UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997.
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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Gentia Software 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
-----------------------------------
Securities registered or to be registered pursuant to Section 12(g) of
the Act:
Ordinary Shares, nominal value (pound)0.15 per share, each represented
by one American Depositary 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, 1997 was
9,609,751 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
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Page
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Item 1. Description of Business ............................................... 3
Item 2. Description of Property ................................................ 18
Item 3. Legal Proceedings ...................................................... 18
Item 4. Control of Registrant .................................................. 19
Item 5. Nature of Trading Market ............................................... 19
Item 6. Exchange Controls and Other Limitations Affecting Security Holders ..... 20
Item 7. Taxation ............................................................... 20
Item 8. Selected Financial Data ................................................ 23
Item 9. Management's Discussion and Analysis of Financial Conditions and
Results of Operations ................................................ 24
Item 9a Quantitative and Qualitative Disclosures about Market Risk ............. 32
Item 10. Directors and Officers of Registrant ................................... 32
Item 11. Compensation of Directors and Officers ................................. 33
Item 12. Options to Purchase Securities from Registrant or Subsidiaries ......... 33
Item 13. Interest of Management in Certain Transactions ......................... 34
PART II
Item 14. Description of Securities to be Registered ............................. 35
PART III
Item 15. Defaults Upon Senior Securities ........................................ 35
Item 16. Changes in Securities, Changes in Security for Registered Securities
and Use of Proceeds................................................... 35
PART IV
Item 17. Financial Statements ................................................... 35
Item 18. Financial Statements ................................................... 35
Item 19. Financial Statements and Exhibits ...................................... 35
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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. On July 1, 1997 the Company changed its
name to Gentia Software plc to reflect the growth in its product of the same
name. Unless the context otherwise requires, references herein to the "Company"
are to Gentia Software plc and its consolidated subsidiaries and references to
"Gentia" are to the Company's software product.
The Company develops, markets and supports high performance networked
business intelligence software for business planning and decision making. The
Company's software products employ a multidimensional database and a highly
flexible end user environment which empowers business managers throughout a
networked enterprise to perform, report and share complex analyses 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, scalable, 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.
On December 19, 1997, the Company signed a joint development and marketing
agreement (the "Renaissance Agreement") with Renaissance Solutions, Inc.
("Renaissance"), the originators and leading practitioners of "Balanced
Scorecard", to jointly develop and market a software product called `Renaissance
Balanced Scorecard powered by Gentia' ("Balanced Scorecard"). This application
enables the automatic deployment of balanced scorecards throughout an
organization, leveraging the distributed and scalable nature of the underlying
Gentia technology. Because corporate Balanced Scorecards are likely to be
deployed across company Intranets, the Company is producing a web enabled
version of the application which will run on all Internet browsers, making
extensive use of emerging HTML and Java based technologies. Renaissance shall
pay the Company a license fee on all Balanced Scorecard applications sold and in
turn the Company shall pay Renaissance a royalty or referral commission for any
Balanced Scorecard application sales completed by the Company. The Renaissance
Agreement represents an initial step in the Company's shift to `solutions based'
product offerings.
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 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 a
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 optimized 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-
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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.
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. Gentia refers to these type of systems as `Business Intelligence'
applications.
The Company believes that businesses are moving from a "purely technology"
product selection to a "solutions based" approach. The Company believes that
under a "solutions-based" product selection, businesses make software purchasing
decisions based on the ability of a software application to fulfill a specific
requirement, as opposed to a "purely technology" based product selection,
whereby businesses purchase software products based primarily on the
technological achievements and functionality, and then develop solutions based
on such technology. The Company has also recognized that the monitoring and
evaluation of business performance is crucial in developing and maintaining
competitive advantage. The Balanced Scorecard, a Gentia-powered application that
allows a business to measure, analyze and monitor financial and non-financial
information using a variety of leading and lagging indicators, is rapidly
gaining world-wide recognition as a mechanism that can significantly influence
the ability of an organization to predict and respond to changing business
requirements. The Balanced Scorecard represents the Company's initial step at
providing a "solutions based" product offering. Issues that have gated the
deployment of balanced scorecards in the past have primarily revolved around the
lack of a distributed, scalable automated application. The Company believes that
Balanced Scorecard, introduced in early 1998, will remove these limiting
factors.
The Gentia 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.
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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 Gentia'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:
? 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.
? 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.
? 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.
? How should we respond to this trend or exception? (Modeling and "what-if"
scenarios). Using Gentia's "what-if" modeling capabilities, the projected
impact of the trend or exception can be assessed, alternative scenarios
evaluated and corrective action taken or opportunities exploited.
Ease 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
undertaken using visual 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 Scalability
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 and a
growing number of mobile users on 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 remote 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 scalability 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
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WebSuite, an 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. The WebSuite allows customers to deploy
Gentia throughout the business on the Intranet or throughout the world on the
Internet.
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.
Application Framework
The Company has built upon the core system objects contained within the
Gentia system to provide an Application Framework. The Gentia Application
Framework consists of a number of reusable components and comprises five
modules, Data Management, Framework Application Pages, Framework Application
Templates, Framework Administration and Programming and System Function Modules.
Each of these modules has been carefully designed to provide as many application
development requirements as possible.
In any application that is built, there will be a large percentage of common
components including application menus, toolbars, status information, user
administration and navigation. The Gentia Application Framework provides all the
above functions immediately, each one being tailorable to the customer
requirements leaving only the core functionality to be specifically built for
any analytical application.
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:
Focus on "Solutions-based" Networked Business Intelligence. 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.
An example of this focus is the development of the Balanced Scorecard. The
Balanced Scorecard provides "out of the box" functionality for the creation and
deployment of company-wide Balanced Scorecard applications. Following acceptance
of Balanced Scorecard, which was introduced in early 1998, the Company and
Renaissance intend to broaden this application into a suite of networked
business intelligence applications to be termed the `Scorecard Suite', which
will build upon the Gentia Application Framework.
Maintain and Enhance Global Presence. The Company markets Gentia through its
direct sales force in the United States, the United Kingdom, Australia, South
Africa, Germany, France, Belgium and the Netherlands, and through distributors,
value added resellers ("VARs") and strategic partners in Europe, North America,
Asia, South America and Africa. The Company is further expanding its worldwide
direct sales force, particularly in the United States. The Company is
aggressively adding indirect sales relationships in its current markets and in
new markets. 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 450
customers. Customers are typically large international organizations which 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
scalability 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 highly flexible architecture that
facilitates ongoing product innovation. 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
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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. In March 1998, the
Company launched Gentia 4.0 which includes multi lingual versions of the core
Gentia product and customer developed applications across both single and double
byte languages. For example using Gentia 4.0, a French developer could develop
an application using a French based version of the software, and could deploy it
in English, French and German. In addition, Gentia 4.0 represents the first
version of Gentia which is guaranteed as Year 2000 compliant. This functionality
was delivered 3 months earlier than promised to the customer base. By mid-1998,
the Company expects to release a new Web-based version of the Gentia Application
Framework and Balanced Scorecard. These products make extensive use of Java
technology and can utilize the Secure Sockets Layer for secure Intranet
deployment. All Java applets for Gentia 4.0 have been accredited by Sun
Microsystems as 100% Java compatible.
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
compatibility's 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, Gentia Applications and the Gentia Software
Developers Kit which includes an Applications Programming Interface. The Company
licenses Gentia to its customers on a named user basis. These users can be
deployed across clients, servers and internet browsers. Pricing for an initial
Gentia configuration is $115,000 for 50 named users with an additional cost, of
$20,000 for 50 Gentia client installations. For the year ended December 31, 1997
the average software license for a typical Gentia installation was approximately
$136,000. The pricing for Balanced Scorecard is expected to start at $215,000
for 50 users.
Gentia is an integrated product encompassing the following core enabling
technologies and application components:
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 NT Windows NT
Windows 3.1 OS/2
Windows 95 HP-UX
Macintosh Power PC IBM AIX
OS/2 Sun Solaris
Sun Solaris UNIXWARE
Pyramid
"THIN" BROWSER CLIENTS
Netscape Navigator
Microsoft Internet Explorer
Sun HotJava Browser
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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,
scalability 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
The Gentia environment 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
("GUI") 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 responses 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
subtotaling, 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.
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 pre-built and tested objects, ranging
from simple bitmaps to pre-built 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 databases 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 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 (Gentia Analytical DabaBase) 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 neural 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 additional application development. Pages which have been developed in
Gentia incorporating Tables and Charts are 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 the Company. For the new web
version of the Application Framework scheduled for release in mid-1998, further
use will be made of Java and HTML technologies to provide additional analytical
and navigational capabilities. These new functions continue to ease the
increased demand for analytical Intranet based applications which were
previously only possible in a Client/Server environment.
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, the
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Company was the first vendor to implement the Open API standard, designed to
increase interoperatability between different vendor's products. As Microsoft
enters the OLAP market a new Microsoft led API has emerged - OLE DB for OLAP
API. This API has been committed to by the Company and virtually all of its
competitors. The Company is also releasing a consumer based version of API in
Gentia 5.0 which is scheduled for release towards the end of 1998.
Microsoft Excel Add-in. The Gentia Excel add-in is an extension design to
operate within Microsoft's popular spreadsheet. This product utilizes the Gentia
API to give Excel users the ability to connect to a Gentia Server and access the
multidimensional data stored there. Because the Gentia API also gives access to
the Gentia environment, spreadsheet users have the ability to store and forward
spreadsheet models and templates in the Gentia Object Store. This allows the
sharing of analyses and forecasts between spreadsheet users, thus greatly
enhancing the benefit of spreadsheet analysis. The Excel Add-in also permits the
entry of data into a GentiaDB database directly through the spreadsheet
interface.
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.
Customers
The Company sells its products to a variety of businesses, governments and
other organizations worldwide. As of December 31, 1997 the Company had over 450
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,
1997:
Technology
AirTouch Cellular Inc
AT&T Inc
Bell Atlantic Inc
BellSouth Telecommunications, Inc
Bull Information Systems Ltd
Cap Volmac BV
Ceridian Corp
Colt Telecommunications Ltd
Computing Devices International Inc
ECI Telecom BM
ICL plc
McDonnell Information Systems Group
Medidata Inc
Motorola Inc
Oki Europe Ltd
Pioneer NV
Siemens Nixdorf Information Systems Ltd
Sprint United Management Co
Sun Microsystems Inc
Walker Financial Solutions Ltd
Mortgage Lenders
Abv Building Society
Halifax Building Society
Leeds Permanent Building Society
Nationwide Building Society
Northern Rock Building Society
Norwich and Peterborough Building Society
Portman Building Society
West Bromwich Building Society
Yorkshire Building Society
Retail
Auchan SA
Allders Department Stores Ltd
Alpha Airports Group plc
Diamond Shamrock Co
Do-It-All Ltd
Heineken BV
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
Walgreens Co
Food and Beverage
Allied Mills Ltd
Campbell Soup Co Ltd
General Biscuits NV
Gilbeys Inc
Greene King plc
Highland Distilleries Co plc
McDonald's Restaurants
Tip Top Bakeries Pty
Tri Valley Growers Inc
Reckitt & Coleman Ltd
R.Twining & Co Ltd
Schweppes Europe plc
Scottish & Newcastle plc
Whitbread plc
Yates Brothers Wine Lodges plc
Young & Co's Brewery plc
Transportation
BAA plc
Cast Europe NV
Delta Airlines Inc
El Al Israeli Airlines
Federal Express
Hong Kong Airport Services Ltd
Northgate Motors Ltd
Singapore MRT Ltd
South African Airways Corp
Stena Data AB
Insurance Companies
AIG Golden Insurance BM
African Life Assurance Co Ltd
Bayerische Reinsurance AG
Britannic Assurance plc
Canada Maritime Ltd
Cologne Reinsurance AG
Guardian Insurance Ltd
GIO Australia Ltd
Goudse Verzekeringen BV
Hartford Insurance Inc
Independence Blue Cross Inc
Norwich Life Ltd
QBE Insurance Ltd
Sun & Royal Insurance plc
Scottish Amicable Assurance Society
Sun Life Assurance of Canada Inc
Suncorp Insurance & Finance Pty
Swiss Reinsurance
Zurich Australia Insurance Ltd
Manufacturing
ABB Industries
Aerostructure Corp
Albright & Wilson plc
Alcoa Building Products Inc
Alfred McAlpine plc
Audi AG
Avery Dennison BV
Babcock Rosyth Defence Ltd
Beazer Homes USA Inc
Bechtel Ltd
Bertlesmann AG
Boeing Information Systems Services Inc
Continental Tyres AG
DERA
Eastman Chemical Inc
Edon BV
European Vinyl Corp
Fletcher Challenge Forests Pty
Ford Motor Co. of Australia Ltd
Gallaher plc
Giat Industries SA
ICI Europe Ltd
Kimberly-Clark Ltd
Kvaerner John Brown Systems Ltd
Liebherr SA
Meggitt Plc
SCA Molnycke AB
Outokumpu Copper Products Oy
Raychem Corp
Rover Portugal SA
Sanyo Australia (Pty) Ltd
Sclumberger Industries SA
Tetra Pak International SA
Trelleborg AB
Vantona Viyella Ltd
Volvo Data AB
Volkswagon AG
WD & HO Wills Holdings Ltd
Energy
American Electric Power Co
Ashland Petroleum Co
Department of Energy (USA)
Endifor Sistemas Informaticos SA
Espoo SahKo Oy
Foster Wheeler Ltd
Israeli Electricity Company
National Power (UK) plc
Petroleos Mexicana (PEMEX) Corp
Public Service Company of Colorada
Sydney Water Corp
Washington Gas Light Company
Banking and Finance
ABSA Bank
ABN Amro
ADP
ANWB
Australia & New Zealand Banking Group
BACS
Banco Essi
Banco Investimento
Bank of New Zealand
Bank of Tyrol
Barclays Bank plc
BZW Services Ltd
Charles Schwab & Co
Citibank
DEVK
Euralliance SA
European Security Forum Ltd
FGH Bank
Fortis Nederland BV
Interpay Nederland BV
JP Morgan
Lloyds TSB Group plc
M&G Ltd
Massachusetts Mutual Life Insurance Co
Merrill Lynch Corp
National Westminster Bank plc
NCM (UK) Holdings Ltd
Postbank
Postcheque
Sorema (UK) Underwriting Ltd
Standard Chartered Bank
Swiss Mobilar SA
Union Bank of Switzerland
United Mizrahi Bank
VR Leasing AG
VSB Group
Health and Pharmaceuticals
Chase Farm Hospitals NHS Trust
ICN Pharmaceuticals Inc
Massachusetts General Hospital
McKesson Corp
Medscheme (Pty) Ltd
Medtronics Inc
National Blood Service (UK)
North Essex Health Authority
Organon Laboratories Ltd
Parkside Health NHS Trust
Roche Inc
SC Johnson Ltd
Scott Bader Company Ltd
Smith & Nephew Ltd
St.Josephs Hospital
Government
Birmingham City Council
Botswana Police
City of Helsinki Healthcare Dept
Dutch Post Office
Government of Israel
Grampian Regional Council
Helsinki Police Department
Hertfordshire County Council
Instituto de Informatica
Israeli Airforce
Israeli Army (Manpower)
Johannesburg City Council
Kingston Upon Hull City Council
Leicestershire Police
Metropolitan Police Authority
Ministry Of Tourism
Northamptonshire Police
Northwest Provincial Government (S.Africa)
Port of Singapore Authority
Portugese Air Force
Portugese Post
Royal Australian Air Force
Sheffield City Council
South Glamorgan County Council
South Lanarkshire County Council
South Wales Police
South Yorkshire Police
Thames Valley Police
UK Post Office
United States Department of Energy
University of Melbourne
West Mercia Constabulary
West Midlands Police
Woking Borough Council
Wright Paterson Air Force Base
Media and Entertainment
British Sky Broadcasting Ltd
CentreParcs Ltd
Murdoch Magazines (Pty) Ltd
The News International Group plc
Trinity International Holdings Ltd
Victoria Racing Club
Walt Disney Company
No single customer accounted for more than 10% of the Company's
revenues during the fiscal years ending December 31, 1997 and 1996
and one customer accounted for approximately 15% of the Company's
revenue during the nine month period ended December 31, 1995.
10
<PAGE>
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 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
December 31, December 31,
-------------------- ----------
1997 1996 1995
---------- ------- ----------
<S> <C> <C> <C>
North America .................. 36% 40% 39%
United Kingdom ................. 31% 34% 44%
Rest of Europe ................. 22% 15% 11%
Australia ...................... 6% 6% 5%
Rest of World .................. 1% 5% 1%
---- ---- ----
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 South Pacific. 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 adversely affected.
The Company's sales and marketing organization consisted of 64 employees as
of December 31, 1997. Sales staff are based at the Company's joint global
headquarters in Boston, USA, and London, England, as well as in the metropolitan
areas of Atlanta, Chicago, Cleveland, Connecticut, Dallas, Denver, Los Angeles,
New Jersey, New York, Phoenix and San Francisco in the United States, Sydney and
Melbourne in Australia, Johannesburg in South Africa, Antwerp in Belgium, Paris
in France, Frankfurt in Germany, Hertogenbosch and Woerden in the Netherlands
and in Hong Kong.
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 may be terminated after an initial term of two years upon
payment by the Company of sums to the distributors calculated by a formula based
on sales. 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. The Company's distribution business in Europe is
managed through Gentia Software International BV, a Netherlands Corporation
("BV").
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 allow its customers to use Gentia quickly and
efficiently. By helping customers achieve a more rapid rate of return on
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 Gentia by its clients. As of December 31, 1997, 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.
11
<PAGE>
The Company has recently implemented a twenty four hour, seven day a week
telephone support service based in Atlanta, Georgia, providing worldwide
telephone support services. The 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 license list price and are invoiced to customers on an annual basis. In
general, customers who maintain service contracts 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 part 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, reviews 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. This is based upon customer feedback, 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. As a result of the increased productivity
from leveraging this aspect of design, the Company has released and expects to
release several new products during 1998. Gentia version 4.0, released March
1998, provides Year 2000 compliance and comprehensive support for multilingual
applications within the OLAP market. An additional set of GUI product
enhancements provide extra functionality required for Balanced Scorecard but
will also benefit all users of the core Gentia product. Several improvements to
Gentia WebSuite including the support for the Secure Sockets Layer (SSL) enhance
Gentia's ability to deploy highly functional secure analytical applications via
corporate Intranets or the Internet. The Gentia Excel add-in, which allows users
to access gigabytes of information from within the convenience and ease of use
of Excel, has also been modified to support a multi lingual version. In
mid-1998, the release of two additional products are planned, namely web based
versions of the Application Framework and Balanced Scorecard applications.
Ongoing research includes improvements to Wide Area Network deployment by
maximizing the efficiency of network traffic and visual object utilization of
data. In addition, further investment in web based deployment using Java and
HTML/DHTML technologies aim to keep Gentia at the forefront of technology in the
Analytical Applications market. In 1999, substantial improvements to the core
Gentia DB database engine, including the management of complex multidimensional
modeling and calculations through Analytical Cache Models are also planned.
Finally, development to support the newly emerging Microsoft OLE DB for OLAP API
is scheduled over two releases during 1998 and 1999. This allows users to access
Microsoft's new Plato database transparently from within Gentia and Gentia
WebSuite.
As of December 31, 1997, the Company's research and development organization
of 60 full-time employees (1996: 48; 1995: 21) consisted of a combination of
development engineers, quality assurance engineers, product managers and
technical support personnel. The Company's total research and development
expense was approximately $4.7 million for the year ended December 31, 1997,
$3.2 million for the year ended December 31, 1996 and $1.7 million for the nine
month period 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 effect upon the Company's business, operating results and
financial condition.
12
<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 a source code escrow agreement with an escrow
agent enabling certain customers to 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, 1997, the Company had a total of 201 employees, including
60 in research and development, 64 in sales and marketing, 48 in customer
consulting and support services, 25 in finance and administration and 4 in
senior management. Of these employees, 100 were located in the United Kingdom,
57 were located in the United States, 12 in Australia, 24 in Europe, 7 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 is very 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, George Sprenkle, its Chief
Financial Officer, Timothy Jones, the Chief Technology Officer, Scott Silk, the
Sales and Marketing Director and Paul Martin, the 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 on 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 Annual Report contains certain forward-looking statements about the
Company's future business, financial condition and operations that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements set forth below and
elsewhere in this Annual Report should be read as being applicable to all
related forward-looking statements wherever they appear. 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:
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. From the introduction of the initial version of its
Gentia software the Company has shown annual growth in revenues, however, for
the year ended December 31, 1997, the Company experienced a decrease in license
revenues and a loss from operations, due primarily to a shift in its focus to
`solutions-based' product offerings. See Item 1 - "Description of Business -
General" and "--Industry Background" and Item 9 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations". There can be no
assurances that decreases in revenues and losses from operations will not occur
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 fall below expectations, operating results are likely to
be
13
<PAGE>
disproportionately affected. There can be no assurance that the Company will
be able to achieve 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 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 Gentia, 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 such as
Balanced Scorecard or enhancements to products of its competitors, the timing of
revenue recognition under the Company's agreements (and customer order deferrals
in anticipation thereof), the impact of acquisitions by the Company and 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
other factors.
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
to 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 co-operative
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 Balanced Scorecard, and maintenance and
support contracts, will continue to account for all or substantially all of the
Company's revenues for 1998 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
14
<PAGE>
competition, technological change or other factors would have a material adverse
effect on the Company's business, operating results and financial condition.
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 growing, however, 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, 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 are bound by long-term employment agreements.
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."
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,
15
<PAGE>
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, UK pounds sterling,
Australian dollars, Dutch guilders, French francs, German marks and the Company
does not currently engage in significant hedging activities. 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. Exchange rate fluctuations in relation to the U.K.
pound sterling and other currencies in which the Company does business relative
to the U.S. dollar may impact the reported financial information. See Item 9 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" 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. 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 makes sales, which afford only limited protection. There can
be no assurance that other competitors 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 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
16
<PAGE>
enacted in the future or unfavorable judicial decisions. 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 40% of the outstanding Ordinary
Shares as at December 31, 1997, and assuming all existing outstanding options
are exercised, all present directors, executive officers and principal
shareholders would beneficially own approximately 39% 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, in the form of ADSs, in the public market could adversely effect the
market price for the ADSs. As of December 31, 1997 the Company had outstanding
9,609,751 Ordinary Shares, of which 4,715,226 were owned of record by the
Depositary (as defined) representing an equal number of ADSs. Of the remaining
4,894,525 Ordinary Shares outstanding, 767,333 are freely tradable by persons
who are not "affiliates" (as defined in Rule 144 ("Rule 144") of the Securities
Act of 1933, as amended) of the Company and the remaining 4,127,192 Ordinary
Shares may be sold pursuant to an effective registration statement under
Securities Act or an applicable exemption from registration thereunder,
including Rule 144 (which permits resales of securities subject to limitations
depending on the holding period of such securities and in the case of shares
held by affiliates of the Company).
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 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 11,100 square feet in Boston, USA and approximately 11,600 square
feet in London, England pursuant to leases which expire in October 1998, July
1999, July 2000 and September 2001. 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, Chicago, Denver, Parsippany - New
Jersey, New York and San Francisco in the United States, Sydney and Melbourne in
Australia, Johannesburg in South Africa, Hertogenbosch and Woerden in the
Netherlands, Antwerp in Belgium, Paris in France, Frankfurt in Germany, Hong
Kong, and Guernsey. The Company believes that its existing facilities are
sufficient for its current needs but anticipates that it will need to seek
additional
17
<PAGE>
space before the end of 1998. 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"). Gentia has investigated
Arbor's Patent and in 1996 filed a declatory judgement action in the U.S.
District Court for the District of Massachusetts asserting that both Gentia does
not infringe claims of the Arbor Patent and that the claims of the Arbor Patent
are invalid. Arbor subsequently filed a complaint against the Company in the
U.S. District Court for the Northern District of California asserting that the
Company infringes the Arbor Patent. The Company has retained Arnold White &
Durkee PC as its counsel. In November 1996, the Company's declaratory judgement
action was transferred to the U.S. District Court for the Northern District of
California and consolidated with Arbor's infringement action. The consolidated
action has been stayed pending resolution of two third-party re-examination
requests which have been granted by the U.S. Patent and Trademark Office. A
status conference in respect of this action is expected to occur in August 1998.
The Company is vigorously pursuing its defense against Arbor Software and is
confident that it will prevail in the litigation. Prolonged litigation regarding
Arbor's claim could involve significant additional expenses attendant to such
litigation 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 license the infringed or similar technology, the Company's business,
operating results and financial condition would be materially adversely
affected.
18
<PAGE>
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 December 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 35.5%
All directors and officers as a group
(11 persons) (iv).................. 3,860,500 40.2%
- ---------------
</TABLE>
(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 9,609,751 Ordinary Shares outstanding as of December 31, 1997.
(iii) Includes 3,300,000 Ordinary Shares of which Kappa Ltd is the record
owner and Mr. Wallman is the beneficial owner. Mr Wallman is founder
and a Director of the Company. See Item 10 - "Directors and Officers of
Registrant"
(iv) Officers and directors also held options to acquire 1,026,668 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, 1997,
of 4,715,226 Ordinary Shares, representing 49.1% 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 "GNTIY".
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.
<TABLE>
<CAPTION>
High Low
---- ---
$ $
<S> <C> <C>
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 19.500 8.031
Second Quarter 9.500 3.250
Third Quarter 6.625 3.125
Fourth Quarter 4.375 2.125
1998:
First Quarter 8.000 2.906
</TABLE>
On March 31, 1998, the last sale price for the ADSs as reported on the
Nasdaq National Market was $6.000.
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 (the "Deposit Agreement") dated as
of April 30, 1996, among the Company, the Depositary, and the holders from time
to time of ADRs, 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.
19
<PAGE>
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 remittance of dividends, interest or other payments 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.
Item 7. Taxation
U.S. Federal Income tax and U.K. Tax Consequences to Persons who are Owners of
ADSs
The following generally summarizes 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, estates the income of which is subject to US federal income
taxation regardless of its source or a trust if a court within the United States
is able to exercise primary supervision over the administration and control of
the trust and one or more of the United States persons have the authority to
control all substantial decisions of the trust (collectively "US Holders");
provided however, to the extent and in accordance with the procedures provided
in Notice 98-25 (released by the Internal Revenue Service on April 14, 1998) and
future Treasury Regulations which will incorporate Notice 98-25, certain trusts
in existence on August 20, 1996, and treated as U.S. persons prior to such date
which elect to continue to be treated as U.S. persons will also be considered
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 Field Fisher Waterhouse. 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 under current UK law known as advance corporation
tax ("ACT"). The UK Government announced on March 17, 1998 that, subject to
enactment of the required legislation, the liability to pay ACT will be
abolished in respect of distributions made on or after April 6, 1999. 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. In respect of distributions made on or after
April 6, 1999 the credit available to such shareholders will reduce to one ninth
of the net cash dividend.
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, during the 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 realization 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
20
<PAGE>
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.
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.
If the Company, contrary to expectations, does pay a dividend before April
6, 1999 then it 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 Center, 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, NG2 1BD,
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 realized 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
21
<PAGE>
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
"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 Status
PFIC Classification: Special U.S. taxation rule are applicable to U.S. persons
owning shares in a "passive foreign investment company" ("PFIC"). Investors that
are not subject to U.S. taxation in respect of income on the ADSs or that are
not U.S. persons generally will not be affected by the PFIC rules. A foreign
corporation will be classified as a PFIC for any taxable year during which
either 75% or more of its gross income (including the pro rata share of the
gross income of any corporation (U.S. or foreign) in which the Company is
considered to own 25% or more of the shares by value) for the taxable year is
passive income or 50% or more of the average quarterly value of all of its
assets (including the pro rata share of the assets of any corporation in which
the Company is considered to own 25% or more of the shares by value) produce, or
are held for the production of, passive income. For this purpose, passive income
generally includes dividends, interest, royalties, rents (other than rents and
royalties derived in the active conduct of a trade or business), annuities and
gains from assets that produce passive income. 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. Although the Company will
attempt to conduct its business so as to avoid PFIC status, the Company can
provide no assurances that it will not be a PFIC in respect of its current or
any future taxable year.
Consequences of PFIC Status: If the Company were to be classified as a PFIC, a
U.S. Holder generally would be subject to special tax rules with respect to gain
realized on the sale or any other disposition of such ADSs, and any "excess
distribution" by the Company to the U.S. Holder with respect to ADSs held for
more than one taxable year. In general, excess distributions are any
distributions (including return of capital distributions) received by the U.S.
Holder in a taxable year that are greater than 125% of the average annual
distributions received by the U.S. Holder in the three preceding taxable years,
or the U.S. Holder's holding period, if shorter). Under these rules (i) the gain
or excess distribution would be allocated ratably over the U.S. Holder's holding
period for ADSs, (ii) the amount allocated to the current taxable year would be
treated as ordinary income, (iii) the amount allocated to each prior year would
be subject to tax at the highest rate in effect for that year and (iv) the
interest charge generally applicable to under payments of tax would be imposed
with respect to the resulting tax attributable to each such prior year. For
purposes of the foregoing rules, a U.S. Holder who uses such ADSs as security
for a loan will be treated as having disposed of such ADSs.
For tax years beginning after 1997, a U.S. Holder of ADSs in a PFIC that are
treated as "marketable stock" may also make a "mark-to-market" election. A
shareholder making the "mark-to-market" election will not be subject to the PFIC
rules described above. Instead, in general, an electing shareholder will include
in each year as ordinary income the excess, if any, of the fair market value of
the ADSs at the end of the taxable year over their adjusted basis and will be
permitted an ordinary loss in respect of the excess, if any, of the adjusted
basis of the ADSs over their fair market value at the end of the taxable year
(but only to the extent of the net income of previously included income as a
result of the "mark-to-market" election). The electing U.S. Holder's basis in
the ADSs will be adjusted to reflect any such income or loss amounts.
If the Company is a PFIC in any year, a U.S. Holder who beneficially owns ADSs
during such year must file an annual return or IRS Form 8621 that described its
interest in the Company, the distributions received from the Company and any
gain realized on the disposition of ADSs.
22
<PAGE>
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").
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
------------------------- --------------- ------------------------------------------
1994 1995 1995 1995(i) 1996 1997
----------- ------------- --------------- --------------- ------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License ......................... $ 2,931 $ 6,364 $ 7,657 $ 10,227 $ 16,861 $ 14,985
Services and other .............. 3,134 4,398 4,918 6,163 9,104 12,186
--------- --------- --------- -------- ----------- --------
Total revenues .......... 6,065 10,762 12,575 16,390 25,965 27,171
--------- --------- --------- -------- ----------- --------
Cost of revenues:
License.......................... 128 148 103 171 804 1,179
Services and other............... 980 2,455 2,816 3,580 4,937 6,800
--------- --------- --------- -------- ----------- ---------
Total cost of revenues.... 1,108 2,603 2,919 3,751 5,741 7,979
--------- --------- --------- -------- ----------- ---------
Gross profit ....................... 4,957 8,159 9,656 12,639 20,224 19,192
--------- --------- --------- -------- ----------- ----------
Operating expenses:
Sales and marketing ............. 2,340 3,782 4,301 5,801 10,271 14,308
Research and development ........ 551 1,113 1,284 1,663 3,185 4,698
General and administrative ...... 2,062 2,517 3,017 3,711 3,926 6,279
Goodwill amortization ........... -- -- -- -- 122 372
--------- --------- --------- -------- ----------- ---------
Total operating expenses ... 4,953 7,412 8,602 11,175 17,504 25,657
--------- --------- --------- -------- ----------- ----------
Income (loss) from operations ...... 4 747 1,054 1,464 2,720 (6,465)
Other income (expense) ............. (74) (77) 4 (45) 965 1,235
--------- --------- --------- -------- ----------- ---------
Income (loss) before provision
for income taxes................. (70) 670 1,058 1,419 3,685 (5,230)
(Provision) credit for income
taxes ........................... (12) (254) (384) (521) (1,216) 1,247
--------- --------- --------- -------- ----------- ---------
Net income (loss) .................. $ (82) $ 416 $ 674 $ 898 $ 2,469 $ (3,983)
========= ========= ========= ======== =========== =========
Net income (loss) per share (ii)
- basic......... $ (0.01) $ 0.06 $ 0.10 $ 0.14 $ 0.31 $ (0.44)
- diluted....... $ (0.01) $ 0.06 $ 0.09 $ 0.12 $ 0.24 $ (0.44)
========== ========= ========= ======== =========== =========
Shares used to compute net income
(loss) per share - basic......... 6,459,167 6,459,167 6,459,167 6,459,167 7,845,962 9,154,673
- diluted....... 6,459,167 6,459,167 7,340,156 7,186,190 10,491,703 9,154,673
========== ========= ========= ========= =========== =========
</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.
(ii) The Company has not paid any dividends to holders of Ordinary Shares since
January 1, 1996 and 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 dividends of
$71,000 to existing shareholders. In the years ended March 31, 1995 and 1994,
the Company paid dividends of $81,000 and dividends of $47,000 respectively, to
existing shareholders.
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
(in thousands of US Dollars)
March 31, December 31,
--------------------------- --------------------------------------------
1994 1995 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .................... $ 21 $ 720 $2,280 $25,228 $20,332
Working capital .............................. 87 329 1,606 26,709 22,144
Total assets ................................. 3,200 6,091 7,755 41,551 36,394
Short-term debt .............................. 534 850 475 194 105
Long-term debt, excluding current portion .... 15 82 175 225 109
Total shareholders' equity ................... 456 879 2,490 32,004 27,859
</TABLE>
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section contains a number of forward looking statements that involve
risks and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. 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 those
described in Item 1 - "Description of Business - Business Factors."
Overview
The Company was founded in 1983 to develop, market and support financial
modeling 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. On December 19, 1997, the Company signed the Renaissance
Agreement, a joint development and marketing agreement with Renaissance, a
leading provider of integrated business and technology consulting in the areas
of strategy, solutions and professional services to jointly develop and market
Balanced Scorecard. The Company currently expects that Gentia (including
Balanced Scorecard) 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 Balanced Scorecard) and enhancements thereto.
In the year ended December 31, 1997 the Company has not received any revenues
for Balanced Scorecard and no material amounts have been expended. The
introduction of Balanced Scorecard represents an initial step in the Company's
shift to "solutions-based" product offerings.
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 commission to third parties,
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 certain development licensing costs which are generally
expensed as incurred. See Note 3 of Notes to Consolidated Financial Statements.
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, 1997,
the Company's gross profit on $14,985,000 of license revenues was 92.1% and its
gross profit on $12,186,000 of services and other revenues was 44.2%. The
Company's total gross profit for that period was $19,192,000 or 70.6% 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
$17,850,000 or 65.7%.
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 type of license. The average price
of Gentia licenses
24
<PAGE>
sold has increased from approximately $105,000 for the year ended December 31,
1996 to approximately $136,000 for the year ended December 31, 1997.
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.
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 201
as of December 31, 1997, primarily due to the growth of direct sales and support
functions, as well as in research and development. As a result, since 1993 the
Company's operating expenses have increased in absolute dollar amounts. See Item
1 - "Descriptions of Business - Sales and Marketing". The Company intends to
continue 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 growth in total revenues in recent
years, there can be no assurance that such growth is 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 be profitable on a
quarterly or annual basis. See "-Selected Quarterly Operating Results" and Item
1 - "Description of Business Business Factors - Fluctuations in Quarterly
Results."
The U.S. dollar is the functional currency of the Company as it is the
currency of the principal economic environment in which the Company conducts its
operations. Transactions in foreign currencies are translated into U.S. dollars
at the exchange rate at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the rate of
exchange at the balance sheet date. All differences are taken to the
consolidated statement of operations.
Results of operations of the Company's subsidiaries which have their local
currencies as the functional currency are translated into U.S. dollars at the
average rates for the relevant period, while assets and liabilities of such
subsidiaries are translated using exchange rates at each balance sheet date. The
resulting exchange gains or losses are accumulated in the cumulative translation
adjustment account included as a component of shareholders' equity. Fluctuations
in 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."
25
<PAGE>
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
Year Ended Ended Year Ended
March 31, December 31, December 31,
------------------ ------------ ----------------------------
1994 1995 1995 1995 1996 1997
------- -------- --------- ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees ................... 48.3% 59.1% 61.0% 62.4% 64.9% 55.2%
Services and other ............. 51.7 40.9 39.0 37.6 35.1 44.8
------ ------ ------- ------ ------ ------
Total revenues .............. 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------- ------ ------ ------
Cost of revenues:
License fees ................... 2.1 1.4 0.8 1.1 3.1 4.4
Services and other ............. 16.2 22.8 22.4 21.8 19.0 25.0
------ ------ ------- ------ ------ ------
Total cost of revenues ...... 18.3 24.2 23.2 22.9 22.1 29.4
------ ------ ------- ------ ------ ------
Gross profit ..................... 81.7 75.8 76.8 77.1 77.9 70.6
------ ------ ------- ------ ------ ------
Operating expenses:
Sales and marketing ............ 38.6 35.1 34.2 35.4 39.5 52.6
Research and development ....... 9.0 10.3 10.2 10.1 12.3 17.3
General and administrative ..... 34.0 23.4 24.0 22.7 15.2 23.1
Goodwill amortization .......... -- -- -- -- 0.4 1.4
------ ------ ------- ------ ------ ------
Total operating expenses ... 81.6 68.8 68.4 68.2 67.4 94.4
------ ------ ------- ------ ------ ------
Income (loss) from operations..... 0.1 7.0 8.4 8.9 10.5 (23.8)
Other income (expense) ........... (1.2) (0.7) -- (0.2) 3.7 4.5
------ ------ ------- ------ ------ ------
Income (loss) before provision for
income taxes................. (1.1) 6.3 8.4 8.7 14.2 (19.3)
(Provision) credit for income taxes (0.3) (2.4) (3.0) (3.2) (4.7) 4.6
------ ------ ------- ------ ------ ------
Net income (loss) (1.4)% 3.9% 5.4% 5.5% 9.5% (14.7)%
====== ====== ======= ====== ====== ======
</TABLE>
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenues
The Company's total revenue increased 4.6% from $26.0 million for the year
ended December 31, 1996 to $27.2 million for the year ended December 31, 1997,
primarily as a result of an increase in revenues attributable to consulting,
maintenance and other services.
Revenues for the year ended December 31, 1997 were $8.3 million in the
United Kingdom, $9.8 million in North America, $1.7 million in Australia and
$5.9 million from the rest of Europe and $1.5 million from the rest of the
world. 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
$4.0 million from the rest of Europe and $1.2 million from the rest of the
world. The decrease in revenues in the United Kingdom and in North America are
primarily due to a decrease in license revenues in those regions, which resulted
primarily from a shift in product selection approach that the Company believes
its customers and potential customers are making from a "purely technology"
approach to a "solutions-based" approach. The Company has shifted its product
offering emphasis to respond to this shift, by, among other things, entering
into the Renaissance Agreement and jointly developing Balanced Scorecard. See
"Overview" and Item 1 "Description of Business - General" and "- Industry
Background". The increase in revenues in Europe are due to the Company's
increased presence in France, Germany, Belgium and the Netherlands.
License Revenues. License revenues decreased 11.1% from $16.9 million for
the year ended December 31, 1996 to $15.0 million for the year ended December
31, 1997 primarily due to the shift in product selection approach of the
Company's customers and potential customers that the Company believes has
occurred and is continuing, as discussed above. License revenues decreased from
64.9% of total revenues for the year ended December 31, 1996 to 55.2% for the
year ended December 31, 1997 for the same reason.
Services and Other Revenues. Services and other revenues increased 33.9%
from $9.1 million in the year ended December 31, 1996 to $12.2 million in the
year ended December 31, 1997. This was due to increased maintenance and support
revenues,
26
<PAGE>
together with increased consulting assignments from the growing Gentia customer
base. With the fall in license revenues, services and other revenues increased
from 35.1% of total revenues for the year ended December 31, 1996 to 44.8% for
the year ended December 31, 1997.
Cost of Revenues
Cost of License Revenues. Cost of license revenues was $804,000 and $1.2
million in the years ended December 31, 1996 and 1997, respectively,
representing 3.1% and 4.3% of revenues for those periods. The increase was
primarily due to the increased amount of commission payable to third parties.
Cost of Services and Other Revenues. Cost of services and other revenues was
$4.9 million and $6.8 million in the years ended December 31, 1996, and 1997,
respectively, representing 19.0% and 25.0% of total revenues for those periods.
The percentage increase is due to a slower growth in license revenue.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by 39.3% from
$10.3 million for the year ended December 31, 1996 to $14.3 million for the year
ended December 31, 1997. This increase reflected the expansion of the Company's
sales and marketing organization, particularly in the United States. The Company
expects these expenses to continue to rise as a result of its continued
investment in sales and marketing, together with the expansion of its
geographical coverage. As a percentage of total revenues, sales and marketing
expenses increased from 39.5% to 52.7% of total revenues for the years ended
December 31, 1996 and 1997, respectively.
Research and Development. Research and development expenses increased by
47.5% from $3.2 million for the year ended December 31, 1996 to $4.7 million for
the year ended December 31, 1997. This increase was attributable to a general
increase in research expenditure, including the addition of twelve people to the
Company's technical and research staff. As a percentage of total revenues,
research and development expenses were 12.3% and 17.3% of total revenues for the
years ended December 31, 1996 and 1997, 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,
which will continue to be expensed as incurred. See Note 3 of Notes to
Consolidated Financial Statements.
General and Administrative. General and administrative expenses increased
59.9% from $3.9 million for the year ended December 31, 1996 to $6.3 million for
the year ended December 31, 1997. Expenses increased due to an increase in the
Company's bad debt reserve of $1.3 million due to a more conservative approach
in evaluating receivables and increased staffing and administrative costs
necessary to manage and support the Company's continued geographic expansion.
General and administrative expenses represented 15.2% and 23.1% of total
revenues for the years ended December 31, 1996 and 1997, respectively. Excluding
the bad debt charge for the year, general and administrative costs increased
22.3% over the year ended December 31, 1996. The Company believes that its
general and administrative expenses will continue to increase in fiscal 1998, as
the Company expands its administrative staff, adds infrastructure throughout the
world and incurs continuing costs related to being a public company.
Income (Loss) from Operations
The loss from operations for the year ended December 31, 1997 was $6.5
million, comprising a loss from operations of $1.5 million in the United
Kingdom, $4.2 million in North America and income from operations of $91,000 in
Australia, $491,000 in the rest of Europe and $71,000 in the rest of the world.
Income from operations for the year ended December 31, 1996 was $2.7 million,
comprising income from operations of $2.4 million in the United Kingdom;
$556,000 in North America, $1,000 in Australia, $609,000 in the rest of Europe
and $448,000 in the rest of the world. The change from a profit to a loss in the
United Kingdom was primarily due to a decrease in revenue in UK operations,
including reduced royalty income, as well as increased research expenditure. The
change from a profit to a loss in North America was primarily due to a decrease
in revenue in North American operations, as well as an increase in sales,
marketing and ancillary administration costs in that area. The decrease in
profitability in the rest of Europe and the rest of the world relate to ongoing
costs of acquisition, and development of companies acquired over the last two
years, such as, the acquisitions of the Company's distributors or their
businesses in Belgium, Holland, France, Germany and South Africa, and expansion
related thereto.
Other Income
Other income was $965,000 and $1.2 million in years ended December 31, 1996
and 1997, respectively, and relates primarily to interest earned on interest
bearing deposits on funds raised by the Company's initial public offering in
April 1996. The increase is primarily due to interest receivable on cash
deposits for a full year.
Credit (Provision) for Income Taxes
The provision for income taxes was $1.2 million in the year ended December
31, 1996, and a $1.2 million credit in the year ended December 31, 1997,
representing 33.0% and 23.8% of income (loss) before provision for income taxes
for those periods.
27
<PAGE>
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 organization.
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 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.
License Revenues: License 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. License 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 licenses 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
28
<PAGE>
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 $2.1 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.
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.
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,
1996 and the year ended December 31, 1997, 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.
29
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31,
1996 1996 1996 1996 1997 1997 1997 1997
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
(in thousands of US Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License ................. $3,313 $3,966 $4,091 $5,491 $3,956 $5,018 $3,796 $2,215
Services and other ...... 1,890 2,138 2,327 2,749 3,045 3,088 2,745 3,308
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Total revenues ..... 5,203 6,104 6,418 8,240 7,001 8,106 6,541 5,523
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Cost of Revenues:
License ................. 102 109 388 205 167 116 751 145
Services and other....... 1,032 1,275 1,218 1,412 1,515 1,662 1,729 1,894
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Total cost of revenues. 1,134 1,384 1,606 1,617 1,682 1,778 2,480 2,309
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Gross profit.................. 4,069 4,720 4,812 6,623 5,319 6,328 4,061 3,484
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Operating expenses:
Sales and marketing ..... 2,067 2,314 2,405 3,485 3,114 3,591 3,719 3,884
Research and development 597 775 794 1,019 1,215 1,005 1,187 1,291
General and administrative 885 989 962 1,090 1,117 1,163 1,456 2,543
Goodwill amortization ... -- -- 35 87 88 91 90 103
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Total operating expenses 3,549 4,078 4,196 5,681 5,534 5,850 6,452 7,821
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Income (loss) from operations 520 642 616 942 (215) 478 (2,391) (4,337)
Other (expense) income ....... (2) 269 376 322 303 295 287 350
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Income (loss) before provision
for income taxes ............ 518 911 992 1,264 88 773 (2,104) (3,987)
(Provision) credit for income
taxes ....................... (192) (337) (367) (320) (29) (229) 631 874
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Net income (loss)............. $ 326 $ 574 $ 625 $ 944 $ 59 $ 544 $(1,473) $ (3,113)
========== =========== ========= ========== ========== ========= ========== =========
</TABLE>
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,
1996 1996 1996 1996 1997 1997 1997 1997
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License ................. 63.7% 65.0% 63.7% 66.6% 56.5% 61.9% 58.0% 40.1%
Services and other ...... 36.3 35.0 36.3 33.4 45.5 38.1 42.0 59.9
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Total revenues ........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Cost of Revenues:
License ................. 2.0 1.8 6.0 2.5 2.4 1.4 11.5 2.6
Services and other....... 19.8 20.9 19.0 17.1 21.6 20.5 26.4 34.3
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Total cost of revenues 21.8 22.7 25.0 19.6 24.0 21.9 37.9 36.9
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Gross profit ................. 78.2 77.3 75.0 80.4 76.0 78.1 62.1 63.1
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Operating expenses:
Sales and marketing ..... 39.7 37.9 37.5 42.3 44.4 44.3 56.9 70.3
Research and development. 11.5 12.7 12.4 12.4 17.4 12.4 18.1 23.4
General and administrative 17.0 16.2 15.0 13.2 16.0 14.4 22.2 46.0
Goodwill amortization -- -- 0.5 1.0 1.2 1.1 1.4 1.9
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Total operating expenses 68.2 66.8 65.4 68.9 79.0 72.2 98.6 141.6
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Income (loss) from operations 10.0 10.5 9.6 11.5 (3.0) 5.9 (36.5) (78.5)
Other (expense) income ....... -- 4.4 5.8 3.9 4.3 3.6 4.3 6.3
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Income (loss) before provision
for income taxes ............ 10.0 14.9 15.4 15.4 1.3 9.5 (32.2) (72.2)
(Provision) credit for income
taxes ....................... (3.7) (5.5) (5.7) (3.9) (0.4) (2.8) 9.7 15.8
---------- ----------- --------- ---------- ---------- --------- ---------- ---------
Net income (loss)............. 6.3% 9.4% 9.7% 11.5% 0.9% 6.7% 22.5% (56.4%)
========== =========== ========= ========== ========== ========= ========== =========
</TABLE>
30
<PAGE>
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as demand for Gentia, 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 such as Balanced Scorecard or enhancements to products of
its competitors (and customer order deferrals in anticipation thereof), the
timing of revenue recognition under the Company's agreements, the impact of
acquisitions by the Company and 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 other factors.
Liquidity and Capital Resources
The Company used cash of $3.0 million in its operating activities in the
year ended December 31, 1997 and generated cash of $1.1 million in the year
ended December 31, 1996. 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 September 1997, the Company acquired the business goodwill from its
exclusive distributor in France, and commenced its own operations via a wholly
owned subsidiary in France. The acquisition was accounted for under the purchase
method and resulted in approximately $465,000 being allocated to goodwill.
An additional $121,000 of goodwill was recorded relating to costs on prior
year acquisitions.
Goodwill and intangible assets acquired in respect of acquisitions accounted
for under the purchase method are amortized over their estimated useful life of
10 years.
The Company's investing activities for the year ended December 31, 1997, in
addition to the acquisition, consisted of purchases of property and equipment,
primarily computer equipment and office furniture and equipment, amounted to
$1.1 million, compared to the $1.4 million, for the year ended December 31,
1996.
Primarily as a result of losses over the year, the Company's cash decreased
from $25.2 million at December 31, 1996 to $20.3 million at December 31, 1997;
the Company's working capital decreased from $26.7 million at December 31, 1996
to $22.1 million; and the Company's total assets decreased from $41.6 million at
December 31, 1996 to $36.3 million at December 31, 1997.
As of December 31, 1997, the Company had no material commitments to make any
capital expenditure. The Company's principal commitments consist of
non-cancelable operating leases 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 to
December 31, 1998. Thereafter, if cash generated from operations is insufficient
to satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or other securities or obtain credit facilities. The sale of
additional equity or other securities convertible or exchangeable into equity
could result in dilution to holders of Ordinary Shares or ADSs. 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.
In May 1998, the Company acquired the issued share capital of Technical and
Computer Management Services Ltd/("TCMS Ltd"), a U.K. Company, and its
subsidiary Technical and Computer Management Services LLC ("TCMS LLC") in
consideration of cash and Ordinary Shares with a combined value at approximately
$2.0 million. TCMS Ltd is a technical consulting firm in both the U.S. and U.K.
with extensive experience in the implementation of enterprise-wide, web-based
analytical applications using Gentia technology.
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 and has increased
its bad debt reserve for the year ended December 31, 1997 by $1.3 million.
There was no significant impact as a result of inflation on the Company's
operations during 1995, 1996 or 1997.
31
<PAGE>
Item 9a. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 10. Directors and Officers of Registrant
The directors and executive officers of the Company, and their respective
ages and positions as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Directors
Paul R. Rolph.............................. 54 Chief Executive Officer and Chairman of the Board
George F. Sprenkle.......................... 42 Chief Financial Officer and Director
Timothy S. Jones ........................... 43 Chief Technology Officer and Director
Paul T. Martin ............................. 37 Development Director
Scott G. Silk .............................. 40 Sales and Marketing Director
R. Alan Wallman ............................ 52 Founder and Non-executive Director
Anthony K. Fox ............................. 42 Non-executive Director
James R.H. Buchanan ........................ 41 Non-executive Director
Officers
David P. Holden............................. 39 Company Secretary and Group Financial Controller
Stephen J. Hill ............................ 42 Vice President - Europe, Middle East and Africa
Ian W. Rawlings............................. 39 Vice President
</TABLE>
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.
Mr. Sprenkle joined the Company in October 1997 as Chief Financial Officer.
Prior to joining the Company he held various senior positions at Unisys
Corporation, including Director of Change Management, Director of Worldwide
Accounting and Director of Technology Application.
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. In September
1997 he was appointed the Company's Chief Technical Officer.
Mr. Martin has been working in the Decision Support/OLAP industry for more
than 15 years. Having served at ICL, ultimately as manager of the Decision
Support Unit, he joined the Company in 1989. In 1993 he was promoted to UK
Managing Director and in 1996 he was asked to lead the product management team.
In September 1997 he was appointed Development Director responsible for the
co-ordination of the Company's product strategy.
Mr. Silk joined the Company in January 1997 from Actium Corporation and is
responsible for the co-ordination of worldwide sales marketing 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.
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. Fox joined the Company in November 1995 as Chief Financial Officer,
having 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 was Group Finance Director and 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. In October 1997, Mr. Fox accepted a senior
position with Kingfisher plc but remains a non-executive Director of the
Company.
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.
32
<PAGE>
Mr. Holden joined the Company in March 1996 as Group Financial Controller,
having previously assisted the Company in connection with the Company's Initial
Public Offering. Prior to joining the Company, Mr. Holden has worked in both the
U.S. and the U.K. and has held a number of senior financial positions with
publicly held companies. He was appointed Company Secretary in October 1997. Mr.
Holden is a member of the Institute of Chartered Accountants in England and
Wales.
Mr. Hill joined the Company in December 1997 as Vice President (EMEA) from
Interleaf, where he had been Vice President of International Sales. He is
responsible for sales, marketing and channel development within Europe, the
Middle East and Africa. Prior to 1993 he was employed at Oracle (UK), most
recently as General Manager, and prior to 1987 was employed at Comshare (UK).
Mr. Rawlings joined the Company in June 1992 from Pilot Software. From
November 1992 to December 1993 he was Group Product Marketing Manager
responsible for the introduction of Gentia to the marketplace and in December
1993 was appointed Group Marketing Director. Since 1997, he has been
concentrating on product development.
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, Sprenkle 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. 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, 11 persons as a group, for the year ended December 31,
1997, compared to six persons for the year ended December 31, 1996, was
$924,000, compared to $429,000 for the year ended December 31, 1996. The
Chairman, who was the highest paid director, received $314,000. In addition,
payments of $285,000 were made to companies in which two directors held an
interest for services rendered and costs related thereto. These amounts do not
include amounts received by such persons pursuant to the 1994 Plan and the 1996
Plan (each as defined). See Item 12 - "Options to Purchase Securities from
Registrant or Subsidiaries".
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, 1997 was $18,000. 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 purchase Ordinary Shares to certain directors or employees of
the Company or its subsidiaries for the purchase of Ordinary Shares. The option
prices may not be less than the market value of the Ordinary Shares on the dates
of the option grants.
As of December 31, 1997, options under the 1994 Plan for the purchase of
1,293,333 Ordinary Shares by employees of the Company were outstanding at
exercise prices ranging from 21p to 60p ($0.35 to $0.99) per share, payable in
pounds sterling. The December 31, 1997 exchange rate of $1.6454 to (pound)1.00
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 August 1999 to October 2002. As
of December 31, 1997, options under the 1994 Plan for the purchase of 721,668
Ordinary Shares were held by all directors and executive officers of the Company
as a group. See Note 6 of Notes to Consolidated Financial Statements.
As of May 31, 1998, options under the 1994 Plan for the purchase of
1,245,000 Ordinary Shares by employees of the Company were outstanding at
exercise prices ranging from 21p to 60p ($0.34 to $0.98) per share, payable in
pounds sterling. The May 31, 1998 exchange rate of $1.6307 to (pound)1.00 has
been used for purposes of calculating the dollar value of these exercise prices.
As of May 31, 1998 options under the 1994 Plan for the purchase of 721,668
Ordinary Shares were held by all directors and executive officers of the Company
as a group.
33
<PAGE>
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 options to purchase
Ordinary Shares and make other 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 Ordinary 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, 1997, options under the
1996 Plan for the purchase of 1,594,600 Ordinary Shares were outstanding at
exercise prices ranging from $3.00 to $12.50 per share, payable in U.S. dollars.
All such options vest (i) for non-executive directors, 50% on December 31 of
each year following the date of grant and 50% on the following December 31, (ii)
for employees and executive directors, 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 August 26, 2004. As of December 31, 1997, options
under the 1996 Plan for the purchase of 305,000 Ordinary Shares were held by all
directors and executive officers of the Company as a group. See Note 6 of Notes
to Consolidated Financial Statements.
As of May 31 1998, options under the 1996 Plan for the purchase of 1,976,975
Ordinary Shares were outstanding at an exercise price from $3.00 to $12.50 per
share, payable in U.S. dollars. As of May 31, 1998, options under the 1996 Plan
for the purchase of 492,750 Ordinary Shares were held by all directors and
executive officers of the Company as a group.
The number of Ordinary Shares underlying options held by the Company's
directors as at December 31, 1997 and December 31, 1996 (or appointment), which
are disclosed in the Company's UK statutory accounts, are as follows:
<TABLE>
<CAPTION>
At 31 December 1997 At 31 December 1996
------------------- -------------------
<S> <C> <C>
P R Rolph 473,334 473,334
A K Fox 16,000 16,000
J R H Buchanan 16,000 16,000
G F Sprenkle 50,000 -- (at appointment)
S G Silk 150,000 -- (at appointment)
P T Martin 105,334 105,334 (at appointment)
T S Jones -- 300,000
</TABLE>
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 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
None.
34
<PAGE>
PART II
Item 14. Description of Securities to be Registered
Not Applicable.
PART III
Item 15. Defaults Upon Senior Securities
None.
Item 16. Changes in Securities, Changes in Security for Registered
Securities and Use of Proceeds
None.
PART IV
Item 17. Financial Statements
Not Applicable.
Item 18. Financial Statements
See pages F-1 through F-18 and page S-1 incorporated herein by
reference.
Item 19. Financial Statements and Exhibits
a) The following financial statements and schedule, together with
the report of Ernst & Young thereon, are filed as part of this
annual report.
Page
----
Report of Independent Auditors ......................... F-1
Consolidated Balance Sheets as of
December 31, 1997 and 1996 .............................. F-2
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
(unaudited), and the nine months ended December 31, 1995 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and
the nine months ended December 31, 1995 ................. F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
(unaudited), and the nine months ended December 31, 1995. F-5
Notes to Consolidated Financial Statements .............. F-6
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
b) Exhibits
None.
35
<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.
Gentia Software plc
By:
-------------------------------------
George F Sprenkle
Chief Financial Officer
Dated: _______________, 1998
36
<PAGE>
GENTIA SOFTWARE plc
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ...................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 ......... F-2
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995 (unaudited),
and the nine months ended December 31, 1995........................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and
the nine months ended December 31, 1995............................... F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 (unaudited),
and the nine months ended December 31, 1995........................... F-5
Notes to Consolidated Financial Statements ........................... F-6
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
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Gentia Software plc
We have audited the accompanying consolidated balance sheets of Gentia
Software plc as of December 31, 1997 and 1996, and the related consolidated
statements of operations, cash flows and changes in shareholders' equity for the
years ended December 31, 1997 and 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 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 Gentia Software
plc at December 31, 1997 and 1996, and the consolidated results of its
operations and its consolidated cash flows for the years ended December 31,
1997, 1996 and the nine months 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.
ERNST & YOUNG
Chartered Accountants
London, England
June 29, 1998
F-1
<PAGE>
GENTIA SOFTWARE plc
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets
Cash ........................................................................... $20,332 $25,228
Accounts receivable, net of allowance $1,819 (1996: $478) ....................... 7,758 9,953
Prepaid expenses ................................................................ 1,921 821
Current portion of deferred tax assets .......................................... 285 --
-------- --------
Total current assets ......................................................... 30,296 36,002
Property and equipment, net ..................................................... 2,037 2,013
Goodwill on acquisitions, net of amortization $494 (1996: $122) ................. 3,602 3,388
Long-term portion of deferred tax assets ........................................ 459 148
-------- --------
Total assets ............................................................ $36,394 $41,551
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of lease obligations ............................................ $ 105 $ 194
Accounts payable ................................................................ 1,743 1,648
Taxes payable ................................................................... -- 1,373
Accrued liabilities ............................................................. 1,337 1,778
Deferred revenue ................................................................ 3,630 2,969
Other accounts payable .......................................................... 1,337 1,331
-------- --------
Total current liabilities ............................................... 8,152 9,293
-------- --------
Non-current liabilities
Deferred taxation ............................................................... 274 29
Long-term portion of lease obligations .......................................... 109 225
-------- --------
Total non-current liabilities ............................................ 383 254
-------- --------
Total liabilities ........................................................ 8,535 9,547
-------- --------
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, 9,609,751 issued and outstanding at
December 31, 1997 (1996: 8,999,167) ........................................... 2,300 2,152
Additional paid-in capital ........................................................... 27,406 27,182
Retained earnings .................................................................... (1,236) 2,747
Cumulative translation adjustment .................................................... (611) (77)
-------- --------
Total shareholders' equity .................................................... 27,859 32,004
-------- --------
Total liabilities and shareholders' equity .................................... $36,394 $41,551
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-2
<PAGE>
GENTIA SOFTWARE plc
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, December 31,
----------------------------------------- -----------
1997 1996 1995 1995
--------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
License.............................. $ 14,985 $ 16,861 $ 10,227 $ 7,657
Services and other................... 12,186 9,104 6,163 4,918
-------- ----------- ---------- ----------
Total revenues................ 27,171 25,965 16,390 12,575
-------- ----------- ---------- ----------
Cost of revenues:
License.............................. 1,179 804 171 103
Services and other................... 6,800 4,937 3,580 2,816
-------- ----------- ---------- ----------
Total cost of revenues......... 7,979 5,741 3,751 2,919
-------- ----------- ---------- ----------
Gross profit..................................... 19,192 20,224 12,639 9,656
-------- ----------- ---------- ----------
Operating expenses:
Sales and marketing.................. 14,308 10,271 5,801 4,301
Research and development............. 4,698 3,185 1,663 1,284
General and administrative........... 6,279 3,926 3,711 3,017
Goodwill amortization................ 372 122 -- --
-------- ----------- ---------- ----------
Total operating expenses....... 25,657 17,504 11,175 8,602
-------- ----------- ---------- ----------
Income (loss) from operations.................... (6,465) 2,720 1,464 1,054
Other income (expense)........................... 1,235 965 (45) 4
-------- ----------- ---------- ----------
Income (loss) before provision for
income taxes................................ (5,230) 3,685 1,419 1,058
(Provision) credit for income taxes.............. 1,247 (1,216) (521) (384)
-------- ----------- ---------- ----------
Net income (loss)................................ $ (3,983) $ 2,469 $ 898 $ 674
======== =========== ========== ==========
Net income (loss) per share - Basic.......... $ (0.44) $ 0.31 $ 0.14 $ 0.10
- Diluted........ $ (0.44) $ 0.24 $ 0.12 $ 0.09
======== ========== ========= =========
Shares used to compute net income (loss)
per share - Basic......... 9,154,673 7,845,962 6,459,167 6,459,167
- Diluted ....... 9,154,673 10,491,703 7,186,190 7,340,156
========= ========= ========= =========
</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-3
<PAGE>
GENTIA SOFTWARE plc
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
Share Capital
Ordinary Shares of
15p each Additional Cumulative Total
------------------------ Paid-in Retained Translation Shareholders'
Shares Amount Capital (i) Earnings (i) Adjustment Equity
------------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 4,866,667 $ 1,189 $ -- $ (325) $ 15 $ 879
Issuance of shares (net of
issuance costs of $144) (ii) 877,333 208 648 856
Issuance of shares pursuant to
exercise of options:
Employees ..................... 364,167 86 33 119
Lucas Holdings Limited (ii).... 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
Issuance of shares pursuant to
exercise of options:
Employees.................... 610,584 148 224 372
Exchange translation adjustments. (534) (534)
Net loss......................... (3,983) (3,983)
------------ ---------- ------------ ------------- ------------- --------------
Balance at December 31, 1997......... 9,609,751 $ 2,300 $ 27,406 $ (1,236) $ (611) $ 27,859
============ ========== ============ ============= ============= ==============
</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, 1997 such distributable profits
amounted to $1,825 (1996: $2,329).
(ii) 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-4
<PAGE>
GENTIA SOFTWARE plc
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars except share and per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, December 31,
--------------------------------------- --------------
1997 1996 1995 1995
------------- ------------- ----------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) .......................................... $ (3,983) $ 2,469 $ 898 $ 674
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 836 598 248 241
Goodwill ............................................. 372 122 -- --
Changes in operating assets and liabilities:
Accounts receivable............................... 854 (6,140) (1,206) 136
Provision for bad and doubtful debts ............. 1,341 188 262 254
Supplies.......................................... -- -- 42 45
Prepaid expenses and other assets................. (1,100) (439) 113 (125)
Accounts payable.................................. 95 1,102 246 74
Accrued payroll and related expenses and other
accrued liabilities.......................... (2,159) 2,188 908 49
Deferred revenues................................. 661 1,002 362 215
------------- ------------- ------------ -------------
Net cash (used in) provided by operating activities......... (3,083) 1,090 1,873 1,563
------------- ------------- ------------ -------------
Cash flows from investing activities
Proceeds from disposal of property and assets..... 70 104 75 75
Purchases of property and equipment............... (1,070) (1,428) (849) (589)
Costs of acquisitions............................. (586) (2,722) -- --
------------- ------------- ------------ -------------
Net cash used in investing activities............. (1,586) (4,046) (774) (514)
Cash flows from financing activities
Dividends paid..................................... -- -- (71) (71)
Net (repayment) of capital lease obligations....... (205) (160) (37) (36)
Net proceeds from issuance of shares............... 372 26,464 1,091 1,091
(Decrease) increase in bank overdraft............... -- (391) 154 (409)
------------- ------------- ------------ -------------
Net cash provided by financing activities.......... 167 25,913 1,137 575
Effect of exchange rate changes on cash..................... (394) (9) 1 (64)
------------- ------------- ------------ -------------
Net (decrease) increase in cash............................. (4,896) 22,948 2,237 1,560
Cash at beginning of period................................. 25,228 2,280 43 720
------------- ------------- ------------ -------------
Cash at end of period....................................... $ 20,332 $ 25,228 $ 2,280 $ 2,280
============= ============= ============ =============
Supplemental disclosure of cash flow information
Interest (received) paid, net.......................... $ (1,262) $ (922) $ 37 $ 27
Taxes paid............................................. $ 477 $ 310 $ 63 $ 63
Non-cash investing and financing activities
Acquisition of property and equipment through
capital leases................................... $ 26 $ 360 $ 199 $ 170
Shares issued for acquisition ......................... $ -- $ 590 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE>
GENTIA SOFTWARE 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 the building,
deployment and management of enterprise business intelligence
applications. 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. On December 19, 1997, the Company signed a joint
development and marketing agreement with Renaissance Solutions
Inc ("Renaissance") to jointly develop and market Renaissance
Balanced Scorecard powered by Gentia ("Balanced Scorecard").
Information on the Company's operations by geographic area is
included in Note 11.
Predominantly all of the Company's revenues have been derived
from licenses for Gentia and related services and the Company
currently expects that Gentia and Balanced Scorecard 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 Balanced Scorecard
and enhancements thereto. A decline in demand for, or market
acceptance of, Gentia (or Balanced Scorecard) would have a
material adverse effect on the Company's business, operating
results and financial condition.
(b) Incorporation, Reorganization and Basis of Preparation
Gentia Software 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.
On July 1, 1997, the Company changed its name to Gentia
Software plc to reflect the growth in its software product of
the same name.
(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.
F-6
<PAGE>
GENTIA SOFTWARE plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
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, 1997 and 1996 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.
(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, France, Germany, the
Netherlands, Belgium, Australia, South Africa, Hong Kong and
Guernsey. All material inter-company 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 years ended
December 31, 1997 and 1996, and for the nine-month period
ended December 31, 1995 have been prepared and the auditors
have given unqualified audit reports thereon. Such accounts
have been, and for the year ended December 31, 1997, 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 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 recognized ratably over the term of the contract,
which is typically twelve months. Revenues from training and
consultancy are recognized when the services are performed.
F-7
<PAGE>
GENTIA SOFTWARE plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
(b) Translation of Financial Statements of Foreign Entities
Transactions in foreign currencies are translated into U.S.
dollars at the rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign
currencies are retranslated at the rate of exchange ruling at
the balance sheet date. All differences are taken to the
consolidated statement of operations.
Results of operations of subsidiaries which have their local
currencies as the functional currency are translated into U.S.
dollars at the average rates for the relevant period, while
assets and liabilities are translated using current rates at
each balance sheet date. The resulting exchange gains or
losses are accumulated in the cumulative translation
adjustment account included as a component of shareholders'
equity.
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 any significant hedging
transactions to cover its currency translation exposure.
(c) Income Taxes
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, 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 (Loss) per Share
During 1997, the Company adopted SFAS No. 128, "Earnings per
Share". SFAS 128 changed the method of computing net income
per share from that previously required under the provisions
of Accounting Principles Board Opinion No. 15, "Earnings per
Share," and requires restatement of all prior periods
presented. Under SFAS 128, the Company presents both basic net
income per share and diluted net income per share. Basic net
income per share is computed using the weighted average number
of shares outstanding during the period. Diluted net income
per share reflects the per share effect of dilutive stock
options and other dilutive common stock equivalents.
(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
The Company evaluates property and equipment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long
Lived Assets and Long Lived Assets to be Disposed of".
F-8
<PAGE>
GENTIA SOFTWARE plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
(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.
(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 No. 123 is shown in Note
6.
4. Property and Equipment
Property and equipment comprises:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Computer equipment ............................................. $3,236 $2,706
Furniture, fixtures and office equipment ....................... 792 525
Leasehold improvements.......................................... 520 515
Motor vehicles ................................................. 267 318
----------- -----------
4,815 4,064
Less: accumulated depreciation ................................. 2,778 2,051
----------- -----------
$2,037 $2,013
=========== ===========
5. Accrued Liabilities
December 31,
---------------------------
1997 1996
----------- -----------
Accrued expenses and other current liabilities:
Accrued commissions.......................................... $ 461 $ 805
Other........................................................ 876 973
----------- -----------
$1,337 $1,778
=========== ===========
</TABLE>
F-9
<PAGE>
GENTIA SOFTWARE plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
6. Share Option Plans
a) 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 Taxation of Changeable Gains Act 1992.
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, 1995........................ 2,678,834 (pound) 0.21 $ 0.342 (i)
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 0.21-0.60 0.36-1.03
Exercised in year........................... (596,334) 0.21-0.60 0.333-0.352(iii)
Lapsed in year.............................. (117,333) 0.21-0.60 0.34-0.98
--------- --------- ----------
Balance at December 31, 1997.................... 1,293,333 (pound)0.21-0.60 $ 0.35-0.99
========= ========= =========
Exercisable at December 31, 1997................ 153,000 (pound) 0.21 $ 0.35
========= ========= =========
------------
</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.
(iii) The U.S. dollar equivalent at the exercise dates were $0.336 in
respect of 2,000 options, $0.352 in respect of 51,000 options, $0.333
in respect of 243,334 options, and $0.343 in respect of 300,000
options.
The remaining options are exercisable up to November 2003.
b) 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, 1997, options under the 1996 Plan
for the purchase of 1,594,600 Ordinary Shares by directors,
employees and persons providing services to the Company had been
granted and were outstanding at an exercise price from $3.00 to
$12.50 per Ordinary Share.
(i) On December 11, 1997, certain of the options previously
granted during 1996 and 1997 under the 1996 Plan were amended
by reducing the exercise prices under the options to the
current market rate. The options before amendment provided the
right to acquire up to 468,000 Ordinary Shares at exercise
price ranging from $3.75 to $12.50 per share. The Compensation
Committee offered the option reprice because it felt that due
to changed circumstances, including the reduction in the
trading price of the Company's Ordinary Shares, the options
were no longer providing the incentive they were designed to
provide.
F-10
<PAGE>
GENTIA SOFTWARE 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 1996 .......................................... 910,000 $ 8.50 - 18.75
Lapsed in year ........................................... (76,650) $ 8.50 - 18.75
---------
Balance at December 31, 1996 ............................. 833,350 $ 8.50 - 18.75
Granted in 1997........................................... 1,619,250 $ 3.00 - 14.00
Exercised in year......................................... (14,250) $ 8.50
Lapsed in year ........................................... (843,750) $ 3.00 - 18.75
---------
Balance at December 31, 1997.............................. 1,594,600 $ 3.00 - 12.50
========= ==============
Exercisable at December 31, 1997.......................... 50,338 $ 3.00 - 12.50
========= ==============
</TABLE>
c) Pro forma information regarding net income (loss) and net income
(loss) 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 1997 and
1996: risk-free interest rates of 5%, dividend yield of 0%,
volatility factor of 0.30 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, 1997 was $0.65 and during the year ended
December 31, 1996 was $3.91. The pro forma information is as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1997 1996
---------- -----------
<S> <C> <C>
Pro forma net income (loss) ........................... $(4,585) $2,045
======= ======
Pro forma net income (loss) per share - basic........... $ (0.50) $ 0.26
- diluted......... $ (0.50) $ 0.19
======= ======
</TABLE>
The following table summarizes information about the Company's share
options outstanding and exercisable at December 31, 1997 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 1997 contractual life exercise price 1997 exercise price
------------------ ----------------- ------------------ ------------------------------------ ------------------
<S> <C> <C> <C> <C> <C>
21p 1,196,000 47 months 21p 153,000 21p
60p 97,333 57 months 60p - 60p
--------- --------- --------- --- ------- ---
21p - 60p 1,293,333 48 months 24p 153,000 21p
========= ========= ========= === ======= ===
</TABLE>
F-11
<PAGE>
GENTIA SOFTWARE 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, 1997 under the 1996 Plan:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- --------------------
Number Number
outstanding Weighted average outstanding Weighted
Range of at December 31, remaining Weighted average at December 31, average
exercise price 1997 contractual life exercise price 1997 exercise price
------------------ --------------- -------------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 3.00 1,431,750 80 months $ 3.00 37,625 $ 3.00
$ 4.00 - $12.50 162,850 72 months $ 5.56 12,713 $ 8.99
------------------ --------- --------- ------ ------ ------
$ 3.00 - $12.50 1,594,600 79 months $ 3.98 50,338 $ 4.51
================== ========= ========= ====== ====== ======
</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 $275 for the year ended December 31, 1997,
and $241 for the year ended December 31, 1996, and $200 for the nine
month period ended December 31, 1995.
8. Income Taxes
Income (loss) before income taxes is analyzed as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, December 31,
---------------------------------------- --------------------
1997 1996 1995
-------------------- ------------------ --------------------
<S> <C> <C> <C>
United Kingdom ............................. $(2,349) $ 1,868 $ 964
Overseas ................................... (2,881) 1,817 94
-------- ------- --------
$(5,230) $ 3,685 $ 1,058
======== ======= ========
</TABLE>
Significant components of the (credit) provision for income taxes are as
follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, December 31,
---------------------------------------- --------------------
1997 1996 1995
-------------------- ------------------ --------------------
<S> <C> <C> <C>
Current:
United Kingdom .............................. $ (715) $ 732 $391
United States ............................... (181) 293 3
Other ....................................... -- 347 --
-------- ------- ----
Total current ............................... $ (896) $1,372 $394
Deferred:
United Kingdom .............................. (4) (12) --
United States ............................... (229) (144) (10)
Other........................................ (118) -- --
-------- ------- ----
Total (credit) provision for income taxes... $(1,247) $1,216 $384
======== ======= ====
</TABLE>
F-12
<PAGE>
GENTIA SOFTWARE 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
December 31, December 31
---------------------------------------------------------
1997 1996 1995
----------------- -------------------- ------------------
<S> <C> <C> <C>
U.K. Statutory rate ..................... 31.5% 33.0% 33.0%
Permanent disallowables for U.K. tax..... 0.3 1.2 5.0
Utilization of net operating losses...... 2.8 1.1 (3.7)
Deferred tax valuation adjustments....... (14.4) (3.6) (1.8)
Other - net............................. 3.6 1.3 3.8
------ ----- -----
Effective tax rate ...................... 23.8% 33.0% 36.3%
====== ===== =====
</TABLE>
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
Liabilities:
Fixed asset temporary differences ................................ $ 55 $ 29
Other ............................................................ 219 --
------- ------
274 29
Assets:
Fixed asset temporary differences ................................ 2 42
Net operating loss carry forwards................................. 1,066 98
Deferred revenue ................................................. 362 163
Accrued expenses ................................................. 120 159
Accounts receivable .............................................. -- 18
------- ------
1,550 480
Less: valuation allowance ........................................... (806) (332)
------- ------
Deferred tax assets after valuation allowance ....................... $ 744 $ 148
------- ------
Total net deferred tax asset................................... $ 470 $ 119
======= ======
</TABLE>
At December 31, 1997, the Company had net operating loss carry forwards
in the United Sates of $2,865 (December 31, 1996: $ nil) which may be
carried forward up to 15 years. Net operating loss carry forwards in
other group companies which may be carried forward indefinitely were
$493 (December 31, 1996: $278).
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 were
sustained by these companies to September 16, 1996, have been utilized
where possible by the U.K. sub-group.
F-13
<PAGE>
GENTIA SOFTWARE 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 2002. Total property and equipment acquired under
these capitalized leases, which collateralize such borrowings, are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Computer equipment ........................................... $ 264 $ 302
Furniture, fixtures and office equipment ..................... 56 60
Motor vehicles ............................................... 231 298
----- ------
551 660
Less: accumulated depreciation ............................... (364) (253)
----- ------
$ 187 $ 407
===== ======
</TABLE>
Future minimum annual lease payments under all non-cancelable
operating and capital leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Operating Capital leases
------------------------ leases ---------------
----------
<S> <C> <C>
1998 ................................................................ $ 1,251 $ 122
1999 ................................................................ 1,037 64
2000 ................................................................ 686 37
2001 ................................................................ 528 33
2002-2008 ........................................................... 856 2
------- ----
Total minimum payments .............................................. $ 4,358 258
=======
Less: amounts representing interest ................................. (44)
-----
Present value of capital lease obligation ........................... 214
Less: current portion ............................................... (105)
-----
Lease obligations, long-term ........................................ $ 109
=====
</TABLE>
Rental expenses under operating leases totaled $1,135 for the year
ended December 31, 1997, $945 for the year ended December 31, 1996, and
$609 for the nine month period ended December 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.
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. The Company believes
the risk associated with these transactions are somewhat mitigated by
their geographic dispersion and the overall credit quality of blue chip
companies with which it transacts business.
During the years ended December 31, 1997 and December 31, 1996 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.
F-14
<PAGE>
GENTIA SOFTWARE 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
building, deployment and management of enterprise business
intelligence applications.
Information about the Company's operations by geographic area is as
follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, December 31
--------------------------------------------- ---------------
1997 1996 1995 1995
-------------- --------------- -------------- ---------------
Revenue from unaffiliated customers: (unaudited)
<S> <C> <C> <C> <C>
United Kingdom $12,307 $13,947 $10,979 $ 8,232
Less: Inter-area eliminations (i) (3,994) (4,455) (2,110) (1,796)
------- -------- ------- -------
8,313 9,492 8,869 6,436
Rest of Europe 5,910 3,234 593 593
North America (ii) 9,833 10,154 6,108 4,939
Australia 1,665 1,713 820 607
Rest of World 1,450 1,372 - -
------- -------- ------- -------
Total revenue $27,171 $25,965 $16,390 $12,575
======= ======== ======= =======
United Kingdom includes exports to:
Rest of Europe $ 193 $ 622 $ 1,181 $ 688
Rest of World 52 - 377 164
------- -------- ------- -------
$ 245 $ 622 $ 1,558 $ 852
======= ======== ======= =======
Income from operations:
United Kingdom (i) $(1,509) $ 2,350 $ 2,197 $ 1,441
Rest of Europe 491 609 (7) (7)
North America (ii) (4,238) 586 (4) 145
Australia 91 1 -- (62)
Rest of World 71 448 -- --
Corporate costs (United Kingdom) (1,371) (1,274) (722) (463)
------- -------- ------- -------
Income (loss) from operations $(6,465) $ 2,720 $ 1,464 $ 1,054
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Total assets
United Kingdom ............................ $ 9,463 $ 9,056 $ 5,321
Rest of Europe............................. 3,386 1,538 420
North America (ii)......................... 5,386 5,217 1,438
Australia ................................. 559 683 576
Rest of World ............................. 17,600 25,057 --
--------- ------- --------
Total assets (iii)......................... $ 36,394 $41,551 $ 7,755
========= ======= ========
</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-15
<PAGE>
GENTIA SOFTWARE plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
12. Acquisitions
In September 1997, the Company acquired the business goodwill from its
exclusive distributor in France and commenced its own operations via a
100% subsidiary in France. The acquisition, for approximately $90 in
cash, resulted in approximately $465 being allocated to goodwill.
An additional $121 of goodwill was recorded relating to costs on prior
year acquisitions.
The above acquisition was accounted for under the purchase method and
the assets and liabilities were recorded at their fair values on the
acquisition date. Results of operations of the acquired business are
included from the date of acquisition. The goodwill and intangible
assets acquired in the above transaction is being amortized over its
useful life of ten years.
The following unaudited pro forma financial information assumes the
acquisition occurred at the beginning of the period in which the
acquisition 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 acquisition been
made as discussed above. In addition, they are not intended to be a
projection of future results.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1997 1996
-------------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues ..................................... $27,321 $26,035
======= =======
Net income (loss) ............................. $(3,923) $ 2,539
======= =======
Net income (loss) per share - basic........ $ (0.43) $ 0.32
- diluted...... $ (0.43) $ 0.24
======= =======
</TABLE>
13. Income (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended December 31,
--------------------------------------------------- ------------------
1997 1996 1995 1995
------------- -------------------- ---------------- ------------------
(unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ........... $ (3,983) $ 2,469 $ 898 $ 674
========= ========== ========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares ......... 9,154,673 7,845,962 6,459,167 6,459,167
Effect of dilutive securities:
Share options............... -- 2,645,741 727,023 880,989
Denominator for diluted earnings per share - --------- ---------- ---------- -----------
adjusted weighted average shares 9,154,673 10,491,703 7,186,190 7,340,156
========= ========== ========== ===========
Net income (loss) per share - Basic ...... $ (0.44) $ 0.31 $ 0.14 $ 0.10
- Diluted..... $ (0.44) $ 0.24 $ 0.12 $ 0.09
========= ========== ========== ===========
</TABLE>
F-16
<PAGE>
GENTIA SOFTWARE plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
14. Recent Pronouncements
During October 1997, the Accounting Standards Executive Committee
(AcSEC) of the AICPA issued SOP 97-2, Software Revenue Recognition. SOP
97-2 replaces the SOP 91-1 method of distinguishing between significant
and insignificant vendor obligations as a basis for recording revenue
with a requirement that each element of a software licensing
arrangement (e.g., postcontract customer support (PCS), specified
upgrades and enhancements even on a when-and-if available basis,
additional software products and services) be separately identified and
accounted for based on relative fair values of each element. Further,
in order to recognize revenue for each element as delivered, stringent
requirements for "vendor-specific objective evidence" must be met for
each element's fair value, and no remaining undelivered elements can be
essential to the functionality of the delivered elements. The SOP is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. Different informal and unauthoritative
interpretations of certain provisions of SOP 97-2 have arisen. AcSEC is
already deliberating amendments to SOP 97-2, including deferral of the
effective date of certain provisions of the SOP so AcSEC can develop
and issue an interpretation regarding the applicability and the method
of application of those provisions. Because of the uncertainties
related to the outcome of these amendments, the impact on the future
financial results of the Company is not currently determinable.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December
15, 1997. This Statement established standards for the reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements. The new rule requires that the
Company (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet.
The Company plans to adopt SFAS No. 130 in 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which is effective
for fiscal years beginning after December 15, 1997. This Statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and amends SFAS No. 94, "Consolidation of all
Majority-Owned Subsidiaries." This Statement requires annual financial
statements and interim reports to disclose information about products
and services, geographic areas and major customers based on a
management approach. The management approach requires disclosing
financial and descriptive information about an enterprise's reportable
operating segments based on reporting information the way management
organizes the segments for making business decisions and assessing
performance. It also eliminates the requirement to disclose additional
information about subsidiaries that were not consolidated. This new
management approach may result in more information being disclosed than
presently practiced and require new interim information not previously
presented. The Company plans to adopt SFAS No. 131 in 1998 with impact
only to the Company's disclosure information and not its results of
operations.
15. Related Party Transactions
During the year the Company paid $285 (1996 - $189) to two businesses
owned or controlled by two directors, for services rendered by these
companies and costs related thereto.
16. Subsequent Events
In May 1998, the Company acquired all of the Ordinary Shares of
Technical and Computer Management Services Ltd ("TCMS Ltd"), a U.K.
Company, and its subsidiary Technical and Computer Management Services
LLC/("TCMS LLC") in consideration of $1 million in cash and 166,667
Ordinary Shares, valued at $1 million.
F-17
<PAGE>
GENTIA SOFTWARE plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands of U.S. Dollars, except share and per share data)
17. Contingencies
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"). 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. Gentia has investigated the
Arbor Patent and has retained Arnold, White and Durkee PC to represent
it as its counsel. In November 1996, the Company's declaratory
judgement action was transferred to the U.S. District Court for the
Northern District of California and consolidated with Arbor's
infringement action. The consolidated action has been stayed pending
resolution of two third-party re-examination requests which have been
granted by the U.S. Patent and Trademark Office. The Company is
vigorously pursuing its defense against Arbor and is confident that it
will prevail in the litigation. However, prolonged litigation regarding
Arbor's claim could involve significant additional expenses attendant
to such litigation 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. At
present management are unable to quantify the final legal cost to the
Company. All such legal costs are written off as incurred.
F-18
<PAGE>
SCHEDULE II
GENTIA SOFTWARE 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>
Description
- -----------
Year ended December 31, 1997:
Allowance for bad and doubtful debts $478 $1,474 $(27)(a) $ (106) $1,819
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 $ 322 $(12)(a) $ (66) $ 290
</TABLE>
- -------------------------------------------
a) Exchange adjustments
b) Includes provisions held in the accounts of acquired companies
S-1
