29th Mar 2007 07:00
Embargoed Release: 07:00hrs Thursday 29th March 2007
SOPHEON PLC ("Sopheon", the "Group" or the "Company") PRELIMINARY AUDITED RESULTS FOR THE YEAR TO 31 DECEMBER 2006 Sopheon plc, the international provider of software and services that improvethe financial return from innovation and product development investments,announces its results for the year ended 31 December 2006 together with anoutlook for the current year. Sopheon shares are traded on AIM in London and onthe Euronext Amsterdam.Highlights:
* Revenue for the year was ‚£6.0m (2005: ‚£4.7m) and the EBITDA result for the
year was a profit of ‚£33,000 (2005: ‚£746,000 loss).
* Sixteen new customers were added in the year, with 20 extension orders from
existing customers. By year end there were 87 companies throughout the
world that had licensed our software, and the total number of individual
users from within those organizations surpassed 27,000.
* We released the Accolade‚® Accelerators, a group of new modules which expand
Accolade's out-of-the-box capabilities in key process automation areas such
as Stage-Gate‚®implementation, roadmapping and planning, and product
portfolio management (PPM).
* Sopheon clients participating in a benchmark study by Aberdeen Group on PPM
best practices ranked best-of-class in a variety of key areas including widespread process adoption, speed of portfolio management decisions, meeting cost goals and hitting deadlines.
* Revenue growth in Europe was particularly strong. Strategically we began to
move beyond the specialty chemicals, materials and food & beverage markets
that have historically been our targets and secured our first customers in
the discrete manufacturing industries.
Barry Mence, Chairman, commented: "Past reports to our shareholders have chronicled our progress toward profitability. With today's announcement, we acknowledge that we achieved breakeven EBITDAfor the first time. This milestone, coupled with significant strides during 2006 in virtually every area of our business, has set the stage for Sopheon's next important phase of growth. We know that we must balance the need to drive the Companyforward strategically witha continued focus on financial performance. We're looking forward to another very promising and exciting year."
For further information contact:
Barry Mence, Chairman Sopheon plc Tel : + 44 (0) 1483 685 735 Arif Karimjee, CFO Andrew Tan Hansard Tel : + 44 (0) 207 245 1100 + 44 (0) 7957 203 685 Floor van Maaren Citigate First Financial Tel : + 31 (0) 205 754 010About SopheonSopheon is an international provider of software and services thathelp organizations improve the business impact of product innovation. TheSopheon Accolade‚® system automates gate or phase-based product developmentprocesses and provides strategic decision support that allows companies toincrease revenue and profits from new products. Sopheon is listed on the AIMMarket of the London Stock Exchange and on the Euronext in the Netherlands. Formore information, please visit www.sopheon.com.
Accolade‚® is a registered trademark of Sopheon plc.
Stage-Gate‚® is a registered trademark of the Product Development Institute.
Introduction
We achieved much in 2006. In headline terms, we grew revenues to ‚£6.0m from ‚£4.7m in 2005. This was underpinned by 36 license orders and extensions, takingthe total number of licensed customers to 87. Full-year revenues were 30%higher than the prior year, and we achieved breakeven EBITDA (earnings beforeinterest, tax, depreciation and amortization) for the first time in ourhistory. Coming into 2007 we continue to enjoy high levels of activity in oursales pipeline, reinforcing our belief that we are the leading independentvendor in the market for Product Portfolio Management (PPM) solutions. Thismarket is projected to triple in size between 2006 and 2010. Implementing asystem like Accolade represents a serious commitment for any organization andthis continues to weigh on our sales cycles. However, as our business maturesin scale we believe that this area, which has always brought unpredictabilityto our revenues, will show improvement.At the start 2006, we made a strategic decision to move beyond the chemicals,materials, and food & beverage markets that have historically been our focus.In particular, we began to pursue opportunities in non-food & beverage segmentsof the consumer packaged goods sector. This effort encompassed marketingprograms and targeted business development activity. It led to our securing anumber of new clients, exemplified by Timex, the leading watchmaker in NorthAmerica, and Electrolux, the world's leading international appliance company.Leveraging our partnerships will be critical to achieving our longer term goalsin this area, and we were delighted to announce our first major automobilecustomer, secured in collaboration with Hewlett-Packard. Geographical reach wasalso extended with sales for the first time in Scandinavia, France, Israel,Portugal and New Zealand. Some of these were secured through our growingreseller channel.
Results
Sopheon's consolidated turnover grew to ‚£6.0m (2005: ‚£4.7m). This overallresult included a strong new sales performance by our European business, whichgrew revenues by 68% in the year. This was offset by a relatively flatperformance in the US, accentuated by the weakening of the US dollar in globalcurrency markets. This growth pattern is the opposite of what took place in2005, when we experienced stronger growth in North America. Over the years wehave invested heavily in maintaining a truly international footprint for ourbusiness and this is proving to be both a key differentiator in our businessdevelopment and implementation efforts, and a source of balance for our revenueperformance. Since the introduction of Accolade six years ago, our averageannualized growth in US dollar terms continued to hold at approximately 50%.Overall, Sopheon's revenues for 2006 were 30%, higher than the preceding year.Unlike in 2005, however, revenues were evenly spread across the first andsecond half. Although we look forward to strong growth, we believe that ourperformance in any particular period will remain relatively unpredictable forsome time to come. This is a function of sales cycle time and of transactionvalue.Business mix
During 2006 we closed 16 new license customers and 20 extension orders fromexisting customers. In past statements we have noted the growing influence oflarger sales, which have the potential to increase revenue volatility, but alsounderpin growth. Such transactions also have the effect of pulling throughsubstantial consulting and other service opportunities due both to the moreextensive nature of the implementations in question, and also to a growingtrend of existing customers returning to Sopheon to support expansion effortsthrough additional configuration and consultancy work following the initialroll-out. During 2006, we enjoyed ‚£0.6m of such repeat services business.
In addition to license and services revenues, our third major revenue stream is recurring maintenance income which coming into 2007 has grown to ‚£1.7m, compared to ‚£1.4m a year before.
In 2006 our business delivered a 37:25:38 ratio of license, maintenance,service respectively compared to 40:25:35 in the prior year. We expect ourconsulting revenues to continue to grow strongly and to provide another sourceof stability and maturity to our business. However, we believe that this willbe offset as a proportion of our total revenues by the effect of licensebusiness coming through our expanding reseller network, for which associatedservices work is unlikely to be performed by Sopheon. We expect maintenance tohold at approximately a quarter of our overall revenues.As we first signaled in 2005, the higher proportion of services in our revenuemix has required us to make extensive use of subcontractor partners. Thisrequirement has increased as the scope of deployments and the geographic spreadof our customers have continued to expand. A recent example was our Accoladeinstallation at Electrolux, where we contracted with Arthur D Little to performthe bulk of the implementation work. In spite of this we achieved an overallgross margin, measured after deducting the costs of such partners as well asour own client services resources, of 72% (2005: 73%).
Research & Development expenditure
During 2006, our R&D effort focused on three different areas. During the yearwe developed and launched the Accolade Accelerators, a group of newapplications which expand Accolade's out-of-the-box capabilities in key processautomation areas such as Stage-Gate‚® implementations, roadmapping and planning,and product portfolio management. The Accelerators feature built inbest-practice content and reports that allow a company to leverage Accolade inthese areas with much reduced configuration effort.In addition, we completed the majority of the effort required to transfer ourlegacy healthcare protocol management system onto the Accolade platform, andour hospital clients have now started the upgrade process. Finally, wecontinued to invest substantial resources in developing the next release ofAccolade which is due in late 2007. This release will bring a host of newfeatures to our flagship offering, enabling Sopheon to maintain its leadershipposition and expand to new markets.
As a result of the above, ‚£0.5m (2005: ‚£0.4m) of our 2006 R&D expenditure met the criteria of IAS38 for capitalization.
Operating costs
As noted in the Remuneration Report a bonus was earned by the majority of theGroup's employees in respect of the 2006 performance. This has resulted in anincrease in payroll costs relative to 2005 in all areas, with the principalexception of members of Sopheon's sales teams for whom incentives are tied toindividual or territory results.More specifically, if the effect of the capitalization and amortization of R&Dcosts is added back, we increased total R&D expenditure by ‚£0.2m. Inparticular, this reflects the formation of an internal organization that wecall RAD, short for Research & Application Development. The Group is charteredto work with clients to investigate and create new software applications builton the Accolade platform that would extend the utility and value of the coreoffering; the Accelerators described above were developed by the RAD team.Distribution costs are slightly lower than the previous year in spite of thehigher revenues. Some of this apparent reduction is attributable to thereclassification of certain employees into the RAD team; however, other thanthe bonus noted above both administrative and distribution costs remainedtightly contained. Although we do not currently plan to increase direct salesrepresentation in 2007, we do plan to raise investment in channel developmentand marketing in order to continue to drive growth.We achieved a breakeven consolidated EBITDA position (2005: ‚£0.75m loss). Thistotal reflects a deduction of share based payments of ‚£0.1m (2005: ‚£0.2m). Itexcludes depreciation and amortization charges of ‚£0.3m (2005: ‚£0.5m) for theyear. Including these items, the resultant retained loss for the year was ‚£0.3m(2005: ‚£1.2m) reducing the loss per ordinary share to 0.2p (2005: 0.9p).
Financing and balance sheet
Net assets at the end of the year stood at ‚£1.6m (2005: ‚£2m) and include ‚£0.8m(2005: ‚£0.8m) being the net book value of capitalized research and developmentarising from the application of IAS38. Cash resources at 31 December 2006amounted to ‚£1.0m (2005 - ‚£2.0m). A surge of sales at the end of the yearresulted in trade receivables of ‚£2.5m compared to ‚£1.7m at the end of 2005.
At the end of 2005 Sopheon renewed its ¢â€š¬10 million equity line of credit facility with GEM Global Yield Fund Limited until December 2007, securing continued access to a source of equity-based funding over which the Company retains a substantial degree of control. The facility was not used during 2006 and over 90% of the original equity line remains untapped.
Market
Sopheon's Accolade addresses one of the most universal challenges facingmanufacturing companies today. It is the challenge of operating research anddevelopment - traditionally a black box area of business - as a repeatableprocess, so that results can be predicted and continuously improved. Accoladeautomates the innovation process, enabling companies to strengthen thealignment between their innovation strategies and product development activity,gain a clear view of the commercial potential of projects in their portfolios,and readily access other details of product innovation initiatives in progress.Accolade belongs to a major class of software applications that concentrate onsupporting Product Life-cycle Management (PLM). These solutions help companiescreate and execute their product strategies. ARC Advisory group states that thePLM market totalled nearly $7 billion in 2005, and will nearly double to morethan $13 billion by the end of 2010. Sopheon is focused on Product PortfolioManagement (PPM) which analysts indicate is among the fastest growingsubmarkets within PLM, and they expect its exceptional rate of expansion tocontinue. While most areas of product life cycle management concentrate on theengineering or technical challenges involved in developing and managing aproduct, PPM addresses the business challenges. Analysts view PPM as astrategically critical applications area. Their research has determined thatadoption of PPM methodologies by cross-functional teams engaged in productdevelopment is critical to achieving business impact and success.Most companies have tried to build their innovation processes around commonlyused methodologies such as Stage-Gate‚®, PACE‚® and waterfall. But studies haveshown that, when companies attempt to deploy these methodologies withoutautomating them, they fail 48% of the time. Independent research has confirmedthat Accolade users have a significant edge over other companies endeavouringto implement product portfolio management processes. In late 2006, AberdeenGroup, the IT research and advisory firm, completed a benchmarking report onPPM best-practices for which they surveyed more than 150 manufacturers. Sopheonclients participating in the study ranked best-of-class in a variety of keyareas including widespread process adoption, speed of portfolio managementdecisions, meeting cost goals and hitting deadlines.In 2006 we saw considerable movement in the PLM market among both establishedsuppliers and new entrants. Many of the more established PLM vendors wereinvolved in mergers and acquisitions. We expect that this will continue in2007, as evidenced by the recent high-profile acquisition of UGS by Siemens.These changes are introducing some confusion in the marketplace, but they arealso increasing demand. These factors will continue to challenge Sopheon tosustain its position of market leadership. Our response to this challenge isthe five part strategy set out below.
Growth Strategy
Expand Within Client Base. During 2006, we received 20 license orders fromexisting customers intent on extending the use of our software across theirorganizations. This is up from 13 extension orders in 2005, further validatingthat we have a sticky application with strong growth potential inside ourclient base. The number of Accolade end-users grew by 30% in 2006 to more than27,000. This rapid escalation is traceable partly to the fact that, while earlyimplementations of Accolade were on the department level, the solution isincreasingly being deployed on an enterprise-wide scale. A number of ourcustomers are using the system throughout their global operations. Accoladeusers can now be found in 58 countries worldwide.Expand Within Target Markets.Our primary focus has been on manufacturers ofchemicals, paper and, within the consumer packaged goods sector, food &beverage producers. Sopheon signed sixteen new customers in 2006, seventy-fivepercent of which were in our target verticals. We exited the year with 87clients. In each of the markets we have targeted, our current level ofpenetration is minimal, leaving substantial room for growth. We will continueto focus on this opportunity in 2007.Expand Product.In 2006, Sopheon convened its first Product Advisory Council(PAC) sessions in both North America and Europe. The PAC group is comprised ofexecutive-level decision-makers from client companies in a mix of industries.Their input related to such areas as our product road maps and go-to-marketstrategies has been an extremely valuable input to the next major version ofAccolade, scheduled for commercialization in late 2007.In late 2006, Sopheon introduced a set of add-on applications for its Accoladesolution. Referred to collectively as Accolade Accelerators, the new offeringsare designed to enable companies to more quickly achieve the next level ofmaturity in the governance of their innovation processes and realize theassociated higher levels of business performance.In October of 2006, we announced that we would augment the current use ofMicrosoft tools within Accolade by integrating the software system withMicrosoft Office Project Server 2007. Adoption of the Microsoft product willbroaden and deepen aspects of Accolade's capacity to provide governance supportfor the product innovation process.Expand to New Markets. Throughout its history, Sopheon has made ongoing,nominal investments in select new markets as a way of evaluating opportunitiesto leverage existing technologies and drive additional business growth. In2006, Sopheon announced its expansion into non-food & beverage areas of the CPG(Consumer Packaged Goods) market. Today we have a growing client base in thisvertical, illustrated by such industry leaders as Electrolux, FreudenbergHousehold Products, Nautilus, Reckitt Benckiser, and Timex. These customersinclude several CPG companies that operate in light discrete manufacturing. Ourinitial experiences in discrete will dictate the level of investment and effortwe undertake towards growing in the large discrete manufacturing market - whichincludes the auto, defence and aerospace industries. Leveraging ourpartnerships will be critical to achieving our longer term goals in this area,and we were delighted to announce our first major automobile customer, securedin collaboration with Hewlett-Packard.Sopheon continues to support its historic position as a supplier to thehealthcare protocol market. Our Qualiflow‚® technology is used by healthcareinstitutions to provide doctors, nurses and other medical practitioners withprocedural guidelines at the point of care. Conversion of the Qualiflowsolution to operate on the Accolade platform is expected to be completed in2007. Expansion of our protocol management market activity is on hold untilthis platform transition has been proven successful. Sopheon will thenreaddress its strategies for growing this aspect of our business.
Expand Partnerships.Sopheon remains committed to growing its business through partnerships. We also know that it takes time and investment to develop a strong network of partners that can add value to the Company.
The Microsoft Office Project 2007 integration initiative is the latest advancein a continuing strategic alliance between Sopheon and Microsoft. Since itsinception, Sopheon's Accolade software has incorporated Microsoft products suchas Microsoft Office Project Server and other components of the Microsoft Officesystem, focusing the capabilities of these horizontal platforms on helpingmanufacturers increase the business impact of new product innovation. Based onthe strength and success of Sopheon's business application, the alliancebetween Sopheon and Microsoft has steadily grown. Sopheon has earnedMicrosoft's designation as a Gold Certified and "managed" partner.In 2006, we concentrated on working with existing reseller partners to deepentheir knowledge and understanding of our value proposition, the dynamics of ourmarkets and the capabilities of our product offerings. Partner relationshipsresulted in Sopheon's signing its first clients in Israel, New Zealand,Portugal and Sweden, providing a critical foundation of local references tosupport expansion in these nascent sales territories. We were also active withour consulting partners, working together on a number of Accoladeimplementations in the U.S. and Europe. We expect 2007 to be a year of furthercollaboration and business development efforts with our partners. Plans callfor a continued focus on our existing network, as well as the addition of asmall number of new members.
People
Our ability to deliver value to our customers is a testament to Sopheon people in all parts of our company, many of whom have been working tirelessly for several years to build the business we have today. We thank them for their contribution to our growing success.
Sopheon's executive management team has also been in place for several yearsand comprises a team of five, which includes the three executive directorsbeing Barry Mence the chairman, Andy Michuda the CEO and Arif Karimjee the CFO,in addition to Paul Heller our CTO and Huub Rutten our head of research. TheSopheon plc board includes the three executive directors, in addition to ourthree non-executive directors Stuart Silcock, Dan Metzger and Bernard Al whobring a wealth of knowledge and experience to our business.
Outlook
With the achievement of a breakeven EBITDA result, our business crossed afinancial milestone during 2006. As we approach the next milestone of 100licensees for our software, the scale and maturity for which we have beenstriving since the launch of Accolade six years ago is, we believe, finallycoming through. This is contributing both to rising revenue stability, and torising market recognition. As set out in more detail above, we will build onour achievements by attending to five key areas: * Secure more business from our existing customer base * Extend our hold in established chemicals, materials, food and beverage markets * Expand the Accolade product in depth, functionality, integration and scalability * Enter new vertical markets * Develop and expand our partner network In addition, we will carefully consider potential acquisitions that offer bothstrategic and operational benefits. As always, we recognize the need both todrive Sopheon forward strategically, and to stay focused on financialperformance. This challenge will continue to shape our thinking in the excitingtimes ahead. SOPHEON PLC CONSOLIDATED INCOME STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2006 2006 2005 ‚£'000 ‚£'000
Turnover - continuing activities 6,045 4,664
Cost of sales (1,690) (1,264) Gross profit 4,355 3,400 Distribution expenses 2,401 2,473
Research and development expenses 1,028 974
Administrative expenses 1,232 1,175 Operating loss (306) (1,222) Investment revenue 39 53 Finance costs (36) (67)
Loss on ordinary activities before taxation (303) (1,236)
Retained loss for the year (303) (1,236)
Loss per share - basic and diluted (0.2p) (0.9p)
EBITDA 33 (746) CONSOLIDATEDSTATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 31 DECEMBER 2006 2006 2005 ‚£'000 ‚£'000
Exchange difference on translation of foreign 133 86
operations
Net income/(expense) recognised directly in equity 133 86
Loss for the financial year (303) (1,236)
Total recognised income and expense for the year (436) (1,150) (all attributable to members of the parent company) SOPHEON PLC CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2006 2006 2005 ‚£'000 ‚£'000 Non-current assets Property, plant and equipment 110 101 Intangible assets 848 764 Non-current receivables 10 10 968 875 Current assets Trade and other receivables 2,484 1,741 Cash and cash equivalents 1,034 1,970 3,518 3,711 Total assets 4,486 4,586 Current liabilities Short term borrowings 414 370 Trade and other payables 2,444 2,253
Obligations under finance leases 8 12
2,866 2,635 Net assets 1,620 1,951 Equity and reserves Share capital 6,679 6,665 Other reserves 72,827 72,931
Profit and loss account and translation reserve (77,886) (77,645) Total equity (all attributable to equity holders of 1,620 1,951 the parent company) CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2006 2006 2005 ‚£'000 ‚£'000 Loss for the year (303) (1,236)
Adjustments for non-cash and similar items 397 623
Movements in working capital (596) 465 Tax and interest costs (36) 14
Net cash outflow from operating activities (538) (134)
Investing activities (510) (416) Financing activities 131 1,298
(Decrease)/Increase in cash and cash equivalents (917) 748
NOTES1. Basis of preparationThe financial statements have been prepared in accordance with InternationalFinancial Reporting Standards and Interpretations issued by the InternationalAccounting Standards Board as adopted by the European Union and those parts ofthe Companies Act 1985 which apply to companies preparing their financialstatements under IFRS. Accounting policies have been applied consistently toall the years presented, and on the going concern basis.
2. Going concern.
In 2006 the Group's revenues from continuing operations were ‚£6.0 million andit achieved a breakeven financial result on an EBITDA (earnings beforeinterest, tax, depreciation and amortization) basis. This represented growth of30% over the prior year. At the year end the Group reported consolidated netassets of ‚£1.6 million and gross cash resources of ‚£1 million. The Group hasaccess to a $1 million (‚£583,000) bank line of credit with Silicon Valley Bank,which is secured against the trade debtors of Sopheon Corporation Minnesota. At31 December 2006, $800,000 (‚£409,000) was drawn against this facility. Thefacilities with Silicon Valley Bank have been in place since 1999, and arerenewable annually.The directors remain positive about the direction, focus and momentum of thebusiness and believe that this, together with the Group's existing resourcesprovide it with adequate funding to support its activities through to the pointat which they anticipate that trading will become cash generative on asustained basis. This is in turn dependent on the Group delivering substantialsales growth.Should this not be the case, Sopheon continues to have access to its equityline of credit facility from GEM Global Yield Fund Limited ("GEM") for anaggregate of ¢â€š¬10 million. At the end of 2005, the facility was renewed for afurther two year term expiring in December 2007. GEM's obligation to subscribefor shares is subject to certain conditions linked to the prevailing tradingvolumes and prices of Sopheon shares on the Euronext stock exchange. To dateSopheon has made just one call on the equity line of credit facility, raisingunder ¢â€š¬1 million in March 2004, leaving over ¢â€š¬9 million (‚£6 million) available.While uncertainties remain as to the achievement of the expected sales growthand the continued availability of facilities, the directors believe thattogether, these factors enable the Group to continue as a going concern for theforeseeable future. The financial statements do not include the adjustmentsthat would be required if the Group were unable to continue as a going concern.
3. Annual Report
The abridged financial information set out herein has been extracted fromfinancial statements approved by the directors on 29 March 2007, and which willbe delivered to the Registrar of Companies following the Company's annualgeneral meeting. The auditors have issued an unqualified audit report, butconsistent with prior years, have drawn attention to the uncertainty over goingconcern. This financial information does not constitute statutory accounts asdefined in section 240 of the Companies Act 1985 and has been prepared on thebasis of the accounting policies set out in the financial statements for theyear ended 31 December 2005. The Annual Report and Financial Statements will beposted to shareholders shortly and thereafter will be available from theCompany's registered office at 40 Occam Road, Surrey Research Park, Guildford,Surrey GU2 7YG.NOTES
4. Principal Accounting Policies
Basis of consolidation
The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company ("subsidiaries"). Control isachieved where the Company has the power to govern the financial and operatingpolicies of an entity and to obtain benefits from its activities. Allintra-group transactions, balances, income and expenses are eliminated onconsolidation.
Revenue recognition
Revenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided inthe normal course of business, net of discounts and sales related taxes. Salesof software products are recognised on delivery, and when no significant vendorobligations remain. Revenues relating to maintenance and post contract supportagreements are deferred and recognised over the period of the agreements.Revenues from implementation and consultancy services are recognised as theservices are performed, or in the case of milestone based or long termcontracts, recognised on a percentage basis as the work is completed and anyrelevant milestones are met, using latest estimates to determine the expectedduration and cost of the project.
Leases
Assets held under finance leases are recognised as assets of the Group at theirfair value at the inception of the lease or, if lower, at the net present valueof the minimum lease payments. The corresponding liability to the lessor isincluded in the balance sheet as a finance lease obligation. Lease payments areapportioned between finance charges and reduction of the lease obligation so asto achieve a constant rate of interest on the remaining balance of theliability. Finance charges are charged to profit or loss. Rentals payable underoperating leases are charged to profit or loss on a straight-line basis overthe term of the relevant lease.
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.
Treatment of foreign currencies for consolidation
For the purpose of the consolidated financial statements, the results andfinancial position of each entity are expressed in sterling, which is thefunctional currency of the parent company, and the presentation currency forthe consolidated financial statements. The assets and liabilities of theGroup's foreign operations (including comparatives) are expressed in sterlingusing exchange rates prevailing on the balance sheet date. Income and expenseitems (including comparatives) are translated at the average exchange rates forthe period. Exchange differences arising (including exchange differences onintra-group loans) are classified as equity and transferred to the Group'stranslation reserve. Such translation differences are recognised in profit orloss in the period in which the foreign operation is disposed of.
Deferred taxation
Deferred tax is recognised on differences between the carrying amounts ofassets and liabilities in the financial statements and the corresponding taxbases used in the computation of taxable profit, and is accounted for using thebalance sheet liability method. Deferred tax liabilities are generallyrecognised for all taxable temporary differences, but deferred tax assets arerecognised only to the extent that it is probable that taxable profits will beavailable against which deductible temporary differences can be utilised.Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised. Deferred tax ischarged or credited to profit or loss, except when it relates to items chargedor credited directly to equity, in which case the deferred tax is also dealtwith in equity.NOTES
4. Principal Accounting Policies (continued)
Property, plant and equipment
Computer equipment and fixtures and fittings are stated at cost lessaccumulated depreciation and any accumulated impairment losses. Depreciation ischarged so as to write off the costs of assets over their estimated usefullives, using the straight-line method. Assets held under finance leases aredepreciated 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 arisingon the disposal or retirement of an item of property, plant and equipment isdetermined as the difference between the sale proceeds and the carrying amountof the asset and is recognised in profit or loss.
Intangible assets - research and developmentexpenditure
Development expenditure on internally developed software products is capitalised 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
Capitalised development costs are amortized over the period over which the Group expects to benefit from selling the product developed. Development costs not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in profit or loss as incurred.
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 theeffect of non-market-based vesting conditions) at the date of grant. The fairvalue determined at the date of grant is expensed on a straight-line basis overthe vesting period, based on the Group's estimate of the shares that willeventually vest and adjusted for the effect of non-market-based vestingconditions. Fair value is measured by the binomial option-pricing model. Theexpected life used in the model had been adjusted, based on management's bestestimate, for the effects of non-transferability, exercise restrictions andbehavioral considerations.
NOTES
5. Turnover
All of the Group's revenue in respect of the years ended 31 December 2006 and2005 derived from continuing operations and from the Group's single businesssegment, the design, development and marketing of software products withassociated implementation and consultancy services.
6. Share based payments
In accordance with IFRS2 Share basedPayments, an option pricing model has beenused to work out the fair value of share options granted since November 2002,with this value being charged to the profit and loss account over the expectedvesting period and leading to a charge of ‚£62,000 (2005: ‚£143,000).
7. Earnings per share
The calculation of basic loss per ordinary share is based on a loss of ‚£303,000(2005: ‚£1,236,000), and on 133,441,000 (2005: 131,059,000) ordinary shares,being the weighted average number of ordinary shares in issue during the year.The effect of all potential ordinary shares is antidilutive.
8. EBITDA
EBITDA is defined as earnings before interest, tax, depreciation andamortization and can be arrived at by adding back depreciation and amortizationcharges amounting to ‚£339,000 (2005: ‚£476,000) to the operating loss of ‚£306,000 (2005: ‚£1,222,000).9. Intangible Assets
In accordance with IAS 38Intangible Assets, certain development expendituremust be capitalised and amortised based on detailed technical criteria, ratherthan automatically charging such costs in the profit and loss account as theyarise. This has led to the capitalization of ‚£495,000 (2005: ‚£427,000), andamortization of ‚£305,000 (2005: ‚£392,000) during the year.
10. Obligations under finance leases
Obligations under finance leases include ‚£5,000 (2005: ‚£9,000) relating to amounts due in more than one year.
11. Cautionary Statement
Sopheon has made forward-looking statements in this press release, includingstatements about the market for and benefits of its products and services;financial results; product development plans; the potential benefits ofbusiness relationships with third parties and business strategies. Thesestatements about future events are subject to risks and uncertainties thatcould cause Sopheon's actual results to differ materially from those that mightbe inferred from the forward-looking statements. Sopheon can make no assurancethat any forward-looking statements will prove correct.
SOPHEON PLCRelated Shares:
SPE.L