SPE.L Regulatory News (SPE)

18 Apr 2006 07:00

Embargoed Release: 07:00hrs Tuesday 18th 2006 SOPHEON PLC PRELIMINARY AUDITED RESULTS FOR THE YEAR TO 31 DECEMBER 2005 Sopheon plc ("Sopheon"), the international provider of software and servicesthat improve the financial return from innovation and product developmentinvestments, announces its results for the year ended 31 December 2005 togetherwith an outlook for the current year. Sopheon shares are traded on AIM inLondon and on the Euronext Amsterdam. These results and the 2004 comparativesare reported under International Financial Reporting Standards (IFRS). Areasmaterially affected by this change from the group's former UK GAAP policies arethe requirement to expense share option grants, and to capitalise and amortizecertain software development costs.Highlights: * Revenue for the year was ‚£4.7m (2004: ‚£4.3m) and the EBITDA loss for the year was ‚£0.7m (2004: ‚£1.2m). * Sixteen new customers were added in the year, with 13 extension orders from existing customers. By year end there were 70 companies throughout the world that had licensed our software, and the total number of individual users from within those organizations surpassed 20,000. * Version 6.0 of our market leading Accolade suite was released, equipping our solution with further extensive integration to Microsoft Office and Microsoft Project Server applications. Accolade now supports ten languages including Japanese and Korean. * The recurring contract base on entry to 2006 represented ‚£1.4m of revenue. Revenue visibility for the first half of 2006 stands at ‚£2.2m which is already ahead of the ‚£1.9m reported for the first half of 2005. Visibility includes a substantial imminent order, resulting from a successful pilot that has converted to an enterprise-wide deployment, for which all required internal investment approvals have now been secured. * In addition to raising ‚£1m of new equity, Sopheon completed the full conversion of its convertible loan note, and renewed the group's ¢â€š¬10m equity line facility with GEM Global Yield Fund through December 2007. Sopheon's Chairman, Barry Mence said: "Two thousand and five was another growthyear for Sopheon. But we were dissatisfied with key aspects of our performanceand, in particular, with our failure to achieve profitability. We haveimplemented changesin a range of areas. These actions build on the business andproduct strengths that have underpinned our growth, and areaimed at drivingfaster expansion of revenues and improved margins. The benefits of thesechangesare already in evidence, and we shall maintain our efforts to create more valuefor our shareholders."For further information contact:Barry Mence, Chairman Sopheon plc Tel : + 44 (0) 1483 685 735 Arif Karimjee, CFO Adam Reynolds Hansard Communications Tel : + 44 (0) 207 245 1100 Andrew Tan + 44 (0) 7957 203 685 Floor van Maaren Citigate First Financial Tel : + 31 (0) 205 754 010About SopheonSopheon (LSE:SPE) 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.IntroductionSopheon's consolidated turnover for 2005 grew to ‚£4.7m from ‚£4.3m the yearbefore. We closed 29 license orders and extensions, taking the total number oflicensed customers to 70. Full-year revenues were 8% higher than 2004. We fellshort of our goal of achieving profitability. Our EBITDA losses were ‚£0.7mwhich represents a 40% improvement over 2004 under International FinancialReporting Standards ("IFRS").During the year we released version 6.0 of our market leading Accolade suite, alandmark release, equipping our solution with extensive integration toMicrosoft Office and Microsoft Project Server applications. We also broughttighter focus to our product portfolio during 2005, initiating steps to convertour legacy healthcare solutions onto the Accolade platform. This initiative isscheduled to be completed in June of this year. In the final quarter of 2005 wealso divested Lessenger, the small-scale lab software business in theNetherlands for net proceeds of approximately ‚£0.07m. Late in the year wereceived new market affirmation from IDC, a global IT research and advisoryfirm, which credited Sopheon with first-mover status for our actions tocapitalize on the convergence of the product life cycle management andportfolio management markets.On the corporate front, we completed the full conversion of the group'sconvertible loan note, and renewed the group's ¢â€š¬10m equity line facility withGEM Global Yield Fund through December 2007. We also secured ‚£1m of new equityfunds in May, through a placing of 4.4m shares.In 2005 we announced our decision to adopt IFRS, in part due to the increasingimportance of the group's shareholders that trade through Euronext. InSopheon's case, the key areas of impact are the expensing of share optiongrants, and the capitalisation and amortization of software development costs.Further details of the principal financial effect of these changes are providedin the notes.ResultsSopheon's consolidated turnover grew to ‚£4.7m (2004: ‚£4.3m). This overallresult included a strong new sales performance by our US territory, which grewrevenues by 35% in the year, offset by a weaker outcome in Europe. Almost 60%of our 2005 revenues were from our US operations, up from approximately 45% in2004. This resulted in 8% annual growth for the business as a whole. Thisperformance was made up of two very different six month periods from a resultsstandpoint. Revenues fell 10% in the first half of the year as the organizationfocused on delivering on the record sales in the second half of 2004 andrefilled the sales pipeline. This effort set the stage for 45% growth in thesecond half of 2005, as sales momentum returned to the business. To put this incontext, since the launch of Accolade five years ago, Sopheon has grown coredollar based revenues at an annual average of 50%.In our interim statement we noted a growing proportion of larger salesopportunities which have the potential to generate revenue volatility, but alsosignificant growth. Of the seven such opportunities referred to in our 2005interim statement, one was put on hold, three closed with license orders duringthe period, and the remaining three engaged us in extensive services activityduring 2005.These factors, together with the large license orders secured at the end of2004 which pulled through implementation services in 2005, led to a shift inour revenue mix to 40:25:35 license, maintenance and consulting servicesrespectively (2004: 60:20:20). We believe this shift is a result of the timingof contract signatures across fiscal years. Accordingly, we expect thatlicenses will make up a larger proportion of 2006 revenues and that ourbusiness mix will return to one in which license is more predominant. Asubstantial part of this expectation is linked to customers that purchasedservices from Sopheon last year, and which are now converting to license.Coming into 2006, this represented of the order of ‚£2m of potential newbusiness. Thanks in part to this conversion activity since the year end, ourrevenue visibility for the first half of 2006 is now ‚£2.2m. We definevisibility for a period as being the total of (i) license orders includingthose which are contracted but conditional on acceptance decisions scheduledduring the period; (ii) contracted services business expected to be deliveredin the period; and (iii) recurring maintenance streams. Visibility quoted inthis report also includes a substantial imminent order arising from asuccessful pilot, which has been extended into an enterprise-wide licensedeployment. All of the customer's required internal approvals for theinvestment have been secured, and contract signature is expected in the veryshort term. However, visibility does not include other potential license salesto customers who have commissioned a proof of concept or who have verballyindicated a decision to move forward.Our recurring revenue base has also continued to grow. As a result, we entered2006 with ‚£1.4m of ongoing maintenance and hosting contracts compared to ‚£1m atthe start of 2005.As we signaled at the interim stage last year, the higher proportion ofservices in our revenue mix required us to make extensive use of subcontractorpartners such as Tata Consulting Services ("TCS"). The cost of thissubcontractor activity reduced our gross margins from 77% to 73%. Although weare increasing in-house resources to strengthen our ability to deliver largeinternational implementations, we expect to continue to work with partners as away of deepening market awareness of Accolade and continuing to ensure ourcapacity to meet customer service demand throughout the world.In 2005, we implemented an expansion in R&D resources at our Denver developmentcenter and, with assistance from Microsoft and TCS, were able to devotespecific resources to the landmark release of Accolade 6.0. Accordingly, ‚£0.4m(2004: ‚£0.1m) of our 2005 R&D expenditure met the criteria of IAS38 forcapitalization.The consolidated EBITDA loss was ‚£0.7m (2004: ‚£1.2m). This total reflects adeduction of share based payments of ‚£0.1m (2004: ‚£0.1m). It excludesamortization charges of ‚£0.4m (2004: ‚£0.8m, of which ‚£0.5m relates to acquiredintangible assets which are now fully amortized, and ‚£0.3m relates to R&D) forthe year, and net interest costs of ‚£0.01m (2004: ‚£0.3m). Including theseitems, the resultant retained loss for the year was ‚£1.2m (2004: ‚£2.3m)reducing the loss per ordinary share to 0.9p (2004: 2.0p).Financingand Balance SheetNet assets have remained steady at ‚£2m (2004: ‚£2m) and include ‚£0.8m (2004: ‚£0.7m) being the net book value of capitalized research and development arisingfrom the application of IAS38. Cash resources at 31 December 2005 amounted to ‚£2m (2004 - ‚£1.2m). Approximately ‚£0.2m of the increase over 2004 was due to anincrease in Sopheon's short-term facilities.During 2005 Sopheon renegotiated its convertible loan instrument. This led tofull conversion into equity by the end of the year, eliminating all non-currentdebt.At the end of the year Sopheon also renewed its ¢â€š¬10 million equity line ofcredit facility with GEM Global Yield Fund Limited until December 2007,securing access to a source of equity-based funding over which the companyretains a substantial degree of control. Over 90% of the equity line facilityremains untapped.In May 2005 Sopheon concluded a placing of 4.4m shares for ‚£1m in cash, tobring greater strength to the balance sheet, and to position the business totake timely advantage of possible new opportunities for business expansion.MarketSopheon's Accolade belongs to a major class of software applications calledproduct life cycle management (PLM). Business analysts have placed Sopheon'sAccolade in a sub-class within PLM called product portfolio management (PPM)solutions. The focus of these applications is to help companies make betterdecisions in the management of their portfolios of products. This categoryrepresents only one aspect of what our Accolade system does.In 2005, Sopheon noted the start of a shift of major PLM suppliers in matureapplications such as product data management which began to shift theirattention toward promising, emerging submarkets. A number of these traditionalPLM suppliers have stated they intend to take advantage of the marketopportunity in product portfolio management. Their movement will change thecompetitive landscape for Sopheon, and is likely to confuse the market.However, we also believe that the emergence of additional providers of productportfolio management solutions will create increased demand for innovationprocess automation, Sopheon's core solution. We expect this to result in moresales opportunities for Sopheon and an accelerated transition in the overallmaturity of our market from the early adopter stage it is currently in to widermarket acceptance. We had anticipated seeing early advances in this transitionduring 2005. It didn't happen. We continue to anticipate a market shift.Important third-party affirmation of our view of market convergence trends camelate in 2005 in the form of a report from the global IT market research firm,IDC. IDC analysts cited Sopheon as one of the first to recognize theconvergence taking place between product life cycle management and portfoliomanagement, and credited the company with being a first-mover in takingbusiness advantage of the trend. This recognition specifically highlighted thestrategic value of Sopheon's 2005 decision to integrate its Accolade solutionwith Microsoft technology to provide a unique, highly beneficial answer forcompanies needing both innovation process automation and traditional projectmanagement capabilities in one application.In 2005, Sopheon strengthened its market-share position in targeted verticalindustries. We continued to focus on manufacturers of chemicals, papers andfoods & beverages. Sixteen new customers were added, and we received 13extension orders from existing customers. There are now 70 companies throughoutthe world licensing our Accolade software. The total number of individual usersfrom within those organizations has now surpassed 20,000. A principal reasonfor the recent rapid rise in user counts is that in the past year Accolade hastransitioned from a departmental-level solution to an enterprise application. Anumber of our customers have deployed our system throughout their globaloperations. Accolade is now being used in 48 countries worldwide.Forty-one percent of our revenue in 2005 came from existing clients. We seeadditional potential for growth from within our client base in 2006. We willalso leverage current Accolade users as part of our strategies for signing newclients.We continue to support our historic position as a supplier to the healthcareprotocol market. Our technology is used by healthcare institutions to providedoctors, nurses and other medical practitioners with procedural guidelines atthe point of care. A project to convert the code base for our healthcaresolutions to the Accolade platform is scheduled to be completed in 2006, andexpansion of our protocol management market activity is on hold until thisplatform transition has been proven successful. We will then readdressstrategies for growing this aspect of our business.In 2005 Sopheon announced compliance management software, endorsed by Boeingand Airbus, for the implementation of radio frequency identification (RFID)technology in commercial airplanes. This project, while still active, has beenslow to move commercially. Our 2006 plans call for minimal business growth fromthis initiative.PartnershipsSopheon is committed to growing its business through partnerships. We also knowthat it takes time and investment to develop a strong network of partners thatcan add value to the company. In 2005 we hired a Director of BusinessDevelopment to focus on bringing together a global partner network.2005 was spent working with existing partners to deepen their knowledge andunderstanding of our value proposition, the dynamics of our markets and thecapabilities of our product offerings. We were particularly active with ourconsultingpartners such as TCS who we engaged in a number of Accoladeimplementations throughout 2005. Most of this activity is in North America. Inaddition to our ongoing relationship with new product management expert RobertCooper and his PDI/SGI organization, we have advanced our outreach andrelationship efforts with a select number of new business-management consultingpartners, with whom we are working to develop the market for innovation-processautomation globally. These relationships are in their early stages, and we planto spend more time and energy on building them in 2006 as a prerequisite togenerating meaningful business results. A handful of sales opportunities werebrought forward by these partners in 2005 and continue to be active in oursales funnels. We expect an increase in lead activity and sales contracts fromthis segment in 2006.While we had hoped for more Accolade sales in 2005 through our partner networkthan were achieved, several resellers have now experienced their first salesand all network participants continue to demonstrate a strong commitment torepresenting Accolade. We now have reseller partners signed up in France,Germany, Portugal, Australasia, Korea and South Africa. Sopheon held a globalkick-off meeting with our resellers in February of 2006 and we were pleasedwith the continued commitment and growing knowledge of our market and productexhibited by those in attendance. Further developing and supporting thecapabilities of this network will be a strategic priority in 2006.Sopheon continues to build on its active strategic partnership with Microsoftwith a strong focus on technology development and integration. Sopheon has beenselected as a member of the Partner Advisory Council (PAC) for Microsoft's EPMproject server product line. Through our participation, we receive advancelooks at Microsoft technology developments and have the opportunity toinfluence product direction and strategy. At the moment there is significantplanning activity around the much anticipated release of Microsoft Office 2007,expected in late 2006.ProductIn 2005 Sopheon introduced Version 6.0 of its Accolade solution. It featuressuch enhancements as support for expanded reporting capabilities and advancedintegration with Microsoft technology. It also includes a mix of features thatautomate and facilitate the reuse of information throughout the productinnovation process. Accolade 6.0 embodies our strategy of integratingconverging PLM sub-markets: product portfolio management, including automationof the product development process, and project management. The creation of 6.0was made possible by our strategic relationship with Microsoft and wasaccomplished through the integration of MS Project Server with Accolade.Microsoft has stated that it is excited about its partnership with Sopheonbecause it has resulted in an application that uniquely and effectively focusesMicrosoft technology on the critical front-end of the product developmentprocess and the challenge of product innovation. In addition, Version 6.0supports ten languages including Japanese and Korean. This will be a keyenabler in our strategies for supporting enterprise-wide adoption of Accoladeby global clients, and for entering new international markets.Most of Sopheon's clients have already upgraded to 6.0. This was accomplishedwith minimal disruption or delay for the adopting organizations. The efficiencyof this transition was a direct result of the high quality of our developmentand commercial software code, a core competitive advantage.Sopheon's technology platform design capabilities place us in a unique positionto take advantage of opportunities in new markets. In 2005 we created aninternal organization called RAD (Research & Application Development) charteredto create new applications that leverage the strength of the Accolade platformbut don't require investment in the creation of product code. We have alreadyimplemented initial prototypes of this concept. We expect RAD to generate newsources of revenue for the first time in 2006, with momentum building into2007.Recent Change InitiativesSince its launch five years ago, Accolade has established itself as a marketleading solution that has helped Sopheon to grow core dollar revenues at anannual average of 50%. By most measures, we have come a long distance in ashort time. And as our financial results show, we continued to grow in 2005.That said, we were dissatisfied with our 2005 performance and, in particular,with our failure to achieve profitability. We have consequently initiated aprocess of change that is affecting key aspects of our business and is designedto help us to increase our growth, gain profitability and create more value forour shareholders.Much of this change was initiated in 2005, and has been described earlier inthis communication. More needs to be done, but we are encouraged by ourprogress. For instance, we have taken steps to change the way we evolve ourproduct lines, allowing us to further leverage core technology assets andaccelerate our expansion into new markets. We have made organizational changesthat will enable us to grow and manage our indirect sales channels moreeffectively. We expect these adjustments to begin paying dividends in 2006 byproducing more sales through our partner network. We have further invested invertical marketing with the recent hiring of a senior sales executive who isfocused on selling to the manufacturers of consumer packaged goods. We believethis specialization model has the potential to increase sales-cycle efficiencyand accelerate our penetration of select industry segments. We have made keyhires to expand the capacity of our implementation services, changes that willnot only enable us to more tightly control the speed and quality of servicedelivery but improve margins on this critical aspect of our businessoperations.OutlookOur internal efforts are intended to ensure continued advances in our businessperformance. However, we expect that our growth will be further supported by ananticipated step-change in activity within our target markets. This belief isunderpinned by such leading indicators as the scale of our recent enterprisedeployments, and the increased attention to our market by traditional suppliersof product life cycle management solutions. We anticipate that the movement ofthese suppliers toward our space will have the additional effect of confusingthe market and that we will have to continue to deal with new competitors.Our approach to evolving the business continues to be one of steady preparationand planning so that we are ready when the market accelerates. We believe thatour early success in attracting global industry leaders as clients, our maturebest-practice content, and our dedicated focus on strengthening the businessprocess of product innovation as a prerequisite to improving decision-makingwill continue to differentiate our solution and create barriers to competition.Maintaining our position of market leadership requires a material level ofongoing investment, while keeping costs under control. Meanwhile, we expect ourinconsistent revenue performance to continue until Sopheon grows to a moremature level of business and the influence of individual transactions recedes.This pattern has persisted in the first months of 2006 which have beendominated by a small number of large new license opportunities, combined withcontinued growth in our services business. That said, with over two months togo before the end of the period, our revenue visibility for the first half of2006 stands at ‚£2.2m, already ahead of the ‚£1.9m reported for the first half oflast year.We know what we have to do, and believe that Sopheon is on the right track. Wecontinue to look to the future with optimism.SOPHEON PLC CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 2005 2004 ‚£'000 ‚£'000 as restated Turnover - continuing and discontinued activities 4,664 4,323 Cost of sales (1,264) (993) Gross profit 3,400 3,330 Distribution expenses 2,473 2,591 Research and development expenses 974 1,145 Administrative expenses 1,175 1,723 Operating loss (1,222) (2,129) Investment revenue 53 83 Finance costs (67) (348) Loss on ordinary activities before taxation (1,236) (2,394) Taxation - research and development tax credit - 143 Retained loss for the year (1,236) (2,251) Loss per share - basic and diluted (0.9p) (2.0p) EBITDA loss (746) (1,189) CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 31 DECEMBER 2005 2005 2004 ‚£'000 ‚£'000 as restated Exchange difference on translation of foreign 86 (117)operations Net income/(expense) recognised directly in equity 86 (117) Loss for the financial year (1,236) (2,251) Total recognised income and expensefor the year(all (1,150) (2,368)attributable to members of the parent company) SOPHEON PLC CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2005 2005 2004 ‚£'000 ‚£'000 as restated Non-current assets Property, plant and equipment 101 110 Intangible assets 764 651 Non-current receivables 10 9 875 770 Current assets Trade and other receivables 1,741 1,892 Cash and cash equivalents 1,970 1,211 3,711 3,103 Total assets 4,586 3,873 Current liabilities Short term borrowings 370 129 Trade and other payables 2,253 1,855 Obligations under finance leases 12 - 2,635 1,984 Netassets 1,951 1,889 Equityand reserves Share capital 6,665 5,794 Shares to be issued - 1,509 Share premium account and other reserves 72,931 71,182 Profit and loss account and translation reserve (77,645) (76,596) Total equity (all attributable to members of the 1,951 1,889parent company) CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 2005 2004 ‚£'000 ‚£'000 as restated Loss for the year (1,236) (2,251) Adjustments for non-cash items 623 1,193 Movements in working capital 465 (670) Tax and interest payments and receipts 14 (286) Net cash outflow from operating activities (134) (2,014) Investing activities (416) (44) Financing activities 1,298 2,381 Increase/(decrease) in cash and cash equivalents 748 323NOTES1. Basis of preparationThe financial statements have been prepared in accordance with InternationalFinancial Reporting Standards and Interpretations issued by the InternationalAccounting Standards Board and those parts of the Companies Act 1985 whichapply to companies preparing their financial statements under IFRS. Theprincipal accounting policies are set out below. The policies have been appliedconsistently to all the years presented, and on the going concern basis.In 2005 the group's revenues from continuing operations grew to ‚£4.7 millionand its total losses on an EBITDA (earnings before interest, tax, depreciationand amortisation) basis fell to ‚£0.7 million. At the year end the groupreported consolidated net assets of ‚£2 million and gross cash resources of ‚£2million. The group has access to a $1 million (‚£583,000) bank line of creditwith Silicon Valley Bank, which is secured against the trade debtors of SopheonCorporation Minnesota. At 31 December 2004, $622,000 (‚£362,000) was drawnagainst this facility. The facilities with Silicon Valley Bank have been inplace since 1999, and are renewable annually in October.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. The facility has just been renewed for a further twoyear term expiring in December 2007. GEM's obligation to subscribe for sharesis subject to certain conditions linked to the prevailing trading volumes andprices of Sopheon shares on the Euronext stock exchange. To date Sopheon hasmade one call on the equity line of credit facility, raising just under ¢â€š¬1million in March 2004, leaving ¢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 information does not include the adjustmentsthat would be required if the company or group were unable to continue as agoing concern.2. Annual ReportThe abridged financial information set out herein has been extracted fromfinancial statements approved by the directors on 13 April 2006, 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. The financial information does not constitute statutory accounts asdefined in section 240 of the Companies Act 1985. The Annual Report andFinancial Statements will be posted to shareholders shortly and thereafter willbe available from the Company's registered office at 40 Occam Road, SurreyResearch Park, Guildford, Surrey GU2 7YG.NOTES3. Principal Accounting PoliciesAdoption of International Financial Reporting StandardsThe adoption of IFRS has resulted in changes to the group's accounting policiesin the following areas that have materially affected, compared to the group'sformer UK GAAP policies, the amounts reported in the current and prior year: i. Under IFRS2, an option pricing model has been used 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 expected vesting period and leading to a charge of ‚£132,000 in 2004 and ‚£143,000 in 2005; and ii. Under IAS 38, certain research and development ("R&D") expenditure must be capitalised and amortised based on detailed technical criteria, rather than automatically charging such costs in the profit and loss account as they arise and this has led to the capitalisation of ‚£85,000 in 2004, and ‚£ 427,000 in 2005, with amortisation of ‚£340,000 and ‚£392,000 respectively being charged in each year. This change also increases Sopheon's net assets in each year by ‚£651,000 and ‚£764,000 respectively. The treatment and reporting of Sopheon's revenues have consistently applied theprinciples of AICPA SOP 97-2, which is considered to be best practice in thesoftware industry. These principles are not affected by the adoption of IFRS.Revenue recognitionRevenue 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 from implementation and consultancy services arerecognised as the services are performed. Revenues relating to maintenance andpost contract support agreements are deferred and recognised over the period ofthe agreements. Revenues and associated costs under long term contracts arerecognised on a percentage basis as the work is completed and any relevantmilestones are met, using latest estimates to determine the expected durationand cost of the project.Property, plant and equipmentComputer 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.Share based paymentsThe 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 andbehavioural considerations.NOTES3. Principal Accounting Policies (continued)Research and developmentIn accordance with IAS 38, development expenditure on internally developedsoftware 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 amortised over four years. Development costsnot satisfying the above criteria, and expenditure on the research phase ofinternal projects, are recognised in profit or loss as incurred.Deferred taxationDeferred 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.Treatment of foreign currenciesfor consolidationFor the purpose of presenting consolidated financial statements the assets andliabilities of the group's foreign operations (including comparatives) areexpressed in sterling using exchange rates prevailing on the balance sheetdate. Income and expense items (including comparatives) are translated at theaverage exchange rates for the period. Exchange differences arising (includingexchange differences on intra-group loans) are classified as equity andtransferred to the group's translation reserve. Such translation differencesare recognised in profit or loss in the period in which the foreign operationis disposed of.Retirement benefit costsPayments to defined contribution retirement benefit plans are charged as anexpense as they fall due. The group does not operate any defined benefitretirement benefit plans.LeasingAssets 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.Basis of consolidationThe consolidated financial statements include the results of the company andits subsidiary undertakings.LBITDALBITDA represents the loss before charging or crediting interest, tax,depreciation and amortisation.NOTES4. TurnoverAll of the group's revenue in respect of the years ended 31 December 2005 and2004 derived from continuing operations and from the group's single businesssegment, the design, development and marketing of software products withassociated implementation and consultancy services.5. Earnings per shareThe calculation of basic loss per ordinary share is based on a loss of ‚£1,236,000 (2004 - ‚£2,251,000), and on 131,059,000 (2004 - 114,883,000) ordinaryshares, being the weighted average number of ordinary shares in issue duringthe year. The effect of all potential ordinary shares is antidilutive.6. Obligations under finance leasesObligations under finance leases include ‚£9,000 (2004 - ‚£nil) relating toamounts due in more than one year.7. Shares to be issued'Shares to be issued' at 31 December 2004 included ‚£1,509,000 being theoutstanding amount of the group's Interest Free Mandatory Convertible LoanStock (the "Stock"). The terms of the Stock were modified during 2004 such thatit was only repayable in cash upon the occurrence of certain events relating tothe group's ability to continue in business. Accordingly, no fair value isattributable to the liability component under IAS 32 and the entire amount ofthe Stock is presented within equity shareholders' funds in the group's balancesheet at 31 December 2004. During 2005 the whole of the remaining Stock wasconverted into Sopheon ordinary shares, either pursuant to the exercised ofconversion rights or automatically upon maturity on 23 December 2005.8. Cautionary StatementSopheon 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.ENDSOPHEON PLC