S O P H E O N
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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 solutions structure, align and manage
innovation processes to help organizations generate
more revenues and profits from new products.
Summary Results and Trends ................................. 5
Auditors’ Report .....................................................24
Statement from the Chairman and
Chief Executive Officer ........................................... 6
Financial and Operating Review ............................ 8
Product and Market Overview ............................11
Directors and Advisors .........................................16
Report on Directors’ Remuneration .................17
Directors’ Report ...................................................21
Statement of Directors’ Responsibilities ...........23
Consolidated Income Statements .......................26
Consolidated and Company
Balance Sheets .........................................................27
Consolidated and Company
Cash Flow Statements ...........................................28
Consolidated and Company Statements
of Changes in Equity ..............................................29
Notes to the Financial Statements .....................30
Sopheon is an international provider of software and services.
Sopheon's end-to-end solutions structure, manage, and align
enterprise innovation management processes to improve
the business impact of product innovation.
Summary Results and Trends
2011
2010
2009
2008
2007
Revenue
EBITDA
Profit before tax
Earnings per share
£'000
£'000
£'000
pence
10,276
1,491
104
0.07
10,537
1,510
171
0.10
8,260
(195)
(1,494)
(1.03)
9,304
1,120
44
0.02
6,332
113
(443)
(0.32)
Pre financing cashflow £'000
151
1,320
(1,276)
896
(551)
Net Assets
Gross Cash
Working capital
Long term liabilities
£'000
£'000
£'000
£'000
3,082
2,941
3,289
(1,663)
3,008
3,358
4,145
(2,290)
2,685
1,624
2,001
(1,222)
4,268
2,586
3,068
(1,105)
3,310
2,053
2,140
(1,195)
Working capital is calculated as net current assets after adding back deferred income.
After a tough 2009, growth was strong in 2010. In 2011, we saw continued
high activity from existing customers but a slower pace of investment from new
customers, resulting in a flat performance. We have reorganized to improve focus
on both areas. Looking ahead, our sales pipeline remains very active and includes
a number of substantial opportunities – including some from accounts that signed
initial business in 2011 – and which we expect to bear fruit in 2012.
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e
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200
180
160
140
120
100
80
60
40
20
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
In 2011, we grew our customer base to 185 licensees.
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£
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12000
10000
8000
6000
4000
2000
0
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45
40
35
30
25
20
15
10
5
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Recurring
Revenues
Extensions
We have grown our business by an annualized average of 25% since the launch
of Accolade. In 2011, we saw a total of 54 license orders, of which 40 were
extensions. Revenue from existing customers rose from 74% to 88% of total.
6
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ST A T E M E N T F R O M ThE C hA I R M A N
A N D C hI E F E xE C U T I V E OF F I C E R
Performance
The past year was one of mixed results for Sopheon. We feel very positive about the advances we have made within our
business over time. In 2011, however, these changes did not produce the expected financial growth. Revenues totaled
£10.3m, broadly similar to the £10.5m generated in 2010. In fact, if adjustments are made for the effect of exchange rate
movements, revenues in 2011 were the same as in 2010. EBITDA of £1.5m was also the same as 2010. Thanks to strict
control of costs, and enhanced conversion of development costs into product, we achieved these results despite the
expansion of staff in sales, services and development. For the second year in a row, we are also pleased to report a positive
bottom line profit after tax of £104,000 (2010: £152,000).
Total license transactions including extension orders were 54 in 2011 (2010: 58). We experienced good growth in services
and maintenance revenues, but license income represented only 29 percent of our total income, compared to 37 percent
in 2010. Some of this shift in apportionment is explained by new customers making smaller initial investments, and then
extending implementation across multiple years. The rest is largely due to higher-than-expected levels of customer extension
activity compared to new client acquisition.
From a geographical standpoint, the relative contributions of the US and European markets remained broadly steady at 64
percent and 36 percent respectively. Performance of newer product lines improved in 2011 driven partly by our continued
investment in development. Our innovation planning solution, Accolade® Vision Strategist™, and our new-product ideation
offering, Accolade Idea Lab™, contributed 11 percent and 5 percent of total revenues, compared to 9 percent and 3 percent
respectively in 2010. Income from the sale of our core innovation process support solution, Accolade Process Manager™,
accounted for the remainder of the total.
At the date of this report, full-year 2012 revenue visibility incorporating booked revenue, contracted services business and
the run rate of recurring contracts stands at more than £6.0m, compared to £5.2m at the same time last year. Revenue
visibility is more fully defined in Note 4.
Strategy and Product
We have previously stated that Sopheon’s growth strategies for 2012 and beyond center on three key objectives:
•
Increase our rate of growth by deploying vertical-specific marketing strategies. Our revised marketing
approach comprises a vertical-specific, integrated mix of tactics ranging from digital advertising campaigns and web-based
events to conferences, direct mail and social media programs. Target sectors include consumer packaged goods, and
aerospace and defense.
• Broaden the use of our solutions within existing accounts. We have introduced a range of new products
and services over the past two years, supporting them with account management and marketing programs directed
exclusively into our customer base. Most recently, we reorganized our sales teams to segregate and sharpen the focus
between generating additional revenue from existing customers and adding new accounts.
• Expand direct and indirect distribution channels to acquire new accounts. During 2011, we widened sales
coverage geographically with new hires on the US West Coast and in Germany. We also continued to build our
relationships with consulting partners. In some cases, the initiative includes development and commercialization of
joint offerings. Universally, these partnerships are calculated to leverage complementary skills and reciprocal account
introductions to generate new customers.
Accolade® is a registered trademark of Sopheon plc.
Vision StrategistTM, Process Manager™ and Idea Lab™ are trademarks of Sopheon plc.
STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
7
During 2011, we invested in all three of these objectives. We made progress in some areas. Where we found progress
lagging, we made adjustments. We look for the payoff from these efforts to be reflected in our 2012 results. On the
product front, 2011 was a milestone year for Sopheon. First, we completed a full refresh of the technology platform
upon which our core software offerings are built, and as a result, these are now wholly based on the current Microsoft®
software framework, “.net”. This achievement is the culmination of a multi-year effort that was conducted in tandem with
the continued creation and commercialization of new product features and functionality. During 2011, we also introduced
a new agile development methodology which will allow us to systematically introduce multiple product releases during the
course of a year, rather than larger releases separated by long intervals of time. The combination of the platform change
and switch in methodology provides a mix of important advantages. Principal among them is that we will be able to build
products faster and do a better job of ensuring that they are in step with real customer needs. In 2012, these changes give
us a springboard for the introduction of a number of new functional releases that we expect will advance the value of our
solutions in a range of markets.
Sopheon remains unique in offering an all-in-one software system that encompasses support for strategic innovation
planning, ideation, product development process execution, and portfolio management across the entire product lifecycle.
The strength of our market position has been validated by analysts. Our decision to sustain internal product development
investment despite the recent, ongoing economic uncertainty is serving us well in the present and will continue to fortify
our business performance and potential in the days ahead.
People
Sopheon is differentiated in the market by its reputation for deep domain expertise in innovation management. That know-
how is embodied in our people, whose best-practice understanding and experience have been developed through many
years of helping top businesses achieve innovation success. We are very proud of the commitment that our people have
shown in lifting Sopheon to a position of leadership in this area and in building on that standing throughout the recent
economic turbulence.
Sopheon continues to grow and develop our people. We are selective about whom we add to the team. And when
someone joins, our actions reflect that we understand the importance of transferring as rapidly as possible what we have
learned over time. We recently kicked off an initiative to package key aspects of our unique experience and knowledge
into formal on-boarding and certification training. In 2012, as this initiative is rolled out, our goal is to reduce the ramp-
up time for new employees. This, in turn, will improve our ability to scale our organization as the company continues to
grow, without jeopardizing critical standards for high levels of customer satisfaction. In 2011, also with the goal of better
positioning Sopheon for growth, we reported having taken steps to restructure and strengthen Sopheon’s executive
management team. Our commercial operations are now organized on a regional basis, with teams in North America and
Europe, led by Mike Ducatelli and Jim Conroy respectively. Jim is a new appointment who brings an extensive track record
of sales leadership success to our European business. he earlier held similar positions at Agentrics, Demantra, and Cap
Gemini.
The Sopheon plc board is made up of three executive directors, augmented by three non-executive directors who bring a
wealth of knowledge and experience to our business. Details about each board member can be found on the inside back
cover of this report.
Outlook
Buoyed by strong 2010 results, we expected another year of financial progress in 2011. Instead, we essentially matched the
prior year performance. The principal reason was a fall in license revenues. We attribute this drop-off in part to strong
demand from our client base for extension business, which absorbed the attention of our sales team and diverted energy
from winning new clients. We have since reorganized our sales resources to ensure a more focused attention to both
areas. We believe this will be reflected in improved license performance in 2012, building on our service and maintenance
income streams, which are now each at run-rates of around £1m a quarter. Accordingly, we remain positive about the
growth outlook for the business.
We entered 2011 looking to take advantage of an improving business climate. This included controlled expansion of staff
levels in key areas. As previously reported, we also took action in late 2010 to improve our working capital position to
provide the group with flexibility to react to any new, viable market opportunities that arose. This strategy has enabled
continued investment where it is judged necessary to near- and mid-term business performance. Accordingly, we are
maintaining staffing levels and in fact making further controlled investments in sales and services resources to stimulate and
support future growth. Notwithstanding this stance, we are fully conscious of the need to remain vigilant in matching costs
to revenue expectations, not least due to the continued uncertainty in the global economy.
Looking ahead, our sales pipeline remains very active and includes a number of substantial opportunities from both new
and existing customers – including some accounts that signed initial business in 2011 – and which we expect to bear fruit
in 2012.
Barry Mence
Executive Chairman
21 March 2012
Andy Michuda
Chief Executive Officer
Microsoft® is a registered trademark of the Microsoft Corporation in the United States and/or in other countries.
8
FINANCIAL AND OPERATING REVIEW
FI N A N C I A L A N D OP E R A T I N G RE V I E W
Trading Performance
Sopheon’s consolidated turnover in 2011 was £10.3m, compared to £10.5m in 2010 and £8.3m in 2009. Although the
average Euro rate remained broadly constant relative to Sterling during 2011, there was a fall in the US Dollar rate which
negatively impacted revenues by £200,000. Adjusting for this movement in currency value, revenues were flat year-on-
year. Furthermore, the split of total revenues between North American and European territories also remained broadly
constant year-on-year.
Total license transactions including extension orders were 54 in 2011 compared to 58 in 2010, a reduction of 7 percent.
Accolade Vision Strategist contributed approximately 11 percent of total revenues during 2011 compared to 9 percent
in 2010. Our Idea Lab solution contributed 5 percent of revenues compared to 3 percent the year before. historically,
our performance in the fourth quarter has tended to be very strong and provided a substantial boost to overall annual
revenues. In 2011, although the third quarter showed substantial growth over the third quarter of 2010, in the final
quarter we did not match our record revenues of £3.5m in the fourth quarter of 2010.
Business Mix
The annualized average growth of the business since the launch of Accolade is 25 percent, but as noted above, the year-
on-year performance between 2010 and 2011 was flat. Within this overall picture, maintenance and services revenues
delivered increases of 11 percent and 13 percent respectively; however, license revenues fell 25 percent. We believe the
pause in license revenue is, in part, symptomatic of the sensitivity of our results to individual sales events. Compounding
this issue, we are seeing an evolution of buying patterns whereby customers are increasingly likely to demand extended
validation phases, pilot projects and phased license orders as opposed to making substantial one-off orders as in the past.
A number of new 2011 customer transactions followed this pattern. The fact that new-account sales are taking more
time contributed in 2011 to a greater proportion of revenues being recorded from existing customers. Approximately 79
percent of the value of non-recurring orders in 2011 was derived from our existing customers, compared to 62 percent
the year before. We recognize the importance to long-term growth prospects of bringing on new customers. As noted
earlier, we believe most of the customer investment cycles started in 2011 will come to fruition in 2012. As was also
noted earlier, the strength of demand from our customer base has absorbed much attention from our sales teams, and
we have accordingly taken action to reorganize and improve the focus on winning new customers, without compromising
our existing customer relationships. The continued growth in add-on business from existing customers underlines both
the inherent value of our solutions, and the extended business opportunity for Sopheon from each new customer we
sign.
Similar to prior years certain customers reorganized and rationalized in reaction to the economic conditions, resulting
in termination of some maintenance contracts. The base of recurring business is now £3.9m compared to similar levels
coming into 2011 and £3.7m coming into 2010. The majority of this income is represented by maintenance services, but
also includes hosting services and license rentals. Overall, in 2011 our business delivered a 29:38:33 ratio of licenses,
maintenance, and services respectively compared to 37:34:29 in the previous year.
Overall gross margins have fallen slightly to 73 percent (2010: 75 percent) which can be largely attributed to the relative
increase in service compared to license revenues and the associated higher costs. Within this overall picture, we did
incur approximately £0.3m of third-party software costs (2010: £0.2m). As we have noted in prior annual reports, we
anticipated that license margins will be affected by decisions to embed, rather than build, certain third-party components
or methods of working into our software. This is expected to continue going forward. In the services area, higher
revenues resulted in a rise in the overall cost of service resources. however, salary costs remained fairly constant as we
continued to extend capacity through subcontractors. We expect this balance to shift back towards permanent resources
in 2012 and have already made key additional hires in this area. This should have a beneficial impact on services margins.
Research and Development Expenditure
having sustained investment in product development during the course of 2009, we made some reductions coming
into 2010. Budgets for development were held through 2010, and then gradually released in the final quarter of the
year and early 2011. These expanded development resources have resulted in higher total expenditures in research
and development year-over-year. however, as in 2009, these resources were more focused on specific product releases
FINANCIAL AND OPERATING REVIEW
9
which enhanced the level of investment in capitalized development costs. Accordingly, headline research and development
expenditures reported in the income statement fell to £2.2m, compared to £2.4m in 2010. This apparent reduction of
£0.2m (2010: £0.2m increase) is attributable to the net impact of capitalization, amortization and impairment charges
associated with research and development. The amount of 2011 research and development expenditure that met the
criteria of IAS38 for capitalization was £1.1m (2010: £0.7m).
Sopheon is committed to product leadership, with excellence in research and development a core competency of the
group. Since 2001 Sopheon’s reported research and development costs each year have been at least 20 percent of
revenues reported in that year. For 2011, this metric was 21 percent (2010: 23 percent).
Operating Costs
Of relevance to all aspects of the income statement is the fact that the strong performance in 2010 led to a maximum
bonus award being made to all members of the group who were on the corporate bonus scheme. This covered the
majority of the group’s executives and employees, with the principal exception of the sales teams, for whom incentives
are tied to individual or territory results. The costs of the bonus were allocated to the relevant categories of the income
statement. Due to raised targets, bonuses are not payable for 2011; this reduction almost completely offset the higher
costs arising from staff increases and greater use of subcontractor resources.
Detailed comments regarding professional services and research and development costs are noted above. headline sales
and marketing costs have fallen from £3.6m in 2010 to £3.5m in 2011. As with professional services and research and
development, actual fixed costs rose year-on-year but this was offset by lower commissions and bonus costs, as well as a
lower amortization and impairment charges for the intangible customer assets acquired with Alignent in 2007.
headline administration costs have fallen by £0.1m. Much of the fall can be attributed to reductions in bonus cost.
Unlike operational areas, this was not offset by higher staffing as we maintained constant resources in these areas year-
over-year. Underlying administration costs and resourcing have remained broadly constant, as they have since 2007.
Within this total there have been a number of movements. For example, rent and insurance costs are down, whereas
professional fees and information technology costs have risen. Such costs will continue to be managed tightly as the
group expands operational resources.
Results
The combined effect of the revenue and cost performance discussed above has resulted in Sopheon’s EBITDA (Earnings
before Interest, Tax, Depreciation and Amortization) performance for 2011 staying constant at £1.5m, the same as for
2010.
In common with other businesses in our sector, the board believes EBITDA 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 4 of the financial statements. Our calculation of EBITDA is stated
after charging (i) share-based payments of £40,000 (2010: £81,000); (ii) impairment charges of acquired intangible assets of
£65,000 (2010: £180,000); and (iii) exchange gains of £55,000 (2010: £7,000) but excludes depreciation and amortization
charges for the year of £1.0m (2010: £1.1m) and net finance costs of £0.4m (2010: £0.3m).
Including the effect of interest, depreciation and amortization, the group reported a profit before tax for the year of
£104,000 (2010: £171,000). No tax has been provided, compared to £19,000 in 2010 representing US Alternative
Minimum Tax chargeable on US profits. The profit per ordinary share was 0.07p (2010: 0.10p).
Financing and Balance Sheet
Consolidated net assets at the end of the year stood at £3.1m (2010: £3.0m). Cash and cash equivalents at 31 December
2011 amounted to £2.9m (2010: £3.4m). Approximately £1.8m was held in US Dollars, £0.9m in Euros and £0.2m in
Sterling.
Intangible assets stood at £3.7m (2010: £3.6m) at the end of the year. This includes (i) £2.7m being the net book value of
capitalized research and development (2010: £2.4m) and (ii) an additional £1.0m (2009: £1.2m) being the net book value
of Alignent intangible assets acquired in 2007. The carrying value of the Alignent intangibles has been impacted by both
amortization and impairment charges. Further details are set forth in Note 14.
1 0
FINANCIAL AND OPERATING REVIEW
In June 2007, the group entered into a $3.5m, 48-month mezzanine term loan with BlueCrest Capital Finance
(“BlueCrest”), in connection with its acquisition of Alignent Software Inc. This term loan was repayable in equal monthly
installments through to July 2011. In December 2010 the group signed an agreement with BlueCrest to refresh the
mezzanine term loan back up to $3.5m, for a new 39-month term, repayable in equal monthly installments of $90,000
plus interest through March 2014. The loan bears interest at 13 percent per annum. No warrants were issued to
BlueCrest in connection with the transaction.
In addition to the term loan, for a number of years the group has had access to a revolving line of credit with BlueCrest,
secured against the trade receivables of Sopheon’s North American business and with a maximum draw capacity of
$1.25m. The facility is periodically renewable and the next renewal date is 31 May 2012.
In October 2009, the company issued £850,000 of convertible unsecured loan stock (the “Loan Stock”) to a group of
investors including key members of the board and senior management team. The Loan Stock has a conversion price of
7.75p per share, and matures on 31 January 2013.
Sopheon’s equity line of credit facility with GEM Global Yield Fund Limited ("GEM") was due to expire on 23 December
2011. During the year, GEM agreed to implement a further two year extension at no cost to Sopheon, through to
23 December 2013. 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.
The principal risks and uncertainties facing the group are further described in the Directors’ Report on pages 21 to 22.
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
Manufacturers throughout the world are scrambling to respond to unstable economic conditions,
increased material costs and price-sensitive markets. Success depends upon agility, in particular a
capacity to make fast, informed adjustments to strategic plans and continually reorder operating
priorities to align with external change.
Innovation is increasingly viewed as the principal remaining lever for improving business value. But such opportunities do
not come without risk. In their pursuit of innovation success, executives are literally betting the future of their organizations
on decisions about where to invest limited resources. Poor decisions on innovation investments can generally be traced
to one of four factors:
1) Failure to anticipate the impact of short-term decisions on long-term strategy. Operational decisions
are often made without a clear understanding of their probable impact on long-term strategies, or how those
decisions might be affected by shifts in market dynamics and product and technology investments.
2) Lack of transparency. Decision makers can’t get a clear picture of where their innovation resources are being
spent, or on investment options.
3)
4)
Inability to judge what is valuable (and what is not). Organizations often lack market-driven processes for
determining the potential business value of investment alternatives. As a result, spending decisions are based on
little more than gut feel.
Inability to bring innovation to market with speed. Today, global and local market conditions fluctuate at
unprecedented rates. Windows of business opportunity can close as fast as they open. Companies that are unable
to quickly conceive, develop and commercialize innovative products to fulfill emerging needs are at a serious
competitive disadvantage.
Sopheon is recognized as a global leader in the provision of solutions for innovation management. Our software and
services deliver comprehensive support for the system of cross-functional decision-making that determines, aligns and
manages innovation activity. This capacity, which defines innovation management, helps ensure that executives make the
right decisions about where to spend their innovation resources. Ultimately, Sopheon’s solutions enable companies to
increase profits and revenues from innovation investments.
Sopheon’s Accolade solution is the first software system in the industry to provide end-to-end support for innovation
management, including enablement of strategic innovation planning, ideation, product portfolio management, and
innovation process execution.
1 2
PRODUCT AND MARKET OVERVIEW
Sopheon’s Solutions
Sopheon’s Accolade solution is the first software system in the industry to provide end-to-end support for innovation
management, including enablement of strategic innovation planning, ideation, product portfolio management, and innovation
process execution. Accolade’s Vision Strategist component automates the strategic roadmapping process, allowing users to
visualize and forecast the future of products, markets and technologies. Accolade Idea Lab helps organizations generate, select
and develop winning product and service ideas. Accolade Process Manager automates the product innovation process and
provides strategic decision support for the management of product portfolios.
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. The software also makes it possible for senior leadership, planning and product
development teams to understand the dependencies among existing initiatives and anticipate how near-term decisions
are likely to affect long-term strategies and performance goals.
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
can objectively separate winning innovation opportunities from losers early in the development cycle, helping to
keep investments concentrated on high-value opportunities. Unique knowledge management capabilities and “smart”
technology enable brainstorming and discovery, contributing to a steady flow of innovative ideas. Features such as
scorecards, tailored idea-selection criteria, resource reports and information-gathering, and presentation templates
grounded in best practices strengthen process management 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. One common result is that the execution of new product initiatives is inefficient and even conflicted, crippling
the organization’s ability to respond to new market opportunities. Sopheon’s solutions create a seamless, automated
process and decision framework that continually reconciles strategic product planning and operational execution. The
impact is to dramatically reduce the time it takes to bring new products to market.
“It really doesn’t matter what sector a business operates in, Sopheon’s solutions provide an opportunity for much
greater product development efficiency and accuracy.”
— Martin Butler Research
Business Solution Audit
April 2011
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.
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).
The analysts view Sopheon as a specialty vendor in PPM. 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 that can impede the achievement of profitable
innovation, including the management of innovation risk and reward.
PRODUCT AND MARKET OVERVIEW
1 3
Product Portfolio Management
Strategic Innovation 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 subclass. They
consider PPM to be 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.
Forrester, the prominent IT research and
analyst firm, has identified Sopheon as one
of the clear market-share leaders among
specialty providers of project and portfolio
management tools for product development.
Uk-based Martin Butler Research published
an audit in April of 2011 on Sopheon’s
complete line of solutions. The analysis
credited Sopheon with excellent product
development process management
capabilities, deep domain experience, and a
broad range of support services.
“[Gartner] client feedback suggests that most manufacturers still prefer the [product portfolio management]
capabilities of specialty vendors over offerings made by the large PLM vendors or ERP vendors. If a manufacturer
is focused on tools and techniques to valuate opportunities and products in a portfolio, [or] more focused on
managing the product development process for multiple activities in a portfolio, specialty vendors still have an
advantage.”
— Gartner
“Hype Cycle for Manufacturing Product Life Cycle
and Operations Management, 2011”
July 2011
Growth Strategy
For Sopheon, as for many of our customers, 2011 was a year that challenged us to prudently apply our operational
resources across a mix of potential areas for business development. Through these efforts we achieved strong growth in
our existing account base. This success was fundamental to our strategies because a healthy customer population provides
a critical foundation for continued revenue expansion as markets rebound from recent economic turbulence. however,
this predominate focus on servicing existing customers came with a price. It diverted attention and resources away from
generating new business. The result was a drop-off in our acquisition of new accounts. What’s more, the new customers
we won in 2011 exhibited a tendency to buy licenses over time, instead of as in the past, purchasing sufficient volumes up
front to satisfy their mid- and long-term needs. This is a further example of the frugality that characterizes today’s business
practices. We have taken action to invest in additional resources that will be focused on the acquisition of new customers
in 2012. We expect to begin realizing a return on these investments during the next 18 months.
Client Base
As the size of our customer population continues to expand, so too do Sopheon’s opportunities for growth. In 2011,
79 percent of Sopheon’s revenues came from new orders out of the installed base. This income can be credited in part to
our decision, despite the economic downturn, to maintain historic investment levels in product development and to focus
commercial resources on deepening our relationships with existing accounts. The enhancements to our solutions resulting
from these investments played a direct role in encouraging current customers to take further advantage of Accolade’s value,
generally in one of three scenarios:
1) Enterprise expansion of Accolade use. Existing customers continued to extend their initial deployments of our
software, adding licenses to enable product innovation in more business units or other areas of the enterprise.
2) Support for advanced levels of innovation management. Sopheon has tight, extended partnerships with a
growing group of customers who are strategically committed to raising the maturity of their innovation-management
systems to world-class levels. The majority of these accounts invested in additional, more advanced software modules
and engaged Sopheon to provide guidance services.
1 4
PRODUCT AND MARKET OVERVIEW
3) Use of Accolade for processes beyond product portfolio management. More and more customers are
expanding the use of Accolade beyond product portfolio management to include the management of other PLM-
related processes. Examples include cost-savings management programs, research-and-development planning, and
the management of corporate initiatives.
In October, Sopheon convened a session of its global Product Advisory Council (PAC). The eight-member organization
comprises representatives of current customers, including ConAgra, Cytec, Dr. Pepper Snapple Group, heinz, Land
O’Lakes, Parker hannifin, PepsiCo and Regal Beloit. The group provided substantial feedback on Sopheon’s product plans
and direction. Its input continues to have material impact on our product and go-to-market strategies.
Product Development
Sopheon made major progress during 2011 in the way we develop products. These advances came in two strategic areas.
First was the completion of a multi-year effort to replace our core product platform with .net technology. This modern
software framework provides increased design flexibility and high compatibility with other technology platforms. It also
brings new levels of efficiency to the development process. One of our goals in making the change was to minimize
market and business-development disruption. We accomplished this by continuing to build and commercially introduce
new capabilities using the old platform while simultaneously transferring to the new technology. We successfully
completed this migration and have now transferred all of our software development to the new platform.
The second major area of progress in our product development efforts during the past year was the switch from a
“waterfall” development process to a new methodology called “agile.” As a result of this change, Sopheon will be able to
consistently generate more end-user relevant products, and deliver them to market faster. We can also offer much more
flexibility to our customers in the timing of their adoption of new versions of our new software, and it will make such
upgrades easier to install.
Supported by these advances, Sopheon expects to introduce three significant new product releases in 2012. The agile
methodology enabled us to deliver on the new technology platform. It has also caused us to embrace a customer-
centric approach to generating new products whereby our developers interact directly with end-users as part of the
development process. The initial feedback from our customers on the changes we have made and the expected benefits
has been highly favorable. We expect to realize positive business impact from these improvements in 2012.
In formulating our product development strategies, we pay rigorous attention to evolving customer requirements,
technology trends, user preferences and other external factors that have the potential to impact our business success.
For some time, we have been monitoring and assessing the exploding use of mobile devices to access software
applications, the growing popularity of software-as-a-service (SAAS) delivery models, and the emergence of cloud
computing. Our response to such change is generally based on a mix of independent research, ongoing input from our
prospects and customers, and counsel from third-party experts such as IT firm analysts. Soon we will be bringing our
first mobile interface to the market. In the case of cloud technology, Sopheon has introduced both rental pricing and
hosted services as the first step in a strategy to test the market’s interest in accessing Sopheon’s software in a cloud
environment. In the past year, some of our new customers have chosen to rent our applications rather than own them.
In addition, approximately one-third of our new accounts during that period opted to take advantage of our hosting
services instead of installing our software on-site. Feedback from customers and prospects continues to indicate that
they are not ready to access Sopheon’s applications in the cloud, primarily due to concerns over having their highly
valuable intellectual property and other sensitive content stored and exchanged in an environment that they do not
own or control. however, over the next two to three years, we expect such acceptance to grow. As with mobile
delivery, when a decision is made to move forward with cloud computing, our new technology platform and agile process
capabilities put us in a strong position to take advantage of this expected opportunity with speed.
Service Development
Broadly stated, one of the principal goals of users of Sopheon’s software is to create competitive advantage through
product innovation. Our Accolade line of innovation management solutions enables the achievement of this goal by
informing decisions that lead to more profitable, revenue-generating new products. In 2011, we expanded our mix of
services aimed at helping Accolade customers maximize the return they derive from their use of our software. Called
Advisory Consulting Services (ACS), these offerings deliver advice and counsel in critical innovation process areas
supported by our applications. All engagements are customized to the specific needs of the customer. Examples of
deliverables include workshops to improve the effectiveness of portfolio management practices and project decision
meetings, consultation on ways to strengthen the strategic alignment between product plans and day-to-day operational
activities, and training sessions on how to design and implement product development processes that can improve
innovation results. The complete range of ACS services is focused on optimizing the value customers derive from use of
our software, leading to broader adoption of our solutions and increased Sopheon revenue and profit growth.
PRODUCT AND MARKET OVERVIEW
1 5
Core Markets
Sopheon’s marketing and business development efforts in 2011 continued to focus primarily on manufacturers of chemicals,
paper, consumer goods and federal, aerospace and defense (FA&D) products and programs. More than half of our
customer base is comprised of companies from these markets, a circumstance that has accelerated our development of
industry-specific domain expertise. The resulting best-practice knowledge and proprietary tools and techniques are often
a decisive advantage as we compete for additional business in these verticals. We recently received additional validation of
our growing prominence in consumer goods markets. For the second consecutive year, Sopheon was named one of the
top 10 suppliers of new product development and introduction solutions to manufacturers in the sector based on a survey
of senior-executive readers of Consumer Goods Technology magazine. The company was further recognized by the industry
for its sponsorship of a widely cited research study on the challenges facing consumer goods manufacturers in their pursuit
of successful product innovation.
Sixty-four percent of the senior executives participating in a 2011 Sopheon/CGT study of innovation practices
in the consumer goods industry identified portfolio management challenges as one of the issues impeding their
product innovation success.
Although Sopheon remains committed to expanding its business within the federal, aerospace and defense sector, 2011
was a challenging year in these markets. Many government programs were put on hold due to budget constraints. We are
expecting this sector to recover in 2012.
Partnerships
Reseller Partners
As we have indicated, one of the keys to increasing our rate of growth is to gain more business through third-party
resellers. We previously reported having established affiliate or reseller relationships with organizations in Germany, France,
the United kingdom, Australia, New Zealand and korea. During 2011, resellers generated 6 percent of Sopheon’s total
revenues, matching their percent contribution in 2010. The fact that their level of contribution didn’t change was indicative
of a difficult year when many prospective buyers remained preoccupied with the effects of continued economic turbulence.
But the performance of our reseller network also reflected our struggles in scaling this program for growth. During 2011,
we introduced resellers to a number of new tools and a broad range of new product capabilities. Overall, we remain very
pleased with the strength of their commitment to advancing their efforts on our behalf. In February of this year, many of
our reseller partners again invested in joining us for our global sales conference to learn about our newest product and
service capabilities.
Consulting Partners
In 2011, we maintained our relationships with a core group of consulting services organizations, including Arthur D.
Little, Deloitte, kalypso, and Stage-Gate® International. Following through on earlier-announced plans, we are developing
relationships with additional partners. Of note in this area is some joint project activity with Accenture. We recently
extended our partner association with Microsoft, qualifying for Gold competency as an independent solution vendor. The
Gold designation places Sopheon in the top one percent of members of Microsoft’s partner network.
We continue to experience regular contact from consulting firms exploring Sopheon’s interest in partnership opportunities.
As the depressed economy eroded demand for enterprise resource-planning (ERP) deployments, the consulting
organizations whose services are designed to support such large-scale implementations saw business decline. Many seeking
new business opportunities were attracted by the growth trends and long-term promise of the innovation management
market. Sopheon is now working with a number of these firms whose services complement our software applications and
can help us bring more value to our customers. We anticipate expanding our ecosystem of consulting partners throughout
the coming year. Our Advisory Consulting Services team is playing an important role in the education and training of
these new partners as we work jointly on commercial projects. One of our goals in 2012 is to formalize two of these
relationships where the affiliation includes the partner’s creation of a center-of-excellence practice supporting Sopheon’s
Accolade offering.
Stage-Gate® is a registered trademark of the Product Development Institute, Inc.
1 6
DIRECTORS AND ADVISORS
DI R E C T O R S A N D AD V I SOR 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 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
Squire Sanders
7 Devonshire Square
Cutlers Gardens
London EC2M 4Yh
Loyens & Loeff
Fred Roeskestraat 100
1076 ED Amsterdam
The Netherlands
finnCap Limited
60 New Broad Street
London EC2M 1JJ
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
RE P O R T O N DI R E C T O R S’ RE 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. During 2011, the board
granted a 3 percent pay increase to executive directors as of 1 March 2011. This was consistent with the pay increase
granted to the majority of the group’s employees. From time to time, the remuneration committee may take advice from
appropriate remuneration consultants or to consult benchmarking data.
Contracts
The service contract between the company and Mr. Michuda is terminable on up to three months’ notice, with an additional
twelve 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 six to nine 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 changes year on year. Benefits primarily comprise healthcare insurance and similar expenses. Details of directors’
interests in shares and options are set out in the Directors’ Report.
Pay and Fees
2011
£
Bonus
2011
£
Benefits
2011
£
Total
2011
£
Total
2010
£
Executive Directors
B.k. Mence
A.L. Michuda
A. karimjee
Non-executive Directors
S.A. Silcock
B.P.F. Al
D. Metzger
132,080
156,269
107,868
18,000
18,000
18,000
_______
450,217
_______
_______
-
-
-
-
-
-
9,736
7,738
2,282
141,816
164,007
110,150
190,964
245,400
145,495
-
-
-
18,000
18,000
18,000
18,000
18,000
18,000
_______
635,859
_______
_______
_______
-
_______
_______
_______
19,756
_______
_______
_______
469,973
_______
_______
1 8
REPORT ON DIRECTORS’ REMUNERATION
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 2010 and 2011, these objectives were set with regard to EBITDA performance. For 2011, these objectives were set
such that incentive started to accrue from EBITDA of £1,500,000, after providing for the costs of the bonus itself. These
measures were applied to 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 2011, contributions of £4,875, £3,201 and £4,800 (2010 - £4,875, £3,139 and £4,848) were paid respectively
to the pension schemes of B.k. Mence, A.L. Michuda and A. karimjee.
Performance Graph
The following graph shows the company’s share price performance on AIM since January 2006, compared with the
performance of the FTSE AIM All Share index, which has been selected for this comparison as it is a broad-based index which
the directors believe most closely reflects the performance of companies with similar characteristics as the company’s.
30
25
20
15
10
5
e
u
l
a
v
/
)
p
(
e
c
i
r
P
0
2006
2007
2008
2009
2010
2011
2012
SPE 5P ORD
AXX (rebased to SPE)
REPORT ON DIRECTORS’ REMUNERATION
1 9
Directors’ 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:
Share Options
Ordinary Shares
8%
Convertible Loan
Stock 2013
At 31 December
2011
2010
2011
2010
2011
2010
B.k. Mence
A.L. Michuda
A. karimjee
S.A. Silcock
S.A. Silcock*
B.P.F. Al
D. Metzger
462,500
3,932,932
1,137,500
-
-
-
-
485,000
4,002,624
1,150,000
-
-
25,000
-
14,430,535
155,188
87,667
950,000
76,639
650,000
100,000
14,423,847
155,188
87,667
950,000
76,639
650,000
100,000
£200,000 £200,000
£20,000 £20,000
£12,000 £12,000
£100,000 £100,000
-
-
£40,000 £40,000
-
-
Of the 14,430,535 ordinary shares mentioned above B.k. Mence beneficially owns and is the registered holder of 10,129,715
ordinary shares. A further 2,300,820 ordinary shares are held by Inkberrow Limited, a company in which B.k. Mence is the
majority shareholder 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 2,000,000 ordinary shares.
The following table provides summary information for each of the directors who held office during the year and who held
options to subscribe for Sopheon ordinary shares. All options were granted without monetary consideration.
Date of
Grant
Exercise
Price
1 April 2008
2 May 2001
30 April 2002
15 April 2005
B.k. Mence (1)
B.k. Mence (1)
B.k. Mence (5)
3 May 2006
B.k. Mence (7)
B.k. Mence (8) 29 June 2007
B.k. Mence (9)
A.L. Michuda (2)
1 January 2001
A.L. Michuda (3)
2 May 2001
A.L. Michuda (3)
30 April 2002
A.L. Michuda (3)(4)
5 November 2003
A.L. Michuda (5)
15 April 2005
A.L. Michuda (7)
3 May 2006
A.L. Michuda (8)
29 June 2007
A.L. Michuda (5)(9)
1 April 2008
A.L. Michuda (5)
27 June 2008
A.L. Michuda (5)
27 June 2010
2 May 2001
A. karimjee (1)
A. karimjee (1) 30 April 2002
5 November 2003
A. karimjee (4)(6)
15 April 2005
A. karimjee (5)
3 May 2006
A. karimjee (7)
29 June 2007
A. karimjee (8)
1 April 2008
A. karimjee (5)(9)
27 June 2008
A. karimjee (5)
27 June 2010
A. karimjee (5)
2 May 2001
B.P.F. Al (1)
77.5p
14.75p
25.25p
22p
19p
13.25p
160p
77.5p
14.75p
16.25p
25.25p
22p
19p
13.25p
14p
7.5p
77.5p
14.75p
16.25p
25.25p
22p
19p
13.25p
14p
7.5p
77.5p
At 31
December
2010
22,500
100,000
62,500
100,000
100,000
100,000
5,030
54,662
487,932
2,225,000
150,000
100,000
250,000
250,000
230,000
250,000
12,500
150,000
300,000
62,500
100,000
100,000
175,000
100,000
150,000
25,000
Granted
During
Year
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Expired
During
Year
(22,500)
-
-
-
-
-
(5,030)
(54,662)
-
-
-
-
-
-
-
-
(12,500)
-
-
-
-
-
-
-
-
(25,000)
At 31
December
2011
-
100,000
62,500
100,000
100,000
100,000
-
-
487,932
2,225,000
150,000
100,000
250,000
250,000
230,000
250,000
-
150,000
300,000
62,500
100,000
100,000
175,000
100,000
150,000
-
None of the directors exercised any share options during the year.
2 0
REPORT ON DIRECTORS’ REMUNERATION
(1) Exercisable between the third and tenth anniversary of the date of grant.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 93,846 of these options are exercisable between the third and tenth anniversary of the date of grant and 206,154 options
are exercisable as to one-third immediately and one-third on each of the first and second anniversaries of the date of
grant.
(7) 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.
(8) Vesting of one-half of these options was subject to performance conditions based on the achievement of certain financial
objectives in 2007. The conditions were met.
(9) Vesting of one-half of these options was subject to performance conditions based on the achievement of certain financial
objectives in 2008. The conditions were met.
The mid-market price of Sopheon ordinary shares at 31 December 2011 was 5.5p. During the financial year the mid-market
price of Sopheon ordinary shares ranged from 5.25p to 10.5p.
Save as disclosed above, no director (or member of his family) or connected persons has any interest, beneficial or non-
beneficial, in the share capital of the company.
Auditable Part of the Remuneration Report
In their audit opinion on page 24, BDO LLP refer to their audit of the disclosures required by the Companies Act 2006.
These comprise the following disclosures in this report:
• The table on page 17 showing total emoluments received by directors during the year ended 31 December 2011;
• The text on page 18 showing total pension contributions made on behalf of the directors during the year ended 31
December 2011;
• The share options table for the year ended 31 December 2011 on page 19.
Approved by the board on 21 March 2012 and signed on its behalf by:
A. karimjee
Director
DIRECTORS’ REPORT
2 1
DI R E C T O R S’ RE 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 is given in the Statement from the Chairman and Chief Executive
Officer on page 6 and the subsequent Financial and Operating 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 2011 is a profit after tax of £104,000 (2010: profit after tax
of £152,000). 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, and the roles and responsibilities of Chairman and CEO
are segregated. Periodically the directors review the composition of the board, and consider whether additional skills are
required linked to the company’s objectives at the time. Initial appointment of a new director is made by the board and
then put to shareholders for ratification in general meeting. Subsequently, each director is put forward for re-election to
the shareholders every three years. Biographies of the directors 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 satisfied that the scale
of the group’s activities do not warrant the establishment of an internal audit function. 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. During 2011, all directors attended all meetings either in person
or by conference call. 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 continues to monitor market needs carefully and has formalized processes for soliciting input to product strategy
from analysts and customers.
Sopheon's prospects of achieving sustained 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 but also due to the
fact that the timing and size of individual sales, can have a substantial impact on performance in a given period. 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 alongside its investment strategy, or in the absence of such growth,
its ability to secure funding through the company's facilities or other sources. Sopheon management carefully monitors short-
and medium-term financing requirements and has regularly raised additional funding resources to meet requirements. 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.
2 2
DIRECTORS' REPORT
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. As a relatively small
business, Sopheon is more exposed to this risk than some of its larger competitors. Sopheon management checks staff
remuneration against recognized benchmarks and other industry sources, and seeks to maintain pay at competitive levels
appropriate to its business.
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. Over the years
Sopheon has built up a network of both resellers and consulting partners; however, this has yet to mature and the revenues
delivered through these relationships remain a relatively small part of the total.
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 policies, and is not aware of any such claims at this time.
Share Option Schemes
Details of options granted are shown in Note 28 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 2011 the company had approximately 21 days’ purchases outstanding (2010: 31 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 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.
Substantial Shareholdings
The directors are aware of the following persons who as at 21 March 2012 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
14,430,535
11,691,260
9.9
8.0
B.k. Mence’s interest represents direct beneficial holdings as well as those of his family.
Approved by the board on 21 March 2012 and signed on its behalf by:
A. karimjee
Director
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
2 3
ST A T E M E N T O F DI R E C T O R S’ RE S P O N S I B I L I T I E S
I N RE S P E C T O F
ThE FI N A N C I A L ST A T E M E N T S
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors
have elected to prepare the group and company financial statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company
and of the profit or loss of the group for that period. The directors are also required to prepare financial statements in
accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment
Market and the rules of the Euronext Amsterdam Stock Exchange.
The annual report is the responsibility of, and has been approved by, the directors. The directors confirm to the best of
their knowledge that:
• The financial statements, prepared in accordance with International Financial Reporting Standards as endorsed by the
European Union and Article 4 of the IAS regulation, give a true and fair view of the assets, liabilities, financial position
and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and
• The annual report includes a fair review of the development and performance of the business and the position of the
issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal
risks and uncertainties that they face.
In preparing these financial statements, the directors are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgments and accounting estimates that are reasonable and prudent;
• State whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any
material departures disclosed and explained in the financial statements; and
• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will
continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the
company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable
them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also
responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Website Publication
The directors are responsible for ensuring the annual report is made available on a website. Annual reports are
published on the company'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 company's website is the responsibility of the directors. The directors' responsibility also extends to the ongoing
integrity of the annual reports contained therein.
2 4
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
IN D E P E N D E N T A U D I T O R S’ RE P O R T T O ThE
ME M B E R S O F SO PhE O N P L C
We have audited the financial statements of Sopheon plc for the year ended 31 December 2011 which comprise the
consolidated income statement, the consolidated statement of comprehensive income, the consolidated and company
balance sheets, the consolidated and company cash flow statements, the consolidated and company statements of changes
in equity, and the related notes. The financial reporting framework that has been applied in their preparation is applicable
law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent
company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a
body, for our audit work, for this report, or for the opinions we have formed.
Respective Responsibilities of Directors and Auditors
As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial
statements in accordance with applicable law and International Standards on Auditing (Uk and Ireland). Those standards
require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the Audit of the Financial Statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/
scope/private.cfm
Opinion on Financial Statements
In our opinion:
• The financial statements give a true and fair view of the state of the group’s and the parent company’s affairs as at 31
December 2011 and of the group’s profit for the year then ended;
• The group financial statements have been properly prepared in accordance with IFRSs as adopted by the European
Union;
• The parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the
European Union; and
• The financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Emphasis of Matter – Going Concern
In forming our opinion on the financial statements, which is not modified, 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, and the possibility of having to repay in cash £850,000 of convertible loan stock on
31 January 2013, or if this objective is not met, being able to raise sufficient additional finance. The financial statements do
not include the adjustments that would result if the group were unable to continue as a going concern.
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SOPHEON PLC
2 5
Opinion on Other Matters Prescribed by the Companies Act 2006
In our opinion:
• The part of the Directors’ Remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006; and
• The information given in the Directors’ Report for the financial year for which the financial statements are prepared is
consistent with the financial statements.
Matters on Which We are Required to Report by Exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to
you if, in our opinion:
• Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
• The parent company financial statements are not in agreement with the accounting records and returns; or
• Certain disclosures of directors’ remuneration specified by law are not made; or
• We have not received all the information and explanations we require for our audit.
Iain henderson (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
55 Baker Street
London W1U 7EU
United kingdom
21 March 2012
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
2 6
FINANCIAL STATEMENTS
CO N S O L I D A T E D IN C O M E ST A T E M E N T
F O R ThE YE A R EN D E D 3 1 DE C E M B E R 2 0 1 1
Revenue
Cost of sales
Gross profit
Sales and marketing expense
Research and development expense
Administrative expense
Operating profit
Finance income
Finance expense
Profit before tax
Income tax expense
Profit for the year
Earnings per share
Basic and fully diluted (pence)
Notes
3
2011
£’000
2010
£’000
10,276
(2,731)
_______
10,537
(2,603)
_______
7,545
7,934
(3,533)
(2,173)
(1,377)
_______
(3,593)
(2,417)
(1,488)
_______
462
436
8
9
8
(366)
_______
6
(271)
_______
104
171
10
-
_______
(19)
_______
104
_______
152
_______
12
0.07p
_______
_______
0.10p
_______
_______
C O N S O L I D A T E D S T A T E M E N T O F C O M P R EhE N S I V E
I N C O M E F O R ThE Y E A R E N D E D 3 1 D E C E M B E R 2 0 1 1
Profit for the year
Other comprehensive income
Exchange differences on translation of foreign operations
Total comprehensive income for the year
2011
£’000
2010
£’000
104
152
(58)
_______
39
_______
46
_______
_______
191
_______
_______
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 B A L A N C E S hE E TS
A T 3 1 DE C E M B E R 2 0 1 1
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
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Capital reserves
Translation reserve
Retained losses
Total equity
Group
Company
Notes
2011
£’000
2010
£’000
2011
£’000
2010
£’000
13
14
15
16
17
18
19
20
21
20
24
25
166
3,748
-
12
––––––––
3,926
––––––––
3,265
2,941
––––––––
6,206
––––––––
10,132
1,467
1,448
2
2,470
––––––––
5,387
––––––––
1,663
––––––––
1,663
––––––––
7,050
––––––––
3,082
––––––––
––––––––
141
3,633
-
12
––––––––
3,786
––––––––
4,119
3,358
––––––––
7,477
––––––––
11,263
2,346
982
4
2,633
––––––––
5,965
––––––––
2,290
––––––––
2,290
––––––––
8,255
––––––––
3,008
––––––––
––––––––
-
-
6,119
-
––––––––
6,119
––––––––
-
703
––––––––
703
––––––––
6,822
301
-
-
-
––––––––
301
––––––––
823
––––––––
823
––––––––
1,124
––––––––
5,698
––––––––
––––––––
7,279
55,803
362
(60,362)
––––––––
3,082
––––––––
––––––––
7,279
73,719
420
(78,410)
––––––––
3,008
––––––––
––––––––
7,279
55,803
-
(57,384)
––––––––
5,698
––––––––
––––––––
-
-
6,119
-
––––––––
6,119
––––––––
9
734
––––––––
743
––––––––
6,862
435
-
-
-
––––––––
435
––––––––
799
––––––––
799
––––––––
1,234
––––––––
5,628
––––––––
––––––––
7,279
65,954
-
(67,605)
––––––––
5,628
––––––––
––––––––
Approved by the board and authorized for issue on 21 March 2012.
Barry k. Mence
Director
Arif karimjee
Director
2 8
FINANCIAL STATEMENTS
C O N S O L I D A T E D A N D C O M P A N Y C A Sh F L O W
S T A T E M E N T S F O R ThE Y E A R E N D E D
3 1 D E C E M B E R 2 0 1 1
Group
Company
Notes
2011
£’000
2010
£’000
2011
£’000
2010
£’000
Operating Activities
Profit 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 charges
Provisions against intra-group loans
Operating cash flows before movements in working capital
Decrease/(increase) in receivables
(Decrease)/increase in payables
Net cash generated from/(used in) operating activities
Investing Activities
Finance income
Purchases of property, plant and equipment
Development costs capitalized
Intra-group loans
Repayment of intra-group loans
Net cash from/(used in) investing activities
Financing Activities
Proceeds from borrowings
Repayment of borrowings
Increase/(decrease) in lines of credit
Interest paid
Net cash from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of the year
18
104
152
42
(477)
(8)
366
101
994
39
-
-
––––––––
1,596
855
(1,123)
––––––––
1,328
––––––––
(6)
271
106
1,148
81
-
-
––––––––
1,752
(1,146)
1,457
––––––––
2,063
––––––––
(1)
83
-
-
39
(250)
(270)
––––––––
(357)
(2)
(134)
––––––––
(493)
––––––––
(5)
65
-
-
81
(280)
125
––––––––
(491)
(24)
88
––––––––
(427)
––––––––
8
(125)
(1,060)
-
-
––––––––
6
(92)
(657)
-
-
––––––––
1
-
-
(803)
1,323
––––––––
5
-
-
(1,742)
1,945
––––––––
(1,177)
––––––––
(743)
––––––––
521
––––––––
208
––––––––
-
(673)
442
(342)
––––––––
(573)
––––––––
(422)
3,358
5
––––––––
2,941
––––––––
––––––––
2,152
(1,014)
(465)
(271)
––––––––
402
––––––––
1,722
1,624
12
––––––––
3,358
––––––––
––––––––
-
-
-
(59)
––––––––
(59)
––––––––
(31)
734
-
––––––––
703
––––––––
––––––––
-
-
-
(65)
––––––––
(65)
––––––––
(284)
1,018
-
––––––––
734
––––––––
––––––––
FINANCIAL STATEMENTS
2 9
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 S O F
ChA N G E S I N E Q U I T Y F O R ThE Y E A R E N D E D
3 1 D E C E M B E R 2 0 1 1
Group
At 1 January 2010
Profit for the year
Exchange differences on translation of
foreign operations
Total comprehensive income for the year
Recognition of share-based payments
Lapsing and expiry of share options
Reclassification of embedded derivative as equity
At 1 January 2011
Profit for the year
Exchange differences on translation of
foreign operations
Total comprehensive income for the year
Recognition of share-based payments
Purchase of shares by Esot (Note 25)
Transfer of merger reserve to profit and loss
reserve (see Note 25)
At 31 December 2011
Retained
Losses
£’000
(78,608)
152
-
––––––––
152
––––––––
-
46
-
––––––––
(78,410)
104
-
––––––––
104
––––––––
-
-
Total
£’000
2,685
152
39
––––––––
191
––––––––
81
-
51
––––––––
3,008
104
(58)
––––––––
46
––––––––
39
(11)
Share
Capital
£’000
7,279
-
Capital
Reserves
£’000
Translation
Reserve
£’000
73,633
-
381
-
-
––––––––
-
––––––––
81
(46)
51
––––––––
73,719
-
-
––––––––
-
––––––––
39
(11)
39
––––––––
39
––––––––
-
-
-
––––––––
420
-
(58)
––––––––
(58)
––––––––
-
-
-
––––––––
-
––––––––
-
-
-
––––––––
7,279
-
-
––––––––
-
––––––––
-
-
-
––––––––
7,279
––––––––
––––––––
(17,944)
––––––––
55,803
––––––––
––––––––
-
––––––––
362
––––––––
––––––––
17,944
––––––––
(60,362)
––––––––
––––––––
-
––––––––
3,082
––––––––
––––––––
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. Details and description of the capital reserves are set out in Note 25.
Company
Share
Capital
£’000
Capital
Reserves
£’000
Retained
Losses
£’000
At 1 January 2010
Loss and total comprehensive income for the year
Recognition of share-based payments
Lapsing and expiry of share options
Reclassification of embedded derivative as equity
At 31 December 2010
Profit and total comprehensive income for the year
Recognition of share-based payments
Purchase of shares by Esot (Note 25)
Transfer of merger reserve to profit and loss
reserve (see Note 25)
At 31 December 2011
7,279
-
-
-
-
––––––––
7,279
-
-
-
-
––––––––
7,279
––––––––
––––––––
65,868
-
81
(46)
51
––––––––
65,954
-
39
(11)
(10,179)
––––––––
55,803
––––––––
––––––––
Total
£’000
5,973
(477)
81
-
51
––––––––
5,628
42
39
(11)
(67,174)
(477)
-
46
-
––––––––
(67,605)
42
-
-
10,179
––––––––
(57,384)
––––––––
––––––––
-
––––––––
5,698
––––––––
––––––––
3 0
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 2006 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.
A number of new standards, amendments and interpretations to existing standards have been adopted by the group, but have
not been listed, since they have no material impact on the financial statements.
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 2 January 2011 and which the group has decided not to adopt early.
The directors are still assessing the impact of these revisions.
•
IFRS 9 Financial Instruments (Replacement of IAS 39) (Effective for periods beginning on or after 1 January 2013). This
revision is yet to be endorsed by the EU. This standard will eventually replace IAS 39 in its entirety.
• Disclosures – Transfers of Financial Assets (Amendments to IFRS 7) (Effective for periods beginning on or after 1 July 2011).
This revision is yet to be endorsed by the EU. This amendment requires the disclosure of information in respect of all
transferred financial assets that are not derecognized and for any continuing involvement in a transferred asset existing
at the reporting date, irrespective of when the related transfer transaction occurred. It will affect inter alia companies
with debt factoring arrangements.
• Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (Effective for periods beginning on or after
1 July 2012). This revision is yet to be endorsed by the EU. This amendment requires the grouping together of items
within Other Comprehensive Income that may be reclassified to the profit or loss section of the income statement.
•
•
•
IFRS 10 Consolidated Financial Statements (Replacement of IAS 27) (Effective for periods beginning on or after 1 January
2013). This standard is yet to be endorsed by the EU. This standard establishes principles for the presentation and
preparation of consolidated financial statements.
IFRS 12 Disclosures of Interests in Other Entities (Effective for periods beginning on or before 1 January 2013). This
standard is yet to be endorsed by the EU. This standard sets out disclosure requirements for all forms of interests in
other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities.
IFRS 13 Fair Value Measurement (Effective for periods beginning on or before 1 January 2013). This standard is yet to be
endorsed by the EU. This standard sets out a framework for measuring fair value and requires disclosures about fair
value measurements.
None of the other new standards, amendments or interpretations in issue is expected to have a material effect on the group
or company financial statements.
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. This assessment
has included consideration of the forecast performance of the business for the foreseeable future, the cash and financing
facilities available to the group, and the repayment terms in respect of the group’s borrowings, including the potential of having
to repay convertible loan stock in January 2013.
During 2011, the group achieved revenues of £10.3m and a profit before tax of £104,000. This represents a flat performance
compared to the previous year. The performance in 2010 was a substantial improvement over 2009. Coming into 2012, the
group’s sales pipeline remains very active, and accordingly, the directors remain positive about the prospects for the business.
NOTES TO THE FINANCIAL STATEMENTS
3 1
In December 2010, the group renegotiated its loan note from BlueCrest Capital Finance (“BlueCrest”) for a new principal
value of $3.5m, which brought in new working capital of approximately $2.7m. The principal is repayable in equal monthly
instalments of $90,000, plus interest, through March 2014. The group also has access to a revolving line of credit with
BlueCrest which is secured against the trade receivables of Sopheon’s North American business. This facility is periodically
renewable, and the current term is to 31 May 2012. The facility limit is $1,250,000. At 31 December 2011, $1,200,000
(£776,000) was drawn against this revolving facility. In addition, during 2009 the group had secured a convertible loan for
£850,000, which is repayable or convertible by 31 January 2013.
Notwithstanding the group’s stable funding and trading position, the time-to-close and the order value of individual sales
continues to vary considerably. When combined with the relatively low-volume and high-value nature of the group’s
business, these are factors which constrain the ability to accurately predict revenue performance. In addition, to meet its
strategic objectives, the group has expanded its staff levels. If sales fall short of expectations, there is a risk that the group’s
facilities may prove insufficient to cover both operating activities and the repayment of its debt facilities, which latter
point could be due to the regular repayment of the BlueCrest term loan, the possibility of non-renewal of the BlueCrest
revolving line of credit, or the possibility of having to repay in cash £850,000 of convertible loan stock on 31 January 2013.
In such circumstances, the group would be obliged to seek additional funding.
The directors have concluded that the circumstances set forth above represent material uncertainties, which may cast
significant doubt upon the group’s ability to continue as a going concern, however they 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
statements do not include the adjustments that would be required if the company or group were unable to continue as a
going concern.
Basis of Consolidation
The consolidated financial statements incorporate the financial statements of the company and entities controlled by the
company ("subsidiaries"). Control is achieved where the company has the power to govern the financial and operating
policies of an entity and to obtain benefits from its activities. All intra-group transactions, balances, income and expenses
are eliminated on consolidation.
Business Combinations
The acquisition of subsidiaries is accounted for within the consolidated financial statements using the purchase method,
as set out within IFRS 3 Business Combinations for acquisitions made on or before 1 January 2010. 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 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
within sales and marketing expense (in respect of customer relationships) and research and development expense (in
respect of IPR and technology). 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.
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.
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.
3 2
NOTES TO THE FINANCIAL STATEMENTS
Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for
goods and services provided in the normal course of business, net of discounts and sales-related taxes.
Sales of software products are recognized on delivery, provided that no significant obligations remain owing to the customer
in connection with such product sale. Such significant obligations could include giving a customer a right to return the
software product without any preconditions, or if the group has failed to deliver an element of the software product by the
balance sheet date. 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
fixed price or milestone-based projects, 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 the income statement.
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the
relevant lease.
Interest on Borrowings
All interest on borrowings is recognized in the income statement 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). 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. Exchange differences arising on the settlement of monetary
items, and on the retranslation of monetary items, are included in the income statement for the period.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the group’s foreign operations
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 where there is no intention that these should be settled) are classified as equity and
transferred to the group’s translation reserve. Such translation differences are recognized in the income statement 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.
NOTES TO THE FINANCIAL STATEMENTS
3 3
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 the income statement.
The following rates are used for the depreciation of property, plant and equipment:
Computer equipment
Furniture and fittings
20-33 percent on a straight-line basis
20-25 percent on a straight-line basis
Investments
Investments in subsidiaries within the company balance sheet 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 their fair values at the date of acquisition and are 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 sales and
marketing expense.
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. This has been estimated to be four years from the date of code-finalization of the applicable
software release. The amortization expense in respect of internally generated intangible assets is included in research and
development costs.
3 4
NOTES TO THE FINANCIAL STATEMENTS
Development costs not satisfying the above criteria and expenditure on the research phase of internal projects are
recognized in the income statement as incurred.
Impairment of Tangible and Intangible Assets (Excluding Goodwill)
At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine
whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is
not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
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.
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.
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.
NOTES TO THE FINANCIAL STATEMENTS
3 5
2. Financial Liabilities
The group classifies its financial liabilities in the category of financial liabilities at fair value through profit or loss and those
measured at amortized cost.
Financial Liabilities at Fair Value through Profit or Loss
The group does not have any liabilities held for trading nor has it designated any financial liabilities as being at fair value
through profit or loss.
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 (including the host debt element of the convertible loan noted above), 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.
Unless otherwise indicated, the carrying values of the group’s financial liabilities measured at amortized cost represent a
reasonable approximation of their fair values.
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(f) 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.
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. Estimates and judgments adopted for property plant and
equipment, externally acquired intangible assets and internally generated intangible assets are dealt with in the accounting
policy notes set forth above that relate to these areas. 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.
3 6
NOTES TO THE FINANCIAL STATEMENTS
3 . S E G M E N TA L A N A LY S I S
All of the group’s revenue in respect of the years ended 31 December 2011 and 2010 is derived from the design,
development and marketing of software products with associated implementation and consultancy services, as more
particularly described in the Directors’ Report. For management purposes, the group is organized geographically across
two principal operating segments, which can be expressed geographically. The first segment is North America, and the
second Europe, Middle East and Africa (EMEA). Information relating to these two segments is given below.
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 arm’s length basis.
Year ended 31 December 2011
Income Statement
External revenues – by location of customers
External revenues – by location of operations
Operating profit before interest and tax
Finance income
Finance expense
Profit before tax
Income tax expense
Depreciation, amortization and impairment charges
EBITDA
Balance Sheet
Fixed asset additions
Capitalization of internally generated development costs
Total assets
Total liabilities
Year ended 31 December 2010
Income Statement
External revenues – by location of customers
External revenues – by location of operations
Operating profit before interest and tax
Finance income
Finance expense
Profit before tax
Income tax expense
Depreciation, amortization and impairment charges
EBITDA
Balance Sheet
Fixed asset additions
Capitalization of internally generated development costs
Total assets
Total liabilities
North
America
£’000
6,565
7,189
(139)
-
(281)
(420)
-
(1,090)
884
––––––––
100
1,060
7,701
(4,924)
––––––––
––––––––
North
America
£’000
7,085
7,380
73
-
(204)
(131)
(19)
(1,248)
1,141
––––––––
89
657
8,955
(5,741)
––––––––
––––––––
EMEA
£’000
Total
£’000
3,711
3,087
601
8
(85)
524
-
(5)
607
––––––––
25
-
2,431
(2,126)
––––––––
––––––––
10,276
10,276
462
8
(366)
104
-
(1,095)
1,491
––––––––
125
1,060
10,132
(7,050)
––––––––
––––––––
EMEA
£’000
Total
£’000
3,452
3,157
363
6
(67)
302
-
(6)
369
––––––––
3
-
2,308
(2,514)
––––––––
––––––––
10,537
10,537
436
6
(271)
171
(19)
(1,254)
1,510
––––––––
92
657
11,263
(8,255)
––––––––
––––––––
One customer, served by both segments, accounted for approximately 10 percent of the group’s revenues in 2011. One
customer, served by both segments, accounted for approximately 10 percent or more of the group’s sales in 2010.
External revenues in 2011 exclude inter-segment revenues which amounted to £793,000 (2010: £572,000) for North
America and £192,000 (£383,000) for EMEA.
Revenues attributable to customers in the Uk in 2011 amounted to £1,092,000 (2010: £772,000). The segmental analysis
above has been presented using information that is readily available to management.
NOTES TO THE FINANCIAL STATEMENTS
3 7
4 . E B I T D A A N D R E V E N U E V I S I B I L I T Y
EBITDA
The directors consider that EBITDA, which is defined as earnings/(loss) 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
Interest payable
Interest receivable
Amortization of intangible assets
Depreciation of property, plant and equipment
Income tax expense
EBITDA
Revenue Visibility
2011
£’000
2010
£’000
104
152
366
(8)
928
101
-
––––––––
1,491
––––––––
––––––––
271
(6)
968
106
19
––––––––
1,510
––––––––
––––––––
Another performance indicator used by the group and referred to in narrative descriptions of the group’s performance
is revenue visibility. At any point in time it 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.
5 . P R O F I T F O R T H E Y E A R
The profit 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
2011
£’000
2010
£’000
(55)
1,363
928
66
101
328
80
––––––––
––––––––
(7)
1,449
968
180
106
348
82
––––––––
––––––––
Net foreign exchange losses or 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
During the year the group obtained the following services from its auditors and associated firms. Fees for the audit of
subsidiaries pursuant to legislation are not segregated from those for the group and are included in the amounts disclosed.
Audit of the financial statements of the group
Review of interim financial information
Audit of US pension plan
Tax services
2011
£’000
2010
£’000
50
10
5
35
––––––––
––––––––
50
10
5
3
––––––––
––––––––
3 8
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
2011
£’000
2010
£’000
5,662
453
123
509
–––––––
6,747
––––––––
––––––––
5,942
393
103
404
–––––––
6,842
––––––––
––––––––
Included within the above are staff costs capitalized as development expenditure amounting to £1,060,000 (2010:
£657,000). Included within wages and salaries are bonus and sales commission costs amounting to £311,000 (2010:
£1,138,000).
The average monthly number of employees during the year was made up as follows:
Development and operations
Sales and management
2011
Number
61
31
–––––––
92
––––––––
––––––––
2010
Number
56
28
–––––––
84
––––––––
––––––––
The above staff costs and the numbers of employees during the year include the executive directors.
The remuneration of all directors were as follows:
Fees and emoluments
Pension contributions
2011
£’000
2010
£’000
470
13
––––––––
483
––––––––
––––––––
636
13
––––––––
649
––––––––
––––––––
No director exercised share options during the year (2010: None). Pension contributions are to personal defined
contribution schemes and have been made for three directors (2010: three) who served during the year.
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
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
2011
£’000
2010
£’000
8
––––––––
––––––––
6
––––––––
––––––––
2011
£’000
2010
£’000
(366)
––––––––
––––––––
(271)
––––––––
––––––––
NOTES TO THE FINANCIAL STATEMENTS
3 9
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
The charge for the year can be reconciled to the accounting profit as follows:
Profit before tax
Tax (charge) at the Uk corporation tax rate of 26.5% (2010: 28%)
Adjustment for differing rates of corporate taxation in overseas jurisdictions
Tax effect of expenses that are not deductible in determining taxable losses
Temporary differences arising from the capitalization and amortization of internally
generated development costs
Utilization of prior year losses
Income tax expense for the year
2011
£’000
2010
£’000
-
––––––––
––––––––
(19)
––––––––
––––––––
2011
£’000
2010
£’000
104
––––––––
––––––––
152
––––––––
––––––––
(28)
(22)
(98)
(43)
(39)
(175)
79
69
––––––––
-
––––––––
––––––––
(15)
263
––––––––
(19)
––––––––
––––––––
The tax charge in 2010 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 percent of current year profits, with AMT chargeable at a rate of 20 percent on the remaining 10 percent.
There is no tax arising on other comprehensive income.
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
2011
£’000
2010
£’000
165
165
(1,100)
14,457
––––––––
13,522
––––––––
––––––––
(965)
20,498
––––––––
19,698
––––––––
––––––––
At 31 December 2011, tax losses estimated at £45m were available to carry forward by the Sopheon group, arising from
historic losses incurred. These losses represent a potential deferred tax asset of £14.5m, based on the tax rates currently
applicable in the relevant tax jurisdictions.
Of these tax losses, an aggregate amount of £12m (representing £4.2m of the potential deferred tax asset) represents
pre-acquisition tax losses of Sopheon Corporation (Minnesota) 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.
4 0
NOTES TO THE FINANCIAL STATEMENTS
1 1 . P R O F I T 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 profit dealt with in the financial statements of the parent company for the year ended 31 December 2011was £42,000
(2010: loss of £477,000). Advantage has been taken of Section 408 of the Companies Act 2006 not to present an income
statement for the parent company.
1 2 . E A R N I N G S P E R S H A R E
Profit after tax
Weighted average number of ordinary shares for
the purpose of basic earnings per share
2011
£’000
2010
£’000
104
––––––––
––––––––
152
––––––––
––––––––
’000s
’000s
145,579
––––––––
––––––––
145,579
––––––––
––––––––
The profit attributable to ordinary shareholders and the weighted average number of ordinary shares for the purpose of
calculating the diluted earnings per ordinary share are the same as those used for calculating the basic earnings/(loss) per
ordinary share in both 2011 and 2010. This is (i) because the exercise of conversion rights attaching to the convertible
loan stock (details of which are set out in Note 20), would have the effect in each year of increasing earnings per ordinary
share (by virtue of the saving of loan stock interest, which would otherwise be payable, and of interest receivable on
subscription proceeds), and are therefore not dilutive; and (ii) because the warrants to subscribe for 502,790 ordinary
shares and the 13,193,054 share options to subscribe for ordinary shares, (details of which are set out in Notes 24 and 28)
either have a strike price above the average market price for the year, or have an immaterial impact.
NOTES TO THE FINANCIAL STATEMENTS
4 1
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 2010
Additions
Exchange differences
At 1 January 2011
Additions
Exchange differences
Amounts written off
At 31 December 2011
Accumulated Depreciation
At 1 January 2010
Depreciation charge for the year
Exchange differences
At 1 January 2011
Depreciation charge for the year
Exchange differences
Amounts written off
At 31 December 2011
Carrying Amount
At 31 December 2011
At 31 December 2010
Computer
Equipment
£’000
Furniture
& Fittings
£’000
2,166
86
8
––––––––
2,260
97
10
(1,559)
––––––––
808
––––––––
2,026
99
4
––––––––
2,129
95
9
(1,559)
––––––––
674
––––––––
428
6
-
––––––––
434
28
3
(279)
––––––––
186
––––––––
417
7
-
––––––––
424
6
3
(279)
––––––––
154
––––––––
Total
£’000
2,594
92
8
––––––––
2,694
125
13
(1,838)
––––––––
994
––––––––
2,443
106
4
––––––––
2,553
101
12
(1,838)
––––––––
828
––––––––
134
––––––––
––––––––
32
––––––––
––––––––
166
––––––––
––––––––
131
––––––––
––––––––
10
––––––––
––––––––
141
––––––––
––––––––
The net carrying amount of property, plant and equipment includes £2,000 (2010: £4,000) in respect of assets held under
finance leases.
Company
The company has no property, plant and equipment.
4 2
NOTES TO THE FINANCIAL STATEMENTS
1 4 . I N TA N G I B L E A S S E T S
Development Technology
Customer
and IPR Relationships
Goodwill
Total
Cost
At 1 January 2010
Additions (internally generated)
Exchange differences
At 1 January 2011
Additions (internally generated)
Exchange differences
At 31 December 2011
Amortization
At 1 January 2010
Charge for the year
Exchange differences
At 1 January 2011
Charge for the year
Exchange differences
At 31 December 2011
Accumulated Impairment Losses
At 1 January 2010
Impairment losses in year
Exchange differences
At 1 January 2011
Impairment losses in year
Exchange differences
At 31 December 2011
Carrying Amount
At 31 December 2011
At 31 December 2010
Costs
(Internally
Generated)
£’000
5,484
657
166
––––––––
6,307
1,060
121
––––––––
7,488
––––––––
3,094
710
90
––––––––
3,894
764
78
––––––––
4,736
––––––––
-
-
-
––––––––
-
-
-
––––––––
-
––––––––
2,752
––––––––
––––––––
2,413
––––––––
––––––––
£’000
£’000
£’000
£’000
863
-
28
––––––––
891
-
11
––––––––
902
––––––––
466
96
13
––––––––
575
46
10
––––––––
631
––––––––
259
-
9
––––––––
268
-
3
––––––––
271
––––––––
-
––––––––
––––––––
48
––––––––
––––––––
1,619
-
51
––––––––
1,670
-
21
––––––––
1,691
––––––––
478
162
12
––––––––
652
118
13
––––––––
783
––––––––
285
180
8
––––––––
473
66
8
––––––––
547
––––––––
361
––––––––
––––––––
545
––––––––
––––––––
609
-
18
––––––––
627
-
8
––––––––
635
––––––––
-
-
-
––––––––
-
-
-
––––––––
-
––––––––
-
-
-
––––––––
-
-
-
––––––––
-
––––––––
635
––––––––
––––––––
627
––––––––
––––––––
8,575
657
263
––––––––
9,495
1,060
161
––––––––
10,716
––––––––
4,038
968
115
––––––––
5,121
928
101
––––––––
6,150
––––––––
544
180
17
––––––––
741
66
11
––––––––
818
––––––––
3,748
––––––––
––––––––
3,633
––––––––
––––––––
The amortization period for the internally generated development costs relating to the group’s software products is four
years. The amortization periods for (a) technology & IPR and (b) customer relationships, arising from the acquisition of
Alignent Software, Inc. in June 2007, are four years and eight years respectively. Goodwill is not amortized. The residual
goodwill arising on the acquisition of Alignent is attributable to the enhanced market position of each of the group’s
operating segments, 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 each of the group’s operating segments.
The valuation used for this purpose is based on cash-flow projections for the next two years, then extrapolated using a
pre-tax discount rate of 14.6 percent and an annual growth assumption of 20 percent for four years, and thereafter for an
indefinite period at a growth assumption of 3 percent. Sensitivity analysis performed on these projections demonstrates
significant valuation headroom above the carrying value of goodwill even if the growth rate for the four year period is
reduced to 5 percent. The annualized average growth of the business since the launch of the group’s core Accolade solution
is approximately 25 percent.
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 2010 and 2011, 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 customer relationships
of £66,000 (2010: £180,000).
NOTES TO THE FINANCIAL STATEMENTS
4 3
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 pre-tax discount rate of 14.6
percent. The remaining amortization period for the acquired Alignent customer relationships is 3.5 years.
Company
The company has no intangible assets.
1 5 . I N V E S T M E N T I N S U B S I D I A R I E S
At 31 December 2010 and at 31 December 2011
Cost
Less: Amounts provided
Carrying amount
Company
£’000
41,560
35,441
––––––––
6,119
––––––––
––––––––
Details of the company’s subsidiaries at 31 December 2011 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 percent
Software sales and services
Common Stock
100 percent
Software development and
sales
Common Stock
100 percent
Software sales and services
Ordinary Shares
100 percent
Software sales and services
Ordinary Shares
100 percent
Software sales and services
Ordinary Shares
100 percent
holding company
Common Stock
100 percent
Dormant
Ordinary Shares
100 percent
Dormant
Ordinary Shares
100 percent
Dormant
Ordinary Shares
100 percent
Dormant
Ordinary Shares
100 percent
Dormant
Ordinary Shares
100 percent
Dormant
Ordinary Shares
100 percent
Dormant
Applied Network Technology Ltd.*
United kingdom
Ordinary Shares
100 percent
Employee Share Ownership
Trust
1 6 . O T H E R R E C E I V A B L E
Other receivable
Group
Company
2011
£’000
2010
£’000
2011
£’000
2010
£’000
12
––––––––
––––––––
12
––––––––
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
The other receivable represents a deposit paid in respect of a property leased by the group.
4 4
NOTES TO THE FINANCIAL STATEMENTS
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
2011
£’000
2010
£’000
2011
£’000
2010
£’000
3,103
5
––––––––
3,108
145
12
––––––––
3,265
––––––––
––––––––
3,870
5
––––––––
3,875
232
12
––––––––
4,119
––––––––
––––––––
-
-
––––––––
-
-
-
––––––––
-
––––––––
––––––––
-
-
––––––––
-
9
-
––––––––
9
––––––––
––––––––
Trade and other receivables are stated net of allowances totaling £30,000 (2010: £28,000) 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 totaling £40,191,000 (2010: £40,460,000) 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
2011
£’000
2010
£’000
2011
£’000
2010
£’000
1,824
1,117
––––––––
2,941
––––––––
––––––––
2,129
1,229
––––––––
3,358
––––––––
––––––––
133
570
––––––––
703
––––––––
––––––––
76
658
––––––––
734
––––––––
––––––––
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 (2010: £23,000) held by the group’s employee share
ownership trust.
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
2011
£’000
2010
£’000
2011
£’000
2010
£’000
344
114
221
788
––––––––
1,467
––––––––
––––––––
444
91
208
1,603
––––––––
2,346
––––––––
––––––––
24
103
-
174
––––––––
301
––––––––
––––––––
29
141
-
265
––––––––
435
––––––––
––––––––
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.
NOTES TO THE FINANCIAL STATEMENTS
4 5
Group
Company
2011
£’000
2010
£’000
2011
£’000
2010
£’000
776
672
––––––––
1,448
319
663
––––––––
982
-
-
––––––––
-
-
-
––––––––
-
840
823
––––––––
1,663
––––––––
3,111
––––––––
––––––––
1,491
799
––––––––
2,290
––––––––
3,272
––––––––
––––––––
823
––––––––
823
––––––––
823
––––––––
––––––––
-
799
––––––––
799
––––––––
799
––––––––
––––––––
2 0 . B O R R O W I N G S
Current Loans and Borrowings
Line of credit
Loan notes (current portion)
Total current loans and borrowings
Non-current Loans and Borrowings
Loan notes
8% convertible loan stock 2013
Total non-current loans and borrowings
Total loans and borrowings
a) Line of Credit
The line of credit is denominated in US Dollars and bears interest at a variable rate currently 10.95 percent. The
line of credit is a revolving facility limited to the lesser of $1,250,000 and 75 percent of the eligible trade receivables
of the group’s US subsidiaries, which at 31 December 2011 amounted to $3,482,000 (£2,252,000) (2010: $4,968,000
(£3,173,000)). At 31 December 2011, $1,200,000 (£776,000) was drawn down under the line of credit facility (2010:
$500,000 (£319,000)).
b) Loan Notes
The loan notes are denominated in US Dollars and represent mezzanine loan finance provided BlueCrest Capital Finance
LLC (“BlueCrest”). The loan notes were issued in June 2007 for an initial principal amount of $3,500,000 repayable in
equal installments over the four-year period to July 2011 bearing interest at a fixed rate of 11.03 percent.
On 8 December 2010, the group entered into a new mezzanine loan with BlueCrest, for an amount of $3,500,000, equal to
the principal amount of the original loan. Part of the proceeds after expenses were applied in repayment of the remaining
balance outstanding on the original mezzanine loan, with the balance to provide additional working capital of approximately
$2.7m for the group. The new mezzanine loan is repayable in 39 monthly instalments of $90,000, together with interest at
a fixed rate of 13 percent per annum, over the period to March 2014.
The mezzanine loan and the line of credit, which is also provided by BlueCrest, are secured by a debenture and guarantee
provided by Sopheon plc. The company has estimated the risk of this guarantee being called at 5 percent of the carrying
value of the loan, and in its financial statements has included a provision for this amount within other payables.
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 6
NOTES TO THE FINANCIAL STATEMENTS
c) 8 Percent Convertible Loan Stock 2013
The convertible loan stock is denominated in Sterling and bears interest at a fixed rate of 8 percent per annum. The loan
stock was issued at par in a nominal amount of £850,000 on 1 October 2009 with a maturity date of 30 September 2011.
On 8 December 2010, the holders of the loan stock unanimously agreed to extend the maturity date by a further 16
months to 31 January 2013.
The original terms provided that the loan stock was convertible into Sopheon ordinary shares at a conversion price of 10p
per share, and contained provisions for the amendment of the conversion price in the case of any subsequent equity issues
by the company at a price per share lower than the conversion price. The conversion price was amended, in conjunction
with the extension of the maturity date, to 7.75p, being the market price for Sopheon shares on 7 December 2010. At the
same time, the provisions for future amendment of the conversion price were removed. The loan stock is convertible at
any time up to the extended maturity date of 31 January 2013, and any loan stock not converted will be repaid at par on
that date.
The liability at maturity of the loan stock is £850,000. The carrying value of the liability component of the loan stock at
31 December 2011 was £823,000 based on discounted cash flows using a discount rate of 16.4 percent. Following the
removal on 8 December 2010 of the provisions for future amendment of the conversion price, the carrying value of the
equity component represented by the conversion rights attaching to the loan stock was reclassified from debt to equity in
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
2011
£’000
2010
£’000
2011
£’000
2010
£’000
2
-
––––––––
2
––––––––
––––––––
2
2
––––––––
4
––––––––
––––––––
-
-
––––––––
-
––––––––
––––––––
-
-
––––––––
-
––––––––
––––––––
The group leases a telephone system with a net carrying value at 31 December 2011 of £2,000 (2010: £4,000).
Future lease payments are due as follows:
At 31 December 2011
Within one year
Due in one to five years
At 31 December 2010
Within one year
Due in one to five years
Minimum
Lease
Payments
£’000
2
-
––––––––
2
––––––––
––––––––
Minimum
Lease
Payments
£’000
2
2
––––––––
4
––––––––
––––––––
Interest
£’000
-
-
––––––––
-
––––––––
––––––––
Interest
£’000
-
-
––––––––
-
––––––––
––––––––
Present
Value
£’000
2
-
––––––––
2
––––––––
––––––––
Present
Value
£’000
2
2
––––––––
4
––––––––
––––––––
NOTES TO THE FINANCIAL STATEMENTS
4 7
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
2011
£’000
345
279
––––––––
624
––––––––
––––––––
Other
2011
£’000
52
18
––––––––
70
––––––––
––––––––
Land &
Buildings
2010
£’000
334
422
––––––––
756
––––––––
––––––––
Other
2010
£’000
58
37
––––––––
95
––––––––
––––––––
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.
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.
1. Financial Assets
Current Financial Assets
Trade receivables
Other receivables
Accrued income
Cash and cash equivalents
Non-current Financial Assets
Other receivable
Group
Company
Notes
2011
£’000
2010
£’000
2011
£’000
2010
£’000
17
17
17
18
3,103
5
12
2,941
––––––––
6,061
––––––––
––––––––
3,870
5
12
3,358
––––––––
7,245
––––––––
––––––––
-
-
-
703
––––––––
703
––––––––
––––––––
-
-
-
734
––––––––
734
––––––––
––––––––
16
12
––––––––
––––––––
12
––––––––
––––––––
-
––––––––
––––––––
-
––––––––
––––––––
The group does not have any financial assets in any other categories.
4 8
NOTES TO THE FINANCIAL STATEMENTS
2. Financial Liabilities
Current Financial Liabilities
Trade payables
Other payables
Accruals
Loans and borrowings
Obligations under finance lease
Non-current Financial Liabilities
Loans and borrowings
8% convertible loan stock 2013
Obligations under finance lease
Group
Company
Notes
2011
£’000
2010
£’000
2011
£’000
2010
£’000
19
19
19
20
21
20
20
21
344
114
788
1,448
2
––––––––
2,696
––––––––
840
823
-
––––––––
1,663
––––––––
4,359
––––––––
––––––––
444
91
1,603
982
2
––––––––
3,122
––––––––
1,491
799
2
––––––––
2,292
––––––––
5,414
––––––––
––––––––
24
103
174
-
-
––––––––
301
––––––––
-
823
-
––––––––
823
––––––––
1,124
––––––––
––––––––
29
141
265
-
-
––––––––
435
––––––––
-
799
-
––––––––
799
––––––––
1,234
––––––––
––––––––
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.
Principal Financial Instruments
The principal financial instruments used by the group, from which financial instrument risk arises, are as follows:
• Trade and other receivables
• Cash and cash equivalents
• Trade and other payables
• Loan notes
• Bank line of credit
• Convertible loan stock
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:
NOTES TO THE FINANCIAL STATEMENTS
4 9
a) 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 2011, the largest single customer accounted for 10 percent of group
revenues (2010:10 percent).
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 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 2011, provisions or write-offs
against customer receivables amounted in total to less than 0.5 percent 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 2011
At 31 December 2010
Total
£’000
Current
£’000
Past Due
+30 Days
£’000
Past Due
+60 Days
£’000
3,103
–––––––––
–––––––––
2,726
–––––––––
–––––––––
167
–––––––––
–––––––––
210
–––––––––
–––––––––
3,870
–––––––––
–––––––––
2,418
–––––––––
–––––––––
793
–––––––––
–––––––––
659
–––––––––
–––––––––
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:
2011
£’000
Provision
£’000
Gross
Value
£’000
Carrying
Value
£’000
Gross
Value
2010
£’000
Provision
£’000
Carrying
Value
Trade receivables
North America
United kingdom
Rest of Europe
2,282
463
388
–––––––––
3,133
–––––––––
–––––––––
30
-
-
–––––––––
30
–––––––––
–––––––––
2,252
463
388
–––––––––
3,103
–––––––––
–––––––––
3,098
554
246
–––––––––
3,898
–––––––––
–––––––––
16
12
-
–––––––––
28
–––––––––
–––––––––
3,082
542
246
–––––––––
3,870
–––––––––
–––––––––
5 0
NOTES TO THE FINANCIAL STATEMENTS
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
Utilization of provisions
New provisions
Closing balance
2011
£’000
2010
£’000
28
(28)
30
–––––––––
30
–––––––––
–––––––––
20
-
8
–––––––––
28
–––––––––
–––––––––
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.
The company provides in full for amounts due from subsidiaries. The company is exposed to credit risk in respect of its
cash and cash equivalents, which are held in the form of current account and money market balances with leading Uk, US
and European banking institutions.
b) 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 cash flow
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.
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 2011
Trade and other payables
Line of credit
Loan notes
Future interest – loan notes
Convertible loan stock
Future interest – convertible loan stock
Finance lease
Total financial liabilities
On Demand
or Within
Six Months
£’000
Within
One Year
£’000
Within
Two Years
£’000
Within
Five Years
£’000
1,444
776
336
92
-
34
1
–––––––––
2,683
–––––––––
–––––––––
-
-
336
70
-
34
1
–––––––––
441
–––––––––
–––––––––
-
-
672
72
850
6
-
–––––––––
1,600
–––––––––
–––––––––
23
-
168
3
-
-
-
–––––––––
194
–––––––––
–––––––––
Total
£’000
1,467
776
1,512
237
850
74
2
–––––––––
4,918
–––––––––
–––––––––
NOTES TO THE FINANCIAL STATEMENTS
5 1
At 31 December 2010
Trade and other payables
Line of credit
Loan notes
Future interest – loan notes
Convertible loan stock
Future interest – convertible loan stock
Finance lease
Total financial liabilities
Company
At 31 December 2011
Trade and other payables
Convertible loan stock
Future interest – convertible loan stock
Total financial liabilities
At 31 December 2010
Trade and other payables
Convertible loan stock
Future interest – convertible loan stock
Total financial liabilities
c) Market Risk
On Demand
or Within
Six Months
£’000
Within
One Year
£’000
Within
Two Years
£’000
Within
Five Years
£’000
2,346
319
331
135
-
34
1
–––––––––
3,166
–––––––––
–––––––––
-
-
331
114
-
34
1
–––––––––
480
–––––––––
–––––––––
-
-
663
160
-
68
2
–––––––––
893
–––––––––
–––––––––
-
-
829
75
850
6
-
–––––––––
1,760
–––––––––
–––––––––
Total
£’000
2,346
319
2,154
484
850
142
4
–––––––––
6,299
–––––––––
–––––––––
On Demand
or Within
Six Months
£’000
301
-
34
–––––––––
335
–––––––––
–––––––––
On Demand
or Within
Six Months
£’000
435
-
34
–––––––––
469
–––––––––
–––––––––
Within
One Year
£’000
-
-
34
–––––––––
34
–––––––––
–––––––––
Within
Two Years
£’000
-
850
6
–––––––––
856
–––––––––
–––––––––
Within
Five Years
£’000
-
-
-
–––––––––
-
–––––––––
–––––––––
Total
£’000
301
850
74
–––––––––
1,225
–––––––––
–––––––––
Within
One Year
£’000
-
-
34
–––––––––
34
–––––––––
–––––––––
Within
Two Years
£’000
-
-
68
–––––––––
68
–––––––––
–––––––––
Within
Five Years
£’000
-
850
6
–––––––––
856
–––––––––
–––––––––
Total
£’000
435
850
142
–––––––––
1,427
–––––––––
–––––––––
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.
5 2
NOTES TO THE FINANCIAL STATEMENTS
d) Interest Rate Risk
The group’s fixed rate interest bearing liabilities comprise loan notes with a carrying value at 31 December 2011 of
£1,512,000, which bear a fixed interest rate of 13 percent, and convertible loan stock with a carrying value of £823,000,
which bears a fixed interest rate of 8 percent. These liabilities do not give rise to interest rate risk. The group also has a
line of credit, on which £776,000 was outstanding at 31 December 2011, and which bears a variable interest rate based on
a margin of 1.25 percent above the lender’s Prime Rate. Should this rate vary by 1 percent the annualized effect would be
to increase or reduce finance costs by £8,000.
The company’s interest bearing liabilities consist of its convertible loan stock which bears a fixed rate of interest of 8
percent, which does not give rise to interest rate risk.
The group invests its surplus cash in bank deposits denominated in US 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 surplus cash held in the form of bank deposits at 31 December 2011 was £1,117,000. During 2011 interest rates
on US Dollar or Sterling money market deposits averaged around 0.5 percent. The annualized effect of a movement of
0.5 percent in the average interest rate received on the group’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 £5,000.
The company’s interest bearing deposits at the balance sheet date were £570,000. The annualized effect of a movement of
0.5 percent in the average interest rate received on the group’s bank deposits at the balance sheet date would result in an
increase or decrease the company’s interest income of £3,000.
e) 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 2011
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 2010
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
2,264
1,777
–––––––––
4,041
–––––––––
–––––––––
693
2,290
–––––––––
2,983
–––––––––
–––––––––
US Dollars
£’000
3,094
1,904
–––––––––
4,998
–––––––––
–––––––––
1,386
2,477
–––––––––
3,863
–––––––––
–––––––––
Sterling
£’000
Euro
£’000
Total
£’000
473
219
–––––––––
692
–––––––––
–––––––––
237
823
–––––––––
1,060
–––––––––
–––––––––
394
945
–––––––––
1,339
–––––––––
–––––––––
316
-
–––––––––
316
–––––––––
–––––––––
3,132
2,941
–––––––––
6,073
–––––––––
–––––––––
1,246
3,113
–––––––––
4,359
–––––––––
–––––––––
Sterling
£’000
Euro
£’000
Total
£’000
552
773
–––––––––
1,325
–––––––––
–––––––––
335
799
–––––––––
1,134
–––––––––
–––––––––
253
681
–––––––––
934
–––––––––
–––––––––
417
-
–––––––––
417
–––––––––
–––––––––
3,899
3,358
–––––––––
7,257
–––––––––
–––––––––
2,138
3,276
–––––––––
5,414
–––––––––
–––––––––
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 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.
NOTES TO THE FINANCIAL STATEMENTS
5 3
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.
The following table shows the effects, all other things being equal, of changes to exchange rates on the group’s profit 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.
Weakening of US Dollar by 10c
Strengthening of US Dollar by 10c
Weakening of Euro by 10c
Strengthening of Euro by 10c
2011
2010
2011
2010
Increase/
(Decrease)
in Profit
After Tax
£’000
Increase/
(Decrease
in Profit
After Tax
£’000
Effect of
Exchange Differences
on Translation of
Assets and Liabilities
of Foreign Operations
£’000
£’000
(10)
3
-
(26)
–––––––––
–––––––––
18
(23)
15
(18)
(118)
134
(57)
67
––––––––– –––––––––
––––––––– –––––––––
(212)
242
(26)
31
–––––––––
–––––––––
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 profit after tax of the company. It is based on the company’s
assets and liabilities at the relevant balance sheet date.
Weakening of US Dollar by 10c
Strengthening of US Dollar by 10c
Weakening of Euro by 10c
Strengthening of Euro by 10c
f) Capital
2011
2010
(Increase)/Decrease
in Profit After Tax
£’000
£’000
(19)
22
(22)
25
–––––––––
–––––––––
(7)
8
(25)
29
–––––––––
–––––––––
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.
2 4 . S H A R E C A P I TA L
Issued and Fully Paid
Ordinary shares of 5p each
2011
Number
2011
£’000
2010
Number
2010
£’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 2011 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.
5 4
NOTES TO THE FINANCIAL STATEMENTS
2 5 . C A P I TA L R E S E R V E S
Group
At 1 January 2010
Recognition of share-based payments
Lapsing of share options
Reclassification of embedded
derivative as equity (see Note 20)
At 1 January 2011
Recognition of share-based payments
Purchase of shares by Esot
Transfer of merger reserve to
profit and loss reserve
At 31 December 2011
Company
At 1 January 2010
Recognition of share-based payments
Lapsing of share options
Reclassification of embedded
derivative as equity (see Note 20)
At 1 January 2011
Recognition of share-based payments
Purchase of shares by Esot
Transfer of merger reserve to
profit and loss reserve
At 31 December 2011
Share
Premium
£’000
52,096
-
-
-
––––––––
52,096
-
-
-
––––––––
52,096
––––––––
––––––––
Share
Premium
£’000
52,096
-
-
-
––––––––
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
––––––––
––––––––
Equity
Reserve
£’000
709
81
(46)
51
––––––––
795
39
(11)
-
––––––––
823
––––––––
––––––––
Equity
Reserve
£’000
709
81
(46)
51
––––––––
795
39
(11)
-
––––––––
823
––––––––
––––––––
Total
£’000
73,633
81
(46)
51
––––––––
73,719
39
(11)
(17,944)
––––––––
55,803
––––––––
––––––––
Total
£’000
65,868
81
(46)
51
––––––––
65,954
39
(11)
(10,179)
––––––––
55,803
––––––––
––––––––
Share premium represents the premium arising on the issue of shares and its use is governed by the provisions of the
Companies Act 2006.
The 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 carrying values of such investments have since been subject to
impairment charges exceeding the amount of the merger reserve, and accordingly the full amount of the merger reserve
has been transferred to profit and loss reserve.
The capital redemption reserve is a non-distributable reserve arising from the cancellation in 2001 of deferred shares.
The equity reserve comprises the deemed value of outstanding share options granted in connection with the acquisition
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, the fair value of warrants to subscribe for Sopheon shares issued to BlueCrest Capital
Finance LLC, and the equity component of the group’s 8 percent convertible loan stock 2013.
In addition, investment by the group’s employee share ownership trust (the “Esot”) in the company’s shares is deducted
from equity in the consolidated balance sheet as if they were treasury shares, by way of deduction from the equity reserve.
At 31 December 2011, the Esot held 185,244 (2010: 244) ordinary shares in the company, which represents 0.1 percent
(2010: 0.0 percent) of the company’s ordinary share capital. The reserve of £11,000 (2010: £Nil) represents the cost of
these shares held by the Esot at 31 December 2011.
NOTES TO THE FINANCIAL STATEMENTS
5 5
The purpose of the Esot is to facilitate the company’s policy of offering participation in the ownership of its shares to
employees for reward and incentive purposes. At 31 December 2011 and at 31 December 2010, no shares held by the
Esot were under option or had been gifted to any employees. Arrangements for the distribution of benefits to employees
will be made at the Esot’s discretion in such manner as the Esot considers appropriate. Administration costs of the Esot
are accounted for in the profit and loss account of the company as they are incurred.
2 6 . 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 £123,000 (2010: £103,000) represents contributions paid to such plans at rates
specified in the rules of the plans.
2 7 . 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 executive directors and members of the
group’s operating and executive management committees during the year was as follows:
Emoluments and benefits
Pension contributions
Share-based payments
2011
£’000
2010
£’000
1,006
30
24
–––––––
1,060
–––––––
–––––––
900
21
43
–––––––
964
–––––––
–––––––
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 subsidiaries by way of interest-free loans
Net management charges to subsidiaries
2011
£’000
2010
£’000
521
250
–––––––
203
288
–––––––
The amounts owed by subsidiary companies to the parent company at 31 December 2011 totaled £40,191,000 (2010:
£40,460,000). A full provision has been made against these amounts, which are unsecured and are subordinated to the
claims of all other creditors.
During 2011 and 2010 the company granted share options to employees of subsidiary companies. Details of grants of
share options are disclosed in Note 28.
Other Related Party Transactions
There were no other related party transactions during the year under review or the previous year.
5 6
NOTES TO THE FINANCIAL STATEMENTS
2 8 . 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
Lapsed or expired during the year
Outstanding at the end of the year
Exercisable at the end of the year
Number of
Share
Options
2011
Weighted
Average
Exercise
Price
2011
£
Number of
Share
Options
2010
Weighted
Average
Exercise
Price
2010
£
12,504,924
880,000
(191,870)
–––––––––
13,193,054
–––––––––
–––––––––
10,801,432
–––––––––
–––––––––
0.17
0.09
0.63
–––––––––
0.16
–––––––––
–––––––––
0.17
–––––––––
–––––––––
12,141,618
1,460,000
(1,096,694)
–––––––––
12,504,924
–––––––––
–––––––––
10,338,100
–––––––––
–––––––––
0.22
0.08
0.61
–––––––––
0.17
–––––––––
–––––––––
0.18
–––––––––
–––––––––
No share options were exercised during the year (2010: Nil). The options outstanding at the end of the year have a
weighted average contractual life of 4.6 years (2010: 5.0 years).
During 2011, share options were granted on 26 April 2011 and on 28 September 2011. In both cases the exercise prices
of the options granted was 8.75p, and the estimated fair value was 5.2p. During 2010, share options were granted on 27
August 2010.
The fair values for options granted are calculated using the binomial option-pricing model. The principal assumptions used
were:
Date of Grant
Share price at time of grant
Exercise price
Expected volatility
Risk-free rate
Expected dividend yield
September
2011
April
2011
August
2010
8.75p
8.75p
40%
5%
Nil
8.75p
8.75p
40%
5%
Nil
7.5p
7.5p
40%
5%
Nil
The expected contractual life of the options used was either five or ten 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 £39,000 (2010: £81,000) relating to equity-settled share-based
payments during the year.
DI 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 Lawford & Co, chartered
accountants and until 2010 a director of Lawfords Ltd. also 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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