S O P H E O N
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8
A N N U A L R E P O R T
Where innovation means business™
Sopheon is an international provider of software and services.
Sopheon’s software applications automate product development
and strategic product planning, delivering efficiencies
and decision support that enable companies to generate
more revenue and profit from product innovation.
Summary Results and Trends ................................. 5
Statement of Directors’ Responsibilities ...........21
Statement from the Chairman and
Chief Executive Officer ........................................... 6
Financial and Operating Review ............................ 8
Product and Market Overview ............................11
Directors and Advisors .........................................16
Auditors’ Report .....................................................22
Consolidated Income Statement .........................24
Balance Sheets .........................................................25
Consolidated and Company Statement of
Recognized Income and Expense ........................26
Report on Directors’ Remuneration .................17
Cash Flow Statements ...........................................27
Directors’ Report ...................................................18
Notes to the Financial Statements .....................28
Sopheon's software solves the challenge of synchronizing
innovation planning and execution – an industry first –
with new capabilities that address the needs of a growing
range of companies.
Summary Results and Trends
2008
2007
2006
2005
£'000
Revenue
£'000
EBITDA
Profit before tax
£'000
Earnings per share pence
9,304
1,120
44
0.02
6,332
113
(443)
(0.32)
6,045
33
(303)
(0.23)
4,664
(746)
(1,236)
(0.94)
£'000
Net assets
£'000
Gross cash
£'000
Working capital
Long term liabilities £'000
4,268
2,586
3,068
(1,105)
3,310
2,053
2,140
(1,195)
1,620
1,034
1,667
1,951
1,970
1,932
-
-
Working capital is calculated as net current assets after adding back
deferred income.
2008 was a year of strong growth in revenues and a transformation in
EBITDA. In spite of considerable amortization and interest costs, we
delivered a positive profit before tax. All key balance sheet metrics improved.
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2007
2008
During 2008 we grew our customer base to 157 licensees.
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2008
Recurring revenue base
Total revenues
License extension orders
We have grown our business by an annualized average of 36
percent since the launch of Accolade. Our existing customers
accounted for over 60 percent of total revenues in 2007 and
2008, providing a solid platform for growth.
6
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
S T A T E M E N T F R O M T H E C H A I R M A N
A N D C H I E F E x E C U T I V E O F F I C E R
Performance
Sopheon delivered a landmark performance in 2008. We are delighted to report revenues that grew from £6.3m to £9.3m,
EBITDA of £1.1m (2007: £0.1m) and a profit after tax of £29,000 (2007: loss of £443,000).
License sales were spread across a total of 53 new and extension orders compared to 47 transactions the year before.
We entered 2008 with a licensee base of 135 companies, and grew this to 157 by the end of the year. Performance was
geographically balanced, with both the US and Europe showing revenue growth in excess of 40 percent. Our reseller
partners accounted for 11 percent of the total, up from 6 percent in the previous year. Vision Strategist™, the solution that
we acquired with Alignent in June 2007, contributed 13 percent of revenues in 2008. The remainder was Accolade® related.
Our recurring revenue base coming into 2009 was £3.7m. By comparison, we entered 2008 with recurring revenues
totalling £2.6m. Overall, 65 percent of revenues in 2008 came from current customers, highlighting the opportunity that
we have to continue to expand the use of our solutions inside existing accounts.
At the date of this report, full-year 2009 revenue visibility incorporating booked revenue, contracted services business and
the run rate of recurring contracts already stands at £5.4m. Revenue visibility is more fully defined in Note 3.
These developments underline the growing maturity of our business. However, particularly in these uncertain economic
times, our reported performance does remain sensitive to the timing, value and profile of individual sales events.
Strategy and Product
Our acquisition of Alignent in 2007 has been fully integrated and is contributing both strategically and operationally to the
progress of our business. Revenues for Alignent’s Vision Strategist grew 28 percent compared to the solution’s annualized
contribution in 2007. Our expectation that the software would improve our ability to break into the aerospace and
defense sectors has been validated. Throughout 2008, we invested substantial time and energy in these markets, learning
their dynamics and requirements while developing the relationships needed to generate business. As a result of these
efforts, we entered 2009 with an active pipeline of significant sales opportunities in these sectors.
Investment in product development has remained a cornerstone of our business philosophy. During 2008 our development
team completed four product releases, two each for Accolade and Vision Strategist. This included, in the first quarter, the
most significant new release of Accolade since the software was introduced to the market more than seven years ago.
These releases have positioned Sopheon for continued leadership in the market.
Accolade® is a registered trademark of Sopheon plc.
Vision StrategistTM is a trademark of Sopheon plc.
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
7
Moreover, we believe that our 2008 results reflect the fact that our software can bring immediate value to recession-
plagued companies that need to reduce costs, without undercutting their prospects for long-term growth. Our solutions
help companies maximize returns from available resources when times are tough, while also supporting the development
of programs and strategies to enable them to accelerate out of the downturn and emerge with increased competitive
strength. In particular, our software can help them to:
Improve strategic agility and “uncertainty planning”
•
• Make faster, better-informed portfolio decisions
•
• Keep daily operational activities aligned with organizational strategies for growth
• Cut costs by improving innovation process and team efficiencies
Identify, prioritize and act on the most promising innovation opportunities
These are mission critical improvements in these turbulent times.
People
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 continuing
contribution to our growing success. Over the last two years, we have welcomed many new staff to the Sopheon team;
by the end of 2008 we had 105 employees, compared to 65 at the end of 2006 and 92 at the end of 2007.
Sopheon’s executive management team has been in place for several years. It has five members. Our Chief Financial
Officer Arif Karimjee and the two of us serve on the team, and also act as executive directors. Our Chief Technology
Officer Paul Heller and Vice President of Research Huub Rutten complete the group. Executive management is
complemented by a strong operational management team that lead the marketing, sales and customer services functions in
each of the US and Europe. The Sopheon plc board is made up of the three executive directors, augmented by three
non-executive directors, who bring a wealth of knowledge and experience to our business. Details about each of the
directors are on the inside back cover of this report.
Outlook
By the end of 2008, Sopheon had 157 licensed customers with strong representation from each of our target markets.
During the year, we were recognized by members of the analyst community not just as a best-of-breed offering, but as the
most mature within our class of applications.
Companies understand the business importance of continued, prudent investment in product innovation, and Sopheon
addresses that need. We are enjoying significant repeat business from our customer base, coupled with a good number
of high-quality new clients; since the start of the market downturn, organizations such as Bayer HealthCare, Burger King,
Novartis, PepsiCo and the U.S. Army have adopted our software. During the same period, existing customers such as
General Motors, Medtronic, Lockheed Martin, SABMiller and Verizon Wireless extended their investment in our solutions.
Anecdotal evidence indicates that many of these investments were made not in spite of the recession, but because of it.
However, we are very conscious that the current level of uncertainty in the economic environment is unprecedented, and
a number of major corporations find themselves fighting for survival. Although our sales pipelines remain very active, some
potential customers are simply deferring all capital investment decisions, irrespective of their potential return. Accordingly,
it is tough to predict growth with any accuracy. In response, we have developed tight operational plans that make spending
contingent on historic and forecasted revenue performance on a quarter-by-quarter basis. This cautious mindset may well
affect our growth trajectory in the short term, but will underpin all hiring and expenditure decisions throughout 2009.
Revenue visibility for 2009 already stands at £5.4m. This gives us a solid base from which to pursue our business goals. We
believe that our solutions offer compelling value to companies faced with the need to cut costs without jeopardizing their
strategies for growth. However, the market promise is countered by turmoil across the economic landscape. We face this
uncertain environment with caution, but with continued optimism.
Barry Mence
Executive Chairman
25 March 2009
Andy Michuda
Chief Executive Officer
8
FINANCIAL AND OPERATING REVIEW
F I N A N C I A L A N D O P E R A T I N G R E V I E W
Trading Performance
Sopheon’s consolidated turnover grew to £9.3m (2007: £6.3m). From a geographical standpoint, revenues for the US
business increased by approximately 50 percent, with 42 percent growth in Europe. This performance was boosted to a
degree by a weakening of the annual average exchange rate between Dollar and Sterling from 1.9969 in 2007 to 1.8521
in 2008. Nevertheless, in dollar terms, total revenues were $17.2m compared to $12.7m in 2007, representing growth of
35 percent, a very creditable performance given the economic conditions. The annualized average growth of the business
since the launch of Accolade eight years ago is approximately 36 percent.
Total license transactions including extension orders rose from a total of 47 in 2007 to 53 in 2008. This included 15
transactions relating to the Vision Strategist solution, acquired with the Alignent business in June 2007. Overall, the
former Alignent business contributed approximately 13 percent of total revenues during 2008.
Although both our core regions demonstrated strong growth in revenues for 2008, the US business accounted for 63
percent and 64 percent of our total revenues in 2007 and 2008 respectively, and we believe this emphasis will continue.
Business Mix
Overall, in 2008 our business delivered a 44:28:27 ratio of license, maintenance, service respectively compared to
34:29:37 in the prior year. In our last report we had predicted that the proportion of license revenues would rise in
2008, assisted in part by the effect of the transactions that were deferred from the end of 2007, and indeed license
revenue almost doubled in Sterling terms.
Consulting revenues grew by almost 40 percent and we expect this to continue to expand steadily, providing a source
of stability and maturity to our business even though it may become a smaller overall proportion as license revenues
become more prevalent. Services business from existing customers had grown sharply to £1.2m in 2007, and we were
pleased to maintain this performance with £1.3m of such business recorded during 2008. While we are very proud of the
achievements of our services staff, we believe that in time services will moderate as a proportion of our total revenues
by the effect of license business coming through partners, for which associated services work is unlikely to be performed
by Sopheon.
Overall revenues from existing customers remained above 60 percent of total revenues for the second year in a row. We
believe this underlines both the value of our solutions and the increasing stability of the business.
Recurring income has grown to £3.7m coming into 2009, compared to £2.6m a year before. The majority of this income
is represented by maintenance services, but also includes hosting services and license rentals.
Overall gross margins have held fairly steady at 75 percent (2007: 73 percent) but this continues a trend of improvement,
with 2006 at 72 percent. One factor that affects margin is the degree to which our services group recruits permanent
staff as opposed to using subcontractors. We have gradually built-up our internal resources over the last two years,
carefully matching growth in resources to growth in revenue but successfully reducing reliance on subcontractors. This
has increased the strength of the services team from 18 to 30 over the two-year period, of which five joined in 2008. In
future, margins may also be slightly affected by decisions to embed, rather than build, certain third-party components or
methods of working into our software.
Research and Development Expenditure
The R&D effort in 2008 continued the theme of advancing the capabilities in parallel of both of our key product offerings,
namely Accolade and Vision Strategist. As a consequence we delivered four releases during the year, two for each
product. This effort included the release in the first quarter of the most significant new version of Accolade in Sopheon’s
history – version 7.0 – which has extended our value not only to the process manufacturing markets that we have
historically targeted, but also to the large aerospace, defense and automobile sectors.
FINANCIAL AND OPERATING REVIEW
9
Headline R&D expenditure almost doubled, but half of this can be attributed to an increase of £0.5m in amortization and
impairment charges. Of this, £0.2m represents higher amortization costs for the group’s internally generated R&D assets,
largely relating to the Accolade 7.0 release. A further £0.1m is due to the full year effect of amortizing the R&D assets
acquired with Alignent in June 2007. The final £0.2m represents impairment charges taken against the Alignent R&D asset.
As further detailed in note 14, the decision by certain customers to terminate or convert their legacy installations of
Vision Strategist affected the recurring revenue base which formed part of the valuation of the intangible assets acquired
with Alignent. The board does not believe that these events have any bearing on the commercial and strategic justification
for the Alignent acquisition.
Accordingly, ignoring the effect of the capitalization and amortization of such costs, total R&D expenditure increased
by almost £0.5m compared to 2007. Since 2001 Sopheon has maintained R&D spend at above 20 percent of revenues.
Sopheon is committed to product leadership and R&D excellence is a core competency of the group. Building on
recruitment that took place across 2007, we increased R&D staff from 29 to 33 during 2008. Much of the additional
resource was devoted to the research and requirements work associated with the early phases of several planned new
releases, in addition to sustaining work to keep existing releases in step with platform changes. As a result of the above,
the amount of 2008 R&D expenditure that met the criteria of IAS38 for capitalization remained flat at £0.8m
(2007: £0.8m).
Operating Costs
Overall staff costs have increased by approximately £1.6m. Three principal factors have contributed to the increase.
Approximately £0.6m can be attributed to the fall in the exchange rate for Sterling against the US dollar and the Euro, the
currencies in which the majority of the group’s employment costs are denominated. A further £0.2m is due to a higher
level of bonus being earned by the group’s employees as a result of the improvement in financial results over 2007. The
remaining amount can be attributed to the impact of our increased staffing levels. During 2007, headcount rose from 65
to 92, leading to an average of 85 for the year; these staff members joined throughout the year, so the full year cost effect
of the expansion did not arrive until 2008. During 2008, we expanded resources to a total of 105 by the end of the year,
for an average of 98 during the year. These expansions occurred in the three key operational areas, namely research and
development, distribution (sales and marketing), and customer services.
Detailed comments regarding customer services and research and development costs are noted above.
Headline distribution costs were £1m higher than the previous year. This included £0.1m for the full year effect of
amortizing the intangible customer assets acquired with Alignent in June 2007, and £0.2m of impairment charges taken
in the year against that same asset for the reasons given in the discussion of R&D costs above. Of the remaining £0.7m,
over £0.2m of the increase is due to higher bonus and commission payments linked to the higher performance achieved.
The remaining increase is due to higher investment in sales and marketing resources in line with revenue growth, in
addition to currency exchange factors.
Headline administration costs have fallen by £0.2m. This fall can largely be attributed to exchange gains recorded on
the foreign currency cash balances held in Sopheon plc. Underlying administration costs have remained broadly flat
year on year; administration staff and related costs have not been expanded during the period, and provisions recorded
against investments and loans to the group’s reseller partners has remained in line with prior year levels. We continue to
operate a conservative policy with regard to the recoverability of such investments.
Results
The combined effect of the revenue and cost performance discussed above had a dramatic effect on Sopheon’s EBITDA
performance for 2008 which rose to £1.1m (2007: £0.1m).
In common with other businesses in our sector, Sopheon measures its annual performance using EBITDA (Earnings
before Interest, Tax, Depreciation and Amortization) which the board believes provides a useful indicator of the operating
performance of our business by removing the effect on earnings of tax, capital spend and financing. EBITDA is further
defined and reconciled to the profit before tax in Note 12 of the financial statements.
1 0
FINANCIAL AND OPERATING REVIEW
Our calculation of EBITDA is stated after charging (i) share based payments of £0.1m (2007: £0.1m); (ii) impairment
charges of acquired intangible assets of £0.3m (2007: £nil); and (iii) exchange gains of £0.2m (2007: £49,000) but excludes
depreciation and amortization charges for the year of £0.9m (2007: £0.5m) and net finance costs of £0.2m (2007: £0.1m).
Including the effect of interest, depreciation and amortization, the group reported a profit before tax for the year of
£44,000 (2007: loss £0.4m). Although the group has substantial accumulated tax losses in all territories, certain tax
jurisdictions do not permit a complete offset of profits against such losses resulting in a small US “Alternative Minimum
Tax” charge that reduces the retained profit after tax to £29,000. The profit per ordinary share was 0.02p (2007: loss of
0.32p).
Financing and Balance Sheet
Net assets at the end of the year stood at £4.3m (2007: £3.3m). Gross cash resources at 31 December 2008 amounted
to £2.6m (2007: £2.1m). Approximately £1.1m was held in US Dollars, £0.6m in Euros and £0.9m in Sterling.
Intangible assets stood at £4.7m (2007: £3.7m) at the end of the year. This includes (i) £2.4m being the net book value
of capitalized research and development arising (2007: £1.4m) and (ii) an additional £2.3m (2007: £2.3m) being the net
book value of Alignent intangible assets acquired in 2007. The underlying assets are denominated in US Dollars. Due to
amortization and impairment charges, the underlying US Dollar value of these assets lowered during the year, however,
the value in Sterling has risen due to the movement in exchange rates. Further details are set forth in Note 14.
As part of the funding raised for the Alignent acquisition, Sopheon secured $3.5m of medium-term debt from BlueCrest
Capital Finance LLC (“BlueCrest”). The debt is being repaid in 48 equal monthly installments, and is secured by a
debenture and guarantee from Sopheon plc. Since inception, approximately $1.1m of the medium-term debt principal
has been repaid. The group also has an additional $750,000 revolving credit facility from BlueCrest, secured on accounts
receivable. Further details are set out in Note 20 of the financial statements.
Sopheon’s equity line of credit facility with GEM Global Yield Fund Limited ("GEM") remains in place through
23 December 2009. The directors have not yet concluded whether to seek extension of the instrument. In 2007,
GEM agreed to implement a two-year extension at no cost to Sopheon. The facility has been used to raise working
capital once, in March 2004, leaving approximately 90 percent of the original €10m facility available under the extended
agreement. Drawings under the GEM equity line of credit are subject to conditions relating inter alia to trading volumes
in Sopheon shares.
Short term borrowings connected with the group’s revolving facilities amounted to £0.5m (2007: £0.4m). In both years,
this represents $750,000 with the Sterling increase linked to exchange rate movements. Similarly, the overall medium-
term loan balance has increased from £1.6m to £1.7m, but this apparent increase disguises payments of $1.1m which
actually reduced the dollar carrying value of the debt by $0.8m. These repayments have been funded out of free
cash flow.
PRODUCT AND MARKET OVERVIEW
1 1
P R O D U C T A N D M A R K E T O V E R V I E W
Sopheon’s Solutions
In today’s difficult economy, nearly every corporate executive is worried about this challenge: how to
achieve short-term cost savings without sacrificing strategies for long-term growth.
The current business environment is the most uncertain that many organizations have ever faced. Companies are being
forced to continually rethink strategies and adjust spending priorities. When it comes to innovation, executives are literally
betting the future on their decisions about where to invest increasingly limited resources. The choices they make will
determine whether their companies emerge successfully from the downturn, falter, or succumb. Too often, their decisions
are wrong.
Poor decisions on innovation investments can generally be traced to one of three factors:
1) Lack of transparency. Decision-makers can’t get a clear picture of where their innovation resources are
being spent.
2) Inability to judge what is valuable (and what is not). Organizations often lack market-driven processes for
determining the potential business value of investment options. As a result, spending decisions are based on little
more than gut feel.
3) Failure to anticipate consequences. Decisions are sometimes made without a clear understanding of their
probable impact on long-term strategies, or how they might be affected by shifts in market dynamics and other
product and technology investments.
These factors typically lead to either of two negative outcomes. One is inaction, whereby low-value projects are allowed
to linger and sap valuable resources while high-potential initiatives starve due to lack of support. The second outcome is
even worse: truly valuable projects are unwittingly killed, resulting in loss of business opportunity and a glut of low-margin,
“me-too” products that accelerate a spiral of declining financial performance.
Sopheon's solutions ensure that company executives make the right decisions about where to spend their innovation
resources. Our software synchronizes corporate strategic product planning with new-product development,
commercialization and management. Sopheon’s offerings are the first in the industry to address and successfully resolve
the synchronization challenge.
Sopheon’s Accolade system is used by manufacturing companies to automate their processes for developing new
products. Our Vision Strategist solution automates processes for strategic product planning. As an integrated offering,
they constitute the first software system in the history of product lifecycle management that is able to synchronize
product, market and technology planning with day-to-day product development activity.
1 2
PRODUCT AND MARKET OVERVIEW
Sopheon has two principal offerings. Its Accolade solution is a modular software system specifically designed to increase
work efficiency and improve decision-making in the development and management of new products. Sopheon’s Vision
Strategist solution automates and manages the customer’s strategic product planning process. Sopheon has integrated
these software offerings into a single solution that manages the complete lifecycle of products from their conception as
raw ideas until they are retired from the marketplace.
Products fall into three general categories. The first is comprised of new product concepts that are not yet funded as
active projects. They represent the product roadmap for the long-term future. The second is made up of products that
are actively funded and in development. They represent anticipated sources of financial contribution in the mid-term
future. The third category consists of products that have been commercialized and are contributing to the revenue
and profit performance of the company today. Sopheon’s integrated software system provides a central repository for
storing and managing data and information on all types of product innovation projects across the organization. This
centralization, augmented by easy access to the stored data, enables executives and product development teams to make
quicker, more informed decisions.
The integration of Accolade and Vision Strategist creates the only comprehensive strategic product planning and
innovation process support solution in the marketplace. The offering ties product, market and technology roadmapping
directly to the operational aspects of product development. Use of Sopheon’s software helps to demystify research
and development by providing dynamic, real-time visibility to planning and project information and aligning innovation
efforts across the organization. It allows executives and cross-functional teams to more effectively assess the business
opportunities and risks associated with product innovation initiatives, the short-term cost implications of such initiatives,
and their likely impact on long-term strategies and objectives for revenue and profit growth.
Through their use of Sopheon’s software, organizations are able to:
1) Improve strategic agility and “uncertainty planning”.
Our solutions support agility in strategic planning by rapidly moving decision-relevant information both vertically
and horizontally inside the organization. The easy flow of data permits senior executives to know, and react quickly,
when project details change or external events suddenly demand adjustments or refinements to active strategies.
2) Make faster, better-informed portfolio decisions.
Strong portfolio management helps organizations optimize limited resources. Sopheon’s software makes it possible
for users to see in real time where innovation resources are invested. The solutions’ dashboards consolidate,
aggregate and present metrics so that information can be monitored at a glance. Innovation plans and projects can
be stored in one place so that access is quick and easy.
3) Identify, prioritize and act on the most promising innovation opportunities.
Users of Sopheon’s software are able to separate winning products from losers early in the development cycle,
helping to keep investments concentrated on high-value opportunities. Features such as scorecards, tailored
selection criteria, resource reports and information-gathering and presentation templates grounded in best
practices strengthen process governance and minimize innovation risk.
4) Keep daily operational activities aligned with organizational strategies for growth.
An estimated 65 percent of companies struggle to keep product portfolios and operational and project activity
aligned with corporate strategic plans. Sopheon’s solutions create a seamless, automated process and decision
framework that continually reconciles strategic product planning and operational execution.
5) Cut costs by improving innovation process and team efficiencies.
According to recent Gartner research, companies whose product lifecycle management priorities include
deployment of technology applications such as Sopheon’s software can reduce product development costs by
30 percent or more. The savings happen because users are able to identify and abandon low-value or non-strategic
projects early, before valuable resources are spent on development.
PRODUCT AND MARKET OVERVIEW
1 3
The Market
Sopheon’s solutions belong to a major class of software applications that concentrate on supporting product lifecycle
management (PLM). The purpose of this applications group is to help companies develop and execute their product
strategies.
" P r O d u c T P O r T f O l i O M A n A g e M e n T i S O n e O f T h e f A S T e S T
g r O W i n g S e g M e n T S O f T h e P r O d u c T l i f e c y c l e M A n A g e M e n T
M A r k e T. r e V e n u e S f r O M P P M A P P l i c AT i O n S A r e e x P e c T e d T O
i n c r e A S e AT A c O M P O u n d A n n u A l r AT e O f 1 7 % T h r O u g h 2 0 1 2 "
“T he Prod uc t l ifec yc le Man agement M arket Siz ing repo r t, 2007 -20 1 2”
Ju ly 2 00 8
– AMr researc h
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. Software solutions in most areas of product lifecycle management
concentrate on the engineering or technical challenges involved in managing a product while it is under development.
Sopheon’s solutions are designed to instead address the business challenges associated with product innovation, including
the management of innovation risk and reward.
Product Portfolio Management
Strategic Product Planning and Process Execution
The Business Layer of PLM
PDM/Formula Management
CAD Diagrams, Change Orders, ROMs
The Technical Layer of PLM
ERP/CRM
Sales, Supply Chain, Mfg Costs, Sales Forecasts
The Transactional Layer of PLM
Business analysts have placed Sopheon’s Accolade system in a
subclass of product lifecycle management applications referred to as
product portfolio management solutions.
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 findings indicate that
adoption of PPM methodologies enables users
to more objectively assess product innovation
investment options and increase the number
of products that achieve commercial success.
AMR, an IT research and advisory firm, has
determined that product portfolio management
is one of the fastest growing segments of
the product lifecycle management market. It
forecasts that revenues from PPM applications
will continue to increase at a compound annual
rate of 17 percent through 2012.
A number of vendors of project portfolio
management solutions that have historically
focused their software and go-to-market strategies on the project management needs of corporate information
technology organizations continue to step up their attempts to migrate toward the product portfolio management space.
The increased number of competitors and new entrants into our market will challenge our efforts to sustain a position of
market leadership.
1 4
PRODUCT AND MARKET OVERVIEW
“ A M O n g B e S T O f B r e e d S , S O P h e O n h A S h A d T h e M O S T
T r A c T i O n i n T h e P P M M A r k e T. ”
“T he Prod uc t l ifec yc le Man agement M arket Siz ing repo r t, 2007 -20 1 2”
Ju ly 2 00 8
– AMr researc h
Growth Strategy
As we reported last year, Sopheon has been pursuing a five-part strategy for growth, and we made significant progress in
2008. Further details are set out below.
1) Expand Within Client Base
Sopheon entered 2008 with a customer base of 135 companies. We exited the year with 157 customers, a level of
growth that attests to both the health of our company and the advancing maturity of our solutions in the marketplace.
As the size of our customer population continues to expand, so too do Sopheon’s opportunities for growth. In 2008 the
number of existing customers that extended their licenses for our software rose to 27. One of the principal contributors
to expanded deployment of our solutions is their use to automate business processes other than product development.
Examples include management of mergers and acquisitions, capital expenditure projects, supply chain management and
technology development. Overall, approximately 60 percent of our revenues in 2008 came from existing accounts, an
encouraging indication of the impact that our customer base can have on our efforts to drive consistent growth.
“Prior to our adoption of Sopheon’s Accolade system, we had searched unsuccessfully for a PLM solution that
could support the layer of business information needed to make sound planning and product range decisions.
For manufacturers faced with the challenge of managing product innovation and technology reuse on a global
scale, [Accolade’s] capabilities are game-changing. For Electrolux, they are indispensable.”
— Johan Skåntorp, Vice President, Global Product Planning
Electrolux Floorcare & Small Appliances
2) Expand Product
Sopheon continued to invest substantially during 2008 in expanding the capabilities of its software products. Our product
development team completed four product releases during the year, including two new versions of Accolade, and two of
Vision Strategist.
Accolade development in 2008 culminated in release of the most significant new version of the software since it was
introduced to the market more than seven years ago. It featured a broad mix of new attributes designed to improve the
efficiency and effectiveness of cross-functional product innovation planning and execution. Many of the enhancements
offered in the software were based on our work with existing customers such as General Motors and Electrolux. These
new capabilities underpinned Sopheon’s strategies for moving beyond the process manufacturing verticals that we have
historically targeted and into the large aerospace, defense and automotive sectors. Development of a subsequent new
version of Accolade was completed late in 2008 and introduced to the market early in 2009. This latest version of
the software provides advanced decision support that enables senior executives to more effectively prioritize product
innovation investments and keep available resources focused on projects promising high business returns. These
capabilities are of strategic importance as they open the door for Sopheon to a new area within corporations: the
project management office (PMO). The PMO is a centralized coordinating body that integrates and oversees project
management across the enterprise. Professionals in this role represent a new functional market for Accolade.
Sopheon also completed two new versions of its Vision Strategist software in 2008. The first, launched early in the
year, introduced a variety of enhancements to improve the clarity of roadmaps, reduce the time required to create and
manage them, and make it easier to communicate them. A new portfolio management accelerator allows the user to see
roadmap data in the context of current product, project and funding commitments, and make informed decisions about
whether and how priorities need to be adjusted to take maximum advantage of both near- and long-term opportunities.
A second new release, introduced in the autumn, improved the performance of Vision Strategist’s roadmapping engine and
increased the number of technology platforms the software supports.
PRODUCT AND MARKET OVERVIEW
1 5
3) Expand Within Core Markets
Sopheon’s marketing and business development efforts in 2008 continued to focus on manufacturers of chemicals, paper
and, within the consumer packaged goods sector, food and beverage producers. Fifty-five percent of the new customers
we gained during the period were from these core markets. It is noteworthy that, although our solutions have historically
been adopted because of their capacity to help drive additional revenue from new products, their attractiveness is being
positively impacted by the fact that the market downturn is forcing companies to come up with creative ways of eliminating
unnecessary costs. A major food company recently invested in Accolade not only to improve their innovation results, but
to optimize cost-reduction efforts.
“Accolade has provided us with a state-of-the-art innovation management system. For the first time we are able
to monitor all aspects of our R&D initiatives and make truly well-informed decisions about which ones to support.
As a result, we are in a position to significantly reduce the number of active projects in our development pipeline,
and to back the most promising opportunities with more resources. Accolade gives us the foundation we need to
achieve profitable growth from product innovation well into the future.”
— Martin Riediker, Chief Innovation Officer
Ciba
4) Expand to New Markets
In 2008, Sopheon continued its expansion beyond its core markets into the automotive, aerospace and defense sectors.
Nearly 20 percent of new customers during the period came from these industries. At the same time, our pipeline of
sales opportunities within these segments grew steadily. Although the sales cycles tend to be longer than in our traditional
markets, the average value of transactions is expected to be materially higher. Furthermore, we are seeing significant
validation from manufacturers in these discrete verticals of the need for our integrated solution, involving the use of Vision
Strategist and Accolade in unison to synchronize innovation planning and execution. We expect that the automotive,
aerospace and defense markets will further contribute to Sopheon’s growth during 2009.
“We conducted a thorough review process and found that Sopheon’s software was the only solution that met our
needs. Vision Strategist enables us to objectively review investment options, pool resources across the company
and speed the redeployment and development of needed technologies. We expect that with VS we will see a
significant increase in our return on technology investments.”
— Scott Harris, Technology Innovation Manager
Bell Helicopter
5) Expand Partnerships
reseller Partners
As we have indicated, a core element of our strategy for growing through partnerships is to distribute our solutions
through third-party resellers. We previously reported having established affiliate or reseller relationships with organizations
in Germany, Australia, New Zealand, Portugal, France and the United Kingdom. We recently extended our reseller network
to the Far East by putting in place a relationship with a leading distributor of product engineering tools in India.
During 2008, resellers generated 11 percent of Sopheon’s total revenues, compared to 6 percent in 2007. We are
encouraged by this increase in contribution, and will further our investment in the development of these partners with the
expectation that their positive impact on Sopheon’s sales and financial performance will continue to grow.
“Our relationship with Sopheon allows Maxsoft to provide manufacturers with a solution that will enable them to
structure and govern their new product development processes. The Sopheon system has proven consistently that
it can connect with a company’s innovation strategies and provide automation and decision support that will lead
to higher levels of revenue growth and profits from new products. We believe that it is the right solution at the
right time for the Indian market. ”
— Rajeev Gopalakrishnan, Chief Executive Officer
Maxsoft
consulting Partners
In 2008, Sopheon’s business again benefited from our collaboration with consulting partners. Several of these relationships
came about when we were introduced to the consultants by common customers. We work with a core group of
organizations that include Hewlett-Packard, Arthur D. Little, Deloitte, Kalypso and PRTM, as well as Robert Cooper and
Stage-Gate® Incorporated.
Sopheon continues its relationship with Microsoft® as a Gold-Certified partner, leveraging Microsoft technology wherever it
brings value to our business development efforts and to our customers.
Stage-gate® is a registered trademark of the Product development institute.
Microsoft® is a registered trademark of Microsoft corporation.
1 6
DIRECTORS AND ADVISORS
D I R E C T O R S A N D A D V I S O R S
directors
Barry K. Mence
Andrew L. Michuda
Arif Karimjee ACA
Stuart A. Silcock FCA
Bernard P. F. Al
Daniel Metzger
Executive Chairman
Chief Executive Officer
Finance Director
Non-executive Director
Non-executive Director
Non-executive Director
Secretary
Arif Karimjee
registered Office
Surrey Technology Centre
40 Occam Road, Surrey Research Park
Guildford, Surrey GU2 7YG
registered name and number
Sopheon plc.
Registered in England and Wales No. 3217859
Lloyds TSB Bank plc.
77 High Street
Southend-on-Sea
Essex SS1 1HT
Briggs and Morgan
2200 IDS Center, 80 South Eighth Street
Minneapolis, MN 55402
United States
Auditors
Principal Bankers and financiers
Solicitors and Attorneys
AiM nominated Adviser and Broker
euronext Paying Agent
registrars
BDO Stoy Hayward LLP
55 Baker Street
London W1U 7EU
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
United States
BlueCrest Capital Finance, LLC
225 West Washington, Suite 200
Chicago, IL 60606
United States
Hammonds
7 Devonshire Square
Cutlers Gardens
London EC2M 4YH
Loyens & Loeff
Fred Roeskestraat 100
1076 ED Amsterdam
The Netherlands
Seymour Pierce Limited
20 Old Bailey
London EC4M 7EN
Kempen & Co.
Beethovenstraat 300
1077 WZ Amsterdam
The Netherlands
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield HD8 0LA
REPORT ON DIRECTORS’ REMUNERATION
1 7
R E P O R T O N D I R E C T O R S ’ R E M U N E R A T I O N
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
The service contract between the company and Mr Michuda is terminable on up to 3 months’ notice, with 12 months
salary in lieu of notice due by the company in the event of termination without cause. Service contracts between the
company and the other 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. Mr Mence’s remuneration is largely fee-based and therefore
subject to fluctuations from period to period. Mr Michuda’s remuneration is payable in US dollars, the average exchange
rate for which has increased significantly compared with the previous year. Details of directors’ interests in shares and
options are set out in the Directors’ Report.
executive directors
B.K. Mence
A.L. Michuda
A. Karimjee
non-executive directors
S.A. Silcock
B.P.F. Al
D. Metzger
Pay
and fees
2008
£
126,664
123,575
98,786
Benefits
2008
£
Bonus
2008
£
Total
2008
£
Total
2007
£
2,209
8,318
1,634
28,500
30,948
18,342
157,373
162,841
118,762
141,152
125,991
101,013
18,000
18,000
18,000
_______
403,025
_______
_______
-
-
-
_______
12,161
_______
_______
-
-
-
_______
77,790
_______
_______
18,000
18,000
18,000
_______
492,976
_______
_______
18,000
18,000
18,000
_______
422,156
_______
_______
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 2008 objectives were set with regard to 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 to the amounts disclosed above, pension contributions are made to individual directors’ personal pension
schemes. During 2008 contributions of £4,875, £2,844 and £4,248 (2007 - £4,875, £2,253 and £4,396) 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 Lawford & Co., a firm of chartered accountants of which S.A. Silcock is a
partner.
1 8
DIRECTORS’ REPORT
D I R E C T O R S ’ R E P O R T
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, including the requirements of S234 of the Companies Act
1985, is given in the Statement from the Chairman and Chief Executive Officer on page 6 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 11. The group’s result for the year ended
31 December 2008 is a profit after tax of £29,000 (2007: Loss of £443,000). The directors do not intend to declare a
dividend.
Corporate Governance
The Sopheon board is committed to high standards of corporate governance and aims to follow appropriate governance
practice, although as a company incorporated in the UK and listed on AIM and Euronext, the company is not subject to the
requirements of the UK Combined Code 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 caliber to bring the right level of independent judgment 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 17.
Principal Risk Areas
As with any business at its stage of development Sopheon faces a number of risks and uncertainties. The board monitors
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. This risk has become particularly relevant in view of the economic turmoil that has affected the global
economy.
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 maximized.
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, the competition for qualified employees continues to be
difficult and retaining key employees has become accordingly more challenging and expensive.
DIRECTORS’ REPORT
1 9
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.
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 2008 the company had approximately 49 days’ purchases outstanding (2007: 39 days).
Charitable and Political Donations
The group has made no charitable or political donations during the year.
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 LLP 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
2008
2007
Ordinary Shares
2008
2007
485,000
3,789,251
1,000,000
-
-
25,000
-
385,000
3,309,251
825,000
-
-
25,000
-
14,423,847
155,188
87,667
950,000
76,639
650,000
100,000
14,423,847
155,188
87,667
918,716
98,077
650,000
100,000
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 2,300,000 ordinary shares are held by Inkberrow Limited, a company in which B.K. Mence and
his family trust are the majority shareholders and in which S.A. Silcock is a minority shareholder. In addition B.K. Mence is,
or his wife or children are, potential beneficiaries under trusts holding an aggregate of 3,847,800 ordinary shares.
The table overleaf 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.
2 0
DIRECTORS’ REPORT
date of
grant
exercise
price
3 May 2006
2 May 2001
2 May 2001
15 September 2000
15 September 2000
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)
B.K. Mence (9) 29 June 2007
B.K. Mence (10)
A.L. Michuda (2)
A.L. Michuda (2)
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 (6) 15 April 2005
3 May 2006
A.L. Michuda (8)
A.L. Michuda (9) 29 June 2007
A.L. Michuda(10)
A.L. Michuda 27 June 2008
A. Karimjee (1)
A. Karimjee (1)
30 April 2002
A. Karimjee (1)
A. Karimjee (5)(7)
5 November 2003
A. Karimjee (6) 15 April 2005
A. Karimjee (8) 3 May 2006
A. Karimjee (9) 29 June 2007
A. Karimjee (10)
A. Karimjee
B.P. F. Al (1)
77.5p
14.75p
25.25p
22p
19p
1 April 2008 13.25p
230p
322p
427.5p
160p
77.5p
14.75p
16.25p
25.25p
22p
19p
13.25p
14p
150p
77.5p
14.75p
16.25p
25.25p
22p
19p
13.25p
14p
77.5p
1 April 2008
27 June 2008
22 November 1999
2 May 2001
2 May 2001
1 April 2008
At 31
december
2007
22,500
100,000
62,500
100,000
100,000
-
7,846
12,501
16,280
5,030
54,662
487,932
2,225,000
150,000
100,000
250,000
-
-
100,000
12,500
150,000
300,000
62,500
100,000
100,000
-
-
25,000
granted
during
year
-
-
-
-
-
100,000
-
-
-
-
-
-
-
-
-
-
250,000
230,000
-
-
-
-
-
-
-
175,000
100,000
-
lapsed
during
year
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
At 31
december
2008
22,500
100,000
62,500
100,000
100,000
100,000
7,846
12,501
16,280
5,030
54,662
487,932
2,225,000
150,000
100,000
250,000
250,000
230,000
100,000
12,500
150,000
300,000
62,500
100,000
100,000
175,000
100,000
25,000
None of the directors exercised any share options during the year.
(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 was subject to performance conditions relating to the achievement of
positive EBITDA in two successive quarters. The conditions were met.
(6) 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.
(7) 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.
(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.
(9) Vesting of one half of these options is subject to performance conditions based on the achievement of certain financial
objectives in 2007. The conditions were met.
(10) Vesting of one half of these options is subject to performance conditions based on the achievement of certain financial
objectives in 2008.
The mid-market price of Sopheon ordinary shares at 31 December 2008 was 7.5p. During the financial year the
mid-market price of Sopheon ordinary shares ranged from 7.00p to 15.25p.
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 25 March 2009 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
% issued Ordinary Shares
14,423,847
9,691,260
9.9
6.7
Mr. Mence’s interest represents direct beneficial holdings as well as those of his family.
Approved by the board on 25 March 2009 and signed on its behalf by:
A. Karimjee
Director
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
2 1
S T A T E M E N T O F D I R E C T O R S ’ R E S P O N S I B I L I T I E S
I N R E S P E C T O F T H E F I N A N C I A L S T A T E M E N T S
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any
time the financial position of the company, for safeguarding the assets of the company, for taking reasonable steps for the
prevention and detection of fraud and other irregularities and for the preparation of a Directors’ Report and Directors’
Remuneration report which comply with the requirements of the Companies Act 1985.
The directors are responsible for preparing the annual report and the financial statements in accordance with the
Companies Act 1985. The directors are also required to prepare financial statements for the group in accordance with
International Financial Reporting Standards as adopted by the European Union (IFRSs) and the rules of the London Stock
Exchange for companies trading securities on the Alternative Investment Market. The directors have chosen to prepare
financial statements for the company in accordance with IFRSs.
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 IFRSs. A fair presentation also requires the Directors to:
• consistently 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 IFRSs 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.
Financial statements are published on the group's website in accordance with legislation in the United Kingdom governing
the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The
maintenance and integrity of the group's website is the responsibility of the directors. The directors' responsibility also
extends to the ongoing integrity of the financial statements contained therein.
2 2
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
I N D E P E N D E N T A U D I T O R S ’ R E P O R T T O T H E
M E M B E R S O F S O P H E O N P L C
We have audited the group and parent company financial statements (the ''financial statements'') of Sopheon plc for the
year ended 31 December 2008 which comprise the Consolidated Income Statement, the Consolidated and Company
Balance Sheets, the Consolidated and Company Cash Flow Statements, the Consolidated and Company Statement
of Recognized Income and Expense 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 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 and Operating Review and the Product and Market
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
2 3
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 2008 and of its profit 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 2008;
• the financial statements have been properly prepared in accordance with the Companies Act 1985; and
• the information given in the directors’ report is consistent with the financial statements.
Emphasis of Matter – Going Concern
In forming our opinion on the financial statements, which is not qualified, we have considered the adequacy of the
disclosures made in Note 2 to the financial statements concerning the group’s ability to continue as a going concern. As
in prior years, these disclosures identify certain factors that indicate the existence of material uncertainties which may cast
significant doubt about the group’s ability to continue as a going concern. As discussed in Note 2, the appropriateness of
the going concern basis remains reliant on the group achieving an adequate level of sales in order to maintain sufficient
working capital to support its activities, or if this objective is not met, being able to raise sufficient additional finance.
BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London
25 March 2009
2 4
FINANCIAL STATEMENTS
C O N S O L I D A T E D I N C O M E S T A T E M E N T
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 8
Revenue
Cost of sales
Gross profit
Distribution expense
Research and development expense
Other administrative expense
Total administrative expense
Operating profit/(loss)
Finance income
Finance expense
Profit/(loss) before tax
Income tax expense
Profit/(loss) for the year
(all attributable to equity holders of the parent company)
Earnings/(loss) per share
Basic and diluted (pence)
notes
3
2008
£’000
2007
£’000
9,304
(2,304)
_______
6,332
(1,703)
_______
7,000
4,629
(3,516)
(2,523)
(1,995)
(1,289)
(1,027)
(1,462)
(3,284)
_______
(2,489)
_______
200
(383)
55
(211)
_______
44
(15)
_______
70
(130)
_______
(443)
-
_______
29
_______
_______
(443)
_______
_______
8
9
10
12
0.02p
_______
_______
(0.32p)
_______
_______
FINANCIAL STATEMENTS
2 5
C O N S O L I D A T E D A N D C O M P A N Y B A L A N C E S H E E T
A T 3 1 D E C E M B E R 2 0 0 8
Assets
non-current Assets
Property, plant and equipment
Intangible assets
Investments in subsidiaries
Other receivable
Total non-current assets
current Assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Liabilities
current liabilities
Trade and other payables
Borrowings
Obligations under finance leases
Deferred revenue
Total current liabilities
non-current liabilities
Borrowings
Obligations under finance leases
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Other reserves
Translation reserve
Retained losses
group
company
notes
2008
£’000
2007
£’000
2008
£’000
2007
£’000
13
14
15
16
17
18
19
20
21
20
21
235
4,706
-
12
––––––––
4,953
––––––––
3,568
2,586
––––––––
6,154
––––––––
11,107
2,003
1,080
3
2,648
––––––––
5,734
––––––––
1,103
2
––––––––
1,105
––––––––
6,839
––––––––
4,268
––––––––
––––––––
182
3,725
-
10
––––––––
3,917
––––––––
2,221
2,053
––––––––
4,274
––––––––
8,191
1,376
755
3
1,552
––––––––
3,686
––––––––
1,192
3
––––––––
1,195
––––––––
4,881
––––––––
3,310
––––––––
––––––––
-
-
6,119
-
––––––––
6,119
––––––––
28
1,421
––––––––
1,449
––––––––
7,568
473
-
-
-
––––––––
473
––––––––
-
-
––––––––
-
––––––––
473
––––––––
7,095
––––––––
––––––––
24
25
26
26
7,279
73,627
587
(77,225)
––––––––
7,279
73,499
(191)
(77,277)
––––––––
7,279
65,862
-
(66,046)
––––––––
-
-
6,119
-
––––––––
6,119
––––––––
40
1,391
––––––––
1,431
––––––––
7,550
443
-
-
-
––––––––
443
––––––––
-
-
––––––––
-
––––––––
443
––––––––
7,107
––––––––
––––––––
7,279
65,734
-
(65,906)
––––––––
Total equity (all attributable to equity holders
of the parent company)
4,268
––––––––
––––––––
3,310
––––––––
––––––––
7,095
––––––––
––––––––
7,107
––––––––
––––––––
Approved by the board and authorized for issue on 25 March 2009.
Barry K. Mence
Director
Arif Karimjee
Director
2 6
FINANCIAL STATEMENTS
C O N S O L I D A T E D A N D C O M P A N Y S T A T E M E N T
O F R E C O G N I Z E D I N C O M E A N D E x P E N S E
F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 8
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
Exchange differences on translation
of foreign operations
Net income/(expense) recognized directly in equity
778
–––––––
778
(27)
–––––––
(27)
-
–––––––
-
-
–––––––
-
Profit/(loss) for the year
29
–––––––
(443)
–––––––
(153)
–––––––
(1,616)
–––––––
Total recognized income and expense for the year
(all attributable to equity holders of the parent company)
807
–––––––
–––––––
(470)
–––––––
–––––––
(153)
–––––––
–––––––
(1,616)
–––––––
–––––––
FINANCIAL STATEMENTS
2 7
C O N S O L I D A T E D A N D C O M P A N Y
C A S H F L O W S T A T E M E N T F O R T H E Y E A R E N D E D
3 1 D E C E M B E R 2 0 0 8
group
company
notes
2008
£’000
2007
£’000
2008
£’000
2007
£’000
Operating Activities
Profit/(loss) for the year
Adjustments for:
Finance income
Finance costs
Depreciation of property, plant and equipment
Amortization and impairment 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
Net cash generated from/(used in) operating activities
Investing Activities
Finance income
Purchases of property, plant and equipment
Acquisition of business
Recognition of development costs
Intra-group loans
Net cash used in investing activities
Financing Activities
Proceeds of issues of shares
Proceeds from borrowings
Repayment of borrowings
(Decrease) in bank overdrafts and lines of credit
Interest paid
Net cash from financing activities
Net 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
29
(443)
(163)
(1,616)
(55)
211
96
1,148
151
-
-
––––––––
1,580
(506)
649
––––––––
1,723
––––––––
(70)
130
94
402
105
-
-
––––––––
218
399
(375)
––––––––
242
––––––––
(49)
2
-
-
151
(235)
14
––––––––
(280)
11
47
––––––––
(222)
––––––––
55
(85)
-
(797)
-
––––––––
(827)
––––––––
70
(78)
(1,894)
(785)
-
––––––––
(2,687)
––––––––
49
-
-
-
190
––––––––
239
––––––––
-
-
(469)
-
(211)
––––––––
(680)
––––––––
216
2,011
1,758
(150)
(37)
(130)
––––––––
3,452
––––––––
1,007
-
-
-
-
(2)
––––––––
(2)
––––––––
15
(62)
14
-
-
105
(147)
1,171
––––––––
(535)
(4)
14
––––––––
(525)
––––––––
62
-
-
-
(911)
––––––––
(849)
––––––––
2,011
-
-
-
(13)
––––––––
1,998
––––––––
624
2,053
317
––––––––
1,034
12
––––––––
1,391
15
––––––––
741
26
––––––––
18
2,586
––––––––
––––––––
2,053
––––––––
––––––––
1,421
––––––––
––––––––
1,391
––––––––
––––––––
2 8
NOTES TO THE FINANCIAL STATEMENTS
1 . G E N E R A L I N F O R M AT I O N
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 16. The principal activities of the Company and its subsidiaries are
described in Note 3. The financial statements have been prepared in Pounds Sterling and rounded to the nearest thousand.
2 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
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.
The group has adopted the following new standards:
• ifric 11, ifrS 2 group and Treasury Share Transactions (effective for accounting periods beginning on or after 1 March
2007). IFRIC 11 requires share-based payment transactions in which an entity receives services as consideration
for its own equity instruments to be accounted for as equity-settled. There was no impact on the group’s financial
statements from its adoption.
• ifric 12 Service concession Agreements (effective for accounting periods beginning on or after 1 January 2008). There
was no impact on the group’s financial statements from its adoption.
• ifric 14, iAS 19 The limit on a defined Benefit Asset, Minimum funding requirements and their interaction (effective for
accounting periods beginning on or after 1 January 2008). There was no impact on the group’s financial statements
from its adoption.
• Amendments to iAS 39 and ifrS 7 reclassification of financial instruments (effective from 1 July 2008). This Amendment
permits an entity to reclassify non-derivative financial assets (other than those designated at fair value through
profit or loss by the entity upon initial recognition) out of the fair value through profit or loss category in particular
circumstances. The Amendment also permits an entity to transfer from the available-for-sale category to the loans and
receivables category a financial asset that would have met the definition of loans and receivables (if the financial asset
had not been designated as available for sale), if the entity has the intention and ability to hold that financial asset for
the foreseeable future. There was no impact on the group’s financial statements from its adoption.
The following new standards, amendments and interpretations to existing standards have been published that are
mandatory for the group's accounting periods beginning on or after 1 January 2009 or later periods and which the group
has decided not to adopt early. These fall into three categories:
i) New standards, amendments or interpretations, the adoption of which may have a material impact on the results or
net assets of the group:
There are none in this category.
ii) New standards, amendments or interpretations, the adoption of which would affect the presentation of the group’s
financial statements:
• Amendment to iAS 1 Presentation of financial Statements Agreements (effective for accounting periods beginning on or
after 1 January 2009). Amendments to the presentation of owner changes in equity and comprehensive income.
• revised ifrS 3 Business combinations Agreements (effective for accounting periods beginning on or after 1 July 2009).
This revised statement makes certain changes to the accounting for acquisitions, including a requirement to write off
acquisition costs to profit and loss account instead of including them in the costs of acquisition, but does not require
past acquisitions to be restated.
• ifrS 8 Operating Segments (effective for accounting periods beginning on or after 1 January 2009).
iii) New standards, amendments or interpretations, the adoption of which would have no material impact on the results
or net assets of the group or the presentation of the group’s financial statements:
• revised ifrS 1 first-time adoption of international financial reporting Standards (effective for accounting periods beginning
on or after 1 January 2009).
• ifric 13 customer loyalty Programmes (effective for accounting periods beginning on or after 1 July 2008).
NOTES TO THE FINANCIAL STATEMENTS
2 9
• ifric 15 Agreements for the construction of real estate (effective for accounting periods beginning on or after 1 January
2009).
• ifric 16 hedges of a net financial investment in a foreign Operation (effective for accounting periods beginning on or
after 1 October 2008).
• ifric 17 distribution of non-cash Assets to Owners (effective for accounting periods beginning on or after 1 July 2009).
• Amendment to iAS 23 Borrowing costs (effective for accounting periods beginning on or after 1 January 2009).
• Amendment to ifrS 2 Share-based payments: Vesting conditions and cancellations (effective for accounting periods
beginning on or after 1 January 2009).
• Amendments to iAS 27 consolidated and Separate financial Statements cancellations (effective for accounting periods
beginning on or after 1 July 2009).
• Amendments to iAS 32 and iAS 1 Puttable financial instruments and Obligations Arising on liquidation (effective for
accounting periods beginning on or after 1 January 2009).
• Amendment to iAS 39 financial instruments recognition and Measurement: eligible hedged items (effective for accounting
periods beginning on or after 1 July 2009).
• embedded derivatives (Amendments to ifric 9 and iAS 39) (effective for accounting periods ending on or after
30 June 2009).
• improving disclosures about financial instruments (Amendments to ifrS 7) (effective for accounting periods beginning on
or after 1 January 2009).
• ifric 18 Transfer of Assets from customers (effective to transfers received from customers from 1 July 2009).
• improvements to ifrSs (effective for accounting periods beginning on or after 1 January 2009).
Going Concern
The financial statements have been prepared on a going concern basis. In reaching their assessment, the directors have
considered a period extending at least 12 months from the date of approval of these financial statements and have
considered both the forecast performance for the next 12 months and the cash and financing facilities available to the
group.
In 2008, the group achieved revenues of £9.3m and generated a profit of £29,000. The directors are positive about the
direction, focus and momentum of the business and believe that the group’s existing resources and facilities described
below provide it with adequate funding to support its activities through to the point at which they anticipate that
operations will become cash generative on a sustained basis. This is however dependent on the group continuing to deliver
an adequate level of sales. Furthermore, the time-to-close and the order value of individual sales can vary considerably,
factors which constrain the ability to accurately predict revenue performance, and which are heightened by the tough
economic conditions. These conditions are also likely to result in customers taking longer to pay amounts owed to the
group.
At 31 December 2008, the group reported net assets of £4.3m and gross cash resources of £2.6m. The group has a loan
note from BlueCrest Capital Finance (“BlueCrest”) which is repayable in equal monthly installments of £63,000 through
July 2011 and stood at £1.6m at year end. The group also has access to a bank line of credit with BlueCrest which is
secured against the trade receivables of Sopheon’s North American business, and was fully drawn down at
31 December 2008 for a value of £521,000.
If sales fall short of expectations or if the group’s bank facilities prove insufficient, the group may need to raise additional
finance. Sopheon continues to have access to the equity markets. In addition, the group has access to an equity line of
credit facility from GEM Global Yield Fund Limited (“GEM”) for an aggregate of €10m, the current term of which expires in
December 2009. The facility originally expired in December 2005 and has been extended twice, each time for an additional
two year period. 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 one call on the equity
line of credit facility, raising just under €1m in March 2004, leaving a maximum €9m potentially available.
3 0
NOTES TO THE FINANCIAL STATEMENTS
The directors have concluded that these circumstances represent material uncertainties, however believe that taken as
a whole, the factors described above enable the group to continue as a going concern for the foreseeable future. The
financial information does 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.
Identifiable intangible assets are capitalized at fair value as at the date of acquisition. The useful lives of these intangible
assets are assessed and amortization is charged on a straight-line basis, with the expense taken to the income statement.
Intangible assets are tested for impairment when a trigger event occurs. Useful lives are also examined on an annual basis
and adjustments, where applicable, are made on a prospective basis.
Significant Accounting Estimates and Judgments
Management is required to make judgments, 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
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 and impairment 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.
NOTES TO THE FINANCIAL STATEMENTS
3 1
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.
Interest on Borrowings
All interest on borrowings is recognized in profit or loss in the period in which it is 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.
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.
3 2
NOTES TO THE FINANCIAL STATEMENTS
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 utilized.
Deferred tax is calculated at tax rates that have been enacted or substantively enacted at the balance sheet date, and that
are expected to apply in the period when the liability is settled or the asset realized. 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 impairment. Impairment tests are undertaken whenever events or
changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an
investment exceeds its recoverable amount, the investment is written down accordingly.
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 in respect of externally acquired technology and intellectual
property (“IPR”) is included in research and development costs in the income statement, and the amortization expense in
respect of externally acquired customer relationships is included in distribution costs.
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, typically over four years. The amortization expense in respect of internally generated intangible assets
is included in research and development costs.
Development costs not satisfying the above criteria and expenditure on the research phase of internal projects are
recognized in profit or loss as incurred.
NOTES TO THE FINANCIAL STATEMENTS
3 3
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.
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
1. Financial Assets
The group’s financial assets fall into the category of loans and receivables. The group does not have any financial assets
in the categories of fair value through profit and loss or available for sale. The group has not classified any of its financial
assets as held to maturity.
Unless otherwise indicated, the carrying values of the group’s financial assets are a reasonable approximation of their fair
values.
loans and receivables
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. They arise principally through the provision of goods and services (e.g. trade receivables) but also include cash and
cash equivalents and other types of contractual monetary asset. They are initially recognized at fair value plus transaction
costs that are directly attributable to the acquisition or issue and subsequently carried at amortized cost using the
effective interest rate method, less provision for impairment. The effect of discounting on these financial instruments is not
considered material.
Impairment provisions are recognized when there is objective evidence (such as significant financial difficulties, default or
significant delay in payment on the part of the counter-party) that the group will be unable to collect all the amounts due
under the terms of the receivable, the amount of such provision being the difference between the net carrying amount and
the present value of the future expected cash flows associated with the receivable. For trade receivables, such provisions
are recorded in a separate allowance account with the loss being recognized within administrative expenses in the income
statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is
written off against the associated provision.
2. Financial Liabilities
The group classifies its financial liabilities in the category of financial liabilities measured at amortized cost. The group does
not have any financial liabilities at fair value through profit or loss.
Unless otherwise indicated, the carrying values of the group’s financial liabilities are a reasonable approximation of their fair
values.
3 4
NOTES TO THE FINANCIAL STATEMENTS
financial liabilities Measured at Amortized cost
Financial liabilities measured at amortized cost include:
• Trade payables and other short-dated monetary liabilities, which are initially recognized at fair value and subsequently
carried at amortized cost using the effective interest rate method.
• Bank and other borrowings, which are initially recognized at fair value net of any transaction costs directly attributable
to the acquisition of the instrument. Such interest-bearing liabilities are subsequently measured at amortized cost
using the effective interest rate method, which ensures that the interest expense over the period to repayment is at
a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes
initial transaction costs and premiums payable on redemption, as well as any interest payable while the liability is
outstanding.
3. Share Capital
Financial instruments issued by the group are treated as equity only to the extent that they do not meet the definition of
a financial liability. The group’s ordinary shares are classified as equity. For the purpose of the disclosures given in Note
23(6) the group considers its capital to comprise its ordinary share capital, share premium and other capital reserves less
its accumulated retained loss.
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 behavioral considerations.
As set out in Note 24, the group has also issued warrants to certain financing institutions which are also treated as equity-
settled share-based payments and expensed over the life of the warrant instrument as set out above.
3 . R E V E N U E
All of the group’s revenue in respect of the years ended 31 December 2008 and 2007 derived from the group’s single
business segment, the design, development and marketing of software products with associated implementation and
consultancy services, as more particularly described in the Director's Report.
Continuing Operations
Software and associated consultancy services
2008
£’000
2007
£’000
9,304
–––––––
–––––––
6,332
–––––––
–––––––
Revenue visibility at any point in time comprises revenue expected from (i) closed license orders, including those which
are contracted but conditional on acceptance decisions scheduled later in the year; (ii) contracted services business
delivered or expected to be delivered in the year; and (iii) recurring maintenance, hosting and rental streams. The visibility
calculation does not include revenues from new sales opportunities expected to close during the remainder of the year.
4 . G E O G R A P H I C A L S E G M E N T S
The group’s primary reporting format for segment information is geographical segments. Information relating to the
group’s geographical segments, which are North America, United Kingdom and Rest of Europe, is given below. The group’s
principal operations are based in the United States, the United Kingdom and the Netherlands.
For management purposes, the group is organized 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.
NOTES TO THE FINANCIAL STATEMENTS
3 5
The information in the following table relating to external revenues includes analysis both by location of customer and by
location of operations. The information relating to other items provides analysis by location of operations only.
Inter-segment revenues are priced on an arms length basis.
year ended 31 december 2008
income Statement
External revenues - by location of customer
External revenues - by location of operations
Inter-segment revenues
Net profit/(loss) before interest and tax
Income tax expense
Depreciation and amortization
Balance Sheet
Capital expenditure
Total assets
Total liabilities
year ended 31 december 2007
income Statement
External revenues - by location of customer
External revenues - by location of operations
Inter-segment revenues
Net loss before interest and tax
Income tax expense
Depreciation and amortization
Balance Sheet
Capital expenditure
Total assets
Total liabilities
north
America
£’000
5,993
6,777
667
472
15
(915)
––––––––
united
kingdom
£’000
1,357
1,781
-
156
-
-
––––––––
rest of
europe
£’000
1,954
746
680
(428)
-
(5)
––––––––
77
8,976
(5,504)
––––––––
––––––––
1
1,823
(780)
––––––––
––––––––
7
308
(555)
––––––––
––––––––
north
America
£’000
united
kingdom
£’000
rest of
europe
£’000
4,002
4,177
564
(44)
-
(491)
––––––––
74
6,192
(3,792)
––––––––
––––––––
1,087
1,212
-
(137)
-
(1)
––––––––
1
1,869
(732)
––––––––
––––––––
1,243
943
555
(202)
-
(4)
––––––––
3
130
(357)
––––––––
––––––––
Total
£’000
9,304
9,304
1,347
200
15
(920)
––––––––
85
11,107
(6,839)
––––––––
––––––––
Total
£’000
6,332
6,332
1,119
(383)
-
(496)
––––––––
78
8,191
(4,881)
––––––––
––––––––
5 . P R O F I T / ( L O S S ) F O R T H E Y E A R
The profit/(loss) for the year has been arrived at after charging/(crediting):
Continuing Operations
Net foreign exchange gains
Research and development costs (excluding amortization)
Amortization of intangible assets
Impairment of intangible assets
Depreciation of property, plant and equipment
Operating lease rentals – land and buildings
Operating lease rentals – other
2008
£’000
2007
£’000
(216)
1,171
824
324
96
330
90
––––––––
––––––––
(49)
707
402
-
94
265
87
––––––––
––––––––
Net foreign exchange gains arise on the translation of certain cash and trade balances held in Euros and US Dollars and are
accordingly included in administration expense.
6 . A U D I T O R S ’ R E M U N E R AT I O N
Audit of the financial statements of the group
2008
£’000
2007
£’000
56
––––––––
––––––––
64
––––––––
––––––––
Fees for the audit of the company are not segregated from those for the group and are included in the above amounts.
3 6
NOTES TO THE FINANCIAL STATEMENTS
7 . S TA F F C O S T S
Wages and salaries
Social security costs
Pension contributions
Employee benefits expense
Share-based payments expense (all equity-settled)
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
5,313
390
98
318
151
–––––––
6,270
–––––––
–––––––
3,929
294
76
223
105
–––––––
4,627
–––––––
–––––––
135
20
10
2
21
–––––––
188
––––––––
––––––––
130
19
10
1
17
–––––––
177
––––––––
––––––––
Included within the above are staff costs capitalized as development expenditure amounting to £797,000 (2007: £785,000).
The average monthly number of employees during the year was made up as follows:
Development and operations
Sales and management
group
company
2008
number
2007
number
2008
number
2007
number
65
33
–––––––
98
–––––––
–––––––
55
30
–––––––
85
–––––––
–––––––
-
2
–––––––
2
––––––––
––––––––
-
2
–––––––
2
––––––––
––––––––
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)
2008
£’000
2007
£’000
493
12
44
––––––––
549
––––––––
––––––––
423
12
29
––––––––
464
––––––––
––––––––
No director exercised share options during the year (2007: None). Pension contributions are to personal defined
contribution schemes and have been made for three directors (2007: three) who served during the year.
The emoluments of the highest paid director were as follows:
Emoluments
Benefits
Pension contributions to defined contribution scheme
Share-based payments expense (all equity-settled)
2008
£’000
2007
£’000
155
8
3
21
––––––––
187
––––––––
––––––––
139
2
5
8
––––––––
154
––––––––
––––––––
Full details of directors’ remuneration are disclosed in the Report on Directors’ Remuneration on page 17.
8 . F I N A N C E I N C O M E
Income on financial assets measured at amortized cost
Interest income on bank deposits
2008
£’000
2007
£’000
55
––––––––
––––––––
70
––––––––
––––––––
NOTES TO THE FINANCIAL STATEMENTS
3 7
9 . F I N A N C E E X P E N S E
Interest expense on financial liabilities measured at amortized cost
Interest on borrowings
1 0 . I N C O M E TA X E X P E N S E
Income tax expense for the year – current tax
2008
£’000
2007
£’000
(211)
––––––––
––––––––
(130)
––––––––
––––––––
2008
£’000
2007
£’000
15
––––––––
––––––––
-
––––––––
––––––––
The charge for the year can be reconciled to the accounting profit/(loss) as follows:
Profit/(loss) before tax
Tax (charge)/credit at the UK corporation
tax rate of 28% (2007: 30%)
Adjustment for differing rates of corporate
taxation in overseas jurisdictions
Tax effect of expenses that are not deductible
in determining taxable losses
Timing differences arising from the capitalization
and amortization of internally generated development costs
Losses for the year not relievable against current tax
Utilization of prior year losses
Income tax expense for the year
2008
£’000
2008
%
2007
£’000
2007
%
44
––––––––
––––––––
(443)
––––––––
––––––––
(12)
(30)
28%
67%
133
(1)
30%
-
(286)
(650%)
(122)
(27%)
102
-
211
––––––––
(15)
––––––––
––––––––
232%
-
(480%)
––––––––
-
––––––––
––––––––
166
(176)
-
––––––––
-
––––––––
––––––––
37%
(40%)
-
––––––––
-
––––––––
––––––––
The tax charge represents US Alternative Minimum Tax (“AMT”), which is payable notwithstanding the availability of tax
losses from prior years. For AMT purposes, the use of prior year tax losses to offset current taxable profits is restricted to
90% of current year taxable profits, with AMT chargeable at a rate of 20% on the remaining 10%.
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 capitalization of
internally generated development costs
Unrelieved trading losses
Unrecognized deferred tax asset
2008
£’000
2007
£’000
165
165
(1,023)
27,554
––––––––
26,696
––––––––
––––––––
(623)
21,904
––––––––
21,446
––––––––
––––––––
At 31 December 2008, tax losses estimated at £70 million were available to carry forward by the Sopheon group, arising
from historic losses incurred. These losses represent a potential deferred tax asset of £27.6 million, based on the tax rates
currently obtaining in the relevant tax jurisdictions.
Of these tax losses, an aggregate amount of £22 million (representing £9.7 million of the potential deferred tax asset)
represents pre-acquisition tax losses of Sopheon Corporation (Minnesota), Orbital Software Inc. and Alignent Software, Inc.
The future utilization of these losses may be restricted under section 382 of the US Internal Revenue Code, whereby the
ability to utilize 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.
3 8
NOTES TO THE FINANCIAL STATEMENTS
1 1 . L O S S D E A LT W I T H I N T H E F I N A N C I A L S TAT E M E N T S O F T H E
PA R E N T C O M PA N Y
The loss dealt with in the financial statements of the parent company for the year ended 31 December 2008 was £163,000
(2007: £1,616,000). Advantage has been taken of Section 230 of the Companies Act 1985 not to present an income
statement for the parent company.
1 2 . E A R N I N G S / ( L O S S ) P E R S H A R E A N D E B I T D A
Earnings/(loss) per share
Profit/(loss) after tax
Weighted average number of ordinary shares for
the purpose of basic earnings per share
2008
£’000
2007
£’000
29
––––––––
––––––––
(443)
––––––––
––––––––
’000s
’000s
145,579
––––––––
––––––––
140,286
––––––––
––––––––
The profit attributable to ordinary shareholders and the weighted average number of ordinary shares for the purpose of
calculating the diluted earnings/(loss) per ordinary share are the same as those used for calculating the basic earnings/(loss)
per ordinary share in both 2008 and 2007. This is because the exercise of warrants to subscribe for 502,790 ordinary
shares and of share options to subscribe for 13,104,438 ordinary shares, all of which are “out of the money” (details of
which are set out in Notes 24 and 29), would have the effect in 2008 of increasing earnings per ordinary share (by virtue
of interest receivable on subscription proceeds) and in 2007 of reducing the loss per ordinary share, and are therefore not
dilutive.
EBITDA
The directors consider that EBITDA, which is defined as earnings before interest, tax, depreciation and amortization, is an
important measure, since it is widely used by the investment community. It is calculated as follows:
Profit/(loss) for the year after tax
Income tax expense
Interest expense
Interest income
Amortization of intangible assets
Depreciation of tangible fixed assets
EBITDA
2008
£’000
2007
£’000
29
15
211
(55)
824
96
––––––––
1,120
––––––––
––––––––
(443)
-
130
(70)
402
94
––––––––
113
––––––––
––––––––
NOTES TO THE FINANCIAL STATEMENTS
3 9
1 3 . P R O P E R T Y, P L A N T A N D E Q U I P M E N T
group
Cost
At 1 January 2007
Additions
Acquisitions
Exchange differences
At 1 January 2008
Additions
Exchange differences
At 31 December 2008
Accumulated Depreciation
At 1 January 2007
Depreciation charge for the year
Exchange differences
At 1 January 2008
Depreciation charge for the year
Exchange differences
At 31 December 2008
Carrying Amount
At 31 December 2008
At 31 December 2007
computer
equipment
£’000
furniture &
fittings
£’000
1,585
73
73
22
––––––––
1,753
81
429
––––––––
2,263
––––––––
1,492
83
20
––––––––
1,595
84
372
––––––––
2,051
––––––––
212
––––––––
––––––––
158
––––––––
––––––––
335
5
13
7
––––––––
360
4
98
––––––––
462
––––––––
318
11
7
––––––––
336
12
91
––––––––
439
––––––––
23
––––––––
––––––––
24
––––––––
––––––––
Total
£’000
1,920
78
86
29
––––––––
2,113
85
527
––––––––
2,725
––––––––
1,810
94
27
––––––––
1,931
96
463
––––––––
2,490
––––––––
235
––––––––
––––––––
182
––––––––
––––––––
The following rates are used for the depreciation of property, plant and equipment:
Computer equipment
Furniture and fittings
20% to 33% on a straight-line basis
20% to 25% on a straight-line basis
The net carrying amount of property, plant and equipment includes £1,000 (2007: £4,000) in respect of assets held under
finance leases.
company
The company has no property, plant and equipment.
4 0
NOTES TO THE FINANCIAL STATEMENTS
1 4 . I N TA N G I B L E A S S E T S
development Technology
and iPr
costs
customer
relationships
goodwill
Total
Cost
At 1 January 2007
Additions (internally generated)
Acquisitions
Exchange differences
At 1 January 2008
Additions (internally generated)
Exchange differences
At 31 December 2008
Amortization
At 1 January 2007
Charge for the year
Exchange differences
At 1 January 2008
Charge for the year
Exchange differences
At 31 December 2008
Accumulated Impairment Losses
At 1 January 2008
Impairment losses in year
At 31 December 2008
Carrying Amount
At 31 December 2008
At 31 December 2007
£’000
£’000
£’000
£’000
(internally
generated)
£’000
2,218
785
-
(36)
––––––––
2,967
797
1,371
––––––––
5,135
––––––––
1,370
233
(24)
––––––––
1,579
459
741
––––––––
2,779
––––––––
-
-
––––––––
-
––––––––
-
-
700
-
––––––––
700
-
224
––––––––
924
––––––––
-
87
-
––––––––
87
188
89
––––––––
364
––––––––
-
161
––––––––
161
––––––––
2,356
––––––––
––––––––
1,388
––––––––
––––––––
399
––––––––
––––––––
613
––––––––
––––––––
-
-
1,312
1
––––––––
1,313
-
458
––––––––
1,771
––––––––
-
82
-
––––––––
82
177
82
––––––––
341
––––––––
-
163
––––––––
163
––––––––
1,267
––––––––
––––––––
1,231
––––––––
––––––––
-
-
493
-
––––––––
493
-
191
––––––––
684
––––––––
-
-
-
––––––––
-
-
-
––––––––
-
––––––––
-
-
––––––––
-
––––––––
684
––––––––
––––––––
493
––––––––
––––––––
2,218
785
2,505
(35)
––––––––
5,473
797
2,244
––––––––
8,514
––––––––
1,370
402
(24)
––––––––
1,748
824
912
––––––––
3,484
––––––––
-
324
––––––––
324
––––––––
4,706
––––––––
––––––––
3,725
––––––––
––––––––
The amortization period for the internally generated development costs relating to the group’s software products is 4
years. The amortization periods for (a) technology & IPR and (b) customer relationships, arising from the acquisition of
Alignent Software, Inc., are 4 years and 8 years respectively. Goodwill is not amortized. The residual goodwill arising on the
acquisition of Alignent is attributable to the enhanced market position of the group as a whole, due to the completeness of
the solution that Sopheon can offer the market, in addition to the ability to penetrate wholly new markets such as aerospace
and defense for the overall product set. The recoverable amount of the goodwill can be underpinned on a value in use basis
by the expected performance of the group as a whole.
The initial valuation of the intangible assets acquired with Alignent relating to technology and IPR, and to customer
relationships, used an income-based approach. During 2008 the recurring income from the acquired Alignent customer base
reduced, due to a mix of factors including the conversion of certain rental licenses to perpetual, changes in rental levels,
and cancellations. The overall reduction exceeded the rate of attrition of such recurring income estimated in the original
valuation exercise, leading to impairments in the carrying value of the acquired Alignent technology and IPR, and the acquired
Alignent customer relationships, of $298,000 (2007: $nil) and $302,000 (2007: $nil) respectively. All other assumptions of the
original valuation have been retained in the impairment review. The valuation exercise, and the recoverable amount of the
intangible assets and goodwill, are based on value in use with a discount rate of 14.6%.
company
The company has no intangible assets.
NOTES TO THE FINANCIAL STATEMENTS
4 1
1 5 . S U B S I D I A R I E S
At 31 December 2007 and at 31 December 2008
Cost
Less: Amounts provided
Carrying amount
company
£’000
41,560
35,441
––––––––
6,119
––––––––
––––––––
Details of the company’s subsidiaries at 31 December 2008 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. The common stock of
Alignent Software, Inc. is held by Sopheon Corporation, Delaware, USA.
name of company
Place of incorporation
Sopheon Corporation
Minnesota, USA
Sopheon Corporation
Delaware, USA
Alignent Software, Inc.
California, 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
nature of Ownership
interest
Proportion of
Voting rights held
nature of Business
Common Stock
100%
Software sales and services
Common Stock
100%
Software development and
sales
Common Stock
100%
Software sales and services
Ordinary Shares
100%
Software sales and services
Ordinary Shares
100%
Software sales and services
Ordinary Shares
100%
Holding company
Common Stock
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Ordinary Shares
100%
Dormant
Applied Network Technology Ltd.*
United Kingdom
Ordinary Shares
100%
Employee Share Ownership
Trust
4 2
NOTES TO THE FINANCIAL STATEMENTS
1 6 . O T H E R R E C E I V A B L E
Non-current receivable
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
12
––––––––
––––––––
10
––––––––
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
The other receivable represents a deposit paid in respect of a property leased by the group.
1 7 . T R A D E A N D O T H E R R E C E I V A B L E S
Trade receivables
Other receivables
Total receivables
Prepayments
Accrued income
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
3,293
25
––––––––
3,318
242
8
––––––––
3,568
––––––––
––––––––
1,980
82
––––––––
2,062
132
27
––––––––
2,221
––––––––
––––––––
-
-
––––––––
-
28
-
––––––––
28
––––––––
––––––––
-
14
––––––––
14
26
-
––––––––
40
––––––––
––––––––
Trade and other receivables are stated net of allowances totalling £4,000 (2007: £47,000) for estimated irrecoverable
amounts. The directors consider that the carrying amount of trade and other receivables approximates to their fair value.
A full provision has been made against amounts totalling £39,412,000 (2007: £39,398,000) 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.
1 8 . C A S H A N D S H O R T- T E R M B A N K D E P O S I T S
Cash at bank
Short term bank deposits
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
1,165
1,421
––––––––
2,586
––––––––
––––––––
1,043
1,010
––––––––
2,053
––––––––
––––––––
-
1,421
––––––––
1,421
––––––––
––––––––
381
1,010
––––––––
1,391
––––––––
––––––––
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 and bearing interest at variable rates. The carrying amount of these
assets represents a reasonable approximation to their fair value.
Included in cash at bank of the group is an amount of £23,000 held by the group’s employee share ownership trust.
NOTES TO THE FINANCIAL STATEMENTS
4 3
1 9 . T R A D E A N D O T H E R PAYA B L E S
Trade payables
Other payables
Tax and social security costs
Accruals
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
367
158
157
1,321
––––––––
2,003
––––––––
––––––––
211
137
141
887
––––––––
1,376
––––––––
––––––––
45
170
-
258
––––––––
473
––––––––
––––––––
22
184
-
237
––––––––
443
––––––––
––––––––
Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The directors consider that the carrying amounts of trade and other payables represent a reasonable approximation to
their fair values.
2 0 . B O R R O W I N G S
current loans and Borrowings
Line of credit
Loan notes (current portion)
non-current loans and Borrowings
Loan notes
Total loans and borrowings
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
522
558
––––––––
1,080
1,103
––––––––
2,183
––––––––
––––––––
377
378
––––––––
755
1,192
––––––––
1,947
––––––––
––––––––
-
-
––––––––
-
-
––––––––
-
––––––––
––––––––
-
-
––––––––
-
-
––––––––
-
––––––––
––––––––
The line of credit and the loan notes are denominated in US Dollars.
The loan notes are for an initial principal amount of $3,500,000 repayable in equal installments over the four-year period
to July 2011 and bear interest at a fixed rate of 11.03%.
The line of credit bears interest at a variable rate based on a margin of 1.25% over the bank’s US Prime Rate. The line of
credit is a revolving facility limited to the lesser of $750,000 and 75% of the eligible trade receivables of the group’s US
subsidiaries, which at 31 December 2008 amounted to $4,174,000 (£2,903,000) (2007: $2,341,000 (£1,176,000)).
The loan notes and the line of credit, both of which are provided by BlueCrest Capital Finance LLC, are secured by a
debenture and guarantee provided by Sopheon plc. The company has estimated the risk of this guarantee being called at
5% of the carrying value of the loan, and in its financial statements has included a provision for this amount within other
payables.
The fixed interest rate on the loan note of 11.05% was based on the yield on the 3 year US Treasury Note at the time
of issue, plus a spread of 6.05%. Although Treasury Note yields have now fallen, spreads on similar mezzanine financing
instruments have also widened. Accordingly, the directors consider that the carrying amounts for loan notes and the line
of credit represent a reasonable approximation of the financial instruments’ fair values.
4 4
NOTES TO THE FINANCIAL STATEMENTS
2 1 . O B L I G AT I O N S U N D E R F I N A N C E L E A S E S
The present value of future lease payments is analyzed as:
Current liabilities
Non-current liabilities
group
company
2008
£’000
2007
£’000
2008
£’000
2007
£’000
3
3
-
-
2
––––––––
5
––––––––
––––––––
3
––––––––
6
––––––––
––––––––
-
––––––––
-
––––––––
––––––––
-
––––––––
-
––––––––
––––––––
The group leases a telephone system with a net carrying value at 31 December 2008 of £2,000 (2007: £4,000). The lease
is for a five year period to May 2010 and carries an implied rate of interest of 4%.
Future lease payments are due as follows:
At 31 december 2008
Within one year
Due in one-to-five years
At 31 december 2007
Within one year
Due in one-to-five years
Minimum
lease
payments
£’000
3
2
––––––––
5
––––––––
––––––––
Minimum
lease
payments
£’000
3
4
––––––––
7
––––––––
––––––––
interest
Present
value
£’000
£’000
-
-
––––––––
-
––––––––
––––––––
interest
3
2
––––––––
5
––––––––
––––––––
Present
value
£’000
£’000
-
1
––––––––
1
––––––––
––––––––
3
3
––––––––
6
––––––––
––––––––
2 2 . O P E R AT I N G L E A S E A R R A N G E M E N T S
At the balance sheet date, the group had outstanding commitments under operating leases in respect of which the total
future minimum lease payments were due as follows:
Due within one year
Due after one year and within five years
land &
buildings
2008
£’000
Other
2008
£’000
375
153
––––––––
528
––––––––
––––––––
75
92
––––––––
167
––––––––
––––––––
land &
buildings
2007
£’000
331
207
––––––––
538
––––––––
––––––––
Other
2007
£’000
71
15
––––––––
86
––––––––
––––––––
The group leases its office accommodation in the US, UK and the Netherlands and has operating leases for office
equipment and vehicles.
company
The company has no operating leases.
NOTES TO THE FINANCIAL STATEMENTS
4 5
2 3 . F I N A N C I A L I N S T R U M E N T S
Categories of Financial Assets and Liabilities
The following table sets out the categories of financial instruments held by the group. All of the group’s financial assets are
in the category of loans and receivables, and all of its financial liabilities are in the category of financial liabilities measured
at amortized cost.
Financial Assets
loans and receivables
group
company
current financial Assets
Trade receivables
Other receivables
Accrued income
Cash and cash equivalents
non-current financial Assets
Other receivable
notes
2008
£’000
2007
£’000
2008
£’000
2007
£’000
17
17
17
18
3,293
25
8
2,586
––––––––
5,912
––––––––
––––––––
1,980
82
27
2,053
––––––––
4,142
––––––––
––––––––
-
-
-
1,421
––––––––
1,421
––––––––
––––––––
-
14
-
1,391
––––––––
1,405
––––––––
––––––––
16
12
––––––––
––––––––
10
––––––––
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
The group does not have any financial assets in any other categories.
Financial Liabilities
financial liabilities measured at
amortized cost
group
company
current financial liabilities
Trade payables
Other payables
Accruals
Loans and borrowings
Obligations under finance lease
non-current financial liabilities
Loans and borrowings
Obligations under finance lease
notes
2008
£’000
2007
£’000
2008
£’000
2007
£’000
19
19
19
20
21
367
158
1,321
1,080
3
––––––––
2,929
––––––––
––––––––
1,103
2
––––––––
1,105
––––––––
4,034
––––––––
––––––––
211
137
887
755
3
––––––––
1,993
––––––––
––––––––
1,192
3
––––––––
1,195
––––––––
3,188
––––––––
––––––––
45
170
258
-
-
––––––––
473
––––––––
––––––––
-
-
––––––––
-
––––––––
473
––––––––
––––––––
22
184
237
-
-
––––––––
443
––––––––
––––––––
-
-
––––––––
-
––––––––
443
––––––––
––––––––
The group does not have any financial liabilities in any other categories.
Financial Instrument Risk Exposure and Management
The group is exposed to risks that arise from its use of financial instruments. This note describes the group’s objectives,
policies and processes for managing those risks and the methods used to measure them.
There have been no changes in the group’s exposure to financial instrument risks, its objectives, policies and processes for
managing those risks or the methods used to measure them from previous periods, unless otherwise disclosed in this note.
4 6
NOTES TO THE FINANCIAL STATEMENTS
Principal financial instruments
The principal financial instruments used by the group, from which financial instrument risk arises, are as follows:
• Trade receivables
• Cash and cash equivalents
• Trade and other payables
• Loan notes
• Bank line of credit
general Objectives, Policies and Processes
The board has overall responsibility for the determination of the group’s risk management objectives and policies and,
whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that
ensure the effective implementation of the objectives and policies to the group’s finance function. The board receives
quarterly reports from the group finance director through which it reviews the effectiveness of the processes put in place
and the appropriateness of the objectives and policies it sets. The group’s risk management procedures are also reviewed
periodically by the Audit Committee.
The overall objective of the board is to set policies that seek to reduce risk as far as possible without unduly affecting the
group’s competitiveness and flexibility. Further details regarding these policies are set out below:
1. credit risk
Credit risk arises principally from the group’s trade receivables, other receivables and accrued income. It is the risk that
the counterparty fails to discharge its obligations in respect of the instrument.
The group’s software is principally marketed at major international corporations of good credit standing, and the group’s
historical bad debt experience is very low. Due to the potentially large size of certain individual sales, in a particular
year one customer can account for a substantial proportion of revenues recorded. However, such concentrations rarely
persist for multiple years and therefore the directors do not believe that the group is systematically exposed to credit risk
concentration in respect of particular customers. In 2008, the largest single customer accounted for 9% of group revenues
(2007: 9%).
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. At the year end
the group was holding a proportion of its deposits and bank balances with each of Lloyds Banking Group plc, Royal Bank of
Scotland plc, and Silicon Valley Bank.
The group does not enter into derivatives to manage credit risk.
The following table illustrates the group’s maximum exposure to credit risk, by class of financial instruments, at the balance
sheet date, including a geographical analysis of exposure in respect of trade receivables:
Trade receivables
North America
United Kingdom
Rest of Europe
Total trade receivables
Other receivables
Accrued income
Cash and cash equivalents
Maximum credit risk exposure
2008
carrying
value
£’000
2008
Maximum
exposure
£’000
2007
carrying
value
£’000
2007
Maximum
exposure
£’000
2,784
321
188
–––––––––
3,293
37
8
2,586
–––––––––
5,924
–––––––––
–––––––––
2,784
321
188
–––––––––
3,293
37
8
2,586
–––––––––
5,924
–––––––––
–––––––––
1,568
377
35
–––––––––
1,980
92
27
2,053
–––––––––
4,152
–––––––––
–––––––––
1,568
377
35
–––––––––
1,980
92
27
2,053
–––––––––
4,152
–––––––––
–––––––––
NOTES TO THE FINANCIAL STATEMENTS
4 7
The group's customers are major international corporations of high credit standing and therefore the group does not
typically obtain credit ratings for individual customers. Nevertheless, current economic conditions have resulted in such
major corporations slowing down payments and this is reflected in the ageing profile of the group’s receivables. However,
impairment of trade receivables is very rare, and in the three years ending 31 December 2008 provisions or write-offs
against customer receivables amounted in total to less than 0.5% of revenues. Such impairments do not arise from credit
defaults, but principally from disagreements with a very small number of former customers over their responsibility for
renewal fees for maintenance or hosting contracts. Sopheon's policy is to pursue collection of such fees but to make
provision against the applicable receivable if collection is uncertain.
The following is an analysis of the group’s trade receivables identifying the totals of trade receivables which are current and
those which are past due but not impaired:
At 31 December 2008
At 31 December 2007
Total
£’000
current
£’000
Past due
+30 days
£’000
Past due
+60 days
£’000
3,293
–––––––––
–––––––––
2,824
–––––––––
–––––––––
243
–––––––––
–––––––––
226
–––––––––
–––––––––
1,980
–––––––––
–––––––––
1,864
–––––––––
–––––––––
36
–––––––––
–––––––––
80
–––––––––
–––––––––
The following is an analysis of the group’s provisions against trade receivables, analyzed between the geographical segments
in which the group’s operations are located:
2008
£’000
Provision
£’000
gross
value
£’000
carrying
value
£’000
gross
value
2007
£’000
Provision
£’000
carrying
value
Trade receivables
North America
United Kingdom
Rest of Europe
2,784
325
188
–––––––––
3,297
–––––––––
–––––––––
-
4
-
–––––––––
4
–––––––––
–––––––––
2,784
321
188
–––––––––
3,293
–––––––––
–––––––––
1,611
381
35
–––––––––
2,027
–––––––––
–––––––––
43
4
-
–––––––––
47
–––––––––
–––––––––
1,568
377
35
–––––––––
1,980
–––––––––
–––––––––
The group records impairment losses on its trade receivables separately from the gross amounts receivable.
The movements on this allowance during the year are summarized below:
Opening balance
Increases in provisions
Written off against provisions
Recovered amounts reversed
Closing balance
2008
£’000
2007
£’000
47
-
(43)
-
–––––––––
4
–––––––––
–––––––––
41
39
(14)
(19)
–––––––––
47
–––––––––
–––––––––
The main factors used in assessing the impairment of the group’s trade receivables are the age of the balances and the
circumstances of the individual customer.
2. liquidity risk
Liquidity risk arises from the group’s management of working capital, and more particularly its ability to reach a point
where its trading is cash generative, together with the finance charges and principal repayments on its debt instruments.
It is the risk that the group will encounter difficulties in meeting its financial obligations as they fall due.
The group’s policy is to maintain significant cash balances, short term bank deposits and facilities with a view to having
sufficient cash to meet its liabilities when they become due. The board annually approves budgets including cashflow
projections for each of the operating companies within the group and receives regular information as to cash balances
held and progress against budget. Attention is particularly drawn to the detailed discussion of the factors which enable the
group to continue as a going concern for the foreseeable future in the section headed “Going Concern” in Note 2 to the
financial statements.
4 8
NOTES TO THE FINANCIAL STATEMENTS
The following table sets out an analysis of the contractual maturity of the group’s and the company’s financial liabilities that
must be settled gross, based on exchange rates prevailing at the relevant balance sheet date.
group
At 31 december 2008
Trade and other payables
Line of credit
Loan notes
Future interest - Loan notes
Finance lease
Total financial liabilities
At 31 december 2007
Trade and other payables
Line of credit
Loan notes
Future interest - Loan notes
Finance lease
Total financial liabilities
company
At 31 december 2008
Trade and other payables
Total financial liabilities
At 31 december 2007
Trade and other payables
Total financial liabilities
3. Market risk
Within
one year
£’000
Within
five years
£’000
2,003
522
558
157
3
–––––––––
3,243
–––––––––
–––––––––
-
-
1,103
103
2
–––––––––
1,208
–––––––––
–––––––––
Within
one year
£’000
Within
five years
£’000
1,376
377
378
158
3
–––––––––
2,292
–––––––––
–––––––––
-
-
1,192
188
4
–––––––––
1,384
–––––––––
–––––––––
Total
£’000
2,003
522
1,661
260
5
–––––––––
4,451
–––––––––
–––––––––
Total
£’000
1,376
377
1,570
346
7
–––––––––
3,676
–––––––––
–––––––––
Within
one year
£’000
One to
five years
£’000
Total
£’000
473
–––––––––
473
–––––––––
–––––––––
-
–––––––––
-
–––––––––
–––––––––
473
–––––––––
473
–––––––––
–––––––––
Within
one year
£’000
One to
five years
£’000
Total
£’000
443
–––––––––
443
–––––––––
–––––––––
-
–––––––––
-
–––––––––
–––––––––
443
–––––––––
443
–––––––––
–––––––––
Market risk arises from the group’s use of interest-bearing and foreign currency financial instruments. It is the risk that the
future cash-flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk) or foreign
exchange rates (currency risk).
The group does not have any financial instruments that are publicly traded securities and is not exposed to other price risk
associated with changes in the market prices of such securities.
NOTES TO THE FINANCIAL STATEMENTS
4 9
4. interest rate risk
The group’s interest bearing liabilities comprise loan notes with a carrying value of £1,662,000 which bear a fixed interest
rate of 11.03% and accordingly do not give rise to interest rate risk, together with a line of credit for £522,000 which
bears a variable interest rate based on a margin of 1.25% above the lender’s Prime Rate. Should this rate vary by 2% the
annualized effect would be to increase or reduce finance costs by £10,000.
The group invests its surplus cash in bank deposits denominated in Dollars, Euros or Sterling, which bear interest based
on short-term money market rates, and in doing so exposes itself to fluctuations in money market interest rates. The
group’s and the company’s surplus cash held in the form of bank deposits at the balance sheet date was £1,421,000.
The annualized effect of a movement of 2% in the average interest rate received on the group’s and the company’s bank
deposits at the balance sheet date would result in an increase or decrease in the group’s and the company’s interest
income of £28,000.
5. currency risk
The following is an analysis of the group’s financial assets and liabilities, analyzed by the currency in which they are
denominated:
At 31 december 2008
financial assets:
Receivables and accrued income
Cash and cash equivalents
Total financial assets
financial liabilities:
Trade and other payables
Borrowings
Total financial liabilities
At 31 december 2007
financial assets:
Receivables and accrued income
Cash and cash equivalents
Total financial assets
financial liabilities:
Trade and other payables
Borrowings
Total financial liabilities
uS dollars
£’000
Sterling
£’000
euro
£’000
Total
£’000
2,817
1,075
–––––––––
3,892
331
877
–––––––––
1,208
190
634
–––––––––
824
3,338
2,586
–––––––––
5,924
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
1,141
2,188
–––––––––
3,329
430
-
–––––––––
430
432
-
–––––––––
432
2,003
2,188
–––––––––
4,191
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
uS dollars
£’000
Sterling
£’000
euro
£’000
Total
£’000
1,642
584
–––––––––
2,226
420
1,046
–––––––––
1,466
37
423
–––––––––
460
2,099
2,053
–––––––––
4,152
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
619
1,953
–––––––––
2,572
469
-
–––––––––
469
288
-
–––––––––
288
1,376
1,953
–––––––––
3,329
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
–––––––––
The group’s policy is, where possible, to allow group entities to settle liabilities denominated in the functional currency
with cash generated from their own operations in that currency. The group also maintains cash and bank deposits in the
currencies which are the functional currencies of its operating entities, which are the US Dollar, the Euro and Sterling.
The group is exposed to currency risk in respect of such foreign currency denominated bank deposits and bank loans.
Taking into account the fact that a large proportion of the group’s income and expenditure arise in US Dollars and, to a
lesser extent, in Euros, the group’s policy is not to seek to hedge such currency risk.
5 0
NOTES TO THE FINANCIAL STATEMENTS
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 and, whilst this would be an economic hedge of the cash-flow risk, the group does not employ hedge
accounting.
Assets and liabilities of group entities located in the United States and the Netherlands are denominated respectively in
US Dollars and Euros and are therefore exposed to currency risk giving rise to gains or losses on translation into Sterling,
which are recognized directly in equity through the translation reserve. Such assets include the group’s intangible assets,
which are denominated in US Dollars, and the group’s line of credit and loan notes, which are also denominated in US
Dollars. 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.
The following table shows the effects, all other things being equal, of changes to exchange rates on the group’s loss after
tax and on the exchange differences on retranslation of the assets and liabilities of foreign operations which is recognized
directly in equity. It illustrates the effects if the exchange rates for the US Dollar and the Euro had been higher or lower
than those which actually applied during the year and at the year end.
2008
increase/
(decrease)
in profit
after tax
2007
decrease/
(increase)
in loss
after tax
2008
2007
effect on
exchange differences
on translation of
assets and liabilities
of foreign operations
£’000
£’000
£’000
£’000
(25)
31
(9)
47
–––––––––
–––––––––
11
(12)
34
(31)
(31)
45
(57)
61
––––––––– –––––––––
––––––––– –––––––––
(138)
148
(19)
16
–––––––––
–––––––––
Weakening of US Dollar by 10c
Strengthening of US Dollar by 10c
Weakening of Euro by 10c
Strengthening of Euro by 10c
The company holds certain assets, mainly bank deposits, and liabilities denominated in the functional currencies of its
principal operating subsidiaries, which are the US Dollar, the Euro and Sterling. The following table shows the effects, all
other things being equal, of changes to exchange rates at the year end on the loss after tax of the company. It is based on
the company’s assets and liabilities at the relevant balance sheet date.
2008
2007
(increase)/decrease
in loss after tax
£’000
£’000
4
(3)
(48)
61
–––––––––
–––––––––
3
(3)
(93)
108
–––––––––
–––––––––
Weakening of US Dollar by 10c
Strengthening of US Dollar by 10c
Weakening of Euro by 10c
Strengthening of Euro by 10c
6. capital
The group considers its capital to comprise its share capital and share premium and other capital reserves less the
accumulated retained losses. The group is not subject to any externally imposed capital requirements. In managing its
capital, the group’s primary objective is to support the development of the group’s activities through to the point where
they are cash generative on a sustained basis.
The group’s capital is all equity capital and is summarized in Note 24.
NOTES TO THE FINANCIAL STATEMENTS
5 1
2 4 . S H A R E C A P I TA L
Authorized
Ordinary shares of 5p each
issued and fully Paid
Ordinary shares of 5p each
2008
number
2008
£’000
2007
number
2007
£’000
200,000,000
–––––––––
–––––––––
10,000 175,000,000
–––––––––
–––––––––
–––––––––
–––––––––
8,750
–––––––––
–––––––––
2008
number
2008
£’000
2007
number
2007
£’000
145,579,027
–––––––––
–––––––––
7,279 145,579,027
–––––––––
–––––––––
–––––––––
–––––––––
7,279
–––––––––
–––––––––
The company has one class of ordinary shares, which carry no right to fixed income.
At 31 December 2008, the company had outstanding 502,790 warrants to subscribe for ordinary shares at a price of
20p per share, which were issued in June 2007 to BlueCrest Capital Finance, LLC in connection with the financing of the
acquisition of Alignent Software, Inc.
2 5 . C A P I TA L R E S E R V E S
group
At 1 January 2007
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
At 1 January 2008
Recognition of share-based payments
Lapsing of share options
At 31 December 2008
company
At 1 January 2007
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
At 1 January 2008
Recognition of share-based payments
Lapsing of share options
At 31 December 2008
Share
premium
£’000
50,685
1,411
-
-
––––––––
52,096
-
-
––––––––
52,096
––––––––
––––––––
Share
premium
£’000
50,685
1,411
-
-
––––––––
52,096
-
-
––––––––
52,096
––––––––
––––––––
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
1,314
-
149
(888)
––––––––
575
151
(23)
––––––––
703
––––––––
––––––––
Share
options
reserve
£’000
1,314
-
149
(888)
––––––––
575
151
(23)
––––––––
703
––––––––
––––––––
Total
£’000
72,827
1,411
149
(888)
––––––––
73,499
151
(23)
––––––––
73,627
––––––––
––––––––
Total
£’000
65,062
1,411
149
(888)
––––––––
65,734
151
(23)
––––––––
65,862
––––––––
––––––––
5 2
NOTES TO THE FINANCIAL STATEMENTS
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 and the fair value of
warrants to subscribe for Sopheon shares issued to BlueCrest Capital Finance LLC.
2 6 . C H A N G E S I N E Q U I T Y
group
At 1 January 2007
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
At 1 January 2008
Recognition of share-based payments
Lapsing of share options
Exchange differences on translation
of foreign operations
Profit for the year
At 31 December 2008
Share
capital
£’000
6,679
600
-
-
-
-
–––––––––
7,279
-
-
-
-
–––––––––
7,279
–––––––––
–––––––––
72,827
1,411
149
(888)
-
-
–––––––––
73,499
151
(23)
-
-
–––––––––
73,627
–––––––––
–––––––––
capital
reserves
£’000
Translation
reserve
£’000
retained
earnings
£’000
(164)
-
-
-
(77,722)
-
-
888
Total
£’000
1,620
2,011
149
-
(27)
-
–––––––––
(191)
-
-
778
-
–––––––––
587
–––––––––
–––––––––
-
(443)
(27)
(443)
––––––––– –––––––––
3,310
151
-
(77,277)
-
23
-
29
778
29
––––––––– –––––––––
4,268
––––––––– –––––––––
––––––––– –––––––––
(77,225)
The translation reserve represents accumulated differences on the translation of assets and liabilities of foreign operations.
Retained losses represent accumulated trading losses, including amortization and impairment charges in respect of goodwill
and intangible assets arising from past acquisitions.
company
At 1 January 2007
Shares issued at a premium
Recognition of share-based payments
Lapsing of share options
Loss for the year
At 1 January 2008
Recognition of share-based payments
Lapsing of share options
Loss for the year
At 31 December 2008
Share
capital
£’000
capital
reserves
£’000
retained
earnings
£’000
Total
£’000
6,679
600
-
-
-
–––––––––
7,279
-
-
-
–––––––––
7,279
–––––––––
–––––––––
65,062
1,411
149
(888)
-
–––––––––
65,734
151
(23)
-
–––––––––
65,862
–––––––––
–––––––––
(65,178)
-
-
888
(1,616)
6,563
2,011
149
-
(1,616)
––––––––– –––––––––
7,107
151
-
(163)
––––––––– –––––––––
7,095
––––––––– –––––––––
––––––––– –––––––––
(65,906)
-
23
(163)
(66,046)
NOTES TO THE FINANCIAL STATEMENTS
5 3
2 7 . R E T I R E M E N T B E N E F I T P L A N S
The group operates defined contribution retirement benefit plans which employees are entitled to join. The total expense
recognized in the income statement of £98,000 (2007: £76,000) represents contributions paid to such plans at rates
specified in the rules of the plans.
2 8 . R E L AT E D PA R T Y T R A N S A C T I O N S
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
executive management committee during the year was as follows:
Emoluments and benefits
Pension contributions
Share-based payments
2008
£’000
2007
£’000
743
18
70
–––––––
831
–––––––
–––––––
617
17
46
–––––––
680
–––––––
–––––––
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:
Net amounts repaid by/(advanced to) subsidiaries by way of interest-free loans
Net management charges to subsidiaries
2008
£’000
2007
£’000
190
210
–––––––
(911)
209
–––––––
The amounts owed by subsidiary companies to the parent company at 31 December 2008 totalled £39,412,000 (2007:
£39,398,000). A full provision has been made against these amounts, which are unsecured and are subordinated to the
claims of all other creditors.
During 2008 and 2007 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.
5 4
NOTES TO THE FINANCIAL STATEMENTS
2 9 . S H A R E - B A S E D PAY M E N T S
Equity-Settled Share Option Schemes
The group has a number of share option schemes for all employees. Options are exercisable 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
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
Exercisable at the end of the year
number of
share
options
2008
10,925,314
2,731,224
-
(552,100)
–––––––
13,104,438
–––––––
–––––––
8,786,131
–––––––
–––––––
Weighted
average
exercise
price
2008
£
0.27
0.14
-
0.14
–––––––
0.24
–––––––
–––––––
0.27
–––––––
–––––––
number of
share
options
2007
9,439,665
1,857,500
-
(371,851)
–––––––
10,925,314
–––––––
–––––––
7,752,875
–––––––
–––––––
Weighted
average
exercise
price
2007
£
0.33
0.19
-
1.47
–––––––
0.27
–––––––
–––––––
0.30
–––––––
–––––––
No share options were exercised during the year (2007: Nil). The options outstanding at the end of the year have a
weighted average contractual life of 6.3 years (2007: 6.4 years).
In 2008, share options were granted on 1 April 2008 and on 27 June 2008. The exercise prices of the options granted on
1 April 2008 was 13.25p, and the estimated fair value was 7.8p. The exercise prices of the options granted on 27 June 2008
were 14p (for options granted mainly under the US and UK schemes) and 14.75p (for certain options granted under the
Dutch scheme), and the estimated fair values were 8.3p and 4.9p respectively. In 2007, share options were granted on 28
June 2007. The exercise price of the options granted on that date was 19p, and the estimated fair value was 11.25p.
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
27 June
2008
14.75p
14.75p
40%
5%
Nil
27 June
2008
14p
14p
40%
5%
Nil
1 April
2008
11 October
2007
13.25p
13.25p
40%
5%
Nil
19p
19p
40%
5%
Nil
The expected contractual 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 and company recognized total expenses of £151,000 (2007: £149,000) relating to equity-settled share based
payments during the year.
3 1 . A P P R O V A L O F F I N A N C I A L S TAT E M E N T S
The financial statements were approved by the board of directors and authorized for issue on 25 March 2009.
D I R E C T O R S
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 a 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 four years from June 2001 to July 2005 and currently holds a number of other directorships in
the United Kingdom.
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.
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