UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934.
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. For the fiscal year ended December 31, 1996.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission File Number: 0-28300
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Planning Sciences International plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
Tuition House, St George's Road, Wimbledon, London SW19 4EU
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not applicable
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Securities registered or to be registered pursuant to Section 12(g) of the
Act:
American Depositary Shares, each representing one Ordinary Share, nominal
value (pound)0.15 per share.
-----------------------------------
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
-----------------------------------
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
The number of outstanding shares of each of the issuer's classes of capital
or common stock as of December 31, 1996 was 8,999,167 Ordinary Shares,
nominal value (pound)0.15 per share.
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has
elected to follow.
[ ] Item 17 [X] Item 18
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TABLE OF CONTENTS
PART I
Page
----
Item 1. Description of Business ......................................... 3
Item 2. Description of Property ......................................... 17
Item 3. Legal Proceedings ............................................... 17
Item 4. Control of Registrant ........................................... 18
Item 5. Nature of Trading Market ........................................ 18
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders................................................ 19
Item 7. Taxation ........................................................ 19
Item 8. Selected Financial Data ......................................... 24
Item 9. Management's Discussion and Analysis of Financial
Conditions and Results of Operations ........................... 25
Item 10. Directors and Officers of Registrant ............................ 35
Item 11. Compensation of Directors and Officers .......................... 36
Item 12. Options to Purchase Securities from Registrant or Subsidiaries... 37
Item 13. Interest of Management in Certain Transactions................... 37
PART II
Item 14. Description of Securities to be Registered ...................... 38
PART III
Item 15. Defaults Upon Senior Securities ................................. 38
Item 16. Changes in Securities and Changes in Security for
Registered Securities........................................... 38
PART IV
Item 17. Financial Statements ............................................ 38
Item 18. Financial Statements ............................................ 38
Item 19. Financial Statements and Exhibits ............................... F-1
2
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PART I
Item 1. Description of Business
General
The Company was incorporated in England and Wales in September 1993 as
Rorycreek Limited and changed its name to Planning Sciences Holdings Limited in
October 1993 on its acquisition by the controlling shareholders of Planning
Sciences plc ("PSP"). In March 1994 the Company acquired all of the issued and
outstanding shares of PSP in a share for share exchange. On March 1, 1996 the
Company was re-registered as a public limited company and changed its name to
Planning Sciences International plc. Unless the context otherwise requires,
references herein to the "Company" or to "Planning Sciences" are to Planning
Sciences International plc and its consolidated subsidiaries.
The Company develops, markets and supports high performance networked
business intelligence software for business planning and decision making. The
Company's Gentia software employs a multidimensional database and a highly
flexible end user environment which empowers business managers throughout a
networked enterprise to perform, report and share complex analyzes of business
data. Gentia enables the enterprise-wide integration of structured and
unstructured data contained in operational databases, data warehouses and
external data sources and allows users to perform on-line analytical processing
through a highly integrated, scaleable, networked system. Gentia users can also
employ automated agents to analyze, update and monitor key business performance
indicators, rapidly perform scenario analyses and distribute information to
users throughout the enterprise.
Industry Background
As the global business environment becomes increasingly competitive,
organizations are responding by improving the efficiency and effectiveness of
their operations. Businesses are demanding higher levels of productivity and are
distributing decision making authority more evenly throughout their networked
organization. In this context, effective corporate decision making is becoming
more dependent upon the ability to rapidly collect, organize and analyze large
amounts of data from disparate sources. Understanding and managing
enterprise-wide information is crucial for making informed decisions and
responding to rapidly changing business conditions.
In order to remain competitive, many businesses are deploying powerful
client/server computer systems. The proliferation of networks, high capacity
mass data storage and distributed enterprise computer systems has created a
flood of data which has increased dramatically in recent years. Commercial use
of the Internet and Intranets has added yet another factor for corporate MIS
personnel to consider when integrating disparate client/server systems, legacy
applications and hardware as they seek to provide enterprise-wide solutions
demanded by end users.
The traditional relational database management system ("RDBMS"), while
optimized for on-line transaction processing ("OLTP"), is inherently limited for
decision support activities. Large organizations typically store data in number
of disparate OLTP systems dedicated to specific functions such as finance or
manufacturing. These operational databases automate transactions and generate
business records which can be processed and stored electronically, such as
credit card charges, airline reservations and customer shipments. Thousands of
these transactions can occur every second, creating enormous volumes of
important business data. Organizations have optimised OLTP systems to safely and
quickly handle vast amounts of transactional data but have been unable to
effectively utilize these systems for decision support. Such systems may have
add-on analysis modules for particular functional areas, but are generally
incapable of integrating data from throughout the enterprise, and have limited
planning, analysis and reporting capabilities. In addition, OLTP systems are
generally mission critical applications and could be adversely affected if
system resources are utilized to process large and complex queries against the
RDBMS.
Spreadsheets are another popular approach to planning and analysis. However,
spreadsheets are two-dimensional and not suitable for analyzing multidimensional
views of data without the re-entry of significant amounts of data or laborious
sheet-by-sheet changes. The limited ability to integrate and update spreadsheets
ultimately restricts planning, analysis and reporting capabilities.
The data warehouse has emerged as a means by which users can conduct large,
complex, real-time queries of historical data, while maintaining the integrity
of an organization's database. Organizations have begun to collect selected data
in a central repository from disparate OLTP databases throughout the enterprise
in a subject-oriented, standardized and non volatile form and made available on
a read-only basis. This approach provides users throughout the organization with
more efficient access to critical data in the organization's RDBMS.
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Because users are generally not familiar enough with database syntax to
extract data from data warehouses without assistance from MIS personnel,
database query and reporting tools have been developed to allow those users to
more easily access and view contents of databases and data warehouses. However,
these tools typically lack the robust calculation capabilities required to
quickly perform "what-if" analyses of complex scenarios against large volumes of
data. In addition, many of these tools inefficiently utilize organizations'
client/server computing resources and cause degradation of network performance
since large amounts of data must be delivered to the client where the processing
occurs. Users are demanding more robust software for accessing and analyzing
data contained in RDBMSs and data warehouses which utilize the processing power
across the enterprise-wide networks.
On-line analytical processing ("OLAP") is a proven category of software
specifically designed for business planning and analysis. OLAP provides a basis
for strategic and tactical decision making by allowing users to work with large
volumes of historical and projected data located throughout the enterprise and
to transform such data into useful information. OLAP software is designed to
facilitate planning and analysis by enabling users to easily organize and view
data in multiple dimensions, rapidly perform interactive scenario analyses and
share data with other users, without significant utilization of MIS resources.
While exceeding the analytical capabilities of its predecessors, the
majority of OLAP software available to date has been unable to fully address the
system integration and enterprise-wide decision support needs of organizations.
Such software must be intuitive and easy to use, rapidly deployable across all
client/server platforms, the Internet and corporate Intranets. OLAP software
that can address these multiple needs enables organizations to transform data
into relevant information and consequently to substantially improve their
decision making processes and ability to succeed in today's competitive business
environment. Planning Sciences refers to these type of systems as Business
Intelligence applications.
The Planning Sciences Solution
The Company develops, markets and supports Gentia, a network centric
applications development environment which utilizes a multidimensional OLAP
database for building Networked Business Intelligence applications. Gentia's
broad analytical capabilities enhance the decision making ability of business
managers and analysts across the enterprise. In addition, Gentia's client/server
communications architecture enables real-time collaboration and data sharing in
a workgroup environment regardless of physical location or computing platform
used. This combination of analytical and architectural strengths allows
corporations to use Gentia to address the pressures associated with increased
competition, globalized business practices, and the accumulation of important
data inside and outside of their organizations.
The following are the principal characteristics of Gentia and a discussion
of the relevant benefits:
Broad Business Intelligence
Gentia enables users to answer a broad range of business questions through
the seamless integration of data sources, including the Company's
multidimensional OLAP database, relational databases and external information
sources such as on-line news service and the Internet. These features allow for
the appropriate tool to be used for each task, matching database strengths with
the question being asked. The following are typical questions answered using
Gentia:
[bullet] What is happening in the organization? (Trend spotting with drill
down). Gentia's multidimensional OLAP database allows users to quickly
spot trends or exceptions and drill down to the specific data that are
most relevant to the issue being investigated.
[bullet] What contributed most to this trend? (Relational query directly to the
data warehouse). Gentia's tight integration of relational query methods
with multidimensional queries allows for a more focused use of data
warehouses. Instead of querying all products across all regions, for
example, Gentia can focus the user on a particular product and region
combination for meaningful analysis.
[bullet] Why did this exception occur? (Textual creation and navigation). Since
Gentia has a complete text engine with hypertext navigation, the "why"
questions can be answered as part of the application, linking
qualitative, textual information to the quantitative data most commonly
found in decision support applications.
[bullet] How should we respond to this trend or exception? (Modelling and
"what-if" scenarios). Using Gentia's "what-if" modelling capabilities,
the projected impact of the trend or exception can be assessed,
alternative scenarios evaluated and corrective action taken or
opportunities exploited.
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Base of Application Development and Maintenance
Gentia employs a unique book-chapter-page metaphor for applications
development. Gentia applications known as books, contain all application
components, including presentation screens, or pages, database definitions, and
query logic. In addition, Gentia's object oriented development environment
provides for a highly visual development process which distinguishes Gentia from
other available products which rely upon traditional programming methods.
Application developers, or authors, create pages visually by dragging
objects such as reports and charts onto the page and connecting these objects to
icons representing both local and distributed databases. Since development is
done visually using objects, development times are often reduced and can be
performed by non technical personnel. In addition, this visual development
paradigm creates a self-documenting system that makes application maintenance
less time consuming and less costly than in traditional programming
environments.
Enterprise-wide Development and Scaleability
Enterprise-wide development of an application is often challenged by the mix
of clients, servers and communications hardware and the logistics of
electronically distributing the application worldwide. The data for enterprise
information systems rarely comes from one source, and the information provided
by such a system is often demanded by hundreds of users at remote sites on
mobile notebook computers.
Gentia's sophisticated client/server communications architecture and broad
platform support facilitate such enterprise-wide employment. Application
authors, for example, can distribute books via local or wide area networks or
even via the Internet simply by dragging them over icons representing remote
servers. In addition, since Gentia applications can run in standalone or
client/server environments on all major hardware, operating systems and
graphical user interfaces ("GUIs"), users in remotes sites have the ability to
use the applications immediately on their platform of choice. In addition, the
distribution of applications can occur bi-directionally and can also be
automated to occur on a scheduled basis or to be triggered by events such as the
existence of new data or new users logging onto the system.
As the number of users increases in an enterprise-wide deployment,
applications tend to become increasingly complex. Gentia's distributed nature
addresses these scaleability requirements. In Gentia, the various components of
an application can be partitioned efficiently for multiple clients or servers,
thus enabling systems managers to optimally configure the applications for
network and processing considerations. As a result, Gentia can be deployed
across a heterogeneous mix of client/server platforms.
As web and browser technology gains market acceptance as the main method of
delivering Decision Support information for the millennium, a key issue facing
IT departments is "how do I move my client/server applications to thin client
and network centric technology". A unique feature of Gentia is the ability to
run an application in a standard browser or from the new emerging breed of
Networked Computers ("NCs") without the requirement for any modifications to an
application. Gentia WebSuite, a new option added to the Company's product
portfolio in the first quarter of 1997, removes the fear and workload of
developing and deploying applications in a networked world.
Automated Data Mining and Alerting
Gentia is designed to manage the increasingly large amounts of data
available in most organizations. In most decision support systems, users are
required to initiate queries to receive answers to their business questions.
Under these decision support systems, users must know not only the question to
ask, but also the time to ask it.
Gentia provides facilities which can automate many of the tasks associated
with decision support and business analysis. Users can create objects called
agents, or "personal assistants", which search large volumes of both text and
numeric data and advise them on trends, exceptions, or continuations of events.
Agents can be programmed to run while a user is building new systems or
performing other tasks, thus greatly enhancing user productivity and
effectiveness.
Business Strategy
The Company's objective is to maximize its customers' competitive advantage
by providing business intelligence solutions that can be developed rapidly,
changed dynamically, expanded easily and distributed widely. Key elements of the
Company's strategy include the following:
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Focus on Networked Business Intelligence Solutions. The Company seeks to
differentiate its products and services by providing customers with a
comprehensive software environment for developing, deploying, using and
maintaining enterprise-wide decision support applications. Gentia is able to
integrate data from multiple sources, including its multidimensional OLAP
database, relational databases and external information sources such as on-line
news services. Its highly scaleable, secure, multi-platform environment enables
users to collect, analyze and disseminate critical information within
departments as well as across the entire enterprise.
Maintain and Enhance Global Presence. The Company markets Gentia through its
direct sales force in the United States, the United Kingdom, Australia, South
Africa, Belgium and the Netherlands, and through distributors, value added
resellers ("VARs") and strategic partners in Europe, North America, Australia,
Asia, South America and Africa. The Company is further expanding its worldwide
direct sales force, particularly in the United States. The Company is
aggressively seeking to establish additional indirect sales relationships in its
current markets, and in new markets, including Asia. In addition, the Company
continues to develop strategic relationships with partners who have established
customer relationships in targeted vertical or geographic markets.
Expand Gentia Usage within Customer Base. The Company currently has over 325
customers. Customers are typically large international organizations which
currently use Gentia in one or more divisions. The Company intends to increase
the revenues generated from this existing customer base by increasing the number
of users within customer organizations and by providing its customers with new
products, product enhancements and consulting services. The networked
enterprise-wide scaleability of Gentia allows the Company to meet its customers'
evolving needs for decision support applications, including the expansion of
Gentia into other divisions or across entire organizations.
Continue Product Innovation. The Company's use of object oriented
programming techniques provides Gentia with a unique and highly flexible
architecture that facilitates ongoing product innovation. In 1996, the Company
released Gentia 3.0 which featured a multidimensional OLAP database designed to
be scaleable in gigabytes. This ability to intelligently handle data volumes
represented a breakthrough in the OLAP marketplace. In the first half of 1997,
the Company released Gentia 3.1 incorporating Gentia WebSuite. The WebSuite
option now extends Gentia's cross platform deployment and renders publishing
applications to the Worldwide Web to a more trivial task. This breakthrough
removes the need for an enterprise to potentially have to develop reporting
applications twice, once for client/server deployment and once for the Worldwide
Web. Gentia WebSuite's integration with the Worldwide Web and emerging Java
technology, resulted in Sun Microsystems (the leading hardware suppliers of Web
servers and authors of the Java language) selecting Gentia as one of their
strategic platforms for deploying Intranet applications.
Leverage Customers' Investments in Information Systems. The Company designed
Gentia to be platform-independent, able to operate across a heterogeneous mix of
client and server platforms without modification, and able to adapt to the
native GUI of the client operating system. Gentia is also designed to integrate
data from the customers' existing information systems, including relational
databases, legacy repositories and data warehouses. These hardware and software
compatibilities allow customers to leverage their existing investments in
information systems, extend the usefulness of existing software and historical
data, enable rapid deployment of Gentia and reduce system downtime.
Deliver Superior Customer Services and Support. The Company further
differentiates its product by providing a high level of customer services,
including product training, application design, system implementation and
ongoing account management. The Company's strategy is to deliver services and
support which enable its customers to quickly and cost-effectively implement and
maintain decision support applications. The Company draws upon over a decade of
experience in implementing decision support applications to provide superior
service and support.
Gentia Software
The Company's principal product Gentia, is an applications development
environment for building Networked Business Intelligence applications. Core
product revenues are supplemented by sales of additional license options
including Gentia WebSuite and Gentia Applications Programming Interface. The
Company licenses Gentia to its customers on a client, server and connected user
basis. Pricing for an initial Gentia server is $50,000 with a $400 per user
additional cost, plus between $2,750 and $5,000 for each user connected to a
Gentia server. For the year ended December 31, 1996, the average software
license fee for a typical Gentia installation was approximately $105,000. Gentia
is an integrated product encompassing the following core enabling technologies
and application components.
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Enabling Technologies
Two unique aspects of Gentia's architecture enable it to address the
enterprise-wide integration needs of today's business decision-makers.
Networked Architecture. Gentia is designed to enable applications to be
developed and deployed across a heterogeneous mix of clients and server
platforms, without recompilation of code or other modifications. Gentia
applications are stored in a platform-independent format but exploit the native
GUI and other features of the client operating system. Because all of Gentia's
client and server versions share the same source code, new versions of Gentia
are released simultaneously on all client and server platforms listed below.
CLIENTS SERVERS
Windows 3.1 Windows NT
Windows NT Novell
Windows 95 OS/2
Macintosh HP-UX
X-Windows IBM AIX
OS/2 Sun
Sun UNIXWARE
Unixware Pyramid
HPIX NEXT
NEXT
"THIN" BROWSER CLIENTS
Netscape Navigator
Microsoft Internet Explorer
Sun HotJava Browser
Agency System. Communications across all client and server platforms running
in a local or wide area network environment are facilitated by Gentia's Agency
System, which forms the backbone of the Gentia networked architecture. Because
the Agency System considers clients and servers to be peers, applications can be
deployed in any fashion ranging from standalone clients to multiple distributed
servers. Applications are easily distributed to end users by dragging books over
icons representing remote servers. As applications grow or become more complex,
scaleability can be accomplished by partitioning the components of an
application across multiple servers, resulting in a more efficient use of
computer resources. In addition, Gentia's multi-threaded agency architecture
allows system managers to centrally control security of distributed applications
throughout the enterprise.
Gentia Application Components
Gentia consists of eight primary components: Graphical Development
Environment, GentiaDB, Gentia Object Store, Agents, Text InfoBase, Gentia
WebSuite, Applications Programming Interface and Systems Management Facilities.
Graphical Development Environment. The Graphical Development Environment
allows users to rapidly build applications using the graphical user interface of
their choice for deployment across the networked enterprise. This entirely
visual development environment is made up of the following components: The
builder palette contains all of the page objects, such as reports, charts,
buttons and bitmaps that the user will see in the application. These objects are
dragged onto the page, positioned, and sized according to user preferences. The
connector palette provides data access and transformation objects which perform
tasks such as filtering, sorting and drill down. The object inspector allows
point and click modification of page objects and connector attributes, such as
size, color and visibility. The connections mapper allows visual design of data
flows for the application. Reports and charts on the page are populated from
data sources simply by drawing lines to connect these objects.
Gentia DB. GentiaDB is a high-performance, high volume multidimensional OLAP
database which provides rapid response times to complex business analysis
queries. GentiaDB organizes data such as products, locations, and sales channels
into a business model metadata dictionary, from which dimensions can be selected
to build subject orientated models. Added to the source data are business rules
that perform analytical tasks such as cost allocations, hierarchical
subtotalling, or the calculation of key ratios. GentiaDB can either reside on a
server for multi-user access or on a standalone client machine for remote or
mobile processing. Gentia development language allows for scripting of enhanced
applications with highly defined scenarios and programs to clean, transform and
map data.
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Gentia Object Store. The Gentia Object Store is a repository distributed
across clients and servers where Gentia's application components such as pages,
database, definitions, agents and SQL Query scripts are physically stored. The
Gentia Object Store comes with over 300 prebuilt and tested objects, ranging
from simple bitmaps to prebuilt application components.
Agents. Agents are productivity-enhancing objects which act as "personal
assistants" to automate tasks such as data mining, alerting end users to
exceptions, trends or patterns, and many systems management functions such as
data loading and application replication. Agents enable users to set up
continuous searching of multiple database to screen both text and numerical data
and advise on trends, exceptions, or events. Agents can run on either a
scheduled or triggered basis, and dependencies between Agents can create a
"ripple effect" of agent processing. Agents on one server can trigger the
execution of agents on another server or client machine by communicating through
the Agency System.
Text InfoBase. Gentia's Text InfoBase is a repository of unstructured
textual data drawn from sources such as the Internet, third party electronic
news feeds, or Lotus Notes, that can provide explanations for exceptions or
trends found in the GADB or data warehouse. This database is built by Agents
that can detect the availability of new text from external sources and perform
extremely rapid searches through large amounts of textual data. The Text
InfoBase is fully integrated into the Gentia environment and utilizes neutral
network technology which enables simple text string searches as well as more
complex concept-based searches.
Gentia WebSuite Option. The Gentia WebSuite option, which is separately
chargeable, allows customers to deploy applications over the web, without the
need for multiple application development. Pages which have been developed in
Gentia incorporating Tables and Charts can get automatically converted to
dynamic HTML tables and Java applets for running unmodified within a web
browser. This not only eliminates effort in trying to redesign or rebuild
applications for the web, it also guarantees reliability and quality as the Java
applets automatically generated are proven and tested by Planning Sciences.
Applications Programming Interface (API). The Gentia API allows third
parties and customers to develop applications in leading development tools such
as Microsoft's Visual Basic, Borland's Delphi and Sybase's PowerBuilder which
can totally incorporate data and functionality from the GentiaDB OLAP database.
As a leading member of the OLAP Council, Planning Sciences were the first vendor
to implement the Open API standard, designed to increase interpretability
between different vendor's products. Planning Sciences plans to develop its own
API applications in 1997 including an Excel spreadsheet Addin and a Visual Basic
data input system for simple budgeting and forecasting.
Systems Management Facilities. The warehouse manager facility uses drag and
drop icons to create workgroups, books and applications security. The warehouse
manager allows the system administrator to define users and their read-write
access level, assign defined users to one or more work groups and provide for
secure user access to the appropriate books and chapters contained in the Gentia
application. The book manager provides the interface to the Gentia Object Store
and allows visual creation and distribution of application components (pages,
text and databases) in application books across the enterprise.
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Customers
The Company sells its products to a variety of businesses, governments and
other organizations worldwide. As of December 31, 1996 the Company had over 325
active customers across a broad range of industries in over 20 countries,
including the United States, the United Kingdom, Australia, Belgium, Canada,
Finland, France, Germany, Hong Kong, Israel, Mexico, the Netherlands, Portugal,
South Africa, Spain and Switzerland. The following is a representative list of
the Company's customers with active licenses or contracts as of December 31,
1996:
Technology
AirTouch Cellular
AT&T
BAAN Development BV
BellSouth Telecommunications, Inc
Bull Information Systems Ltd
Ceridian Corporation
Colt Telecommunications
Computing Devices International
ICL plc
Hewlett Packard
McDonnell Information Systems Group
Motorola Inc.
Oki Europe Ltd
Sprint United Management Co
Sun Microsystems Inc
Texas Instruments Inc
Media and Entertainment
British Sky Broadcasting Ltd.
CentreParcs
The News International Group plc
Retail
Alcampo SA
Allders Department Stores Ltd
Alpha Airports Group plc
Diamond Shamrock Co
Do-It-All Ltd
Karstadt AG
Metro Cash and Carry Ltd
Sainsbury Homebase Ltd
Sears Retail Services Ltd
Specsavers Optical Group Ltd
T&S Stores plc
The Boots Co plc
Food and Beverage
Cadbury Distillers & Vintners (Pty) Ltd
Campbell Soup Co Ltd
Celestial Seasonings Inc
General Biscuits
Gilbeys
Highland Distilleries Co plc
McDonald's Restaurants Ltd
Tip Top Bakeries
Tri Valley Growers
R.Twining & Co. Ltd
Whitbread plc
Young & Co's Brewery plc
Manufacturing
Alcoa Building Products
Babcock Rosyth Defence Ltd
Beazer Homes USA Inc
Boeing Information Systems Services
Coats Viyella plc
Continental Tyres
Eastman Chemical
Ford Motor Co. of Australia Ltd
Gallaher Ltd
Kvaerner John Brown Systems Ltd
McDonnell Douglas
SCA Molnlycke AB
Outokumpu Copper Products Oy
Raychem Corporation
Sanyo Australia (Pty) Ltd
Schlumberger Industries SA
SLA Molnlycke AB
Tetra Park International SA
Thomas Industries Inc
Volvo Data AB
Volkswagon AG
WD & HO Wills Holdings Ltd
Transportation
ANWB BV
BAA plc
El Al Israeli Airlines
Singapore MRT
South African Airways
Stena Data AB
Banking and Finance
ABSA Bank Ltd
ANZ Banking Group Ltd
BACS Ltd
Barclays Bank plc
FGH Bank NV
Fortis Nederland BV
Interpay Nederland BV
Lloyds TSB Group plc
M&G Ltd
National Westminster Bank plc
NCM (UK) Holdings Ltd
Standard Chartered Bank
VSB Group NV
Mortgage Lenders
Abv Building Society
Halifax Building Society
Nationwide Building Society
Norwich and Peterborough Building Society
West Bromwich Building Society
Yorkshire Building Society
Insurance Companies
Cologne Reinsurance
Guardian Insurance Ltd
GIO Australia Ltd
QBE Insurance
Royal and Sun Alliance plc
Scottish Amicable Assurance Society
Sun Life Assurance of Canada
Swiss Reinsurance
Zurich Australia Insurance Ltd
Government
Birmingham City Council
Botswana Police
City of Helsinki
Dutch Post Office
Government of Israel
Helsinki Police Department
Israeli Army (Manpower)
Johannesburg City Council
Kingston Upon Hull City Council
Northwest Provincial Government
(S.Africa)
Port of Singapore Authority
Royal Australian Air Force
Sheffield City Council
South Lanarkshire County Council
Thames Valley Police
United States Department of Energy
West Mercia Constabulary
Wright Paterson Air Force Base
Health and Pharmaceuticals
Chase Farm Hospitals NHS Trust
Massachusetts General Hospital
McKesson Corporation
Medtronics Inc
National Blood Service
North Essex Health Authority
Parkside Health NHS Trust
Roche
Scott Bader Company Ltd
Siemens Nixdorf Information Systems
Smith & Newphew Ltd
St.Josephs Hospital
Energy
American Electric Power
Ashland Petroleum Co.
Endifor Sistemas Informaticos SA
Espoo SahKo Oy
Israeli Electricity Company
Petroleos Mexicana (PEMEX)
Public Service Company of Colorada
No single customer accounted for more than 10% of the Company's revenues
during the fiscal years ended December 31, 1996 and March 31, 1995, and one
customer constituted approximately 15% of the Company's revenues during the
nine-month period ended December 31, 1995.
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Sales and Marketing
The Company markets Gentia software and services in the United States, the
United Kingdom, South Africa, Australia and Europe through its direct sales
organization and markets Gentia worldwide through distributors, strategic
partners, VARs and original equipment manufacturers ("OEMs"). To date, the
Company's revenues have primarily been derived from its direct sales force. The
Company intends to place greater emphasis on expanding its indirect distribution
channels.
The direct sales process involves the generation of sales leads through
direct mail, seminars, exhibition, trade shows and telemarketing. The sales
cycle varies from customer to customer and generally requires from two to six
months. In addition to a base salary, the Company's sales representatives are
compensated on a commission basis which is based upon quarterly and annual
quotas. The direct sales force is responsible for local partner support, joint
sales efforts and resolution of channel conflict. The direct sales force is
compensated for sales made through indirect channel partners as well as direct
sales to ensure appropriate co-operation with the Company's OEMs and VARs.
The following table sets forth for each of the periods shown below the
percentage of the Company's total revenues represented by each of the principal
geographical areas served by the Company.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
----------------- ----------------- ----------------
1996 1995 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
United Kingdom ......................... 34% 44% 48%
North America .......................... 40 39 32
Australia .............................. 6 5 4
Rest of World .......................... 20 12 16
----------------- ----------------- ----------------
Total .......................... 100% 100% 100%
================= ================= ================
</TABLE>
The Company believes that in order to increase sales opportunities and
profitability, it will be required to expand its international operations,
particularly in the United States and the Pacific Rim. The Company has committed
and continues to commit significant time and financial resources to developing
international sales and marketing channels. There can be no assurance, however,
that the Company will be able to maintain or increase international market
demand for Gentia. To the extent that the Company is unable to do so in a timely
manner, the Company's international sales growth will be limited, and the
Company's business operating results and financial condition would be materially
adversely affected.
The Company's sales and marketing organization consisted of 64 employees as
of December 31, 1996. The sales staff is based at the Company's joint global
headquarters in Boston, USA, and London, England, as well as in the metropolitan
areas of Atlanta, Denver, Michigan, New Jersey, New York, and San Francisco in
the United States, Sydney in Australia, Johannesburg in South Africa, Antwerp in
Belgium, and Hertoganbosch and Woerden in the Netherlands.
The Company's business in Europe (excluding the United Kingdom) is conducted
through Planning Sciences International B.V., a Netherlands corporation ("BV"),
which was a joint venture in which the Company held a 90% interest and Milestone
Holding B.V. ("MILESTONE") owned a 10% interest. In July 1996, the Company
acquired the remaining 10% of BV it did not already own.
The Company has directly, or through its subsidiaries, entered into
agreements with certain third parties whereby such parties, either on an
exclusive or non-exclusive basis, function as distributors for Gentia. Certain
of these agreements are terminable after an initial term of two years upon
payment by the Company of sums to the distributors calculated on a formula
basis. Notwithstanding the foregoing, certain of these agreements are subject to
earlier termination by the Company without payment if the distributors fail to
meet performance quotas.
Customer Service and Support
The Company offers a complete range of specialized consulting and customer
support services to assist its customers in using Gentia effectively. These
services include business process consulting, implementation planning, education
and training, technical support and ongoing software maintenance. The Company
believes its consulting services allows its customers to deploy Gentia quickly
and efficiently. By helping customers achieve a more rapid rate of return on
10
<PAGE>
investment, the Company fosters a strong relationship with its customers. The
Company believes that providing a high level of customer support is essential to
the successful marketing and sale of Gentia.
The principal purpose of the Company's consulting services is to facilitate
the optimal use of the Gentia software solution by its clients. As of December
31, 1996, the consulting services group consisted of 48 professionals. Classes
and training programs, as well as consulting services, are available at customer
sites, local sales offices and the Company headquarters. Consulting services are
charged on an hourly or per diem basis and billed monthly.
The Company's customer support group provides Gentia clients with telephone
and on-line technical support as well as product enhancements, updates and new
releases. Telephone hotline support is complemented by a formal escalation
process within the Company. Maintenance and support contracts, which are
typically for twelve months, are established as a fixed percentage of the
software licence list price and are invoiced to customers on an annual basis. In
general, customers who maintain service contacts are entitled to receive
enhancements or upgrades of Gentia at no additional cost.
Product Development
The Company believes that its future success will depend in large parts on
its ability to maintain and enhance its client/server decision support systems
technology and develop new products that meet an expanding range of customer
requirements. The Company's research and development organization is divided
into teams consisting of development engineers, quality assurance engineers,
contract technical writers, product support specialists and product managers.
The research and development organization uses a phase-oriented development
process, including formal documentation, inspections and quality control. The
process includes constant monitoring of quality, schedule, functionality, costs
and customer satisfaction. The market addressed by the Company is sensitive to
product quality and therefore the process is aimed at continuous improvement of
Gentia. The product definition is based upon a consolidation and prioritization
of the requirements from existing customers, from technical support and from
marketing.
The object oriented design of Gentia allows rapid new product development
based upon a high level of code reuse. The resulting development productivity
allows the Company to plan the release of several new products during 1997.
Gentia version 3.1 which includes Gentia WebSuite, facilitates the seamless
deployment of Decision Support applications over the Worldwide Web. Gentia Open
API facilitates the integration of corporate applications developed in a third
party programming tool with the data and functionality of GentiaDB. Gentia Excel
Addin potentially allows users to access gigabytes of information held within a
GentiaDB application from the desktop spreadsheet they are familiar with.
Ongoing research projects include advanced data compression techniques and
neural networks for intelligent data mining of OLAP and relational databases.
As of December 31, 1996, the Company's research and development organization
of 48 full-time employees consisted of fourteen development engineers, four
quality assurance engineers, two product managers and twenty-eight technical
support personnel. The Company's total research and development expense was
approximately $3,185,000 for the year ended December 31, 1996 and $1,663,000 for
the year ended December 31, 1995. The Company anticipates that it will continue
to commit substantial resources to product development in the future. To date,
the Company's development efforts have not resulted in any capitalized software
development cost.
Competition
The market in which the Company competes is intensely competitive, highly
fragmented and characterized by rapidly changing technology and evolving
industry standards. The Company's current and prospective competitors include
companies that offer a variety of planning and analysis software solutions and
range from multidimensional database and analysis vendors such as Oracle
Corporation (through its acquisition of IRI Express) and Arbor Software, Inc.,
to vendors of financial and budgeting software and special purpose tools such as
Comshare Incorporated, The Dun & Bradstreet Corporation (through its acquisition
of Pilot Software), Information Advantage, Inc. and MicroStrategy, Inc.
The Company competes on the basis of various factors, including product
quality, product performance, ease of use, customer support and cost/benefit
considerations. The Company believes it competes favorably with respect to each
of these factors. However, the Company's market is still evolving and there can
be no assurance that the Company will be able to compete successfully against
current and future competitors and the failure to do so successfully would have
a material adverse affect upon the Company's business, operating results and
financial condition.
11
<PAGE>
Proprietary Rights
The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technology leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. There can be no assurance that others will
not develop technologies that are similar or superior to the Company's
technology. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software exists,
software piracy can be expected to be a persistent problem. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
as fully as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate or that competitors will not independently develop
similar technology.
The Company has entered into source code escrow agreements with a limited
number of its customers. Such agreements provide that such parties will have a
limited, non-exclusive right to use such code in the event that there is a
bankruptcy proceeding by or against the Company, if the Company ceases to do
business, or if the Company fails to meet its contractual obligations.
The Company licenses one software program from a third party and
incorporates it into Gentia. This license is a non-exclusive worldwide license
and provides use of the software for a fixed license fee. The Company believes
that the inclusion of third party software programs and tools in its products
reduces product development risk and time to market. The only software embedded
in Gentia is Intersolv Inc.'s Data Direct interface and ODBC drivers.
The Company's name together with its logo is registered as a trademark in
the United Kingdom, the United States and a number of other countries. For a
discussion of other matters relating to proprietary rights, see Item 3 "Legal
Proceedings"
Employees
As of December 31, 1996, the Company had a total of 186 employees, including
48 in research and development, 64 in sales and marketing, 48 in customer
consulting and support services, 19 in finance and administration and 7 in
senior management. Of these employees, 112 were located in the United Kingdom,
43 were located in the United States, 10 in Australia, 11 in Europe, 9 in South
Africa and 1 in Hong Kong. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company experienced any work
stoppage. The Company believes its relationship with its employees to be good.
The Company's business, operating results and financial condition depends to
a significant extent upon a number of key management and technical personnel,
including Paul Rolph, its Chief Executive Officer, Anthony Fox, its Chief
Financial Officer, and Timothy Jones, Development Director, and the loss of any
could adversely affect the Company's business operating results and financial
condition. In addition, the Company believes that its future success will also
depend in a large part in its ability to attract and retain highly skilled
technical, management, sales and marketing personnel. Competition for such
personnel in the computer software industry is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel.
Business Factors
This Report contains certain forward-looking statements about the Company's
future business, financial condition and operations. Actual results may differ
materially from those in such forward-looking statements. Among the factors that
could cause actual results to differ materially and should be carefully
considered are the following:.
Limited History of the Gentia Product; Future Operating Results Uncertain.
Prior to the fiscal year ended March 31, 1994, the Company was engaged primarily
in the development and marketing of PC-based departmental decision support
software and experienced fluctuations in revenues and profitability. Since the
introduction of the initial version of its Gentia software beginning in October
1993, the Company has shown annual growth in revenues and net income. However,
there can be no assurance that the revenue growth and increases in net income
experienced by the Company during this limited period of profitability will be
sustained in the future.
The Company's expense levels are based in significant part on the Company's
expectations of future revenues and therefore are relatively fixed in the short
run. If revenue levels are below expectations, net income is likely to be
disproportionately affected. There can be no assurance that the Company will be
able to achieve or maintain profitability on a quarterly or annual basis in the
future. In addition, it is possible that in some future quarter the Company's
operating results will be below the expectations of market analysts and
investors. In such event, or in the event that adverse
12
<PAGE>
conditions prevail or are perceived to prevail generally or with respect to the
Company's business, the price of the Company's Ordinary Shares and ADSs would
likely be materially adversely affected. See Item 8 - "Selected Consolidated
Financial Data" and Item 9 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Fluctuations in Quarterly Results. The Company's quarterly operating results
have in the past and may in the future vary significantly depending on factors
such as demand for the Company's Gentia software, the level of price and product
competition, changes in pricing policies made by the Company or its competitors,
changes in the mix of direct and indirect channels through which Gentia is
offered and the number, timing and significance of product enhancements and new
product announcements, if any, by the Company and its competitors. Moreover,
such results will likely be affected by the ability of the Company to develop,
introduce and market new and enhanced versions of Gentia on a timely basis, the
size, timing and structure of significant licenses, changes in the Company's
sales incentive strategy, enhancements to Gentia or new products or enhancements
to products of its competitors, the level of the Company's international
revenues, foreign currency exchange rates, the renewal of maintenance and
support agreements, product life cycles, software defects and other product
quality problems, personnel changes, changes in Company strategy, changes in the
level of operating expenses and general domestic and international economic and
political conditions, among others.
In addition, the operating results of many software companies reflect
seasonal trends, and the Company's business, operating results and financial
condition have in the past and may in the future be affected by such trends.
Gentia orders are typically shipped shortly after receipt, and, consequently,
order backlog at the beginning of any quarter has in the past represented only a
small portion of that quarter's expected revenues. As a result, license revenues
in any quarter are substantially dependent on orders booked and shipped in that
quarter. Because of the relatively large dollar size of some of the Company's
software licenses, any delay in the closing of such a transaction could have a
significant impact on the Company's operating results for a particular period.
Due to all the foregoing, revenues for any future quarter are not
predictable with any significant degree of accuracy. Quarterly revenues are also
difficult to forecast because the Company's sales cycle, from initial evaluation
to license and maintenance and support purchases, varies substantially from
customer to customer. Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance. See Item 8 - "Selected
Consolidated Financial Data" and Item 9 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Competition. The market in which the Company competes is intensely
competitive, highly fragmented and characterized by rapidly changing technology
and evolving industry standards. The Company's current and prospective
competitors include companies that offer a variety of planning and analysis
software solutions and range from multidimensional database and analysis
vendors, vendors of financial and budgeting software and special purpose tools.
The Company has experienced and expects to continue to experience increased
competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Also, certain current and potential competitors have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects additional
competition as other established and emerging companies enter the market and new
products and technologies are introduced. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. Current and potential
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties, thereby increasing the
ability of their products to address the needs of the Company's prospective
customers. Such competition could materially adversely affect the Company's
ability to obtain new contracts and maintenance and support renewals for
existing contracts on terms favorable to the Company. Furthermore, competitive
pressures could require the Company to reduce the price of Gentia, which could
materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure to
do so would have a material adverse effect upon the Company's business,
operating results and financial condition. See Item 1 - "Description of Business
- - Competition."
Product Concentration; Dependence upon the Emerging Market for
Multidimensional Database Software for On-line Analytical Processing. Since
October 1993, substantially all of the Company's revenues have been derived from
licenses for Gentia and related services. The Company currently expects that
Gentia-related revenues, including maintenance and support contracts, will
continue to account for all or substantially all of the Company's revenues for
1997 and for the foreseeable future thereafter. As a result, the Company's
future operating results are dependent upon continued market acceptance of
Gentia and enhancements thereto. A decline in demand for, or market acceptance
of, Gentia as a result of competition, technological change or other factors
would have a material adverse effect on the Company's business, operating
results and financial condition.
13
<PAGE>
Although demand for Gentia has grown in recent years, the market for
multidimensional database software for on-line analytical processing and data
warehousing is still emerging and there can be no assurance that it will
continue to grow or that, even if the market does grow, businesses will adopt
Gentia. The Company has spent, and intends to continue to spend, considerable
resources educating potential customers about Gentia and its functions and
on-line analytical processing and data warehousing generally. However, there can
be no assurance that such expenditures will enable Gentia to achieve any
additional degree of market acceptance, and if the market for Gentia fails to
grow or grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected. Historically, the software industry has experienced
significant periodic downturns, often in connection with, or in anticipation of,
declines in general economic conditions during which management information
systems ("MIS") budgets often decrease. As a result, the Company's business,
operating results and financial condition may in the future reflect substantial
fluctuations from period to period as a consequence of general economic
conditions in the software industry. See Item 1 - " Description of Business -
Industry Background, - Gentia Software, - Customers, and - Sales and Marketing"
and Item 9 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dependence on Key Personnel. The Company's business, operating results and
financial condition are significantly dependent upon the continued service of
its senior executive management. See Item 10 - "Directors and Officers of
Registrant." While certain employees are bound by proprietary rights agreements,
none of the Company's employees, other than Charles J. Palmer, are bound by a
long-term employment or non-competition agreement. The Company does not maintain
key man life insurance on any employee. The Company's business, operating
results and financial condition also are significantly dependent upon the
Company's ability to attract and retain qualified managerial, sales and
technical personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be able to retain its key managerial , sales
and technical employees or that it will be able to attract, assimilate or retain
such highly qualified managerial, technical or sales personnel as may be
required in the future. If the Company is unable to retain its key managerial,
sales and technical personnel, or attract, assimilate and retain additional
qualified personnel, particularly those in key positions, the Company's
business, operating results and financial condition would be materially
adversely affected. Additions of new personnel and departures of existing
personnel, particularly in key positions, can be disruptive and could have a
material adverse effect upon the Company's business, operating results and
financial condition. See Item 1 - "Description of Business - Sales and
Marketing, and - Employees" and Item 10 - "Directors and Officers of
Registrant."
Risks Associated with New Versions and New Products; Rapid Technological
Change. The software industry, especially the market in which the Company
competes, is characterized by rapid technological change, frequent introductions
of new products, changes in customer demands and evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
life cycle of versions of Gentia is difficult to estimate. The Company's future
success will depend upon its ability to address the increasingly sophisticated
needs of its customers by developing and introducing enhancements to Gentia on a
timely basis that keep pace with technological developments, emerging industry
standards and customer requirements. There can be no assurance that the Company
will be successful in developing and marketing enhancements to Gentia that
respond to technological changes, evolving industry standards or customer
requirements, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and sale of such
enhancements, or that such enhancements will adequately meet the requirements of
the marketplace and achieve any significant degree of market acceptance. The
Company has in the past experienced minor delays in the release dates of
enhancements to Gentia. If release dates of any future enhancements are delayed
or if they fail to achieve market acceptance when released, the Company's
business, operating results and financial condition may be materially adversely
affected. There can be no assurance that the introduction or announcement of new
product offerings by the Company or the Company's competitors will not cause
customers to defer or forego purchases of current versions of Gentia, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See Item 1 - "Description of Business -
Industry Background, - Gentia Software, - Customers, Sales and Marketing and -
Research and Development" and Item 9 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risk of Software Defects. Software products as internally complex as Gentia
frequently contain errors or defects, especially when first introduced or when
new versions or enhancements are released. Despite extensive product testing,
the Company has in the past released versions of Gentia with defects and
software errors. Although the Company has not experienced material adverse
effects resulting from any such defects and errors to date, there can be no
assurance that, despite testing by the Company and by current and potential
customers, defects and errors will not be found in new versions or enhancements
after commencements of commercial shipments, which could result in a loss of
revenues or delay in market acceptance and have a material adverse effect upon
the Company's business, operating results and financial condition. See Item 1 -
"Description of Business - Gentia Software, and - Research and Development."
14
<PAGE>
Risks Associated with International Operations. A significant amount of the
Company's revenues are derived from countries other than the United States. See
Item 1 - "Description of Business - Sales and Marketing" and Note 11 of Notes to
Consolidated Financial Statements. International sales are subject to inherent
risks, including the impact of possible recessionary environments in global
economies including the United States, costs of localizing products for foreign
countries, longer receivables collection periods and greater difficulty in
accounts receivable collection, unexpected changes in regulatory requirements,
difficulties and costs of staffing and managing foreign operations, reduced
protection for intellectual property rights in some countries, potentially
adverse tax consequences and political and economic instability. Although the
Company has committed and continues to commit significant time and financial
resources to developing international sales and support channels, there can be
no assurance that the Company will be able to sustain or increase revenues from
international licenses of Gentia and maintenance, support and other contracts,
or that the foregoing factors will not have a material adverse effect on the
Company's future revenues and, consequently, on the Company's business,
operating results and financial condition. The Company's direct international
sales are currently denominated in United States dollars, English pounds
sterling, or Australian dollars and the Company does not currently engage in
hedging activities. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in currency exchange
rates in the future will not have a material adverse impact on revenues from
direct international sales and thus the Company's business, operating results
and financial condition. There can be no assurance that the Company will be able
to maintain or increase international market demand for Gentia. To the extent
that the Company is unable to do so in a timely manner, the Company's
international sales growth will be limited, and the Company's business operating
results and financial condition would be materially adversely affected. See Item
1 - "Description of Business - Customers, and - Sales and Marketing" and Item 9
- - "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Currency Fluctuations. While a significant portion of the Company's business
is international in nature, the majority of the Company's sales are transacted
and expenses are incurred in pounds sterling, the Company's functional currency.
The Company's financial statements are prepared in U.S. dollars, and therefore
fluctuations in exchange rates in the pound and other currencies in which the
Company does business relative to the U.S. dollar may cause fluctuations in
reported financial information which are not necessarily related to the
Company's operations. See Item 9 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 3 of Notes to
Consolidated Financial Statements.
Need to Expand Operations in the United States. The Company believes that in
order to increase sales opportunities and profitability, it will be required to
continue to expand its operations in the United States. The Company has
committed and continues to commit significant time and financial resources to
developing sales and support channels in the United States which will require
significant management attention and financial resources. There can be no
assurance, however, that the Company will be able to maintain or increase demand
for Gentia in the United States. To the extent that the Company is unable to do
so in a timely manner, the Company's sales in the United States will be limited,
and the Company's business, operating results and financial condition may be
materially adversely affected. See Item 1 - "Description of Business -
Customers, and - Sales and Marketing" and Item 9 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Need to Manage Growth. The Company has recently experienced a period of
significant growth. In support of future anticipated growth, the Company will be
required to continually improve its financial and management controls, reporting
systems and procedures on a timely basis and expand, train and manage its work
force. There can be no assurance that the Company will be able to do so
effectively, and failure to do so when necessary would have a material adverse
effect upon the Company's business, operating results and financial condition.
See Item 9 "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Proprietary Rights and Risks of Infringement. The Company relies primarily
on a combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company also believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technology leadership position. The Company seeks
to protect its software, documentation and other written materials under trade
secret and copyright laws of the United States and the foreign countries in
which the Company make sales, which afford only limited protection. There can be
no assurance that others will not develop technologies that are similar or
superior to the Company's technology.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
a substantial portion of the Company's sales now occur in countries outside of
the United States, and the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the
15
<PAGE>
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate or that competitors will not independently develop
similar technology.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Gentia to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of, or inability to
maintain, any such software licenses could result in shipment delays or
reductions until equivalent software could be developed, identified, licensed
and integrated which would materially adversely affect the Company's business,
operating results and financial condition. See Item 3 - "Legal Proceedings."
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective as a result of federal, state or local laws or ordinances enacted in
the future or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, the sale and support of Gentia
by the Company may entail the risk of such claims. A successful product
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition. See Item
1 - "Description of Business Proprietary Rights."
Control by Principal Shareholders, Officers and Directors. The present
directors, executive officers and principal shareholders of the Company and
their affiliates beneficially own approximately 56% of the outstanding Ordinary
Shares as at December 31, 1996, and assuming all existing outstanding options
are exercized, all present directors, executive officers and principal
shareholders would beneficially own approximately 50% of the outstanding
Ordinary Shares. As a result, these shareholders will be able to exercise
control over all matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See Item 4 - "Control of Registrant."
Differences in Shareholders' Rights Between U.S. and English Corporations.
The Company is incorporated under the laws of England and Wales. The rights of
holders of Ordinary Shares and, therefore, certain of the rights of ADS holders,
are governed by English law, including the Companies Act 1985, as amended (the
"Companies Act"), and by the Company's Memorandum and Articles of Association.
These rights differ in certain respects from the rights of shareholders in
typical U.S. corporations. In particular, and without limiting the generality of
the foregoing, the Companies Act provides for preemptive rights on the allotment
of equity securities (including Ordinary Shares) in certain cases (to the extent
not disapplied by shareholder vote or by the Articles of Association). The
Companies Act also makes it possible, in certain circumstances, for meetings of
shareholders of the Company to transact business with the affirmative vote of a
lesser number of shares than would be the case in a typical U.S. corporation.
Shares Eligible for Future Sale. Sales of substantial amounts of Ordinary
Shares or ADSs in the public or private market could adversely affect the market
price of the ADSs. Approximately 5,049,167 Ordinary Shares are freely
transferable and tradeable in the United States public market. Of such Ordinary
shares, approximately 4,965,300 Ordinary Shares held by "Affiliates" of the
Company (as defined in the "Securities Act"), are subject to certain
restrictions on resale in the United States only (i) pursuant to an effective
registration statement under the Securities Act or (ii) pursuant to an exemption
from the registration requirements of the Securities Act, including Rule 144
under the Securities Act (which permits resales in the United States subject to
certain limitations, including volume limitations).
Anti-takeover Provisions. Certain provisions of the Company's Articles of
Association may have the effect of restricting the possibility of a change in
control of the Company. The Company's directors have staggered terms of office;
one third of the directors is elected annually. Moreover, nominations by
shareholders for election of directors must be made in writing not less than 10
nor more than 35 days prior to the annual general meeting of shareholders. A
director may be removed by ordinary resolution of the shareholders but only if
notice of such resolution is given to the Company at least 28 days before the
meeting at which the resolution is to be moved. Any of these provisions may make
it difficult for the Company's shareholders to replace the Board of Directors.
In addition, the Company's Articles of Association prohibit the transfer of
shares which would result in the accumulation of a stake of 20% or more of the
voting rights in the Company without either a 75% shareholders' resolution or
the proposed transferee making an offer to purchase the equity share capital of
the Company. The London City Code on Takeovers and Mergers also requires a
general offer for all the equity and voting non-equity share capital of the
Company to be made in certain circumstances, including on the acquisition by any
person or persons acting in concert of shares which (together with shares
already held by them) carry 30% or more of the voting rights of the Company.
The Company's Board of Directors has the authority to issue up to 2,000,000
Preference Shares and to determine the price, rights, conversion ratios,
preferences and privileges of those shares without any further vote or action by
the Company's shareholders. The rights of the holders of Ordinary Shares and
ADSs will be subject to and may be adversely affected by, the rights of the
holders of the Preference Shares. Any issuance of Preference Shares, while
providing desirable flexibility in connection with possible acquisitions,
financings and other corporate purposes, could have the
16
<PAGE>
effect of making it difficult for a third party to acquire a majority of the
outstanding voting shares of the Company and as a result, the issuance thereof
could have a material adverse effect on the market value of the ADSs.
No dividends. The Company does not anticipate paying any cash dividends in
the foreseeable future. See Item 8 - "Selected Financial Data."
Item 2. Description of Property
The Company's administrative, sales and marketing facilities occupy
approximately 9,000 square feet in Boston, USA and approximately 11,300 square
feet in London, England pursuant to leases which expire in July 1998, July 1999
and July 2000. In addition, the Company leases research and development
facilities in Ipswich, England and Glasgow, Scotland and has offices in the
metropolitan areas of Atlanta, Boston, Denver and San Francisco in the United
States, Sydney in Australia, Johannesburg in South Africa, the Netherlands,
Belgium, Hong Kong, Guernsey and Germany. The Company believes that its existing
facilities are sufficient for its current needs but anticipates that it will
need to seek additional space before the end of 1997. The Company believes that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
Item 3. Legal Proceedings
The Company is not aware that it is infringing any proprietary rights of
third parties. On February 21, 1996, Intel and the Company entered into an
agreement pursuant to which the Company ceased to use the "Gentium" name. Since
June 30, 1996 the Company has adopted the name "Gentia" in lieu thereof. There
can be no assurance, however, that third parties will not claim infringement by
the Company with respect to the Company's use of the Gentia name or the
Company's other trademarks or products or variations or enhancements thereto. In
April, 1996 the Company received a letter from counsel to Arbor Software
Corporation ("Arbor") asserting that Gentia infringes several of the claims of a
United States patent held by Arbor (the "Arbor Patent"). The Company has
investigated Arbor's patent as it relates to Gentia. The Company believes, based
on advice of its patent counsels, Wolf, Greenfield & Sacks, P.C., and on
information as it currently exists, that it has meritorious defences to Arbor's
claim of infringement. After receipt of Arbor's letter, in April 1996, the
Company filed a declaratory judgement action in the United States District Court
for the District of Massachusetts asserting both that Gentia does not infringe
certain claims of the Arbor Patent and that other claims of the Arbor Patent are
invalid. Subsequent to the Company's filing, Arbor filed a complaint against the
Company in the United States District Court for the Northern District of
California asserting that the Company infringes the Arbor Patent. The Company
intends to assert its position vigorously and has recently appointed Arnold
White and Durkee PC to assist in its defence. However, there can be no assurance
that the Company will prevail in this litigation and the Company could be
required to design around the Arbor claim and/or enter into a licence agreement,
if available, with Arbor. The Company's patent counsel has advised the Company
that Gentia version 3.1 incorporates a new multi-dimensional database, which
will not infringe the Arbor Patent. Prolonged litigation regarding Arbor's claim
could involve significant additional expenses attendant to such litigation
and/or redesign or a licence agreement and there can be no assurance that this
matter would not result in substantial cost and a diversion of management's
attention and resources which could have a material adverse effect upon the
Company's business, operating results and financial condition. The Company
expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry grows and the functionality of products and competitors in the
Company's industry segment grows and the functionality of products in different
industry segments overlaps. Any such claim, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available or, if available, may not be on terms acceptable
to the Company. In the event of a successful claim of product infringement
against the Company and failure or inability of the Company to licence the
infringed or similar technology, the Company's business, operating results and
financial condition would be materially adversely affected.
Item 4. Control of Registrant
To the Company's knowledge, it is not directly or indirectly owned or
controlled by another corporation or by any foreign government. The table below
sets forth certain information with respect to the beneficial ownership of the
Ordinary Shares of the Company, nominal value (pound)0.15 per share ("Ordinary
Shares") by (a) any person known to the Company to be the owner of more than ten
percent of the Ordinary Shares, as of March 31, 1997 and (b) all officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Identity of Person or Group Amount Owned (i) Percent of Class (ii)
--------------------------- ---------------- ---------------------
<S> <C> <C>
R Alan Wallman (iii) ............................ 3,410,775 37.9%
Lucas Holdings Limited (iv) ..................... 1,107,800 12.3%
All directors and officers as a group
(6 persons) (iv) (v) ........ 3,930,833 43.7%
</TABLE>
17
<PAGE>
- ---------------
(i) For purposes of this table, ownership is determined in accordance with the
beneficial ownership rules of the Securities and Exchange Commission which deem
shares to be beneficially owned by any person who has, or shares, voting or
investment power with respect to the Ordinary Shares. Unless otherwise
indicated, the persons named in this table have sole voting and sole investment
power with respect to all shares shown as beneficially owned.
(ii) Based on 8,999,167 Ordinary Shares outstanding as of December 31, 1996.
(iii) Mr. Wallman is founder and a Director of the Company. See Item 10 -
"Directors and Officers of Registrant".
(iv) Lucas Holdings Limited ("Lucas") is a special purpose investment vehicle
controlled and managed by its sole director, Thornpool Limited ("Thornpool"),
which has sole voting power and sole investment power over the 1,107,800
Ordinary Shares of the Company owned by Lucas. The Company has been informed
that the shares of the Company owned by Lucas are held for the benefit of eight
to ten passive investors based in Hong Kong, none of which are citizens or
residents of the United States. No one investor owns more than a 25% interest
in those shares. Because of a confidentiality agreement with its investors,
Lucas is unable to disclose the identify of those investors. Thornpool is
controlled by Mr. Bruce W. Dunlop (a certified public accountant with the
Nelson Wheeler accounting firm in Hong Kong) who manages the investment for
Lucas. Neither Mr. Dunlop, Thornpool, Lucas, nor any of their owners or
investors has any affiliation with the Company or any of its officers, directors
or principal stockholders, except for the relationship with Mr. Anthony K. Fox.
See Item 13 - "Interest of Management in Certain Transactions".
(v) Officers and directors also held options to acquire 972,334 Ordinary Shares,
which amount is not reflected in this table. See Item 12 - "Options to Purchase
Securities from Registrant or Subsidiaries."
The Bank of New York, which currently serves as Depositary ("the
Depositary") with respect to the American Depositary Shares ("ADSs"), each
representing one Ordinary Share, was the record owner, as of December 31, 1996,
of 3,950,000 Ordinary Shares, representing 43.9% of the Ordinary Shares.
The Company is not aware of any arrangements, the operation of which may, at
a subsequent date, result in a change of control of the Company.
Item 5. Nature of Trading Market
The ADSs are quoted on the Nasdaq National Market under the symbol "PLNSY".
Neither the ADSs nor the Ordinary Shares are listed or quoted on any other
quotation system or securities exchange. The following table sets forth the
range of quarterly high and low closing sale prices of the ADSs on the Nasdaq
National Market since the Company's initial public offering on April 30, 1996.
High Low
---- ---
1996:
Second Quarter (from April 30, 1996) 32.125 18.750
Third Quarter 22.250 11.000
Fourth Quarter 15.375 11.000
1997:
First Quarter (through March 31, 1997) 19.000 8.500
On March 31, 1997, the last sale price for the ADSs as reported on the
Nasdaq National Market was $9.00.
American Depositary Receipts ("ADRs") representing ADSs are issued and
delivered by the Depositary through its principal office in New York City at 101
Barclay Street, New York, NY 10286. Each ADS represents one Ordinary Share
placed on deposit with the Depositary.
Under the terms of the Deposit Agreement, dated as of April 30, 1996, among
the Company, the Depositary, and the holders from time to time of ADRs (the
"Deposit Agreement"), Ordinary Shares may be deposited with the London office of
Bank of New York, as custodian (the "Custodian"), or any successor or successors
to such Custodian. The Depositary provides a variety of services to investors,
as more fully set forth in the form of Deposit Agreement filed as an exhibit to
the Company's Registration Statement on Form F-6 filed with the Securities and
Exchange Commission on April 30, 1996.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
There are currently no U.K. laws or regulations which would restrict the
export or import of capital, such as foreign exchange control restrictions, or
which would affect payment of dividends to non-resident holders of the Company's
securities. There are no restrictions under the Company's Memorandum and
Articles of Association or under English law that limit the right of
non-resident or foreign holders to hold or vote the Ordinary Shares.
18
<PAGE>
Item 7. U.S. Federal Income tax and U.K. Tax Consequences to Persons who
are Owners of ADSs
The following generally summarises the principal U.K. and U.S. Federal tax
consequences of the purchase, ownership and disposition of ADSs evidenced by
ADRs to citizens or residents of the United States for U.S. Federal income tax
purposes (who are not also resident or, in the case of individuals, ordinarily
resident, in the United Kingdom for U.K. tax purposes), corporations or
partnerships created or organized under the laws of the United States or any
State thereof, or estates or trusts the income of which is subject to U.S.
Federal income taxation regardless of its source (collectively, "U.S. Holders").
The discussion of U.S. tax consequences is based on the advice of Davis, Malm &
D'Agostine, P.C. and the discussion of U.K. tax considerations is based on the
advice of Allison & Humphreys. Neither law firm has given a formal tax opinion
to the Company. This is a general summary only and prospective purchasers of
ADSs are advised to consult their own tax advisors with respect to the U.S.
Federal, state and local tax consequences, as well as with respect to the U.K.
tax consequences, of the ownership of ADSs and the ordinary Shares represented
thereby applicable in their particular tax situations.
The statements of U.S. and U.K. tax laws set out below are based (i) on the
laws in force and as interpreted by the relevant taxation authorities as of the
date of this Report and are subject to any changes in the U.S. or U.K. law, or
in the interpretation thereof by the relevant taxation authorities, or in the
double taxation conventions between the United Kingdom and the United States
(the "Conventions"), occurring after such date and (ii) in part, on
representations of the Depositary and assume that each obligation in the Deposit
Agreement and any related agreement will be performed in accordance with its
terms.
For purposes of the Convention and the U.S. Internal Revenue Code of 1986,
as amended (the "Code"), U.S. Holders will be treated as the owners of the
Ordinary Shares represented by ADSs evidenced by ADRs.
Taxation of Dividends
The Company does not expect to pay dividends for the foreseeable future.
Should the Company begin paying dividends, the Company will be required when
paying a dividend in respect of the Ordinary Shares to account to the U.K.
Inland Revenue for a payment known as advance corporation tax ("ACT"). Under
current U.K. law, 20/80th of the amount of the net cash dividend will be allowed
as a credit against the U.K. tax liability of individuals who receive (or who
are treated as receiving) the dividend and who are resident in the United
Kingdom for U.K. tax purposes.
An Eligible U.S. holder (as defined below) is entitled under the Convention
of December 31, 1975, as amended, relating to income taxes (the "Income Tax
Convention") and current U.K. law to claim from the U.K. Inland Revenue a refund
(a "Treaty Payment") for an amount equal to the amount of the tax credit to
which an individual resident in the U.K. for tax purposes would have been
entitled had he received the dividend paid and the related Tax Credit Amount.
For example, assuming continuance of the Tax Credit Amount at the rate of
20/80th of the amount of the dividend, a dividend of (pound)8.00 to such an
Eligible U.S. Holder would generally entitle the eligible U.S. Holder to a
Treaty Payment of 50p (a Tax Credit Amount of (pound)2.00 less a withholding of
(pound)1.50) from the U.K. Inland Revenue giving a total realisation of
(pound)8.50.
For the purposes of this Report, the term "Eligible U.S. Holder" means a U.S.
Holder that is a beneficial owner of an ADS of the cash dividend paid thereon
and that satisfies the following conditions: the U.S. Holder (i) is an
individual, partnership, trust, estate or corporation resident in the United
States for purposes of the Income Tax Convention (and, in the case of a
corporation, is not also resident in the United Kingdom for U.K. tax purposes),
(ii) is not a corporation which, alone or together with one or more associated
corporations, controls, directly or indirectly, 10% or more of the voting shares
of the Company, (iii) holds the ADSs in a manner which is not effectively
connected with a permanent establishment in the United Kingdom from which such
U.S. holder carries on business or with a fixed base in the United Kingdom from
which such U.S. holder performs independent personal services, (iv) under
certain circumstances, is not an investment or holding company, 25% or more of
the capital of which is owned, directly or indirectly, by persons that are not
individuals resident in, and are not nationals of, the United States, (v) under
certain circumstances, is not exempt from Federal income tax on the dividend
income in the United States, (vi) under certain circumstances does not own 10%
or more of the Ordinary Share and (vii) under certain circumstances, did not
acquire the ADSs for reasons which were not bona fide commercial reasons.
If the Eligible U.S. Holder is a U.S. partnership, trust or estate, the Tax
Credit Amount will be available only to the extent that the income derived by
such partnership, trust or estate is subject to U.S. tax as the income of a
resident either in its hands or in the hands of its partners or beneficiaries,
as the case may be.
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<PAGE>
Subject to the discussion below under the heading "Passive Foreign
Investment Companies," for U.S. Federal income tax purposes, the gross amount of
a dividend plus the Tax Credit Amount (i) will be included in gross income by an
Eligible U.S. Holder and (ii) will be treated as foreign source dividend income
to the extent paid out of current or accumulated earnings and profits as
determined for Federal income tax purposes. Subject to certain limitations, the
15% U.K. withholding tax will be treated as a foreign income tax eligible for
direct credit against such Eligible U.S. Holder's Federal income taxes. For the
purposes of the foreign tax credit limitation, dividends distributed by the
Company will generally constitute "passive income" or, in the case of certain
holders, "financial services income." The consequences of these limitations will
depend on the nature and sources of each U.S. Holder's income and the deductions
appropriately allocated or apportioned thereto. If dividends paid by the Company
were to exceed its current and accumulated earnings and profits as determined
for Federal income tax purposes, such excess will be treated as a non-taxable
return of capital to the extent of the U.S. Holder's adjusted basis in the ADSs
and any excess will be treated as a capital gain. No dividends received
deduction will be allowed with respect to dividends paid by the Company.
The Company intends to make arrangements with the U.K. Inland Revenue (the
"H Arrangements") which will permit the applicable Treaty Payments to be paid to
certain Eligible U.S. Holders at the same time as, together with, cash dividends
paid by the Company in respect of ADSs. The H Arrangements, which operate in
respect of dividends paid on shares of U.K. companies that are represented by
ADSs are implemented at the discretion of the U.K. Inland Revenue and may be
amended or revoked. The H Arrangements generally apply to Eligible U.S. Holders
other than (i) estates or trusts any of the beneficiaries of which are not
resident in the United States or Canada, (ii) investments or holding companies
25% or more of the capital of which is owned, directly or indirectly by persons
who are not individuals resident in and nationals of the United States, (iii)
persons exempt from U.S. tax with respect to cash dividends paid on the Ordinary
Shares, (iv) persons owning 10% or more of the Ordinary Shares and (v) U.S.
corporations which alone or together with associated corporations control 10% or
more of the voting shares of the Company. To claim the benefit of the
arrangements, the registered holder must complete the declaration on the reverse
of the dividend check confirming the U.S. Holder's entitlement to the Treaty
Payment and present the check for payment within three months from the date of
issue of the check, or, in the case of ADRs held through the Depository Trust
Company ("DTC"), the broker-dealer or bank-member of DTC which holds the ADSs on
behalf of the Eligible U.S. Holder must complete a declaration as to the
conditions entitling the Eligible U.S. Holder to the Treaty Payment.
If the H Arrangements are not made with the U.K. Inland Revenue at the time
that an Eligible U.S. Holder receives a distribution from the Company, or if the
H Arrangements are made at such time but an Eligible U.S. Holder does not
qualify for the benefits of such arrangements, such Eligible U.S. Holder must,
in order to obtain a Treaty Payment, file a claim for the Treaty Payment in the
manner described in U.S. Internal Revenue Service Revenue Procedure 80-18,
1980-1 C.B. 623 and Revenue Procedure 81-58. 1981-2 C.B. 678. Claims for tax
refunds must be made within six years of the U.K. year of assessment (generally
the twelve month period ending April 5 in each year) in which the related
dividend was paid. The first claim by a claimant for a tax credit under these
procedures is made by sending the appropriate U.K. form in duplicate to the
Internal Revenue Service Centre, Foreign Certification Request, P.O. Box 16347,
Philadelphia. Pennsylvania 19114. Forms may be obtained from the Internal
Revenue Service, Assistant Commissioner (International), 950 L'Enfant Plaza
South, S.W. Washington, D.C. 20024, Attention: Taxpayer's Service Division.
Because a claim is not considered made until the U.K. tax authorities receive
the appropriate form from the Internal Revenue Service, forms should be sent to
the Internal Revenue Service well before the end of the applicable limitation
period. Any claim by a claimant after the first claim should be filed directly
with FICO (International), FitzRoy House, P.O. Box 46, Nottingham, NG12 18D,
England.
Taxation of Capital Gains
A U.S. Holder who is neither a resident nor ordinarily resident in the
United Kingdom for U.K. tax purposes will not generally be liable for U.K. tax
on capital gains realised or accrued on the sale or other disposal of ADSs
unless the ADSs are used or held in connection with a trade, profession or
vocation carried on by such U.S. Holder in the United Kingdom through a branch
or agency, and the ADSs are or have been used, held or acquired in, or for the
purpose of, such trade, profession or vocation or such branch or agency. Subject
to the discussion below under the heading "Passive Foreign Investment
Companies", a U.S. Holder will be liable for U.S. Federal income tax on such
gains to the same extent as on any other gains from sales or disposition of
stock.
A U.S. Holder that is liable for both U.K. and U.S. tax on a gain on the
disposal of the ADSs will generally be entitled, subject to certain limitations
and pursuant to the Income Tax Convention, to credit the amount of U.K. capital
gains or corporation tax, as the case may be, paid in respect of such gain
against such U.S. Holder's U.S. Federal income tax liability in respect of such
gain. U.S. holders should seek professional tax advice to determine their
entitlement to credit U.K. tax against U.S. Federal income tax liability.
Inheritance and Gift Taxes
Provided any applicable U.S. Federal gift or estate tax liability is paid, a
U.S. holder who is domiciled in the United States for the purposes of the United
Kingdom - United States Estate and Gift Tax Convention of October 19, 1978 (the
20
<PAGE>
"Estate Tax Treaty") will generally not be subject to U.K. inheritance tax in
respect of the individual's death or on transfer of the Ordinary Shares or ADSs
during the individual's lifetime, unless the Ordinary Share or ADSs are part of
the business property of a permanent establishment of an enterprise in the
United Kingdom or pertain to a fixed base in the United Kingdom used for the
performance of independent personal services. Where the ADSs or Ordinary Shares
have been placed in trust by a settlor, the ADSs or Ordinary Shares will
generally not be subject to U.K. inheritance tax if the settlor, at the time of
the settlement, was domiciled in the United States and was not a U.K. national.
In the exceptional case where the shares are subject both to U.K. inheritance
tax and to U.S. Federal gift or estate tax, the Estate Tax Treaty generally
provides for the tax paid in the United Kingdom to be credited against tax paid
in the United States or for tax paid in the United States to be credited against
tax payable in the United Kingdom based on rules set out in that treaty.
U.K. Stamp Duty and Stamp Duty Reserve tax
Stamp duty is payable on an instrument of transfer of shares. Provided that
the instrument of transfer is not executed in the United Kingdom and remains at
all subsequent times outside the United Kingdom, no U.K. stamp duty or stamp
duty reserve tax will be payable on the acquisition or transfer of ADSs. If an
instrument of transfer is later brought into the United Kingdom, stamp duty will
then be payable. U.K. stamp duty or such transfer is currently payable at the
rate of 50 pence per (pound)100 (or part thereof). There are provisions within
U.K. tax legislation to ensure that both stamp duty and stamp duty reserve tax
will not generally both arise on the same transaction.
Passive Foreign Investment Company
The Company will be classified as a passive foreign investment company
("PFIC") for U.S. federal income tax purposes in the year of the offering on in
subsequent years if either (i) 75% or more of its gross income is passive income
or (ii) on average for the taxable year, 50% or more of its assets (by value)
produce or are held for the production of passive income. For purposes of this
determination, the average value of assets for the taxable year will be the
average of the fair market value of the assets, determined as of the end of each
quarterly period during the taxable year. For the purpose of these tests, the
assets and gross income of the Company's subsidiaries will be attributed to the
Company. While there can be no assurance, the Company expects, based on
projections of its income and assets and the manner in which the Company intends
to manage its business, that it will not be a PFIC. The Company will monitor its
status and will, promptly following the end of each taxable year, notify
shareholders it believes that it is properly classified as a PFIC for that
taxable year. The consequences of the Company being classified as a PFIC will
depend in part on whether the particular U.S. Holder has made an election (a
"QEF Election") to treat the Company as a qualified electing fund (a "QEF")
under Section 1295 of the Internal Revenue Code.
If the Company is a PFIC during a U.S. holder's holding period for its ADSs
and the U.S. holder does not make a QEF Election, the U.S. holder will generally
be required to pay a special U.S. tax (the "Special Tax"), in lieu of the U.S.
tax that would other wise apply, if such U.S. holder (a) realises a gain on
disposition of ADSs or (b) receives an "excess distribution" from the Company on
ADSs. An "excess distribution" is a distribution that exceeds 125% of the
average distribution over the shorter of the preceding three years or the U.S.
Holder's holding period. For purposes of calculating the Special Tax, a gain on
disposition or "excess distribution" would be treated as having been realised by
the U.S. Holder rateably each day over such U.S. Holder's holding period for its
ADSs. The amount of the Special Tax would be the sum of taxes resulting from the
following calculations: (i) the amount deemed realised in the taxable year of
disposition or "excess distribution" (including amounts allocated to any period
prior to the first taxable year of the Company in which it becomes PFIC) would
be includable in gross income as ordinary income for the taxable year of
disposition or "excess distribution", (ii) amounts deemed realised in each of
the other taxable years would be taxed at the highest marginal U.S. Federal
income tax rates in effect for the applicable class of taxpayer in the year of
deemed realisation, and (iii) an additional tax in the form of an interest
charge would be imposed in the tax deemed deferred in clause (i). The tax
liability with respect to amounts deemed realised in years prior to the taxable
year of disposition or "excess distribution" cannot be offset by any net
operating losses, and gains (but not losses) realised on the sale of ADSs cannot
be treated as capital, even if the ADSs are held as capital assets.
The Special Tax would not apply to any disposition of ADSs by a U.S. Holder,
or to any distribution by the Company to such U.S. Holder, if a QEF Election is
in effect with respect to that U.S. holder for each of the years during such
U.S. Holder's holding period that the Company is a PFIC, and the U.S. Holder
complies with certain reporting requirements (discussed below).
The Company will comply with all reporting requirements necessary for a U.S.
Holder to make a QEF Election, including maintaining books and records in
accordance with U.S. tax principles and will, promptly following the end of any
taxable year in which the Company determines that it is properly classified as a
PFIC, provide to registered holders of Ordinary Shares with U.S. addresses
(including the Depositary), and to other registered shareholders on request,
information necessary for such an election. The Depositary has agreed to
distribute such information to registered holders of ADRs.
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<PAGE>
If a U.S. Holder makes a QEF Election, the U.S. Holder would be currently
taxable on its pro rata share of the Company's ordinary earnings and net capital
gain (at ordinary income and capital gains rates respectively) for each taxable
year of the Company that the Company is classified as a PFIC, even if no
dividend distributions were received. Once a QEF election is made, it will apply
to all subsequent years that the Company is a PFIC and may be revoked only with
the consent of the Internal Revenue Service. A U.S. Holder will not be currently
taxed on the ordinary income and net capital gain on a QEF for any year that the
QEF is not classified as a PFIC. Prospective investors should consult their own
tax advisers concerning the merits of making a QEF Election if the Company is a
PFIC for any taxable year. In addition, certain classes of investors, such as
regulated investment companies and tax-exempt entities, may be subject to
special rules and should consult their own tax advisers concerning the
application of the United States Federal income tax rules governing PFICs in
their particular circumstances. Under current U.S. law, if the Company is a PFIC
in any year, a U.S. Holder must file an annual return on Internal Revenue
Service Form 8621, which describes the income received (or deemed to be received
pursuant to a QEF Election) from the Company and any gain realised on a
disposition of ADSs.
The foregoing discussion applies to the Company and to each of its
subsidiaries. Separate QEF elections must be made by each shareholder for the
Company and for each subsidiary company that is classified as a PFIC.
Controlled Foreign Corporations
Under Subpart F of the Code, a controlled foreign corporation ("CFC") is a
foreign corporation that on any day of its taxable year is owned, directly,
indirectly or by attribution, more than 50% by vote or by value, by "U.S.
Shareholders". For this purpose, a "U.S. Shareholder" is a U.S. person (as
defined in ss.957(c)) who owns directly, indirectly or by attribution at least
10% of the total combined voting power of all shares entitled to vote of the
foreign corporation. Management has represented that the Company is not and
during its current taxable year has not been a CFC.
In the event that a foreign corporation has been a CFC for an uninterrupted
period of at least 30 days during the CFC's taxable year, a U.S. Shareholder who
owns stock in the CFC on the last day in such year must include in income for
his taxable year in which or with which the taxable year of the CFC ends, the
total of (i) his pro rata share of the CFC's subpart F income for such taxable
year, (ii) his pro rata share of the CFC's previously excluded subpart F income
withdrawn from investments in less developed countries for such year, (iii) his
pro rata share of the CFC's previously excluded subpart F income from foreign
base company shipping operations for such year, (iv) his pro rate share of the
CFC's increase in earnings invested in U.S. property for such year, and with
respect to tax years of foreign corporations beginning on or before December 31,
1996 and to tax years of United States shareholders within which and with which
such tax years of foreign corporations end, and (v) his pro rata share of the
lesser of the CFC's earnings and profits accumulated in taxable years beginning
after September 30, 1993 or the amount of the CFC's passive assets in excess of
25% of total assets, computed on the basis of treating all CFCs commonly owned
directly or indirectly by a more than 50% CFC parent as a single CFC. In the
event the Company is a CFC, amounts distributed to U.S. Shareholders are tax
free to the extent that the amounts have been previously taken into income by
such U.S. Shareholders.
A U.S. person (as defined in ss.957(c)) who owns less than 10% of the total
combined voting power of all classes of voting stock of the Company directly or
indirectly, or by attribution, is not taxed on the undistributed income of the
Company even if the Company is a CFC. Distributions to shareholders who are not
U.S. Shareholders (but are U.S. persons) will be taxed under the ordinary rules
relating to the taxation of corporate distribution discussed above.
Under Section 1248 of the Internal Revenue Code, if a U.S. person sells or
exchanges stock in a foreign corporation, or receives a distribution from a
foreign corporation which for U.S. tax purposes is treated as an exchange of
stock, and such person owns, or is considered as owning by applying certain
rules of constructive ownership, 10 per cent or more of the total combined
voting power of all classes of stock entitled to vote of such foreign
corporation at any time during the five-year period ending on the date of the
sale or exchange when such foreign corporation was a CFC, then the gain
recognised on the sale or exchange of such stock shall be included in the gross
income of such person as a dividend, to the extent of the earnings and profits
of the foreign corporation and during the period of period of the stock sold or
exchanged was held by such person while such foreign corporation was a CFC.
The Company will monitor its status, the identity of its U.S. Shareholders,
and will, promptly following the end of any taxable year as to which it has
determined that it is a CFC, notify all shareholders that it is a CFC. In
addition, if the Company is notified by a U.S. Shareholder that it is a CFC, it
will so inform all other shareholders that it knows to be U.S. Shareholders. If
the Company becomes a CFC, it will comply with all U.S. reporting requirements
applicable to such classification.
Foreign Personal Holding Companies
The Company or any of its non-U.S. subsidiaries generally may be classified
as a "foreign personal holding company" ("FPHC") if in any taxable year five or
fewer persons who are U.S. citizens or residents with (directly, indirectly or
by
22
<PAGE>
attribution) more than 50% (by vote or by value) of the Company's stock (a "U.S.
group") and at least 60% (reduced to 50% in years subsequent to the first year
of FPHC status) of the gross income of the Company or any non-U.S. subsidiary
consists of passive income for purposes of the FPHC rules. Because substantially
all of the Company's income is likely to consist of dividends from subsidiaries,
which generally is passive income for purposes of the FPHC rules, the Company
may meet the FPHC income test.
If the Company or any of its subsidiaries is or becomes an FPHC, each U.S.
holder of ADSs or Ordinary Shares (including a U.S. corporation) who held such
shares on the last day of the taxable year of the Company or such subsidiary,
or, if earlier, the last day of its taxable year on which a U.S group existed
with respect to the Company or such subsidiary would be required to include in
gross income as a deemed dividend such U.S. Holder's pro rata portion of the
undistributed "passive" income of the Company or such subsidiary up to and
including the last day on which the U.S. group existed, even if no cash dividend
were actually paid. In such case, if the Company were the FPHC, a U.S. holder
would be entitled to increase its tax basis in the ADSs or Ordinary Shares of
the Company by the amount of the deemed dividend from the Company. If a
subsidiary of the Company were the FPHC, it is not clear that a U.S. holder in
the Company would be afforded similar relief.
Currently, five or fewer U.S. citizens or residents might be deemed to own
more than 50% of the outstanding stock of the Company for purposes of the FPHC
sales. Management believes that because over 50% of the stock of the Company is
held by two British citizens who are not U.S. resident (and no stock is owned by
a U.S. citizen or resident that is related to those two British citizens for
purposes of Code Section 554) and a Bahamian corporation in which no U.S.
citizen or resident has a beneficial interest, at the present time no U.S. group
exists and that no U.S. group will exist on completion of the offering. The
Company can give no assurances regarding future ownership of Company ADSs or
Ordinary Shares or future changes in citizenship or residence of any holders of
such shares, which could result in the creation of a U.S. group and thus cause
the Company to be treated as an FPHC. However, each of Messrs. Wallman and Rolph
promptly will inform the Company if either becomes a U.S. citizen or resident,
or if either becomes aware that a person related to either of them, within the
meaning of Code Section 554, acquires shares in the Company. Moreover, while the
Company intends to monitor its share ownership, it can give no assurance that it
will have timely knowledge of the information of a U.S. group. In this regard,
the Company does not assume any obligation to make timely disclosure with
respect to such status.
If the Company were to become an FPHC, a U.S. person who acquires ADSs or
Ordinary Shares from a decedent would be denied the step-up of tax basis of such
shares to fair market value on the decedent's date of death which other wise
would have been available and instead would have a tax basis equal to the lower
of fair market value or the decedent's basis.
As noted above, certain U.S. tax consequences turn on the composition of the
income of the Company and its subsidiaries. The tax law is not entirely clear as
to the proper classification of all relevant types of income which the Company
and its subsidiaries may realise. Accordingly, there can be no assurance that
management's expectations described above will be fulfilled.
Item 8. Selected Financial Data
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Annual Report on Form 20-F. The selected statement of operations data
and the balance sheet data has been derived from the Consolidated Financial
Statements of the Company, which have been prepared in accordance with generally
accepted accounting principles in the United States ("U.S. GAAP"). Effective
December 31, 1995 the Company changed its fiscal year end from March 31 to
December 31.
23
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (in accordance with US GAAP)
(in thousands of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Nine Months
Year Ended Ended Ended Year Ended
March 31, December 31, December 31, December 31,
--------------------------- ----------- ----------- ---------------------------
1994 1995 1994(i) 1995 1995(i) 1996
----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License ......................... $ 2,931 $ 6,364 $ 3,794 $ 7,657 $ 10,227 $ 16,861
Services and other .............. 3,134 4,398 3,153 4,918 6,163 9,104
----------- ----------- ----------- ----------- ----------- -----------
Total revenues .......... 6,065 10,762 6,947 12,575 16,390 25,965
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
License ............................ 128 148 80 103 171 804
Services and other .............. 980 2,455 1,691 2,816 3,580 4,937
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues ... 1,108 2,603 1,771 2,919 3,751 5,741
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ....................... 4,957 8,159 5,176 9,656 12,639 20,224
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ............. 2,340 3,782 2,282 4,301 5,801 10,271
Research and development ........ 551 1,113 734 1,284 1,663 3,185
General and administrative ...... 2,062 2,517 1,823 3,017 3,711 3,926
Goodwill amortization ........... -- -- -- -- -- 122
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses ... 4,953 7,412 4,839 8,602 11,175 17,504
----------- ----------- ----------- ----------- ----------- -----------
Income from operations ............. 4 747 337 1,054 1,464 2,720
Other income (expense) ............. (74) (77) (28) 4 (45) 965
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes ... (70) 670 309 1,058 1,419 3,685
Provision for income taxes ......... 12 254 117 384 521 1,216
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................. $ (82) $ 416 $ 192 $ 674 $ 898 $ 2,469
=========== =========== =========== =========== =========== ===========
Net income (loss) per share (ii) ... $ (0.01) $ 0.05 $ 0.02 $ 0.08 $ 0.11 $ 0.24
=========== =========== =========== =========== =========== ===========
Shares used to compute net income
(loss) per share 7,895,647 7,895,647 7,895,647 8,765,486 8,532,462 10,447,811
=========== =========== =========== =========== =========== ===========
</TABLE>
- --------------
(i) The figures for the year ended December 31, 1995 comprise audited figures
for the nine months to December 31, 1995 plus figures for the three months to
March 31, 1995 derived from the audited results for the year ended March 31,
1995. The figures for the nine-month period ended December 31, 1994 are derived
from the audited results for the year ended March 31, 1995.
(ii) The Company intends to retain all future earnings to finance future growth
and therefore does not anticipate paying any dividends in the foreseeable
future. In the nine months ended December 31, 1995 the Company paid $71,000 to
existing shareholders (year ended March 31, 1995 $81,000; March 31, 1994
$47,000).
24
<PAGE>
CONSOLIDATED BALANCE SHEET DATA (in accordance with US GAAP)
(in thousands of US Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------------
1994 1995 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents ................. $ 21 $ 720 $ 2,280 $25,228
Working capital ........................... 87 329 1,606 26,709
Total assets .............................. 3,200 6,091 7,755 41,551
Short-term debt ........................... 534 850 475 194
Long-term debt, excluding current portion.. 15 82 175 225
Total shareholders' equity ............... 456 879 2,490 32,004
</TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS DATA (in accordance with UK GAAP) (i)
(in thousands of US Dollars except share and per share data)
<TABLE>
<CAPTION>
Nine Months Nine Months
Year Ended Ended Ended Year Ended
March 31, December 31, December 31, December 31,
----------------------------------- ------------ ------------ ------------------------
1993 1994 1995 1994(ii) 1995 1995(ii) 1996
-------- -------- ----------- ------------ ------------ --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ............. $ 6,404 $ 6,065 $10,762 $ 6,947 $12,575 $16,390 $25,965
Income from operations 139 4 747 337 1,054 1,464 2,720
Net income (loss) .... (3) (82) 416 192 674 898 2,469
</TABLE>
CONSOLIDATED BALANCE SHEET DATA (in accordance with UK GAAP) (i)
(in thousands of US Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash ........................................ $ 19 $ 21 $ 720 $ 2,280 $25,228
Working capital ............................. 456 87 329 1,606 26,709
Total assets ................................ 2,631 3,200 6,091 7,755 41,551
Short-term debt ............................. 575 534 850 475 194
Long-term debt, excluding current portion.... 136 15 82 175 225
Total shareholders' equity .................. 1,108 456 879 2,490 32,004
</TABLE>
- ---------------
(i) The statement of operations data under generally accepted accounting
principles in the United Kingdom ("U.K. GAAP") in respect of the year ended
March 31, 1993 and the balance sheet data at that date relate to operations
prior to the introduction of Gentia and, in the opinion of the Company, are not
comparable to later periods.
(ii) The figures for the year ended December 31, 1995 comprise audited figures
for the nine months to December 31, 1995 plus figures for the three months to
March 31, 1995 derived from the audited results for the year ended March 31,
1995. The figures for the nine-month period ended December 31, 1994 are derived
from the audited results for the year ended March 31, 1995.
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section contains a number of forward looking statements. These
statements are based on current expectations and actual results may differ
materially. Among the factors which could cause actual results to vary are those
described in Item 1 - "Description of Business - Business Factors."
25
<PAGE>
Overview
The Company was founded in 1983 to develop, market and support financial
modelling software for business planning and analysis. Prior to the release of
Gentia, the Company marketed PC-based departmental decision support software
products. The Company commenced commercial shipments of its Gentia software in
October 1993. Since then, predominantly all of the Company's revenues have been
derived from licenses for Gentia and related maintenance, support, training and
consulting services. The Company currently expects that Gentia license and
services revenues will continue to account for all or substantially all of the
Company's revenues for the foreseeable future. As a result, the Company's future
operating results are dependent upon continued market acceptance of Gentia and
enhancements thereto.
Revenues from Gentia consist of license revenues as well as related software
maintenance and support, training and consulting revenues. The sales cycle for a
typical Gentia sale, from initial customer contact through product evaluation,
contract negotiation and signing, ranges from two to six months. License
revenues are recognized upon shipment of the product if no significant vendor
obligations remain and collection of the resulting receivable is probable. In
instances where a significant vendor obligation exists, revenue recognition is
delayed until such obligation has been satisfied. Maintenance and support
revenues, including the element of licensing fees attributable to the initial
warranty period, consist of fees for ongoing support and product updates and are
recognized ratably over the term of the contract, which is typically twelve
months. Revenues from training and consulting are recognized when the services
are performed. See Note 3 of Notes to Consolidated Financial Statements.
Cost of license revenues consist primarily of product packaging,
documentation and production costs together with any fees payable in respect of
software products embedded in the Gentia software. Costs of services and other
revenues consist primarily of customer support costs, consulting costs and
development costs which are generally expensed as incurred. See Note 3 of Notes
to Consolidated Financial Statements. Accordingly, cost of license revenues have
been, and are expected to continue to be, quite low in relation to license
revenues. The Company's gross profit is significantly higher on license revenues
than on services and other revenues. As a result, the mix of revenues during a
period can have a significant impact on the Company's profitability for that
period. For example, in the year ended December 31, 1996, the Company's gross
profit on $16,861,000 of license revenues was 95.2% and its gross profit on
$9,104,000 of services and other revenues was 45.8%. The Company's total gross
profit for that period was $20,224,000 or 77.9% of total revenues. If the
amounts of license revenues and services and other revenues for that period had
been reversed (and the ratios of costs to revenues had remained unchanged), the
Company's gross profit for the period would have been $16,389,000 or 63.1%.
The price of a Gentia license depends in part upon the number of users
contracted for by the customer. Therefore, license revenues depend not only on
the number of licenses sold but also on the size of the license. The average
size of Gentia licenses sold has increased from approximately $100,000 for the
nine-month period ended December 31, 1995 to approximately $105,000 for the year
ended December 31, 1996.
Sales and marketing expenses consist primarily of personnel costs, including
sales commissions, of all personnel involved in the sales process, as well as
costs of advertising, public relations, seminars and trade shows. Research and
development expenses, which are expensed as incurred, consist primarily of
salaries and other personnel-related expenses, depreciation of development
equipment and supplies and occupancy costs related to the Company's dedicated
research facilities. General and administrative expenses consist primarily of
personnel costs for finance, MIS, human resources and general management, as
well as insurance and professional expenses. Other income (expense) represents
the net of interest income, interest expense and foreign exchange gains or
losses. Interest income is received on cash deposits, interest expense relates
primarily to interest paid on credit lines and foreign exchange gains or losses
relate primarily to various cash transactions on operating accounts.
Since 1992, the Company has invested significant resources in developing its
Gentia software, as well as in developing its worldwide sales and marketing
organization. Total employees have increased from 54 as of April 1, 1994 to 186
as of December 31, 1996, primarily due to the growth of direct sales and support
functions. As a result, since 1993 the Company's operating expenses have
increased in absolute dollar amounts. The Company has increased its revenues
from the United States and the `Rest of the World' significantly over the past
three years. See Item 1 "Description of Business - Sales and Marketing" and Note
11 of Notes to Consolidated Financial Statements. The Company intends to hire
additional sales, support and marketing personnel and to increase its promotion
and advertising expenditures, particularly in the United States.
Although the Company has experienced significant growth in total revenues in
recent years, there can be no assurance that such growth rates are sustainable.
The Company's expense levels are based in significant part on the Company's
expectations of future revenues and therefore are relatively fixed in the short
run. If revenue levels are below expectations, net income is likely to be
disproportionately affected. There can be no assurance that the Company will
remain profitable on a quarterly or annual basis. See "-Selected Quarterly
Operating Results" and Item 1 - "Description of Business - Business Factors -
Fluctuations in Quarterly Results."
26
<PAGE>
The pound sterling is the functional currency of the Company as it is the
currency of the principal economic environment in which the Company conducts its
operations. A significant portion of the Company's revenues are received in
pounds sterling, and the majority of costs and expenses, particularly research
and development expenses, are incurred in pounds sterling. The financial
statements of the Company are translated from their functional currency into the
reporting currency, the U.S. dollar, utilizing the current rate method.
Accordingly, assets and liabilities are translated at exchange rates in effect
at the end of the reporting period, and revenues and expenses are translated at
the average exchange rate during the period. All translation gains or losses
from the translation into the Company's reporting currency are included as a
separate component of shareholders' equity. Fluctuations in the U.S. dollar and
pound sterling exchange rates will affect period to period comparisons of the
Company's reported results of operations. See Item 1 - "Description of Business
- - Business Factors - Currency Fluctuations."
Results of Operations
The following table sets forth the percentage of total revenues represented
by the respective line items in the Company's Consolidated Statements of
Operations for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Nine Months
Year Ended Ended Ended Year Ended
March 31, December 31, December 31, December 31,
-------------------- ------------ ------------ --------------------
1994 1995 1994 1995 1995 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues: (unaudited) (unaudited)
License fees ...................... .48.3% 59.1% 54.6% 61.0% 62.4% 64.9%
Services and other ................ 51.7 40.9 45.4 39.0 37.6 35.1
----- ----- ----- ----- ----- -----
Total revenue ................... 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenues:
License fees ...................... 2.1 1.4 1.2 0.8 1.1 3.1
Services and other ................ 16.2 22.8 24.3 22.4 21.8 19.0
----- ----- ----- ----- ----- -----
Total cost of revenues .......... 18.3 24.2 25.5 23.2 22.9 22.1
----- ----- ----- ----- ----- -----
Gross profit ........................ 81.7 75.8 74.5 76.8 77.1 77.9
----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing ............... 38.6 35.1 32.8 34.2 35.4 39.5
Research and development .......... 9.0 10.3 10.6 10.2 10.1 12.3
General and administrative ........ 34.0 23.4 26.2 24.0 22.7 15.2
Goodwill amortization ............. -- -- -- -- -- 0.4
----- ----- ----- ----- ----- -----
Total operating expenses ........ 81.6 68.8 69.6 68.4 68.2 67.4
----- ----- ----- ----- ----- -----
Income from operations .............. 0.1 7.0 4.9 8.4 8.9 10.5
Other income (expense) .............. (1.2) (0.7) (0.4) -- (0.2) 3.7
----- ----- ----- ----- ----- -----
Income before provision for
income taxes ................... (1.1) 6.3 4.5 8.4 8.7 14.2
Provision for income taxes .......... 0.3 2.4 1.7 3.0 3.2 4.7
===== ===== ===== ===== ===== =====
Net income (loss) ................... (1.4)% 3.9% 2.8% 5.4% 5.5% 9.5%
===== ===== ===== ===== ===== =====
</TABLE>
Year ended December 31, 1996 compared to year ended December 31, 1995
Revenues
The Company's total revenue increased 58.4% from $16.4 million for the year
ended December 31, 1995 to $26.0 million for the year ended December 31, 1996,
primarily as a result of an increase in the number and average size of licenses
sold and increased consulting, maintenance and other services, reflecting
increased acceptance of Gentia and expansion of the Company's direct sales and
support organisation.
Revenues for the year ended December 31, 1996 were $8.9 million in the
United Kingdom, $10.2 million in North America, $1.7 million in Australia and
$5.2 million from the rest of the world, (predominantly from Europe and
including $622,000 of export sales from the United Kingdom). Revenues for the
year ended December 31, 1995 were $7.3 million in the United Kingdom, $6.1
million in North America, $820,000 in Australia and $2.1 million from the rest
of the world (predominantly from Europe and including $1.6 million of export
sales from the United Kingdom). The Company has
27
<PAGE>
experienced growth in all its major markets, particularly North America and
Europe (excluding the United Kingdom). These increased revenues are primarily as
a result of increased worldwide acceptance of Gentia and increased consulting
and maintenance services related thereto.
Licence Revenues: Licence revenues increased 64.9% from $10.2 million for
the year ended December 31, 1995 to $16.9 million for the year ended December
31, 1996 primarily due to the higher sales of Gentia. Licence revenues increased
from 62.4% of total revenues for the year ended December 31, 1995 to 64.9% for
the year ended December 31, 1996 primarily due to the increased number and
average size of Gentia licences sold.
Services and Other Revenues: Services and other revenues increased 47.7%
from $6.2 million in the year ended December 31, 1995 to $9.1 million in the
year ended December 31, 1996. This was largely due to increased maintenance and
support revenues together with increased consulting assignments from the growing
Gentia customer base.
Cost of Revenues
Cost of License Revenues. Cost of license revenues was $171,000 and $804,000
in the years ended December 31, 1995 and 1996, respectively, representing 1.1%
and 3.1% of revenues for those periods. The increase was primarily due to the
payment of introduction fees on two contracts.
Cost of Services and Other Revenues. Cost of services and other revenues was
$3.6 million and $4.9 million in the years ended December 31, 1995, and 1996,
respectively, representing 21.8% and 19.0% of total revenues for those periods.
The decrease is due to the faster growth of license revenue over other revenue
and improved margins relating to consultancy revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by 77.1% from
$5.8 million for the year ended December 31, 1995 to $10.3 million for the year
ended December 31, 1996. This increase reflected the hiring of additional sales
and marketing personnel in connection with the expansion of the Company's sales
organization as well as higher sales commissions associated with increased sales
volume. As a percentage of total revenues, sales and marketing expenses
increased from 35.4% to 39.5% of total revenues for the years ended December 31,
1995 and 1996 respectively.
Research and Development. Research and development expenses increased by
91.5% from $1.7 million for the year ended December 31, 1995 to $3.2 million for
the year ended December 31, 1996. This increase was primarily attributable to
the addition of twenty seven people to the Company's technical and research
staff. As a percentage of total revenues, research and development expenses were
10.1% and 12.3% of total revenues for the years ended December 31, 1995 and 1996
respectively. The Company believes that a significant level of investment in
research and development is required to remain competitive and, accordingly, the
Company anticipates that it will continue to devote substantial resources to
product research and development and that research and development costs will be
expensed as incurred. See Note 3 of Notes to Consolidated Financial Statements.
General and Administrative. General and administrative expenses increased
5.8% from $3.7 million for the year ended December 31, 1995 to $3.9 million for
the year ended December 31, 1996. Expenses increased slightly due to the
increased staffing and administrative costs necessary to manage and support the
Company's current and anticipated growth. In addition, in the year ended
December 31, 1996, the Company provided an additional $188,000 against accounts
receivable to cover potential bad debts. General and administrative expenses
represented 22.6% and 15.2% of total revenues for the years ended December 31,
1995 and 1996, respectively. The Company believes that its general and
administrative expenses will continue to increase in absolute dollar amounts in
fiscal 1997, as the Company expands its administrative staff, adds
infrastructure on a global basis and incurs additional costs related to being a
public company, but that as a percentage of total revenue such expenses will
continue to fall.
Income from Operations
Income from operations for the year ended December 31, 1996 was $2.4 million
in the United Kingdom, $586,000 in North America, $1,000 in Australia and $1.1
million in the rest of the world. Income from operations for the year ended
December 31, 1995 was $2.2 million in the United Kingdom; a loss of $4,000 in
North America, breakeven in Australia and a loss of $7,000 in the rest of the
world. The increase in profitability in the United Kingdom was due to the
receipt of additional intra-company royalties. The change from a loss to a
profit in North America was due to additional sales in that area. The change
from a loss to a profit in the rest of the world was due to the Company's
increased presence in other countries due to acquisitions in South Africa,
Belgium, the Netherlands, the setting up of companies in Hong Kong and Germany
and new distribution agreements.
28
<PAGE>
Other Income (Expense)
Other income (expense) was $(45,000) and $965,000 in years ended December
31, 1995 and 1996, respectively, and relates primarily to interest earned (paid)
on interest bearing deposits (overdrafts). The increase in income was due to
significant interest income received on funds raised by the Company's initial
public offering in April 1996.
Provision for Income Taxes
The provision for income taxes was $521,000 and $1.2 million in the years
ended December 31, 1995 and 1996, respectively, representing 36.7% and 33.0% of
income before provision for income taxes for those periods. This decrease
reflected the wider geographical spread of earnings during the year and improved
tax management.
Nine months ended December 31, 1995 compared to the nine months ended December
31, 1994
Revenues
The Company's total revenues increased 81.0% from $6.9 million for the nine
months ended December 31, 1994 to $12.6 million for the nine months ended
December 31, 1995, primarily as a result of an increase in the number and
average size of licenses sold and increased consulting, maintenance and other
services, reflecting increased acceptance of Gentia and expansion of the
Company's direct sales and support organization.
Revenues for the nine months ended December 31, 1995 were $6.4 million in
the United Kingdom (including $852,000 of export sales), $4.9 million in North
America, $607,000 in Australia and $593,000 from the rest of the world,
(predominantly from Europe). Revenues for the nine months ended December 31,
1994 were $4.3 million in the United Kingdom (including $1.1 million of export
sales), $2.4 million in North America, and $249,000 in Australia. The decrease
in export sales from the United Kingdom from $1.1 million to $852,000 is as a
result of the formation of the Company's European subsidiary to undertake sales
to European countries other than the United Kingdom. The Company has experienced
growth in all its major markets, particularly North America. These increased
revenues are primarily as a result of increased acceptance of Gentia and
increased consulting and maintenance services related thereto.
Because the Company commenced shipping its Gentia product in October 1993,
revenues for the nine months ended December 31, 1994 included revenues derived
from the Company's previous products, EPIC and MasterModeller. Revenues from
these products were $1.8 million for the nine months ended December 31, 1994 and
$451,000 for the nine months ended December 31, 1995 and, accordingly, revenues
from sales of Gentia accounted for substantially all of the Company's revenues
for the period ended December 31, 1995. No revenues are expected from these
previous product lines in the future.
License Revenues. License revenues increased 101.8% from $3.8 million for
the nine months ended December 31, 1994 to $7.7 million for the nine months
ended December 31, 1995 primarily due to the higher sales of Gentia. License
revenues increased from 54.6% of total revenues for the nine months ended
December 31, 1994 to 61.0% for the nine months ended December 31, 1995 primarily
due to the increased number and average size of Gentia licenses sold.
Services and Other Revenues. Services and other revenues increased 56.0%
from $3.2 million in the nine months ended December 31, 1994 to $4.9 million in
the nine months ended December 31, 1995. This was due largely to increased
maintenance and support revenues together with increased consulting assignments
from the growing Gentia customer base. Services and other revenues did not
increase in proportion with the growth in revenues in the same period due to the
declining maintenance and support revenues from previous products.
Cost of Revenues
Cost of License Revenues. Cost of license revenues was $80,000 and $103,000
in the nine months ended December 31, 1994 and 1995, respectively, representing
1.2% and 0.8% of total revenues for those periods.
Cost of Services and Other Revenues. Cost of services and other revenues was
$1.7 million and $2.8 million in the nine months ended December 31, 1994 and
1995, respectively, representing 24.3% and 22.4% of total revenues for those
periods. This increase was the result of increased staffing in response to
increases in maintenance, support and consulting revenues and in anticipation of
future growth.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by 88.5% from
$2.3 million for the nine months ended December 31, 1994 to $4.3 million for the
nine months ended December 31, 1995. This increase reflected the hiring of
additional sales and marketing personnel (nine in the United States; eight in
the United Kingdom; one in Australia) in connection with the expansion of the
Company's sales organization as well as higher sales commission associated with
29
<PAGE>
increased sales volume. As a percentage of total revenues, sales and marketing
expenses increased from 32.8% to 34.2% of total revenues for the nine months
ended December 31, 1994 and 1995, respectively.
Research and Development. Research and development expenses increased from
$734,000 for the nine months ended December 31, 1994 to $1.3 million for the
nine months ended December 31, 1995. This increase was primarily attributable to
the addition of nine people to the Company's research staff. As a percentage of
total revenues, research and development expenses were 10.6% and 10.2% of total
revenues for the nine months ended December 31, 1994 and 1995, respectively. The
Company believes that a significant level of investment in research and
development is required to remain competitive and, accordingly, the Company
anticipates that it will continue to devote substantial resources to product
research and development and that research and development expenses will
increase in absolute dollars in fiscal 1996. To date, all research and
development costs have been expensed as incurred. See Note 3 of Notes to
Consolidated Financial Statements.
General and Administrative. General and administrative expenses increased by
65.5% from $1.8 million for the nine months ended December 31, 1994 to $3.0
million for the nine months ended December 31, 1995. Expenses increased
primarily due to the increased staffing and administrative costs necessary to
manage and support the Company's current and anticipated growth. In addition, in
the period to December 31, 1995 the Company provided $178,000 against accounts
receivable for support and maintenance on old product lines and its $55,000
investment in three non-operating subsidiaries. General and administrative
expenses represented 26.2% and 24.0% of total revenues for the nine months ended
December 31, 1994 and 1995, respectively. The decrease as a percentage of total
revenues was due to growth in the Company's total revenues. The Company believes
that its general and administrative expenses will increase in absolute dollar
amounts in fiscal 1996 as the Company expands its administrative staff, adds
infrastructure on a global basis and incurs additional costs related to being a
public company.
Income from Operations
Income from operations for the nine months ended December 31, 1995 was $1.4
million in the United Kingdom and $145,000 in North America; the Company had
losses from operations of $62,000 in Australia and $7,000 in the rest of the
world and unallocated corporate costs of $463,000. Income from operations for
the nine months ended December 31, 1994 was $989,000 in the United Kingdom; the
Company had losses from operations of $75,000 in North America and $74,000 in
Australia and unallocated corporate costs of $503,000. The increase in
profitability in the United Kingdom was due to additional revenue from customers
as well as additional royalties received from subsidiaries. The change from a
loss to profit in North America was due to one exceptional sale to a customer
which accounted for 15% of the Company's revenues during the nine month period
ended December 31, 1995. The loss in the rest of the world in the nine month
period ended December 31, 1995 was incurred in the European subsidiary formed to
undertake sales to European countries other than the United Kingdom.
Other Income (Expense)
Other income (expense) was ($28,000) and $4,000 in the nine months ended
December 31, 1994 and 1995, respectively.
Provision for Income Taxes
The provision for income taxes was $117,000 and $384,000 in the nine months
ended December 31, 1994 and 1995, respectively, representing 37.9% and 36.3% of
income before provision for income taxes for those periods. This increase
reflected the increase in net income indicated above.
Year ended March 31, 1995 compared to year ended March 31, 1994
Revenues
The Company's total revenues increased 77.4% from $6.1 million in the year
ended March 31, 1994 to $10.8 million in the year ended March 31, 1995,
primarily as a result of an increase in the number and average size of licenses
sold and increased consulting, maintenance and other services, reflecting
increased acceptance of Gentia and expansion of the Company's direct and
indirect sales and support organization.
Revenues for the year ended March 31, 1995 were $6.9 million in the United
Kingdom (including $1.7 million of export sales), $3.4 million in North America
and $437,000 in Australia. Revenues for the year ended March 31, 1994 were $4.4
million in the United Kingdom (including $650,000 of export sales) $1.4 million
in North America and $301,000 in Australia. The Company has experienced growth
in all its major markets, with particular emphasis on North
30
<PAGE>
America. These increased revenues are primarily as a result of increased
acceptance of Gentia and increased consulting and maintenance services related
thereto.
Because the Company started shipping its Gentia product in October 1993,
revenues for the year ended March 31, 1994 include revenues derived from the
Company's previous products, EPIC and MasterModeller. Revenues from these
previous products were $4.4 million for the year ended March 31, 1994 and $2.1
million for the year ended March 31, 1995 and accordingly revenues from sales of
the Gentia product accounted for the majority of the Company's revenues for the
year ended March 31, 1995.
License Revenues. License revenues increased 117% from $2.9 million in the
year ended March 31, 1994 to $6.4 million in the year ended March 31, 1995
primarily due to the increased sales of Gentia. License revenues increased from
48.3% of total revenues in the year ended March 31, 1994 to 59.1% in the year
ended March 31, 1995 primarily due to the increased number and average size of
Gentia licenses.
Services and Other Revenues. The increase in services and other revenues
from $3.1 million in the year ended March 31, 1994 to $4.4 million in the year
ended March 31, 1995 was largely due to increased maintenance and support
revenues together with increased consulting assignments from the Gentia client
base. The percentage of the Company's total revenues attributable to services
and other revenues decreased from 51.7% in the year ended March 31, 1994 to
40.9% in the year ended March 31, 1995 due to a significant increase in the
Company's sales of Gentia software. Furthermore, the year ended March 31, 1994
contained a significant amount of services and other revenues associated with
the Company's earlier products which were no longer supported in the year ended
March 31, 1995.
Cost of Revenues
Cost of License Revenues. Cost of license revenues was $128,000 and $148,000
in the years ended March 31, 1994 and 1995, respectively, representing 2.1% and
1.4% of total revenues for those periods.
Cost of Services and Other Revenues. Cost of services and other revenues was
$980,000 and $2.5 million in the years ended March 31, 1994 and 1995,
respectively, representing 16.2% and 22.8% of total revenues for those periods.
This increase was the result of increased staffing in response to increases in
maintenance, support and consulting revenues and in anticipation of future
growth.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 61.6% from $2.3
million in the year ended March 31, 1994 to $3.8 million in the year ended March
31, 1995. This increase reflected the hiring of additional sales and marketing
personnel (seven in the United Kingdom; one in the United States) in connection
with the expansion of the Company's sales organization and higher sales
commissions associated with increased sales volume. Sales and marketing expenses
represented 38.6% and 35.1% of total revenues in the years ended March 31, 1994
and 1995, respectively.
Research and Development. Research and development expenses increased from
$551,000 or 9.0% of total revenues in the year ended March 31, 1994 to $1.1
million or 10.3% of total revenues in the year ended March 31, 1995. This
increase was primarily attributable to an increase in the Company's research
staff. To date, all research and development costs have been expensed as
incurred. See Note 3 of Notes to Consolidated Financial Statements.
General and Administrative. General and administrative expenses increased by
22.1% from $2.1 million in the year ended March 31, 1994 to $2.5 million for the
year ended March 31, 1995. This increase was due to increased staffing necessary
to manage and support the Company's growth. General and administrative expenses
represented 34.0% and 23.4% of total revenues for the years ended March 31, 1994
and 1995, respectively. This decrease was due to growth in the Company's total
revenues which allowed for an improved utilization of fixed costs.
Income from Operations
Income from operations for the year ended March 31, 1995 was $1.8 million
in the United Kingdom; the Company had losses from operations of $337,000 in
North America and $48,000 in Australia and unallocated corporate costs of
$647,000. Income from operations for the year ended March 31, 1994 was $1.3
million in the United Kingdom; the Company had losses from operations of
$495,000 in North America and $80,000 in Australia and unallocated corporate
costs of $699,000. The increase in profitability in the United Kingdom was due
to increased revenue from customers as well as additional royalties received
from subsidiaries.
Other Income (Expense)
Other income (expense) was ($74,000) and ($77,000) in the years ended March
31, 1994 and 1995, respectively.
31
<PAGE>
Provision for Income Taxes
The provision for income taxes was $12,000 and $254,000 for the years ended
March 31, 1994 and 1995, respectively. The increases reflected the increase in
net income indicated above. The provision for income taxes of $254,000 in the
year ended March 31, 1995 represented 37.9% of income before provision for
income taxes for the period. While the Company showed a consolidated operating
loss for accounting purposes for the year ended March 31, 1994, a tax charge of
$12,000 was incurred.
Selected Quarterly Operating Results
The following tables set forth certain unaudited quarterly consolidated
statement of operations data for each quarter of the year ended December 31,
1995 and the year ended December 31, 1996, as well as such data expressed as a
percentage of the Company's total revenues for the periods indicated. This
unaudited quarterly financial information has been prepared on the same basis as
the audited consolidated financial statements contained herein and includes all
adjustments that in the opinion of the Company are necessary for a reasonable
presentation of such information when read in conjunction with the Company's
annual audited consolidated financial statements and notes thereto appearing
elsewhere in this report. The Company's quarterly results have in the past and
may in the future be subject to fluctuations. As a result, the Company believes
that results of operations for the interim periods should not be relied upon as
any indication of the results to be expected for any future period.
32
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------------
Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31,
1995 1995 1995 1995 1996 1996 1996 1996
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License ..................... $ 2,570 $ 2,636 $ 2,151 $ 2,870 $ 3,313 $ 3,966 $ 4,091 $ 5,491
Services and other .......... 1,245 1,654 1,728 1,536 1,890 2,138 2,327 2,749
------- ------- ------- ------- ------- ------- ------- -------
Total revenues ......... 3,815 4,290 3,879 4,406 5,203 6,104 6,418 8,240
------- ------- ------- ------- ------- ------- ------- -------
Cost of Revenues:
License ..................... 68 17 63 23 102 109 388 205
Services and other .......... 764 841 1,014 961 1,032 1,275 1,218 1,412
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues . 832 858 1,077 984 1,134 1,384 1,606 1,617
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ..................... 2,983 3,432 2,802 3,422 4,069 4,720 4,812 6,623
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing ......... 1,500 1,273 1,310 1,718 2,067 2,314 2,405 3,485
Research and development .... 379 409 430 445 597 775 794 1,019
General and administrative .. 694 1,302(i) 937 778 885 989 962 1,090
Goodwill amortization ....... -- -- -- -- -- -- 35 87
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 2,573 2,984 2,677 2,941 3,549 4,078 4,196 5,681
------- ------- ------- ------- ------- -------
------- -------
Income from operations ........... 410 448 125 481 520 642 616 942
Other income (expense) ........... (49) (18) (21) 43 (2) 269 376 322
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes ................. 361 430 104 524 518 911 992 1,264
Provision for income taxes ....... 137 156 38 190 192 337 367 320
======= ======= ======= ======= ======= ======= ======= =======
Net income ....................... $ 224 $ 274 $ 66 $ 334 $ 326 $ 574 $ 625 $ 944
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(i) Includes a provision of $178 against bad and doubtful accounts receivable in
respect of old product lines.
The Company commenced shipment of its Gentia product in October 1993. The
Company's total revenues have increased each quarter shown above, with the
exception of the quarter ended September 30, 1995. In that quarter, there was a
slight decline in license revenues from the previous quarter, due to the
seasonal summer effect in Europe and the United Kingdom. This decline was not so
apparent in 1996. The increase in total revenues were attributable to greater
acceptance of the Company's Gentia software, expansion of the Company's direct
sales organization and worldwide distribution network, and increased
maintenance, support and other revenues from a larger installed base.
Substantially all of the Company's revenues have been derived from sales of its
Gentia software and related services.
In general, license revenues have risen throughout the periods as a result
of continued acceptance of the Gentia product. Services and other revenues
showed similar growth as the Company's customer base increases. The increase in
quarterly services and other revenues since December 31, 1995 reflect growing
support and maintenance revenues from Gentia sales as well as the related
consulting revenues.
Sales and marketing expenses grew throughout the periods, reflecting the
expansion of the Company's sales and marketing organization. The March 31, 1995
quarter showed a large increase in such expenses due to large year-end bonus and
commission payments to sales personnel who had exceeded their annual sales
quotas.
General and administrative expenses increased throughout the periods and as
a percentage of total revenues continued to fall throughout the periods
reflecting expenses associated with additions to the Company's infrastructure.
In the quarter ended June 30, 1995, the Company provided against its outstanding
accounts receivable for support and maintenance on previous products. As of
December 31, 1996 there were no receivables relating to old product lines that
had not been provided for.
33
<PAGE>
The following table sets forth, as a percentage of revenues, certain line
items in the Company's Consolidated Statement of Operations for the periods
indicated
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31,
1995 1995 1995 1995 1996 1996 1996 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License ..................... 67.4% 61.4% 55.5% 65.1% 63.7% 65.0% 63.7% 66.6%
Services and other .......... 32.6 38.6 44.5 34.9 36.3 35.0 36.3 33.4
----- ----- ----- ----- ----- ----- ----- -----
Total revenues ......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of Revenues:
License ..................... 1.8 0.4 1.6 0.5 2.0 1.8 6.0 2.5
Services and other .......... 20.0 19.6 26.2 21.8 19.8 20.9 19.0 17.1
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues . 21.8 20.0 27.8 22.3 21.8 22.7 25.0 19.6
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
Gross profit ..................... 78.2 80.0 72.2 77.7 78.2 77.3 75.0 80.4
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing ......... 39.3 29.7 33.8 39.0 39.7 37.9 37.5 42.3
Research and development .... 9.9 9.5 11.0 10.1 11.5 12.7 12.4 12.4
General and administrative .. 18.2 30.4 24.2 17.7 17.0 16.2 15.0 13.2
Goodwill amortization ....... -- -- -- -- -- -- 0.5 1.0
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 67.4 69.6 69.0 66.8 68.2 66.8 65.4 68.9
----- ----- ----- ----- ----- ----- ----- -----
Income from operations ........... 10.8 10.4 3.2 10.9 10.0 10.5 9.6 11.5
Other income (expense) ........... (1.3) (0.4) (0.5) 1.0 0.0 4.4 5.8 3.9
----- ----- ----- ----- ----- ----- ----- -----
Income before provision for
income taxes ................. 9.5 10.0 2.7 11.9 10.0 14.9 15.4 15.4
Provision for income taxes ....... 3.6 3.6 0.9 4.3 3.7 5.5 5.7 3.9
===== ===== ===== ===== ===== ===== ===== =====
Net income ....................... 5.9% 6.4% 1.8% 7.6% 6.3% 9.4% 9.7% 11.5%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as demand for the Company's
Gentia software, the level of price and product competition, changes in pricing
policies by the Company or its competitors, changes in the mix of direct and
indirect channels through which Gentia is offered, the number, timing and
significance of product enhancements and new product announcements, if any, by
the Company and its competitors, the ability of the Company to develop,
introduce and market new and enhanced versions of Gentia on a timely basis, the
size, timing and structure of significant licenses, changes in the Company's
sales incentive strategy, the timing of revenue recognition under the Company's
agreements, customer order deferrals in anticipation of enhancements to Gentia
or new products of its competitors, the impact of acquisitions of competitors,
the level of the agreements, product life cycles, software defects and other
product quality problems, personnel changes, changes in Company strategy,
changes in the level of operating expenses and general domestic and
international economic and political conditions, among other factors.
Liquidity and Capital Resources
Until September 29, 1995, the Company funded its operations solely from its
initial capital base, operations, cash flows and limited bank facilities. On
September 29, 1995, the Company completed a $1 million private placement of
equity with Lucas Holdings Limited. See Item 13 - "Interests of Management in
Certain Transactions."
The Company generated cash from operations of $1.9 million and $1.1 million
in the years ended December 31, 1995 and 1996, respectively. On April 30, 1996,
the Company completed an initial public offering of 3,450,000 ADSs, representing
3,450,000 Ordinary Shares at $16.00 per share, of which 2,000,000 shares were
sold by the Company and 1,450,000 were sold by certain shareholders.
In May 1996, the Company acquired the business goodwill and certain tangible
assets from its exclusive South African distributor for approximately $139,000
in cash, and commenced its own operations via a wholly owned subsidiary in South
Africa.
In July 1996 the Company acquired the business goodwill from its exclusive
distributor in Germany for approximately $220,000 and commenced its own
operations via a wholly owned subsidiary in Germany.
34
<PAGE>
In July 1996 the Company also acquired for $1,000,000 all of the outstanding
capital stock held by third parties in Planning Sciences International BV, which
manages the group distributors in Continental Europe.
See Item 1 - "Description of Business."
In September 1996, the Company acquired the entire issued capital stock of
its distributors in Belgium, the Netherlands and Luxembourg for $1,790,000
consisting of $1,200,000 in cash and $590,000 paid through the issuance of
40,000 Ordinary Shares. Further payments up to a maximum of $2,000,000 may
become payable depending on the profitability of the businesses acquired based
on the achievement of quarterly targets to December 31, 1997.
All the acquisitions above were all accounted for under the purchase method
and resulted in the recording of approximately $3.5 million in identified
intangibles and goodwill. The goodwill and intangible assets acquired in all the
above transactions are being amortized over their estimated useful life of 10
years.
Aside from acquisitions, the Company's investing activities consisted of
purchases of property and equipment, primarily computer equipment and office
furniture and equipment, amounting to $849,000 and $1.4 million in the years
ended December 31, 1995 and 1996, respectively.
As a result of these investments, the Company's cash increased from $2.3
million at December 31, 1995 to $25.2 million at December 31, 1996. The
Company's working capital increased from $1.6 million at December 31, 1995 to
$26.7 million; and the Company's total assets increased from $7.8 million at
December 31, 1995 to $41.6 million at December 31, 1996.
As of December 31, 1996, the Company had no material commitments to make any
capital expenditures. The Company's principal commitments consist of
non-cancelable operating lease and capital lease agreements as detailed in Note
9 of Notes to Consolidated Financial Statements.
The Company believes that the net proceeds from the April 1996 initial
public offering, together with its current cash and the cash flows generated by
operations, if any, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's liquidity requirements, the Company may seek to sell additional equity
or convertible debt securities or obtain additional credit facilities. The sale
of additional equity or convertible debt securities could result in additional
dilution to the Company's shareholders. A portion of the Company's cash may be
used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. From time to time, in the ordinary
course of business, the Company evaluates potential acquisitions of such
businesses, products or technologies. The Company has no current plans,
agreements or commitments, and is not currently engaged in any negotiations with
respect to any such transaction.
The Company's accounts receivable are relatively high in terms of revenues,
due in part to the inclusion in accounts receivable of deferred revenues
invoiced in advance. The Company is continually reviewing its credit control
procedures with a view to improving receivables collections.
There was no significant impact as a result of inflation on the Company's
operations during 1996, 1995 and 1994.
Item 10. Directors and Officers of Registrant
The officers and directors of the Company, and their respective ages and
positions as of December 31, 1996, (except with respect to Mr Silk, in which
case such information is as of January 31, 1997), are as follows:
Name Age Position
- ---- --- --------
Paul R. Rolph ..... 53 Chief Executive Officer and Chairman of the
Board of Directors
Anthony K. Fox .... 41 Chief Financial Officer, Director and
Company Secretary
Timothy S. Jones .. 42 Development Director
R. Alan Wallman ... 51 Founder and Director
James R.H. Buchanan 40 Director
Ian W. Rawlings ... 38 Vice President (UK Operations)
Scott Silk ........ 39 Vice President (Group Marketing)
Mr. Rolph joined the Company in 1991 as Chief Executive Officer and
Director. He became Chairman of the Board of Directors on March 7, 1996. Mr.
Rolph has over 25 years experience with software companies in the United States,
Europe and Asia, including over ten years experience in project management
software. From 1986 to 1988, Mr. Rolph served as President of Metier Management
Systems, Inc. and as a Director of Lockheed Information Systems Group.
35
<PAGE>
Mr. Fox joined the Company in November 1995 as Chief Financial Officer. He
has been a Director since September 1995. Prior to joining the Company, he held
posts from 1988 to 1995 as Chief Executive Officer and Group Finance Director of
Cathay International Holdings plc., a company listed on the London Stock
Exchange. Prior to that he held posts as Group Finance Director, then Managing
Director, of the Asian operations of Metier Management Systems, Inc. Mr. Fox is
a member of the Institute of Chartered Accountants in England and Wales and the
U.K. Chartered Institute of Taxation.
Mr. Jones joined the Company as Development Director in 1992. From 1982 to
1992, Mr. Jones was Research Manager for Metier Management Systems, Inc., where
he was responsible for high performance database design, parallel processing
research and object-orientated design and programming techniques. Prior to 1982
he held various senior research and development posts in the U.K. Government and
commercial institutions.
Mr. Wallman founded the Company in 1983 and was Chairman of the Board of
Directors until March 7, 1996. Prior to founding the Company, Mr. Wallman had
over 15 years of experience in the technology industry in both technical product
development and senior management positions.
Mr. Buchanan has been a director of the Company since February 28, 1996.
Since 1981, Mr. Buchanan has served as Chairman of Hamilton Brothers Limited, a
financial services company. He currently serves as a non-executive chairman for
Cathay International Holdings plc. Mr. Buchanan is a member of the Institute of
Chartered Accountants in England and Wales.
Mr. Rawlings joined the Company in June 1992 as Branch Sales Manager
responsible for the Commercial Division. From November 1992 to December 1993 Mr.
Rawlings was Group Product Marketing Manager responsible for the introduction of
Gentia to the marketplace. In December 1993, Mr. Rawlings was appointed Group
Marketing Director. From January 1991 through May 1992, Mr. Rawlings held a
sales management position with Pilot Software (now owned by The Dun and
Bradstreet Corporation). In January 1997, Mr. Rawlings was appointed to manage
the United Kingdom operations.
Mr. Silk joined the Company in January 1997 from Actium Corporation and is
responsible for the coordination of worldwide marketing activities and channel
development. Mr Silk has held a number of posts at Unisys and from 1994 to 1995,
he served as Vice President of worldwide software sales and marketing with that
company.
All directors hold office until the next annual general meeting of
shareholders or until their successors are duly elected and qualified. The
officers serve at the discretion of the Board. There are no family relationships
between any of the directors or executive officers of the Company.
The Compensation Committee of the Board of Directors consists of Messrs.
Rolph, Fox and Buchanan. The Compensation Committee establishes salaries,
incentives and other forms of compensation for officers and other employees of
the Company and administers the incentive compensation and benefit plans of the
Company.
The Audit Committee of the Board of Directors consists of Messrs. Rolph,
Wallman and Buchanan. The Audit Committee reviews, acts on and reports to the
Board of Directors with respect to various auditing and accounting matters,
including the selection of the Company's independent accountants, the scope of
the annual audits, fees to be paid to the independent accountants, the
performance of the Company's independent accountants and the accounting
practices of the Company.
Item 11. Compensation of Directors and Officers
The aggregate amount of compensation paid by the Company to all of its
directors and officers - 6 persons as a group for the year ended December 31,
1996 was $428,548. The Chairman who was the highest paid director received
$160,000. In addition, fees of $189,000 were paid to companies in which two
directors held an interest.
The aggregate amount set aside or accrued by the Company to provide pension,
retirement or similar benefits for officers and directors of the Company for the
year ended December 31, 1996 was $26,339. See Item 12 - "Options to Purchase
Securities from Registrant or Subsidiaries."
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
In 1994, the Company adopted an Employee Share Option Scheme (the "1994
Plan") pursuant to which the Board of Directors (or a committee thereof) may
grant options to certain directors or employees of the Company or its
subsidiaries
36
<PAGE>
for the purchase of Ordinary Shares. The option prices may not be less than the
market value of the underlying shares of the dates of the option grants.
As of December 31, 1996, options under the 1994 Plan for the purchase of
2,007,000 Ordinary Shares by employees of the Company were outstanding at
exercise prices ranging from 21p to 60p ($0.36 to $1.03) per share, payable in
pounds sterling. The December 31, 1996 exchange rate of $1.7113 to (pound)1.00
used by the Company in the preparation of its financial statements for the year
then ended, has been used for purposes of calculating the dollar value of these
exercise prices. All options vest three years from date of grant and expire
seven years from date of grant; expiration dates range from February 2001 to
December 2002. As of December 31, 1996, options under the 1994 Plan for the
purchase of 928,334 Ordinary Shares were held by all directors and officers of
the Company as a group. See Note 6 of Notes to Consolidated Financial
Statements.
The Company's 1996 Equity Incentive Plan (the "1996 Plan") is intended to
serve as the successor equity incentive program to the Company's 1994 Plan.
Under the 1996 Plan, the Compensation Committee may grant stock options and
restricted stock grants to directors, employees and other persons providing
services to the Company for up to an aggregate of 2,000,000 Ordinary Shares. The
option or restricted stock prices may be greater than, less than, or equal to
the fair market value of the underlying shares on the date of grant. The 1996
Plan was adopted by the Board of Directors and approved by shareholders on March
7, 1996. As of December 31, 1996, options under the 1996 Plan for the purchase
of 833,350 Ordinary Shares by directors, employees and persons providing
services to the Company were outstanding at an exercise price from $8.50 to
$18.75 per share, payable in U.S. dollars. All such options vest (i) for
non-employee directors, 50% on December 31 of each year following the date of
grant and 50% on the following December 31, (ii) for employees, 25% on December
31 of each year following the date of grant; and (iii) for service providers,
approximately 4.1% at the end of each month beginning at the end of the first
full month after the date of grant, and such options expire between five and
seven years from date of grant, the latest of which expire on November 25, 2003.
As of December 31, 1996, options under the 1996 Plan for the purchase of 44,000
Ordinary Shares were held by all directors and officers of the Company as a
group. See Note 6 to Consolidated Financial Statements.
Grant of Options for Non-Employee Directors
In connection with the adoption of the 1996 Plan on March 7, 1996, the Board
of Directors of the Company voted that persons who are not employees of the
Company and who either were directors on that date (with the exception of R.
Alan Wallman, a founder of the Company) or who subsequently become directors of
the Company ("Eligible Directors") will each receive options under the 1996 Plan
for 16,000 Ordinary Shares effective upon the later of the adoption of the Plan
or their election as directors. As long as each Eligible Director continues to
serve as a director, his or her option will vest as to one-half of such shares
on December 31, of each first year of service and the remaining one-half on
December 31, of the following year. All of such options will have a term of five
years and an exercise price equal to the fair market value of the Ordinary
Shares on the date of grant. The Company's Board of Directors may amend or
terminate this arrangement for Eligible Directors at any future time.
Item 13. Interest of Management in Certain Transactions
Pursuant to an agreement with the Company dated September 29, 1995, Lucas
Holdings Limited ("Lucas"), a Bahamian corporation not previously affiliated
with the Company, acquired the equivalent of 877,333 Ordinary Shares for
$1,000,000 and was granted an option (the "Lucas Option") to purchase an
additional 351,000 shares at $0.33 per share which it exercised on November 1,
1995. Anthony K. Fox, who at the time was unaffiliated with the Company,
assisted Lucas with the transaction and received compensation from the Company
therefor. Pursuant to the agreement between the Company and Lucas, Mr. Fox was
designated as a director of the Company to represent Lucas' interests. Mr Fox
later purchased 50,000 Ordinary Shares from a Lucas shareholder and in November
1995, Mr Fox accepted the Company's offer to serve as its Chief Financial
Officer. Mr. Fox no longer serves as the Lucas representative on the Board of
Directors. Additionally, on October 26, 1995 Lucas purchased from Paul R. Rolph,
Chief Executive Officer and Chairman of the Board of the Company, 333,000 shares
which Mr Rolph acquired from the Company pursuant to the exercise of options on
October 25, 1995. These shares were acquired by Lucas for $0.47 per share. In
addition, the acquisition of the shares by Lucas from Mr. Rolph did not include
the receipt or exchange of any stated or unstated rights, privileges,
consideration, agreements or understandings to or from Lucas, Mr. Rolph, the
Company or any other affiliated or unaffiliated party or parties. Subsequently,
Lucas sold 43,866 shares to Alan L. Stanzler (an attorney who provides legal
services to the Company) and certain members of Mr Stanzler's family.
PART II
Item 14. Description of Securities to be Registered
Not Applicable.
37
<PAGE>
PART III
Item 15. Defaults Upon Senior Securities
None.
Item 16. Changes in Securities and Changes in Security for Registered
Securities
None.
PART IV
Item 17. Financial Statements
Not Applicable.
Item 18. Financial Statements
See pages F-1 through F-17 and page S-1 incorporated herein by
reference.
Item 19. Financial Statements and Exhibits
a) The following financial statements and schedule, together with
the reports of Ernst & Young and Clark Whitehill thereon, are
filed as part of this annual report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors ............................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 .................. F-3
Consolidated Statements of Operations
for the years ended December 31, 1996 and 1995 (unaudited),
the nine months ended December 31, 1995 and the year ended March 31, 1995 ..... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996 and 1995 (unaudited),
the nine months ended December 31, 1995 and the year ended March 31, 1995 ..... F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996 and 1995 (unaudited),
the nine-month period ended December 31, 1995 and the year ended March 31, 1995 F-6
Notes to Consolidated Financial Statements .................................... F-7
Schedule II - Valuation and Qualifying Accounts (all other schedules are
omitted as the information is not required, is not applicable or the
information is presented in the financial statements or related notes thereto) S-1
</TABLE>
b) Exhibits
None.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Planning Sciences International plc
By: /s/ Anthony K. Fox
Anthony K. Fox
Chief Financial Officer
-------------------------------------
Dated: February 13, 1997
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Planning Sciences International plc
We have audited the accompanying consolidated balance sheets of
Planning Sciences International plc as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for the year ended December 31, 1996 and the nine month
period ended December 31, 1995. Our audits also included the financial statement
schedule listed in the Index at Item 19(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with United Kingdom auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurances about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Planning Sciences International plc at December 31, 1996 and 1995, and the
consolidated results of its operations and its consolidated cash flows for the
year ended December 31, 1996 and the nine month period ended December 31, 1995
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG
ERNST & YOUNG
Chartered Accountants
London, England
February 13, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Planning Sciences International plc
We have audited the accompanying consolidated statements of operations,
cash flows and changes in shareholders' equity of Planning Sciences
International plc for the year ended March 31, 1995. Our audit also included the
financial statement schedule listed in the Index at Item 19(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with United Kingdom auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurances about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
consolidated cash flows of Planning Sciences International plc for the year
ended March 31, 1995, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ CLARK WHITEHILL
CLARK WHITEHILL
Chartered Accountants
Reading, England
February 28, 1996, except for
Note 6 - Share Option Plans and
Note 14 - Share Capital,
as to which the date is April 29, 1996
F-2
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
ASSETS December 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets
Cash ................................................................. $ 25,228 $ 2,280
Accounts receivables, net of allowance $478 (1995: $290) ............ 9,953 4,001
Prepaid expenses ..................................................... 821 381
----------- -----------
Total current assets ........................................ 36,002 6,662
Property and equipment, net .......................................... 2,013 1,093
Goodwill on acquisitions, net of amortization $122 (1995:$ nil) ...... 3,388 --
Deferred taxation .................................................... 148 --
----------- -----------
Total assets ................................................ $ 41,551 $ 7,755
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft ....................................................... $ -- $ 391
Current portion of lease obligations ................................. 194 84
Accounts payable ..................................................... 1,648 546
Taxes payable ........................................................ 1,373 310
Accrued liabilities .................................................. 1,778 1,030
Deferred revenue ..................................................... 2,969 1,967
U.K. value added tax ................................................. 346 373
Other accounts payable ............................................... 985 355
----------- -----------
Total current liabilities ................................... 9,293 5,056
----------- -----------
Non-current liabilities
Deferred taxation .................................................... 29 34
Long-term portion of lease obligations ............................... 225 175
----------- -----------
Total non-current liabilities ............................... 254 209
----------- -----------
Total liabilities ........................................... 9,547 5,265
----------- -----------
Shareholders' equity
Preference Shares (pound)1.00 par value:
2,000,000 shares authorized, none issued and outstanding ........ -- --
Ordinary Shares, 15p par value:
30,000,000 shares authorized, 8,999,167 issued and outstanding at
December 31, 1996 (1995: 6,459,167) ............................. 2,152 1,565
Additional paid-in capital .................................................... 27,182 715
Retained earnings ............................................................. 2,747 278
Cumulative translation adjustment ............................................. (77) (68)
----------- -----------
Total shareholders' equity .................................. 32,004 2,490
----------- -----------
Total liabilities and shareholders' equity .................. $ 41,551 $ 7,755
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
F-3
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
-------------------------- ----------- ------------
1996 1995 1995 1995
----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
License ....................... $ 16,861 $ 10,227 $ 7,657 $ 6,364
Services and other ............ 9,104 6,163 4,918 4,398
----------- ----------- ----------- -----------
Total revenues ......... 25,965 16,390 12,575 10,762
----------- ----------- ----------- -----------
Cost of revenues:
License ....................... 804 171 103 148
Services and other ............ 4,937 3,580 2,816 2,455
----------- ----------- ----------- -----------
Total cost of revenues .. 5,741 3,751 2,919 2,603
----------- ----------- ----------- -----------
Gross profit .............................. 20,224 12,639 9,656 8,159
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing ........... 10,271 5,801 4,301 3,782
Research and development ...... 3,185 1,663 1,284 1,113
General and administrative .... 3,926 3,711 3,017 2,517
Goodwill amortization ......... 122 -- -- --
----------- ----------- ----------- -----------
Total operating expenses 17,504 11,175 8,602 7,412
----------- ----------- ----------- -----------
Income from operations .................... 2,720 1,464 1,054 747
Other income (expense) .................... 965 (45) 4 (77)
----------- ----------- ----------- -----------
Income before provision for income taxes .. 3,685 1,419 1,058 670
Provision for income taxes ................ 1,216 521 384 254
=========== =========== =========== ===========
Net income ................................ $ 2,469 $ 898 $ 674 $ 416
=========== =========== =========== ===========
Net income per share ...................... $ 0.24 $ 0.11 $ 0.08 $ 0.05
=========== =========== =========== ===========
Shares used to compute net income per share 10,447,811 8,532,462 8,765,486 7,895,647
=========== =========== =========== ===========
</TABLE>
The figures for the year ended December 31, 1995 comprise audited results for
the nine months ended December 31, 1995 plus figures for the three months to
March 31, 1995 derived from the audited results for the year ended March 31,
1995.
The accompanying notes are an integral part of these statements
F-4
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousand of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
Share Capital
Ordinary Shares of
15p each Additional Capital Cumulative Total
---------------------- Paid-in Redemption Retained Translation Shareholders'
Shares Amount Capital (i) Reserve (i) Earnings (i) Adjustment Equity
--------- ---------- ----------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1994 ......... 48,667 $ 11 $ 218 $ 61 $ 239 $ (73) $ 456
Stock dividend (ii) .......... 4,818,000 1,178 (218) (61) (899) --
Exchange translation
adjustments ................. 88 88
Net income ................... 416 416
Dividends .................... (81) (81)
--------- ---------- ----------- ---------- ---------- ---------- -------------
Balance at March 31, 1995 ........ 4,866,667 1,189 -- -- (325) 15 879
Issuance of shares net of
issuance costs of $144(iii) . 877,333 208 648 856
Issuance of shares pursuant
to exercise of options:
Employees ................ 364,167 86 33 119
Lucas Holdings
Limited (iii) .......... 351,000 82 34 116
Exchange translation
adjustments ............. (83) (83)
Net income ................... 674 674
Dividends .................... (71) (71)
--------- ---------- ----------- ---------- ---------- ---------- -------------
Balance at December 31, 1995 .... 6,459,167 1,565 715 -- 278 (68) 2,490
Issuance of shares (net of
issuance costs of $5,710) .. 2,000,000 453 25,837 26,290
Issuance of shares pursuant
to exercise of options:
Employees ................. 500,000 125 50 175
Issuance of shares pursuant
to acquisition ............ 40,000 9 580 589
Exchange translation
adjustments ................. (9) (9)
Net income .................... 2,469 2,469
--------- ---------- ----------- ---------- ---------- ---------- -------------
Balance at December 31, 1996 ..... 8,999,167 $ 2,152 $ 27,182 $ -- $ 2,747 $ (77) $ 32,004
========= ========== ========== ========== ========== ========== ==========
</TABLE>
(i) The amount of shareholders' equity available for
distribution to shareholders is the amount of profits
determined under U.K. GAAP as distributable in the
statutory accounts of the parent company. At December
31, 1996 such distributable profits amounted to
$2,329 (1995: $787)
(ii) On October 26, 1994, the Company capitalized $1,178
of its retained earnings and other reserves by way of
a bonus issue (stock dividend) of 99 shares for each
share held at that date.
(iii) Pursuant to an agreement with the Company dated
September 29, 1995, Lucas Holdings Limited, a
Bahamian corporation not previously affiliated with
the Company, acquired the equivalent of 877,333
Ordinary Shares for $1,000 and was granted an option
to purchase an additional 351,000 shares at $0.33 per
share which it exercised on November 1, 1995.
The accompanying notes are an integral part of these statements
F-5
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
-------------------------- ------------ ------------
1996 1995 1995 1995
-------------------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income ............................................. $ 2,469 $ 898 $ 674 $ 416
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 598 248 241 227
Goodwill ......................................... 122 -- -- --
Changes in operating assets and liabilities:
Accounts receivable .......................... (6,140) (1,206) 136 (2,107)
Provision for bad and doubtful debts ......... 188 262 254 18
Supplies ..................................... -- 42 45 (3)
Prepaid expenses and other assets ............ (439) 113 (125) 194
Accounts payable ............................. 1,102 246 74 234
Accrued payroll and related expenses and other
accrued liabilities ................ 2,188 908 49 1,061
Deferred revenues ............................ 1,002 362 215 790
-------- -------- -------- --------
Net cash provided by operating activities .............. 1,090 1,873 1,563 830
-------- -------- -------- --------
Cash flows from investing activities
Proceeds from disposal of property and assets ...... 104 75 75 --
Purchases of property and equipment ................ (1,428) (849) (589) (405)
Costs of acquisitions .............................. (2,722) -- -- --
-------- -------- -------- --------
Net cash used in investing activities .................. (4,046) (774) (514) (405)
Cash flows from financing activities
Dividends paid ..................................... -- (71) (71) (81)
Net (repayment) of capital lease obligations ....... (160) (37) (36) (3)
Net proceeds from issuance of shares ............... 26,464 1,091 1,091 --
(Decrease) increase in bank overdraft .............. (391) 154 (409) 270
-------- -------- -------- --------
Net cash provided by financing activities .............. 25,913 1,137 575 186
Effect of exchange rate changes on cash ................ (9) 1 (64) 88
-------- -------- -------- --------
Net increase in cash ................................... 22,948 2,237 1,560 699
Cash at beginning of period ............................ 2,280 43 720 21
-------- -------- -------- --------
Cash at end of period .................................. $ 25,228 $ 2,280 $ 2,280 $ 720
======== ======== ======== ========
Supplemental disclosure of cash flow information
Interest (received) paid, net ..................... $ (922) $ 37 $ 27 $ 41
Taxes paid ......................................... $ 310 $ 63 $ 63 $ 50
Non-cash investing and financing activities
Acquisition of property and equipment through
capital leases ..................................... $ 360 $ 199 $ 170 $ 116
Shares issued for acquisition .......................... $ 590 -- -- --
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. Dollars, except share and per share data)
1. The Company
(a) Business of the Company
The Company develops, markets and supports high performance
client/server decision support software for business, planning and
decision making. Its principal product is marketed under the name
Gentia. The Company's revenues are derived from license revenues for its
Gentia software as well as software support and maintenance, training
and consulting revenues from Gentia licensees. Information on the
Company's operation by geographic area is included in Note 11.
Predominantly all of the Company's revenues are derived from licenses
for Gentia and related services and the Company currently expects that
Gentia-related revenues, including maintenance and support contracts,
will continue to account for all or substantially all of the Company's
revenues for the foreseeable future. As a result, the Company's future
operating results are dependent upon continued market acceptance of
Gentia and enhancements thereto. A decline in demand for, or market
acceptance of, Gentia would have a material adverse effect on the
Company's business, operating results and financial condition.
(b) Incorporation, Reorganization and Basis of Preparation
Planning Sciences International plc (the "Company") was incorporated in
England and Wales in September 1993 as Rorycreek Limited and changed its
name to Planning Sciences Holdings Limited in October 1993 on its
acquisition by the controlling shareholders of Planning Sciences plc
("PSP").
In March 1994 the Company acquired all of the issued and outstanding
shares of PSP in a share for share exchange of one Ordinary Share of
(pound)0.15 par value of the Company for every thirty shares of
(pound)0.05 par value in PSP. The acquisition by the Company of PSP has
been treated as a combination of entities under common control (the
accounting of which is similar to that of a pooling of interests).
On March 1, 1996, the Company was re-registered as a public limited
company and changed its name to Planning Sciences International plc. On
the same date PSP re-registered as a private limited company and changed
its name to Impact Information Systems Limited.
(c) Reorganization of Share Capital
On April 30, 1996, the effective date of the initial public offering,
the Company reorganized its authorized and issued share capital as
follows: its Deferred Shares of 5p each and its "B" Shares of 5p each
were converted into "A" Shares of 5p each and all of its "A" Shares of
5p each were consolidated and redesignated as Ordinary Shares of 15p
each on the basis of one Ordinary Share for every three "A" Shares. All
shares and references thereto in these financial statements have been
restated to show the effect of this reorganization.
2. Basis of Financial Statements
(a) Change of Fiscal Year
In 1995, the Company changed its fiscal year end from March 31 to
December 31. Accordingly, these financial statements are presented for
the years ended December 31, 1996 and March 31, 1995 and for the nine
month period ended December 31, 1995. For comparative purposes,
unaudited statements of operations and cash flows are also presented for
the year ended December 31, 1995. These unaudited financial statements
have been prepared on the same basis as the audited financial statements
and include all adjustments (consisting only of normal recurring
adjustments) that in the opinion of the Company are necessary for a fair
presentation thereof.
F-7
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiaries in the United States,
the United Kingdom, Germany, the Netherlands, Belgium, Australia, South
Africa, Hong Kong and Guernsey. All material intercompany balances and
transactions have been eliminated on consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with United States
generally accepted accounting principles ("U.S. GAAP") requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from these estimates.
(d) Companies Act 1985
These financial statements do not comprise statutory accounts within the
meaning of section 240 of the Companies Act 1985 of Great Britain (the
"Companies Act"). The Company's statutory accounts, which are its
primary financial statements, are prepared in accordance with accounting
principles generally accepted in the United Kingdom ("U.K. GAAP") in
compliance with the Companies Act. Statutory accounts for the year ended
December 31, 1996, the nine-month period ended December 31, 1995 and the
year ended March 31, 1995 have been prepared and the auditors have given
unqualified audit reports thereon. Such accounts for the nine month
period ended December 31, 1995 and the year ended March 31, 1995 have
been, and for the year ended December 31, 1996, will be delivered to the
Registrar of Companies for England and Wales.
3. Significant Accounting Policies
(a) Revenue Recognition
License revenues are recognized upon shipment of the product if it is
fully functional and no significant vendor obligations remain and
collection of the resulting receivable is probable. In instances where a
significant vendor obligation exists, revenue recognition is delayed
until the obligation has been satisfied.
Services and other revenues comprise revenues for support and
maintenance services for ongoing support and product updates, training
and consulting. Support and maintenance revenues are deferred and
recognised ratably over the term of the contract, which is typically
twelve months. Revenues from training and consultancy are recognised
when the services are performed. At December 31, 1996 deferred support
and maintenance revenues and deferred training and consultancy revenues
amounted to $2,899 (1995: $1,249) and $69 (1995: $718), respectively.
(b) Translation of Financial Statements of Foreign Entities
The functional currency of the Company and its U.K. subsidiaries is
sterling. The functional currencies of the other subsidiaries are the
local currencies.
For U.S. reporting purposes these financial statements are presented in
accordance with U.S. GAAP and in U.S. dollars using the translation
principles set out in the Statement of Financial Accounting Standards
("SFAS") No. 52. The consolidated balance sheets are translated into
dollars at the exchange rates prevailing at the balance sheet dates and
the statements of operations and cash flows at average rates for the
relevant periods. Gains and losses resulting from translation are
accumulated as a separate component of shareholders' equity. Net gains
and losses resulting from foreign exchange transactions, which are not
material in any of the reported periods, are included in the
consolidated statement of operations.
F-8
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
Although the Company has no current intentions to pay dividends, were it
to pay dividends they would be declared in sterling out of profits
available for that purpose as determined under U.K. GAAP and in
accordance with the Companies Act.
Due to the number of currencies involved, the constantly changing
exposures, and the substantial volatility of currency exchange rates,
the effect of exchange rate fluctuations upon future operating results
could be significant. To date, the Company has not undertaken hedging
transactions to cover its currency translation exposure.
(c) Income Taxes
Income taxes are computed using the liability method. Under this method,
deferred income tax assets and liabilities are determined based on
temporary differences between the financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
(d) Net Income per Share
Net income per share information is computed based on the weighted
average number of shares outstanding and dilutive share equivalents of
outstanding share options using the treasury stock method. For the nine
month period ended December 31, 1995 and the year ended March 31, 1995,
in accordance with the requirements of the Securities and Exchange
Commission, the computation takes into account the retroactive effect in
both periods of share options and shares issued in the twelve months
ended March 31, 1996 which have been treated as outstanding for both
periods. In the application of the treasury stock method with respect to
such issuances, the IPO price of $16.00 has been used as the repurchase
price.
(e) Property and Equipment
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:
Computer equipment - 4 years
Furniture, fixtures and office equipment - 4 years
Leasehold improvements - period of lease
Motor vehicles - 4 years
(f) Capital Leases
Assets held under capital leases are capitalized in the balance sheet
and are depreciated over their useful lives. Depreciation on these
assets is combined in the consolidated statements of operations with
depreciation on owned assets. The interest element of the rental
obligations is charged to the consolidated statements of operations over
the period of the lease at the interest rate implicit in the lease.
F-9
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
(g) Software Development Costs
Software development costs are included in research and development and
are expensed as incurred. SFAS No. 86 requires the capitalization of
certain software development costs once technological feasibility is
established. With respect to Gentia, technological feasibility was
achieved when all planning, designing, coding and testing activities
were complete. The capitalized cost is then amortized on a straight-line
basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To
date, the period between achieving technological feasibility and the
general availability of such software has been short and software
development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has not capitalized any software development
costs.
(h) Pension Costs
The Company sponsors and contributes to a number of defined contribution
plans. Contributions are charged in the statement of operations as they
become payable in accordance with the rules of the plans.
(i) Stock Based Compensation
The Company uses the intrinsic value method of APB Opinion No. 25
"Accounting for Stock Issued to Employees" for director and employee
stock options. The pro forma effect of using the fair value method for
such options of SFAS 123 is shown in Note 6.
4. Property and Equipment
Property and equipment comprises:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Computer equipment .......................................... $2,706 $1,480
Furniture, fixtures and office equipment .................... 525 460
Leasehold improvements ...................................... 515 209
Motor vehicles .............................................. 318 271
------ ------
4,064 2,420
Less: accumulated depreciation ............................ 2,051 1,327
------ ------
$2,013 $1,093
====== ======
</TABLE>
5. Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ ------
<S> <C> <C>
Accrued expenses and other current liabilities:
Accrued commissions....................................... $ 805 $ 408
Other..................................................... 973 622
------ ------
$1,778 $1,030
====== ======
</TABLE>
F-10
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
6. Share Option Plans
The Company has a share option plan which was adopted in February 1994 (the
"1994 Plan") and which succeeded a prior PSP plan. Outstanding options under
the PSP plan were exchanged for the equivalent number of options under the
Plan. Options granted under the Plan are for periods not to exceed seven
years, and must be issued at the higher of par value or the fair market
value of the shares on the date of grant as determined by the Board of
Directors in accordance with the U.K. Capital Gains Tax Act 1979.
Details of options under the 1994 Plan are as follows:
<TABLE>
<CAPTION>
Number of
Shares Price per Share
--------- ---------------------------------------
<S> <C> <C> <C>
Balance at April 1, 1994 ....................... 13,000 (pound) 21.00 $ 31.18 (i)
Adjustment for stock dividend .................. 1,287,000
Granted in year ........................... 1,378,834 0.21 0.342
---------
Balance at March 31,1995........................ 2,678,834 0.21 0.342
Granted in period........................... 192,333 0.60 0.950
Exercised in period......................... (364,167) 0.21 0.325-0.331(ii)
---------
Balance at December 31,1995..................... 2,507,000 0.21-0.60 0.326-0.331
Exercised in year .............................. (500,000) 0.21 0.35
---------
Balance at December 31, 1996................... 2,007,000 (pound)0.21-0.60 $ 0.36-1.03
========= ================ ============
Exercisable at December 31,1996................. 410,000 (pound) 0.21 $ 0.36
========= ================ ============
</TABLE>
- --------------------
(i) The exercise prices of the above options are fixed in pounds sterling. The
U.S. dollar equivalents have been derived by translating the pound sterling
amounts at the rates of exchange on the respective dates of grant,
cancellation or exercise as appropriate and at period end rates with
respect to the options outstanding at each period end.
(ii) The U.S. dollar equivalent at the exercise dates were $0.325 in respect of
30,833 options and $0.331 in respect of 333,334 options.
The remaining options are exercisable up to November 2003.
The 1996 Equity Incentive Plan (the "1996 Plan") was adopted by the Board of
Directors on March 7, 1996, and is intended to serve as the successor equity
incentive program to the Company's 1994 Plan under which no further share
options have been or will be granted. Under the 1996 Plan, the Compensation
Committee may grant stock options and restricted stock grants to directors,
employees and other persons providing services to the Company for up to an
aggregate of 2,000,000 Ordinary Shares. The option or restricted stock
prices may be greater than, less than, or equal to the fair market value of
the underlying shares on the date of the grant. As of December 31, 1996,
options under the 1996 Plan for the purchase of 833,350 Ordinary Shares by
directors, employees and persons providing services to the Company had been
granted and were outstanding at an exercise price from $8.50 to $18.75 per
Ordinary Share.
F-11
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
Details of options under the 1996 Plan are as follows:
<TABLE>
<CAPTION>
Number of Price per
Shares Share
-------- --------------
<S> <C> <C>
Granted in year .......................................... 572,500 $ 8.50
230,000 $10.00
13,500 $18.75
31,000 $12.50
38,000 $11.00
25,000 $12.50
--------
910,000
Lapsed in year ........................................... (76,650) $ 8.50 - 18.75
--------
Balance at December 31, 1996 ............................. 833,350 $ 8.50 - 18.75
==============
========
Exercisable at December 31, 1996 ......................... none
========
</TABLE>
Pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee share options under the fair value method
consistent with the method prescribed by that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for
1996 and 1995: risk-free interest rates of 5%, dividend yield of 0%,
volatility factor of 0.714, and an expected life of the option of two years.
The weighted average fair value of options, calculated using the
Black-Scholes option pricing model, granted during the year ended December
31, 1996 was $3.91 and during the nine-month period ended December 31, 1995
was $0.17. The pro forma information is as follows:
Nine Months
Year Ended Ended
December 31, December 31,
------------ ------------
1996 1995
------------ ------------
Pro forma net income ................. $2,243 $603
============ ============
Pro forma net income per share ....... $0.21 $0.08
============ ============
The following table summarizes information about the Company's share options
outstanding and exercisable at December 31, 1996 under the 1994 Plan:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Number Number
outstanding Weighted average outstanding
at December 31, remaining Weighted average at December 31, Weighted average
Exercise price 1996 contractual life exercise price 1996 exercise price
----------------- --------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
21p 1,814,667 56 months 21p 410,000 21p
60p 192,333 69 months 60p - 60p
----------------- --------------- ---------------- ---------------- --------------- ----------------
21p - 60p 2,007,000 57 months 25p 410,000 21p
================= =============== ================ ================ =============== ================
</TABLE>
F-12
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
The following table summarizes information about the Company's share options
outstanding and exercisable at December 31, 1996 under the 1996 Plan:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Number Number
outstanding Weighted average outstanding
Range of at December 31, remaining Weighted average at December 31, Weighted average
exercise price 1996 contractual life exercise price 1996 exercise price
----------------- --------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$8.50 - $11.00 770,850 74 months $ 9.07 - -
$12.50 - $18.75 62,500 80 months $13.15 - -
----------------- --------------- ---------------- ---------------- ----------------- ----------------
$8.50 - $18.75 833,350 75 months $ 9.38 - -
================= =============== ================ ================ ================= ================
</TABLE>
7. Employee Pension Plans
The Company sponsors and contributes to a number of defined contribution
pension plans. The assets of these plans are held separately from those of
the Company in independently administered funds. Contributions are expensed
as they become payable. The amount of contributions expensed was $241 for
the year ended December 31, 1996, $200 for the nine month period ended
December 31, 1995 and $146 for the year ended March 31, 1995.
8. Income Taxes
Income before income taxes is analyzed as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
------------ ------------ ---------
1996 1995 1995
------------ ------------ ---------
<S> <C> <C> <C>
United Kingdom ...................... $1,868 $ 964 $ 1,150
Overseas ............................ 1,817 94 (480)
------------ ------------ ---------
$3,685 $ 1,058 $ 670
============ ============ ==========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
------------ ------------ ----------
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Current:
United Kingdom ........................................ $ 732 $391 $209
United States ......................................... 293 3 -
Other ................................................. 347 - -
------------ ------------ ----------
Total current ......................................... $1,372 $394 $209
Deferred:
United Kingdom ........................................ (12) - -
United States ......................................... (144) (10) 45
------------ ------------ ----------
Total provision for income taxes ...................... $1,216 $384 $254
============ ============ ==========
</TABLE>
F-13
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
The following table analyzes the difference between the U.K. tax rate and the
effective tax rate:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
------------ ------------ ----------
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
U.K. Statutory rate ................................. 33.0% 33.0% 33.0%
Permanent disallowables for U.K. tax ................ 1.2 5.0 3.7
Utilization of net operating losses ................. 1.1 (3.7) -
Deferred tax valuation adjustments .................. (3.6) (1.8) 1.0
Other - net ......................................... 1.3 3.8 0.2
============ ============ ==========
Effective tax rate .................................. 33.0% 36.3% 37.9%
============ ============ ==========
</TABLE>
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
----- -----
<S> <C> <C>
Liabilities:
Fixed asset temporary differences .............................. $ 29 $ 16
Other .......................................................... - 18
---- -----
29 34
Assets:
Fixed asset temporary differences .............................. 42 37
Net operating loss carryforwards ............................... 98 139
Deferred revenue ............................................... 163 283
Accrued expenses ............................................... 159 -
Accounts receivable ............................................ 18 7
---- -----
480 466
Less: valuation allowance ......................................... (332) (466)
---- -----
Deferred tax assets after valuation allowance .................... $148 $ -
==== =====
Total net deferred tax asset (liability) .................... $119 $ (34)
==== =====
</TABLE>
At December 31, 1996, the Company had net operating loss carry forwards in
Australia of $278 (December 31,1995: $270) which may be carried forward
indefinitely.
On September 16, 1996, both Planning Sciences Inc. and Planning Sciences
Pacific Pty Ltd. relinquished their residency status in the United Kingdom
and are now taxed solely in the United States and Australia respectively.
For U.K. tax purposes, any losses that have been sustained by these
companies to September 16, 1996, have been utilized where possible by the
U.K. sub-group.
F-14
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
9. Commitments
The Company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2008. In addition, the
Company leases certain equipment under long-term lease agreements that are
classified as capital leases. These capital leases terminate at various
dates through 1999. Total property and equipment acquired under these
capitalized leases, which collateralize such borrowings, are as follows:
December 31,
-------------------------
1996 1995
-------------------------
Computer equipment .......................... $ 302 $ 185
Furniture, fixtures and office equipment .... 60 --
Motor vehicles .............................. 298 203
----- -----
660 388
Less: accumulated depreciation ............. (253) (131)
----- -----
$ 407 $ 257
===== =====
Future minimum annual lease payments under all non-cancelable operating and
capital leases at December 31, 1996 are as follows:
Year ending December 31, Operating Capital
------------------------ --------- -------
leases leases
------ -----
1997 .................................... $ 1,076 $ 240
1998 .................................... 880 151
1999 .................................... 612 70
2000 .................................... 340 38
2001 .................................... 247 2
2002-2008 ............................... 270 --
------- -------
Total minimum payments .................. $ 3,425 501
=======
Less: amounts representing interest ..... (82)
-------
Present value of capital lease obligation 419
Less: current portion ................... (194)
-------
Lease obligations, long-term ............ $ 225
=======
Rental expenses under operating leases totalled $945 for the year ended
December 31, 1996, $609 for the nine-month period ended December 31, 1995
and $456 for the year ended March 31, 1995.
10. Concentrations of Credit Risk and Significant Customers
Potential concentrations of credit risk to the Company consist principally
of cash, cash equivalents and trade receivables. The Company only deposits
short-term cash surpluses with high credit quality banks.
During the years ended December 31, 1996 and March 31, 1995 no customer
accounted for more than 10% of the Company's net sales. During the
nine-month period ended December 31, 1995 sales to one customer accounted
for approximately 15% of the Company's net sales.
The Company provides credit in the normal course of business and accordingly
performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. To date such losses have been within
management's expectations.
F-15
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
11. Industry and Geographic Information
The Company and its subsidiaries operate in one industry segment: the
development, marketing and support of high performance client/server
decision support software.
Information about the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
--------------------- ------------ ----------
1996 1995 1995 1995
-------- -------- ------------ ----------
(unaudited)
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers:
United Kingdom ............................... $ 13,947 $ 10,979 $ 8,232 $ 7,938
Less: Inter-area eliminations (i) ........... (4,455) (2,110) (1,796) (1,022)
-------- -------- -------- --------
9,492 8,869 6,436 6,916
North America (ii) ........................... 10,154 6,108 4,939 3,409
Australia .................................... 1,713 820 607 437
Rest of World ................................ 4,606 593 593 --
-------- -------- -------- --------
Total revenue ................................ $ 25,965 $ 16,390 $ 12,575 $ 10,762
======== ======== ======== ========
United Kingdom includes exports to:
Rest of Europe ............................... $ 622 $ 1,181 $ 688 $ 1,132
Middle East .................................. -- 139 68 199
Africa ....................................... -- 167 68 321
Asia ......................................... -- 71 28 98
======== ======== ======== ========
$ 622 $ 1,558 $ 852 $ 1,750
======== ======== ======== ========
Income from operations
United Kingdom (i) ........................... $ 2,350 $ 2,197 $ 1,441 $ 1,779
North America (ii) ........................... 586 (4) 145 (337)
Australia .................................... 1 -- (62) (48)
Rest of world ................................ 1,057 (7) (7) --
Corporate costs (United Kingdom) ............. (1,274) (722) (463) (647)
======== ======== ======== ========
Income from operations ....................... $ 2,720 $ 1,464 $ 1,054 $ 747
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
--------------------- ---------
1996 1995 1995
-------- -------- ---------
<S> <C> <C> <C>
Total assets
United Kingdom ............................... $ 9,056 $ 5,321 $ 4,669
North America (ii) ........................... 5,217 1,438 1,266
Australia .................................... 683 576 156
Rest of World ................................ 26,595 420 --
======== ======== ========
Total assets (iii) ........................... $ 41,551 $ 7,755 $ 6,091
======== ======== ========
</TABLE>
- --------
(i) Inter-area eliminations consist of intra-group royalties payable by the
Company's overseas subsidiaries to the United Kingdom operations in
respect of license sales and support and maintenance revenues. Such
royalties are based upon 25%-35% of the relevant customer sales for all
reported periods.
(ii) North America consists primarily of the United States.
(iii) Corporate assets are insignificant.
F-16
<PAGE>
PLANNING SCIENCES INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousand of U.S. Dollars, except share and per share data)
12. Acquisitions
In May 1996, the Company acquired the business goodwill and certain tangible
assets from its exclusive South African distributor for approximately
$139,000 in cash. Goodwill amounting to $192,000 arose on this acquisition.
In July 1996 the Company acquired the business goodwill from its exclusive
distributor in Germany for approximately $220,000 in cash, all of which has
been allocated to goodwill.
In July 1996 the Company also acquired all of the outstanding capital stock
held by third parties in Planning Sciences International BV for $1,000,000
in cash. Goodwill amounting to $1,001,000 was allocated to this acquisition.
In September 1996 the Company acquired the entire issued capital stock of
its distributors in Belgium, the Netherlands and Luxembourg for $1,790,000
consisting of $1,200,000 in cash and $590,000 paid through the issuance of
40,000 shares of the Company's Ordinary Shares. Further payments up to a
maximum of $2,000,000 may become payable depending on the profitability of
the businesses acquired based on the achievement of quarterly targets to
December 31, 1997. Such contingent payments will be allocated to goodwill as
they crystallize. To date $2,010,000 has been allocated to goodwill.
All of the above acquisitions were accounted for under the purchase method
and the assets and liabilities were recorded at their fair values on the
acquisition dates. Results of operations include all of these acquisitions
from the dates of acquisition. The goodwill and intangible assets acquired
in all the above transactions are being amortized over their useful life of
ten years.
The following unaudited pro forma financial information assumes the
respective acquisitions occurred at the beginning of the periods in which
the acquisitions took place and, for comparative purposes, at the beginning
of the immediately preceding year. These results have been prepared for
informational purposes only and are not necessarily indicative of the
operating results that would have occurred had the acquisitions been made as
discussed above. In addition, they are not intended to be a projection of
future results.
Nine Months
Year Ended Ended
December 31, December 31,
------------ ------------
1996 1995
------------ ------------
(unaudited) (unaudited)
Revenues ........................... $27,302 $13,571
============
============
Net income ......................... $ 2,377 $ 623
============ ============
Net income per share ............... $ 0.23 $ 0.07
============ ============
13. Recent Pronouncements
In February 1997 the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share". This standard applies to accounting periods ending
after December 15, 1997 and establishes new simplified standards for
computing and presenting earnings per share. Although early adoption is not
permitted, the standard requires restatement of all price period earnings
per share data once adopted.
14. Share Capital
The Share capital of the Company was reorganized upon the effective date of
the Company's initial public offering as described in Note 1(c).
F-17
<PAGE>
SCHEDULE II
PLANNING SCIENCES INTERNATIONAL plc
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
of period expense accounts Deductions period
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Description Year ended December 31, 1996:
Allowance for bad and doubtful debts .......... $290 $175 $ 66(a)(b) (53) $478
Nine months ended December 31, 1995:
Allowance for bad and doubtful debts .......... $ 36 $332 $(12)(a) (66) $290
Year ended March 31, 1995:
Allowance for bad and doubtful debts .......... $ 18 $ 34 $ 2(a) (18) $ 36
</TABLE>
- ---------------
(a) Exchange adjustments.
(b) Includes provisions held in the accounts of acquired companies.
S-1
