SOPHEON PLC
Introduction
During 2002 we focused on operational development of the business and in
particular on Accolade, Sopheon's flagship software solution for product
development. The year saw the full integration of technology acquired in 2001 as
part of the merger with Orbital Software, the release of Accolade version 4.0,
and a substantial increase in Accolade sales activity compared to the year
before. Sopheon is now recognised as a leading supplier of solutions that
improve the financial return on innovation and product development investments
within research and development (R&D), a market that is receiving increasing
attention and focus from the business community. Notwithstanding these positive
developments, during the year we realised that our operating plans for 2002 were
more ambitious than the economic environment permitted. Consequently in the
second half of the year we took further cost reduction measures, resulting in an
EBITDA loss in line with broker expectations in spite of considerable pressure
on revenues.
Results and Finance
Sopheon's consolidated revenues were £12.4m (2001: £14.0m) and consolidated
EBITDA was a loss of £8.9m (2001: £11.8m). Approximately 73% of the total
revenues came from the company's Information Management (IM) division,
representing research analyst services, portal subscriptions and information
provision. The Business Process Solutions (BPS) division, representing software
applications and related consultancy services, contributed 27% of revenue during
the year. As noted above, the mix of business within BPS delivered a
substantially increased proportion of revenues from Sopheon's own solutions as
opposed to bespoke developments and third-party products. IM represented the
bulk of the decline in consolidated revenue with a reduction of £1.3m. The BPS
reduction of £0.3m was made up of an increase in revenues relating to Accolade
and other proprietary products of £1.1m offset by a reduction in sales of
third-party products and bespoke project revenues of £1.4m.
On a consolidated basis costs were down by over twice the revenue reduction,
resulting in a decrease in consolidated EBITDA loss to £8.9m. Of this loss,
£5.3m was recorded in the first half of 2002, reflecting the sharp reductions in
cost base referred to above. Following the impairment charge taken in 2001,
goodwill charges totalled £5.9m (2001: £21.4m) for the year, leading to a loss
before tax of £16.1m (2001: £34.6m) and a loss of 19.4p per ordinary share
(2001: 76.2p).
At 31 December 2002, Sopheon had gross cash resources of £3.4m (2001: £13.3m)
before overdrafts and lines of credit drawn totalling £0.9m (2001: £0.7m).
Coming into 2003 the board took the view that a stronger cash position was
required for a responsible continuation of our development strategy for the
business. After consulting during March with Sopheon's brokers and key
institutional investors, the board came to the conclusion that a restructuring
of the business was the most pragmatic approach to improve the balance sheet
that could be taken in the current market environment.
Accordingly, during April the group entered into a letter of intent with a
potential purchaser to divest Sopheon's US based IM business. The proposed
transaction is progressing well, and subject to certain conditions and events
including the completion of due diligence by the purchaser's financial partners,
is expected to complete by mid July 2003. If concluded the sale would give rise
to a profit on disposal after charging goodwill, with consideration consisting
mainly of cash and net liabilities to be assumed by the purchaser. As a
potential backup in the event that the transaction protracts or is otherwise not
completed, the board has accepted a letter of intent from an alternative
purchaser that is also undertaking due diligence. Consistent with its strategy
of imbedding external human-based decision support capabilities within its
software solutions, Sopheon expects to continue to provide information
management services following closure of either transaction, through an
exclusive outsourcing arrangement with the purchaser.
Separately, the directors will be seeking the extension of the maturity date of
the group's £2.6m of 6% convertible unsecured loan stock, by up to two years
from June 2004. It is proposed that this would be coupled with modification of
other terms of the loan stock, which might include a reduction of the loan stock
conversion price. This in turn, depending on the level of any revised loan stock
conversion price, might require shareholders to approve an increase in the
directors' authority to issue and allot shares. Any changes to the terms of the
stock would also need to be put to a meeting of its holders, which is expected
to take place before the end of June 2003.
The directors believe that their restructuring objectives will be achieved, and
accordingly the unaudited financial information set out in this preliminary
announcement is prepared on the going concern basis. The board is also
considering other complementary measures, and will keep shareholders informed of
developments. Nevertheless, in the event that the IM disposal is not completed,
the maturity of loan stock not extended, or the directors' future sales targets
are not met, and in the absence of any other measures that might be available to
the board, the going concern basis would cease to be appropriate. Your attention
is drawn to the Notes to this statement, which include an explanation of the
basis of preparation of the financial statements and the auditors' intentions as
regards the form of their report.
2002 Trading Summary
General economic uncertainty remained through 2002. In our interim statement we
noted continuing pressure on our IM division, which was particularly hard hit in
Germany. Employment conditions there mean that the cost base is relatively
rigid, and therefore, as a number of clients reduced their level of business
with us following their own restructuring and M&A activity, our German business
suffered higher financial losses than might be expected in a more flexible
environment. As a result, the board has been assessing Sopheon's German
subsidiary with a view to restructuring its activities, also by the end of June
in line with the planned disposal of the US based IM business. The US operations
of the IM division responded to the difficult climate with further reductions in
staff, and towards the end of the year by reorganisation around client-focused
teams.
In our BPS division, activity related to Accolade accelerated, with 30
transactions in 2002 compared to only 4 in 2001. Progress with Accolade at the
end of 2002 can be summarised as follows:
• We ended 2002 with a total of 34 paying Accolade-related transactions achieved
since launch, across 28 clients;
• The total of 34 transactions was made up of 10 initial
licences, 6 additional licences either following on from an assessment or
extending the user base at an existing client, 3 ancillary modules sold
without the core Accolade system, and 15 assessments. Sopheon defines an
assessment as when a client is paying for a trial installation or a consulting
engagement which could lead to an Accolade order;
• 30 of these transactions were sold in 2002, compared to 4 in 2001
Transactions occurred in each of the geographies in which Sopheon operates - the
US, the UK, Germany and the Netherlands - and also in Southeast Asia, where
Sopheon has an active distribution relationship in Singapore. Accolade customers
are highly referenceable. We are pleased with the level of user acceptance and
benefit Accolade is bringing our clients. The BPS division also continued to
develop and expand its Dutch healthcare solutions business.
As a result of these developments, 65% of the total BPS revenues during 2002
were related to Sopheon's proprietary products and services as opposed to
third-party and bespoke solutions. This compares to 30% in 2001. Nevertheless,
our integration teams continued to work on bespoke projects, at a reducing
level, as we continued the transition to supporting our own products.
The board has been conscious of the need to balance cost-reduction with
maintaining business effectiveness and delivery of our strategy. During 2002
fixed costs were reduced by 35%, bringing the cumulative reduction since
Sopheon's acquisition of Orbital Software in late 2001 to 55%. These reductions
are reflected in headcount down to 184 at the end of 2002, compared to 264 in
January 2002 and 349 in late 2001. In particular, following the release of
Accolade 4.0, R&D resources were scaled back and concentrated; marketing
expenditures were focused on short-term lead generation and on third-party
validation of our products; and property and IT infrastructure were
rationalised.
Update on first quarter of 2003
Beset with continued economic turmoil and the uncertainties of war, the market
in the first quarter of 2003 remained sluggish. Despite these conditions,
Sopheon continued to grow its proprietary software business, focused around
Accolade. Specific aspects of Sopheon's business performance during the first
quarter included the following:
• Ten Accolade transactions were completed in the first quarter; 5 sales of
assessments, 3 initial license sales and 2 extensions of ancillary module
licenses.
• We continued our record of 100% satisfaction among installed Accolade clients.
A number of clients expressed interest in increasing the value they derive
from Accolade by expanding its application beyond product development to areas
such as Six Sigma quality improvement initiatives, mergers and acquisitions
and the management of information technology (IT) projects
• An organisation involved in clinical trials for hospitals and
their partners installed Accolade as a way of automating and strengthening
clinical trials management procedures. The system will also include users from
the hospitals and their pharmaceutical and biotech corporate partners.
• A major University Hospital in the Netherlands committed to a five-year
agreement valued at €0.9m, for use of a Sopheon software solution that
automatically updates staff members on scientific and medical advances in
their areas of specialization.
• The US IM business finished the quarter with an 84% renewal rate among
contracts that came due during the quarter, and continued to concentrate on
its strategy of optimising client utilization of
contracts. The impact of the latter was evident in the fact that contract
utilization rates rose during the period to the 94% level, an encouraging
indicator of the probable value of future renewals.
Another important first-quarter development related to Sopheon's software
business was Gartner Group's publication of its first 'Magic Quadrant' for the
product lifecycle management (PLM) market. The Quadrant is a proprietary
analytical tool used by the IT research and advisory firm to assess and profile
the leading suppliers in a given market space. Sopheon's Accolade was one of
only three process automation/portfolio management solutions selected for
inclusion, reflecting Gartner's judgement that our offering has proven its
viability and is among those having the greatest impact on the market.
Market
During 2002, Sopheon was referenced or profiled in 37 reports from firms such as
Gartner, Giga, META Group, IDC and AMR Research that advise end-users on which
products they should use and with which suppliers they should do business.
Research has identified a number of challenges associated with the product
development (PD) process in major corporations. Notably, 47% of PD resources are
spent on products that are financially unsuccessful, and 41% of launched
products fail in the market. Accolade addresses these and other issues by
creating an automated process environment in which to implement standardised
innovation and product development methodologies. The most widely used process
is Stage-Gate, implemented by over 60% of technology-driven companies in North
America. Typically, use of the methodology is paper-based, leading to lack of
adherence, administrative burden, and weak decision support. Accolade solves
these market problems through automation and control of the process.
Product Development and IPR
Accolade was launched in the second quarter of 2001. In September 2002, Sopheon
released version 4.0, which is recognised by our clients as being feature rich,
stable and high-quality software. A key achievement in Version 4.0 was the
creation of the Knowledge Network module, representing the full integration of
the former Orbital Software's Organik technology with Accolade and providing
on-demand support for critical process, business and technical decisions. The
Knowledge Network module links users to internal and external experts,
repositories of information on current and past projects, thousands of sources
of published information, and to Sopheon's IM services, which in the future are
expected to be provided by Sopheon through an exclusive outsourcing arrangement
with the acquirer of this business. The version 4.0 release also included an
idea management and screening module to help generate, manage and evaluate
product ideas, and a built-in, customisable library of templates for key process
deliverables such as product definition records, project reports, operational
plans, supply plans and detailed business and financial analyses.
Sopheon holds patents in three key areas, relating to profiling technology,
presentation of large domain search results by category or type, and application
of information technology to language-intensive processes.
Board of directors and executive management team
Sopheon's group management and governance structure is divided between a Sopheon
plc Board of Directors with more than half of its directors being non-executive,
and an executive management board responsible for operations.
During 2002 Dan Metzger, a former executive of Lawson Software joined the board
following the retirement of Joe Shuster, the founder of Teltech Resource Network
Corporation, one of Sopheon's predecessor companies. Dan brings many years of
enterprise software business experience to the group. The Sopheon plc Board
otherwise remains unchanged with four non-executive directors and three
executive directors, being the Executive Chairman, the CEO and the CFO.
The executive management board is a team of seven, which includes the three
executive directors. Andy Michuda, our CEO, continues to have day-to-day
responsibility for driving the Accolade growth strategy. During the year, Dave
Magnani assumed responsibility as VP of the US based IM business. Chris Hawver,
Paul Heller are chief marketing officer and chief technology officer
respectively, and Huub Rutten remains VP of research and leader of our Dutch
healthcare unit.
Outlook
Although we expect that tough economic conditions will persist in 2003 in all
geographies, we entered 2003 with a substantially reduced cost base and
rationalised infrastructure, a flagship software product that is generating a
high level of interest and sales activity compared to 12 months earlier, an
expanding installed client base, and increased validation of the market.
Accolade has demonstrated, consistently, that it is a valuable solution in which
clients are prepared to invest. Sopheon is very focused on converting this asset
into a viable high-growth business. The planned divestiture of our US IM
business will reduce complexity and sharpen that focus. Since the beginning of
2003, the pipeline for our software products has continued to develop. This
progress supports the board's belief that there is a positive outlook for
Accolade in the current year, and that we are well-positioned to continue to
advance toward our goal of becoming a leading international supplier of software
and services that improve the financial return on innovation and product
development investments.
In addition to driving the commercial development of Accolade, management is
focusing its attention on the successful conclusion of the planned divestiture
of Sopheon's North American IM business. As we go forward the board will
continue to assess the financial resources available to implement our strategy
against the operational progress of the business.
SOPHEON PLC
GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR TO 31 DECEMBER 2002
(UNAUDITED)
2002 2001
£'000 £'000
Turnover 12,353 13,963
Cost of sales (9,002) (10,186)
--------- ---------
Gross profit 3,351 3,777
Administrative, sales and marketing expenses (11,210) (14,136)
Research and development costs (2,331) (3,010)
--------- ---------
Operating loss before amortisation of goodwill (10,190) (13,369)
Amortisation of goodwill (5,922) (21,431)
--------- ---------
Operating loss (16,112) (34,800)
Bank interest receivable 260 373
Interest payable and similar charges (327) (204)
--------- ---------
Loss on ordinary activities before taxation (16,179) (34,631)
Taxation - research and development tax credit 126 -
--------- ---------
Loss on ordinary activities after taxation (16,053) (34,631)
========= =========
Loss per share-basic and diluted (19.4p) (76.2p)
Loss on an EBITDA basis (8,910) (11,757)
========= =========
GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
(UNAUDITED)
2002 2001
£'000 £'000
Loss for the financial year (16,053) (34,631)
--------- ---------
Exchange difference on retranslation of net assets of
subsidiary undertakings 75 31
--------- ---------
Total recognised gains and losses relating to the year (15,978) (34,600)
========= =========
SOPHEON PLC
GROUP BALANCE SHEET AS AT 31 DECEMBER 2002
(UNAUDITED)
2002 2001
£'000 £'000
Fixed assets
Goodwill 4,925 10,893
Tangible assets 900 2,159
--------- ---------
5,825 13,052
Current assets
Debtors 2,660 3,593
Cash and short term deposits 3,355 13,343
--------- ---------
6,015 16,936
Creditors: amounts falling due within one year 6,332 8,584
--------- ---------
Net current (liabilities)/assets (317) 8,352
--------- ---------
Total assets less current liabilities 5,508 21,404
Creditors: amounts falling due after more than one year 3,082 3,039
--------- ---------
2,426 18,365
========= =========
Capital and reserves
Called up share capital 4,147 4,116
Share premium account and merger reserve 63,764 63,756
Other reserves 4,910 5,920
Profit and loss account (70,395) (55,427)
--------- ---------
Shareholders' funds (all equity interests) 2,426 18,365
========= =========
GROUP STATEMENT OF CASH FLOWS FOR THE YEAR TO 31 DECEMBER 2002
(UNAUDITED)
2002 2001
£'000 £'000
Net cash outflow from operating activities (10,268) (11,224)
Return on investment and servicing of finance (67) 169
Taxation 126
Capital expenditure and financial investment (86) (201)
Acquisitions - 13,037
Management of liquid resources 8,186 (3,512)
Financing (12) 4,083
--------- ---------
(Decrease)/increase in cash (2,121) 2,352
(Decrease)/increase in short term deposits (8,186) 3,512
--------- ---------
(Decrease)/increase in cash and liquid resources (10,307) 5,864
========= =========
NOTES
Principal Accounting Policies
Accounting convention and basis of preparation
The financial information set out in this preliminary announcement is prepared
under the historical cost convention and in accordance with applicable
accounting standards, and on the going concern basis. At the year end the group
reported consolidated net current liabilities of £0.3m and gross cash resources
of £3.4m. Whilst the cost base has been substantially reduced, the group has
continued to incur losses. Since the end of the year the directors have taken
steps to restructure the business, initially through the proposed divestiture of
its US based Information Management business. The proposed transaction is
progressing well and, subject to certain conditions and events including the
completion of due diligence by the purchaser's financial partners, is expected
to complete by mid July 2003. If concluded the sale would give rise to a profit
on disposal after charging goodwill, with consideration consisting mainly of
cash and net liabilities to be assumed by the purchaser. As a potential backup
in the event that the transaction protracts or is otherwise not completed, the
board has accepted a letter of intent from an alternative purchaser that is
undertaking due diligence.
The directors are also seeking the extension of the maturity date of the group's
£2.6m of convertible unsecured loan stock, by up to two years from June 2004. It
is proposed that this would be coupled with modification of other terms of the
loan stock, which might include a reduction of the loan stock conversion price.
This in turn, depending on the level of any revised loan stock conversion price,
might require shareholder approval for an increase in the directors' authority
to issue and allot shares. Any changes to the terms of the stock would also need
to be put to a meeting of its holders, which is expected to take place before
the end of June 2003.
The directors believe that these steps will provide the group with adequate
funding to support its activities through to the point at which they forecast
that trading becomes cash generative. Nevertheless, the ability of the group to
continue as a going concern depends upon the completion of the currently
contemplated disposal, thereafter on the rescheduling of the convertible loan
stock (including the receipt of any necessary shareholder approvals) and on
meeting the sales targets on which the trading forecasts for the group are
based, which include objectives for the group's Accolade product that represent
substantial growth over 2002. The directors have a reasonable expectation that
these outcomes will occur, and that together they will provide adequate
resources to enable the group to continue as a going concern. However, these
outcomes are not certain. In the event that the disposal is not completed, the
maturity of loan stock not extended, or sales targets are not met, and in the
absence of any other appropriate measures that might be available to the board,
the cash generated from sales would continue to be insufficient to cover the
cash outflows of the group, and the going concern basis would cease to be
appropriate.
The financial information does not reflect any adjustments which would be
required if the going concern assumption was not appropriate. Given the
uncertainty described above it is not currently possible to determine the extent
and quantification of such adjustments but these would include the
reclassification of creditors due in more than one year to less than one year,
the write down of the carrying value of goodwill in the balance sheet to the
best estimate of net realisable value on disposal, and provision for additional
liabilities.
The auditors have indicated that they expect to issue an unqualified audit
report, but will draw attention to the fundamental uncertainty over going
concern.
Basis of consolidation
The consolidated accounts include the results of the company and its subsidiary
undertakings.
NOTES
Principal Accounting Policies
Tangible fixed assets
Tangible fixed assets are stated at historical cost, less accumulated
depreciation. The costs of developing portals used to deliver products and
services are capitalised as tangible fixed assets in line with UITF29. Tangible
fixed assets are depreciated on a straight-line basis at rates ranging from 20%
to 33% per annum on cost over their expected useful lives.
Research and development
Research and development expenditure is written off as incurred. The cost of
registering patents and trademarks is written off as incurred. Subsidies
received from the European Union and other state agencies are credited to the
profit and loss account over the period to which they relate.
Goodwill
Goodwill arising on consolidation is capitalised and amortised on a
straight-line basis over its estimated useful economic life, which is three
years in all cases. Goodwill is reviewed for impairment at the end of the first
full financial year after acquisition and in other periods if events or changes
in circumstances indicate that carrying values may not be recoverable. If a
subsidiary, associate or business is subsequently sold or closed, any goodwill
arising on acquisition that has not been amortised is taken into account in
determining the profit or loss on sale or closure.
Deferred taxation
Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more, or a right to pay less, tax in
the future have occurred at the balance sheet date, with the following
exception. Deferred tax assets are recognised only to the extent that the
directors consider that it is more likely than not that there will be suitable
taxable profits from which the future reversal of the underlying timing
differences can be deducted. Deferred tax is measured on a non-discounted basis
at the tax rates that are expected to apply in the periods in which timing
differences reverse, based on tax rates and laws enacted or substantively
enacted at the balance sheet date.
Foreign currencies
The assets and liabilities of the subsidiary undertakings are translated at the
rate of exchange ruling at the balance sheet date. The profit and loss account
is translated at the average rate of exchange. The exchange differences arising
on the re-translation of subsidiary undertakings are, together with differences
arising on the translation of long-term intra-group funding loans that are not
intended to be repaid in the foreseeable future, taken directly to reserves. All
other differences are taken to the profit and loss account.
Pensions
Sopheon contributes to the personal pension arrangements of employees, the costs
of which are charged in the profit and loss account as incurred. One of its
subsidiary companies, Sopheon GmbH, is committed to providing certain pensions
based on final pensionable salaries of employees. Its pension liabilities were
measured when the subsidiary was acquired in 2001 using a projected unit method
and discounted at the current rate of return on a high quality corporate bond of
equivalent term and currency to the liabilities. The provision will be used to
offset the future payments to those employees.
Leasing
Assets held under finance leases, which are leases where substantially all risks
and rewards of ownership of the assets have passed to the Group are capitalised
in the balance sheet and are depreciated over their useful lives. The capital
elements of future obligations under financial leases are included as
liabilities in the balance sheet. The interest element of the rental obligations
are charged to the profit and loss account over the period of the lease and
represent a constant proportion f the balance of capital repayments outstanding.
Rentals payable under operating leases are charged to the profit and loss
account on a straight-line basis over the lease term.
NOTES
Principal Accounting Policies
Turnover
Turnover (excluding value-added tax) represents the amounts derived from the
Group's principal activities which comprise £3,307,000 from the design,
development, production and marketing of software products together with
associated implementation and consultancy services and £9,046,000 from the
provision of information and research services. Sopheon has operations in four
geographical markets - Germany, the Netherlands, the UK and the USA.
Sales of software products are recognised on delivery, and when no significant
vendor obligations remain. Revenues from implementation and post contract
support services in respect of software sales are recognised as the services are
performed. Periodic subscription revenue is recognised rateably over the
subscription period. Transaction-based revenue is billed and recognised as the
related services are rendered. Revenues relating to significant maintenance and
support agreements are deferred and recognised over the period of the
agreements. Revenues and associated costs under long term contracts are
recognised on a percentage basis as the work is completed and any relevant
milestones are met, using latest estimates to determine the expected duration
and cost of the project.
Earnings per share
The calculation of basic loss per ordinary share is based on a loss of
£16,053,000 (2001 - loss of £34,631,000), and 82,669,430 (2001 - 45,471,220)
ordinary shares, being the weighted average number of ordinary shares in issue
during the period. The effect of all potential ordinary shares is antidilutive.
Creditors
Creditors within one year include overdrafts and lines of credit totalling
£947,000 at 31 December 2002 (2001 - £709,000) and deferred revenues of
£1,584,000 (2001 - £1,713,000).
Section 142 Companies Act 1985
In view of recent developments Sopheon plc's net assets on an unconsolidated
basis may be adjusted to less than half of its called-up share capital. The
matter is being reviewed by the board and if found to be the case, the directors
will convene an Extraordinary General Meeting under section 142 of the Companies
Act 1985, to consider whether any, and if so what, steps should be taken to deal
with the situation.
Annual Report
The financial information set out above does not constitute the company's
statutory accounts as defined in section 240 of the UK Companies Act 1985 for
the years ended 31 December 2002 or 2001. Statutory accounts for 2001 have been
delivered to the registrar of companies and an unqualified audit opinion was
issued thereon. The statutory accounts for 2002 will be delivered to the
registrar of companies following the Company's annual general meeting. The
Annual Report and Accounts will be posted to shareholders shortly and thereafter
will be available from the Company's registered office at Stirling House, Surrey
Research Park, Guildford, Surrey GU2 7RF.
Cautionary Statement
Sopheon has made forward-looking statements in this press release, including
statements about the market for and benefits of our products and services;
financial results; product development plans; the potential benefits of business
relationships with third parties and business strategies. These statements about
future events are subject to risks and uncertainties that could cause Sopheon's
actual results to differ materially from those that might be inferred from the
forward-looking statements. Sopheon can make no assurance that any
forward-looking statements will prove correct. Descriptions of some of the key
risk factors that could negatively affect Sopheon's future performance are
contained in Sopheon's Form 20 - F Annual Report, on file with the U.S.
Securities and Exchange Commission.