
2,884
-
-
-
––––––––
2,884
-
-
-
––––––––
2,884
––––––––
––––––––
Share
options
reserve
£’000
1,405
-
143
(101)
––––––––
1,447
-
62
(195)
––––––––
1,314
––––––––
––––––––
Share
options
reserve
£’000
1,405
-
143
(101)
––––––––
1,447
-
62
(195)
––––––––
1,314
––––––––
––––––––
Total
£’000
71,182
1,707
143
(101)
––––––––
72,931
29
62
(195)
––––––––
72,827
––––––––
––––––––
Total
£’000
63,417
1,707
143
(101)
––––––––
65,166
29
62
(195)
––––––––
65,062
––––––––
––––––––
Share premium represents the premium arising on the issue of shares and its use is governed by the provisions of the
Companies Act 1985 .
Merger reserve is a non-statutory reserve representing the premium on the issue of shares pursuant to certain past
business combinations which meet specified criteria.
The capital redemption reserve is a non-distributable reserve arising from the cancellation in 2001 of deferred shares.
The share options reserve comprises the deemed value of outstanding share options granted in connection with the
acquisitions of Teltech Resource Network Corporation in 2000 and of Orbital Software Holdings plc in 2001, together
with the fair value of share-based payments to employees pursuant to the group’s share option schemes.
54
NOTES TO THE FINANCIAL STATEMENTS
26. STATEMENT OF CHANGES IN EQUITY
Group
At 1 January 2005
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
Exchange differences on translation
of foreign operations
Loss for the year attributable to
equity shareholders
At 1 January 2006
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
Exchange differences on translation
of foreign operations
Loss for the year attributable to
equity shareholders
Share
capital
£’000
5,794
871
-
-
Shares to
be issued
£’000
Capital
reserves
£’000
Translation
reserve
£’000
1,509
(1,509)
-
-
71,182
1,707
143
(101)
-
-
-
(117)
-
-
-
86
Retained
earnings
£’000
(76,479)
-
-
101
-
Total
£’000
1,889
1,069
143
-
86
-
_______
-
_______
-
_______
-
_______
(1,236)
_______
(1,236)
_______
6,665
14
-
-
-
-
-
-
-
-
72,931
29
62
(195)
(31)
-
-
-
(77,614)
-
-
195
1,951
43
62
-
-
(133)
-
(133)
-
_______
-
_______
-
_______
-
_______
(303)
_______
(303)
_______
At 31 December 2006
6,679
_______
_______
-
_______
_______
72,827
_______
_______
(164)
_______
_______
(77,722)
_______
_______
1,620
_______
_______
Company
At 1 January 2005
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
Loss for the year attributable to equity shareholders
At 1 January 2006
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
Loss for the year attributable to equity shareholders
Share
capital
£’000
Shares to
be issued
£’000
Capital
reserves
£’000
Retained
earnings
£’000
5,794
871
-
-
-
_______
6,665
14
-
-
-
_______
1,509
(1,509)
-
-
-
_______
-
-
-
-
-
_______
63,417
1,707
143
(101)
-
_______
65,166
29
62
(195)
-
_______
(63,999)
-
-
101
(915)
_______
(64,813)
-
-
195
(560)
_______
Total
£’000
6,721
1,069
143
-
(915)
_______
7,018
43
62
-
(560)
_______
At 31 December 2006
6,679
_______
_______
-
_______
_______
65,062
_______
_______
(65,178)
_______
_______
6,563
_______
_______
NOTES TO THE FINANCIAL STATEMENTS
55
27. RETIREMENT BENEFIT PLANS
The group operates defined contribution retirement benefit plans which employees are entitled to join. The total expense
recognized in the income statement of £65,000 (2005: £65,000) represents contributions paid to such plans at rates
specified in the rules of the plans.
28. RELATED PARTY TRANSACTIONS
Details of transactions between the group and related parties are disclosed below.
Compensation of key management personnel
Details of directors’ remuneration are given in Note 7. The total remuneration of directors and members of the group’s
management committee during the year was as follows:
Emoluments and benefits
Pension contributions
2006
£’000
2005
£’000
649
16
–––––––
665
–––––––
–––––––
521
16
–––––––
537
–––––––
–––––––
Transactions with related parties who are subsidiaries of the company
The following is a summary of the transactions of the company with its subsidiaries during the year:
Amounts advanced to subsidiaries by way of interest-free loans
Net management charges to subsidiaries
2006
£’000
2005
£’000
19
239
–––––––
364
226
–––––––
During 2006 and 2005 the company granted share options to employees of subsidiary companies, details of which are
disclosed in Note 29.
Other related party transactions
There were no other related party transactions during the year under review or the previous year.
29. SHARE-BASED PAYMENTS
Equity settled share option schemes
The group has a number of share option schemes for all employees. Options are exerciseable at a price equal to the
market price on the date of grant. The normal vesting periods are as set out below.
Vesting
Sopheon plc (USA) stock option plan
Sopheon UK approved share option scheme
Sopheon UK unapproved share option scheme
Sopheon NV share option scheme
In three equal tranches between the first and third anniversary of grant
On third anniversary of grant
Immediate or as per USA plan
Immediate or as per USA plan
56
NOTES TO THE FINANCIAL STATEMENTS
Details of the share options outstanding during the year are as follows:
Outstanding at the beginning of the year
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at the end of the year
Exerciseable at the end of the year
Number of
share
options
2006
8,530,716
1,602,500
(273,888)
(419,663)
–––––––
9,439,665
–––––––
–––––––
7,147,165
–––––––
–––––––
Weighted
average
exercise
price
2006
£
0.36
0.22
0.16
0.57
–––––––
0.33
–––––––
–––––––
0.37
–––––––
–––––––
Number of
share
options
2005
Weighted
average
exercise
price
2005
£
0.38
7,527,302
0.25
1,382,500
0.15
(113,905)
0.49
(265,181)
–––––––
–––––––
8,530,716 0.36
–––––––
–––––––
–––––––
–––––––
6,650,153 0.41
–––––––
–––––––
–––––––
–––––––
The weighted average share price at the date of exercise for share options exercised during the year was 21p (2005 25p).
The options outstanding at the end of the year have a weighted average remaining life of 7.5 years (2005: 7.3 years).
In 2006, share options were granted on 15 April 2006 and on 11 October 2006. The exercise prices of the options granted
on those dates was 22p and 18.75p respectively, and the estimated fair values were 9.6p and 7.4p respectively. In 2005
share options were granted on 15 April 2005 and 13 October 2005. The exercise prices of the options granted on those
dates were 25.25p and 21.75p respectively, and the estimated fair values were 14.9p and 12.9p respectively.
The fair values were calculated using the binomial option-pricing model. The principal assumptions used were:
Share price at time of grant
Exercise price
Expected volatility
Risk-free rate
Expected dividend yield
15 April
2006
11 October
2006
15 April
2005
13 October
2005
22p
22p
40%
5%
Nil
18.75p
18.75p
40%
5%
Nil
25.25p
25.25p
40%
5%
Nil
21.75p
21.75p
40%
5%
Nil
The expected life of the options used was either 5 or 10 years depending on the particular scheme rules.
Expected volatility was determined by reference to the historic volatility of the company’s share price in the period before
the date of grant.
The group recognized total expenses of £62,000 (2005: £143,000) relating to equity-settled share based payments during
the year.
There were no other related party transactions during the year under review or the previous year.
30. APPROVAL OF FINANCIAL STATEMENTS
The financial statements were approved by the board of directors and authorized for issue on 28 March 2007.
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 was a non-executive Director of Brown & Jackson Plc for 4 years from June 2001
to July 2005 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.
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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