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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, 1998.
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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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
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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.
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Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
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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, 1998 was
10,194,930 Ordinary Shares, nominal value (pound)0.15 per
share.
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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
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PART I
Page
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Item 1. Description of Business ................................................ 3
Item 2. Description of Property ................................................ 21
Item 3. Legal Proceedings ...................................................... 21
Item 4. Control of Registrant .................................................. 23
Item 5. Nature of Trading Market .............................................. 23
Item 6. Exchange Controls and Other Limitations Affecting Security Holders ..... 24
Item 7. Taxation ............................................................... 24
Item 8. Selected Financial Data ................................................ 28
Item 9. Management's Discussion and Analysis of Financial Conditions and Results
of Operations .................................................... 29
Item 9A Quantitative and Qualitative Disclosures about Market Risk ............. 37
Item 10. Directors and Officers of Registrant ................................... 38
Item 11. Compensation of Directors and Officers ................................. 39
Item 12. Options to Purchase Securities from Registrant or Subsidiaries ......... 39
Item 13. Interest of Management in Certain Transactions ......................... 40
PART II
Item 14. Description of Securities to be Registered ............................. 41
PART III
Item 15. Defaults Upon Senior Securities ........................................ 41
Item 16. Changes in Securities, Changes in Security for Registered Securities
and Use of Proceeds ................................................. 41
PART IV
Item 17. Financial Statements ................................................... 41
Item 18. Financial Statements ................................................... 41
Item 19. Financial Statements and Exhibits ...................................... 41
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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. Renaissance pays the Company a license fee on all Balanced
Scorecard applications sold and in turn the Company pays to Renaissance a
royalty or referral commission for any Balanced Scorecard application sales
completed by the Company. The Renaissance Agreement represented the first step
in the Company's shift to 'solutions based' product offerings.
In May 1998, the Company acquired the share capital and resources of
Technical Computer & Management Services ("TCMS"). TCMS was a technical
consulting firm based in the US and UK, with extensive experience in the
implementation of enterprise wide, web based analytical applications using
Gentia technology. Upon acquisition, TCMS management assumed the day to day
operating responsibilities for the Company's worldwide technical consulting
business.
In November 1998, the Company acquired Compression Sciences Limited ("CSL").
CSL developed a Java-based knowledge discovery and data mining product called
K.wiz. K.wiz can independently analyze large quantities of data and
automatically highlight key trends, making it critical to the Company's strategy
to develop intelligent analytical applications. K.wiz components offer data
transformation, visualization and discovery algorithms that deliver
complementary value-added analytical capabilities to client/server and
Internet/Intranet/Extranet deployed applications.
During 1998, the Company began development of several Analytical Applications
that were subsequently released as the Impact Suite of analytical
applications in 1999:
- TrafficOptimizer, which was developed in conjunction with a
major telecommunications company, equips network engineers,
strategic planners and administrators with a powerful tool to
analyze network usage. The application provides detailed
information on network traffic and calling patterns that enable
telecommunication network operators to optimize their existing
network architecture without unnecessary additional capital
expenditures.
- PerformanceImpact is a packaged performance measurement solution
for tracking, measuring and analyzing key performance indicators
("KPIs") across an organization.
- ProfitImpact developed in conjunction with Arthur Andersen, is a
new software solution that supports managers in their quest to
optimize profitability and customer focus. ProfitImpact combines
a powerful activity-based costing (ABC) engine with comprehensive
performance management analyses enabling users to pinpoint
underperforming operations via an enterprise-wide solution.
Today, the Company is the recognized leader in Balanced Scorecard
Applications. The Company's goal is to retain the number one position in that
market, and benefit from its growth. The above investments are aimed towards
profitably growing within this market and complementing the Balanced Scorecard
solution with the recently released "Impact" suite of business solutions. The
Balanced Scorecard is recognized as the most effective framework to provide
senior executives with the right information to support their decision-making
process. We expect many corporations to adopt this approach in the months and
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years ahead.
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
enterprise resource planning ("ERP") 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 ERP systems and legacy
applications as they seek to provide enterprise-wide solutions demanded by end
users.
ERP systems use traditional relational database management system ("RDBMS")
for data storage. 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.
Traditionally spreadsheets are two-dimensional and not suitable for analyzing
multidimensional views of data without the re-entry of significant amounts of
data or laborious sheet-by-sheet changes. The limited ability to integrate and
update spreadsheets ultimately restricts planning, analysis and reporting
capabilities. Microsoft began addressing this issue with their recent release of
SQL Server 7.0 and Excel 2000, enabling users of the new software to use a pivot
table dynamic view in Excel 2000 to create persistent local cubes of data from
SQL Server OLAP services feature.
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
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environment. The Company 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 capability 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 influence the ability of
an organization to predict and respond to changing business requirements. The
Balanced Scorecard represented 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
and web based 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 preferred
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
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new emerging breed of Networked Computers ("NCs") without the requirement for
any modifications to an application. Gentia Web Suite, 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
Web Suite 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.
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 has begun to place greater emphasis
on distribution partners, particularly in South Africa, New Zealand and
Australia. 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 500
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 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 represented the first version of
Gentia which is Year 2000 compliant. During 1998 the Company released 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
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Secure Sockets Layer for secure web-based deployment. All Java applets for
Gentia 4.0 have been accredited by Sun Microsystems as 100% Java compatible.
The Company acquired Compression Science Limited, which developed and
markets a knowledge discovery product known as K.wiz. This acquisition provided
the Company with a data mining capability that provides application intelligence
through the use of machine learning algorithms. The Company will embed the K.wiz
technology in its applications and also seek to market K.wiz through third
parties and OEM's. The K.wiz product is designed to operate in heterogeneous
environments, including the Internet, and has been developed in the Java
programming language from Sun Microsystems.
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 ERP systems,
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 core product, Gentia, is an application development
environment for building Networked Business Intelligence applications. Core
product revenues are supplemented by sales of additional license options
including Gentia Web Suite, Gentia Applications and the Gentia Software
Developers Kit which includes an Applications Programming Interface. The Company
licenses Gentia to its customers on a "per seat" basis. These users can be
deployed across clients, servers and web browsers. Pricing for an initial Gentia
configuration is $150,000 for 50 users. The pricing for Balanced Scorecard is
$182,750 for 50 users and ProfitImpact is $161,500 for 50 users. For the year
ended December 31, 1998 the average software license for a typical Gentia
installation was approximately $120,000 (1997: $136,000).
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 95 HP-UX
Windows 98 IBM AIX
Sun Solaris Sun Solaris
UNIXWARE
Pyramid
ICL
Deck Alpha
BROWSER CLIENTS (GENTIA WEB SUITE)
Netscape Navigator
Microsoft Internet Explorer
Sun HotJava Browser
AGENCY SYSTEM. Communications across all client and server platforms running
in a local or wide area network environment are facilitated by Gentia's Agency
System, which forms the backbone of the Gentia networked architecture. Because
the Agency System considers clients and servers to be peers, applications can be
deployed in any fashion ranging from standalone
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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 Millennium Applications Platform ("G-MAP") environment (consists
of eight primary components: Graphical Development Environment, GentiaDB, Gentia
Object Store, Agents, Text InfoBase, Gentia Web Suite, 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.
GENTIADB. 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 DataBase) 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 WEB SUITE. The Gentia Web Suite 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. In June 1998 the Company
released the web-based version of the framework. Other releases during 1998
include Application Model Designer, Menu Designer and Data Loader.
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 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.
9
<PAGE>
MICROSOFT EXCEL ADD-IN. The Gentia Excel add-in is an extension designed 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
organizations worldwide. As of December 31, 1998 the Company had over 500 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, 1998:
<TABLE>
<S> <C> <C>
TECHNOLOGY FOOD AND BEVERAGE Suncorp Insurance & Finance Pty
AirTouch Cellular Inc Swiss Reinsurance
AT&T Inc Allied Mills Ltd Zurich Australia Insurance Ltd
Bell Atlantic Inc Campbell Soup Co Ltd
BellSouth Telecommunications, Inc General Biscuits NV MANUFACTURING
Bull Information Systems Ltd Gilbeys Inc
Cap Volmac BV Greene King plc ABB Industries
Ceridian Corp McDonald's Restaurants Aerostructure Corp
Colt Telecommunications Ltd Tip Top Bakeries Pty Alcoa Building Products Inc
ECI Telecom BM Reckitt & Coleman Ltd Audi AG
Gartner Group R.Twining & Co Ltd Avery Dennison BV
ICL plc Schweppes Europe plc Babcock Rosyth Defence Ltd
Los Angeles Cellular Telephone Whitbread plc Beazer Homes USA Inc
McDonnell Information Systems Group Yates Brothers Wine Lodges plc Bertlesmann AG
Medidata Inc Young & Co's Brewery plc Boeing Information Systems Services Inc
Motorola Inc Continental Tyres AG
Oki Europe Ltd TRANSPORTATION DERA
Pioneer NV Dow Agrosciences
Siemens Nixdorf Information Systems Ltd BAA plc Eastman Chemical Inc
Sprint United Management Co Cast Europe NV Emirates Petroleum Products
Sun Microsystems Inc DHL International Ltd. European Vinyl Corp
Walker Financial Solutions Ltd Delta Airlines Inc Fletcher Challenge Forests Pty
El Al Israeli Airlines Ford Motor Co. of Australia Ltd
MORTGAGE LENDERS Federal Express Corporation Gallaher plc
Northgate Motors Ltd Giat Industries SA
Abv Building Society Singapore MRT Ltd ICI Europe Ltd
Halifax Building Society South African Airways Corp Kimberly-Clark Ltd
Nationwide Building Society Stena Data AB Liebherr SA
Northern Rock Building Society Mattel
Norwich and Peterborough Building Society INSURANCE COMPANIES SCA Molnycke AB
Portman Building Society Outokumpu Copper Products Oy
Yorkshire Building Society AIG Golden Insurance BM Raychem Corp
African Life Assurance Co Ltd Rover Portugal SA
RETAIL Automobile Association Sanyo Australia (Pty) Ltd
Bayerische Reinsurance AG Sclumberger Industries SA
Auchan SA Britannic Assurance plc Tetra Pak International SA
Alpha Airports Group plc Canada Maritime Ltd Trelleborg AB
Diamond Shamrock Co Cologne Reinsurance AG Vantona Viyella Ltd
Focus Do-It-All Ltd Guardian Insurance Ltd Volvo Data AB
Heineken BV GIO Australia Ltd Volkswagen AG
Karstadt AG Goudse Verzekeringen BV WD & HO Wills Holdings Ltd
Metro Cash and Carry Ltd Hartford Insurance Inc
Specsavers Optical Group Ltd Independence Blue Cross Inc ENERGY
T&S Stores plc Norwich Life Ltd
The Boots Co plc QBE Insurance Ltd American Electric Power Co
Walgreens Co Sun & Royal Insurance plc Ashland Petroleum Co
Scottish Amicable Assurance Society Endifor Sistemas Informaticos SA
Sun Life Assurance of Canada Inc
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
Espoo SahKo Oy Postbank Israeli Army (Manpower)
Foster Wheeler Ltd Postcheque Johannesburg City Council
Israeli Electricity Company Standard Chartered Bank Kingston Upon Hull City Council
Midlands Electricity Board Swiss Mobilar SA Leicestershire Police
National Power (UK) plc Swiss Re Ministry Of Tourism
Petroleos Mexicana (PEMEX) Corp Trendwick (UK) Underwriting Ltd Northamptonshire Police
Public Service Company of Colorada Union Bank of Switzerland Northwest Provincial Government
Sydney Water Corp United Mizrahi Bank (S.Africa)
Washington Gas Light Company VR Leasing AG Port of Singapore Authority
VSB Group Portugese Air Force
BANKING AND FINANCE Portugese Post
HEALTH AND PHARMACEUTICALS Royal Australian Air Force
ABSA Bank Sheffield City Council
ABN Amro Chase Farm Hospitals NHS Trust South Glamorgan County Council
ADP ICN Pharmaceuticals Inc South Lanarkshire County Council
ANWB Massachusetts General Hospital South Wales Police
Australia & New Zealand Banking Group McKesson Corp South Yorkshire Police
BACS Medscheme (Pty) Ltd Swedish Post
Banco Essi Medtronics Inc Thames Valley Police
Banco Investimento Molnlycke Healthcare UK Post Office
Banco del Sur National Blood Service (UK) United States Department of Energy
Bank of New Zealand North Essex Health Authority University of Melbourne
Bank of Tyrol Pacificare Health Systems West Mercia Constabulary
Barclays Bank plc Parkside Health NHS Trust West Midlands Police
Barclays Capital Services Ltd Roche Inc Wright Paterson Air Force Base
Charles Schwab & Co SC Johnson Ltd
Citibank Scott Bader Company Ltd MEDIA AND ENTERTAINMENT
Credit Suisse First Boston Siemens Healthcare
DEVK Smith & Nephew Ltd British Sky Broadcasting Ltd
Euralliance SA St. Josephs Hospital CentreParcs Ltd
Information Security Forum Ltd Murdoch Magazines (Pty) Ltd
FGH Bank GOVERNMENT The News International Group plc
First Tennessee National Bank Thompsons
Fortis Nederland BV Birmingham City Council Trinity International Holdings Ltd
Interpay Nederland BV Botswana Police Victoria Racing Club
JP Morgan City of Helsinki Healthcare Dept
Lloyds TSB Group plc Dutch Post Office
M&G Ltd Government of Israel
Massachusetts Mutual Life Insurance Co Helsinki Police Department
Merrill Lynch Corp Instituto de Informatica
NCM (UK) Holdings Ltd Israeli Airforce
</TABLE>
No single customer accounted for more than 10% of the Company's revenues during
the fiscal years ending December 31, 1998, 1997 and 1996 and one customer
accounted for approximately 15% of the Company's revenue during the nine month
period ended December 31, 1995.
11
<PAGE>
SALES AND MARKETING
The Company markets software and services in the United States, the United
Kingdom, Australia and Europe through its direct sales organization and markets
worldwide through distributors, strategic partners, VARs and original equipment
manufacturers ("OEMs"). In the past, the Company's revenues have primarily been
derived from its direct sales force. The Company now places greater emphasis on
expanding its indirect distribution channels.
The direct sales process involves the generation of sales leads through
direct mail, Internet presence, seminars, exhibitions, trade shows and
telemarketing. The sales cycle varies from customer to customer and generally
requires from two to eight 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. Gentia provides local support for agents,
distributors and partners, to assist with 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>
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
North America ............ 35% 36% 40%
United Kingdom ........... 27% 31% 34%
Rest of Europe ........... 28% 22% 15%
Australia ................ 3% 6% 6%
Rest of World ............ 7% 1% 5%
-----------------------------------------
Total .................... 100% 100% 100%
=========================================
</TABLE>
In the fourth quarter, the Company initiated a series of strategic actions
designed to return the Company to profitability and preserve its financial
resources. These actions resulted in a $5.6 million one time charge comprised of
a $2.9 million restructuring charge and a $2.7 million provision for doubtful
accounts. The $2.9 million restructuring charge is comprised of employee
severance costs of $618,000, facility closures costs and costs to exit certain
businesses of $1.5 million and goodwill impairment of $733,000.
The employee severance charge includes the charge for 11 senior
executives, and is the first step in a series of personnel reductions that
are necessary to return the Company to profitability. During the first
quarter of 1999, the Company recorded an additional $500,000 for severance
payments associated with actions taken during the quarter and it is expected
that a further $1.0 million with be incurred in the second quarter to further
reduce operating costs.
Facility closures were principally in the United States operation, where
the Company reduced its staffing levels significantly and began its move to a
more centralized approach. Additional charges are expected in the second
quarter of 1999 in order to centralize the European operations.
Costs to exit certain businesses relate to the South African, French and
German subsidiaries as well as the Hong Kong distributor. Total costs of $1.7
million includes the goodwill write down associated with these operations.
Cash requirements to fund the $5.6 million charge, consisted of a cash
flow amount of $1.6 million and non cash flows of $4.0 million. Of the $1.6
million, $0.5 million was expended in the first quarter of 1999 while the
balance will occur during 1999 and into 2001 in the case of certain lease
payments.
At this time, the Company believes that the restructure plan will reduce
the Company's operating costs to a level where it can operate profitably.
There can however, be no assurances that the Company will be able to maintain
or increase market demand for its product. To the extent that the Company is
unable to stem its recent declines in license revenues and do so in a timely
manner, the Company's operating results and financial condition would be
adversely affected.
The Company's sales and marketing organization consisted of 69 employees
as of December 31, 1998 (64 at December 31, 1997). Sales staff are based at
the Company's joint global headquarters in Boston, USA, and London, England.
Regional sales offices in the metropolitan areas of Chicago, Cleveland,
Connecticut, Dallas, New Jersey and New York have been closed and are now
serviced by the centralized office. The sales in the metropolitan areas of
Atlanta, Denver, Los Angeles, 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
12
<PAGE>
Hong Kong are still operational. Provision was made as of December 31, 1998 for
the closure of the German and South African offices. Subsequent to the year end,
the office in New Zealand has been closed and the operation in South Africa sold
to a third party. Sales and support of Gentia products in these countries are
now handled through local distributors.
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 its subsidiary, 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, 1998, the
consulting services group consisted of 61 technical professionals. Classes and
training programs, as well as consulting services, are available at customer
sites, local sales offices and the Company headquarters. Consulting services are
charged on an hourly or per diem basis and billed monthly.
The Company operates 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 has embraced a strategic change of direction towards high value
intelligent applications based on the platforms provided by the Gentia and K.wiz
product sets and a worldwide partnering model. In May 1999, Gentia released a
new version of the Renaissance Balanced Scorecard (RBSC) 3.0.1.0. This release
allowed the underlying design of the product to work directly on top of leading
relational database engines such as Oracle and SQL Server 7.0. In addition, full
internationalization was provided to further widen the product's appeal. Through
the Company's partnership with Gartner Measurement, a division of Gartner Group,
a rebranded version of the RBSC was released in June 1999 as the Gartner IT
Scorecard. The Companies have joined forces to offer information technology (IT)
organizations a packaged solution that effectively measures, manages and
optimizes their performance.
New versions of the Application Framework allowed accelerated growth of
Gentia's range of applications, under the new Impact branding. ProfitImpact
1.0.1.0, a high value activity based costing (ABC) and profit analysis
application was developed in conjunction with renowned ABC specialists Arthur
Andersen Switzerland and was released in May 1999. RevenueImpact 1.0.1.0, a high
volume sales analysis application was developed in conjunction with Decision
Systems (Israel) and is scheduled for release in June 1999. PerformanceImpact,
an internally based development, is a complimentary product to RBSC, providing
detailed analysis of key performance indicators across organizational views i.e.
product, location, market etc. PerformanceImpact was released in the first
quarter of 1999 and already has several customers.
While the majority of applications are horizontally focused, the Company has
also completed an innovative partnership with one of the world's largest
computer companies and a major telecommunications company to develop a vertical
application called TrafficOptimizer, that will address specific needs in the
telecommunications market. The application provides detailed information on
network traffic and calling patterns that enable telecommunication network
operators to optimize their existing network architecture without unnecessary
additional capital expenditures.
In first quarter of 1999, Gentia packaged its Gentia product, the Excel
Addin, the Application Framework and Gentia Web Suite as a single platform named
the Gentia Millennium Application Platform (G-MAP). This single platform will
provide a one stop solution for customers wishing to buy or build intelligent
applications that can be deployed across client/server networks or corporate
intranets. G-MAP 5.0.2.0 was released in the first quarter of 1999 and provided
a much more open environment. As traditional OLAP products become a commodity,
Gentia has adopted an open OLAP and RDBMS data architecture for developing
applications. G-MAP was one of the first products on the market to embrace the
OLE DB for OLAP
13
<PAGE>
API standard, allowing new applications to be developed based on Microsoft SQL
Server 7.0 OLAP Services and Applix TM1 now, and all other OLAP/ROLAP engines as
soon as they become fully compliant. In the fourth quarter of 1999, the Company
plans to deliver G-MAP 6.0.1.0 facilitating wide scale deployment of "thin
client" applications via 100% Microsoft and 100% Java clients.
In the second half of 1998 the Company acquired Compression Science Limited,
based in Glasgow UK, which developed and markets a knowledge discovery product
known as K.wiz. This acquisition provided the Company with a data mining
capability that provides application intelligence through the use of machine
learning algorithms. The Company will embed the K.wiz technology in its
applications and also seek to market K.wiz through third parties and OEM's. The
K.wiz product is designed to operate in heterogeneous environments, including
the Internet, and has been developed in the Java programming language from Sun
Microsystems. K.wiz is among the first commercially available knowledge
discovery products that provide the capability to address the data mining
capabilities of e-commerce applications and large transactional data
repositories in real time.
The Company believes that its future success will depend in large part on
its ability to maintain and enhance its client/server and web based technology
as well as develop new products that meet an expanding range of customer
requirements. The Company's research and development organization is divided
into teams consisting of application engineers, 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 and K.wiz. This is based upon customer
feedback, from technical support and from marketing.
As of December 31, 1998, the Company's research and development
organization of 62 full-time employees (1997: 60; 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 $6.8 million for the
year ended December 31, 1998, $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. In addition, the Company
expensed $1.0 million in purchased research and development associated with
the Company's 1998 acquisition of CSL. There was no purchased research and
development in 1997, 1996 or 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.
OPERATIONS TO BE DISCONTINUED
In December 1998, as part of the Company's restructuring and global
reorganization plan, the Company's Board of Directors adopted a plan to
discontinue the Company's operations in Germany, New Zealand and South
Africa. Distribution agents within the territories have or are in the process
of being appointed and be responsible for the operational costs of the
business. The Company will in turn receive royalty payments on the sale of
both licenses and support and maintenance contracts. The agency will also be
responsible for continuing current support and maintenance contracts. As of
April 30, 1999, an agent has been appointed for both New Zealand and South
Africa. No significant gains or losses are expected in excess of the amounts
already provided for in 1998 (Item 9: Restructuring costs).
Results of operations to be discontinued for year ended December 31, 1998:
<TABLE>
<CAPTION>
Germany New Zealand South Africa
---------- ------------ ------------
<S> <C> <C> <C>
Revenues $ 119,543 $ 27,870 $ 367,903
========= ========= =========
Net Loss $(818,550) $(131,750) $(545,336)
========= ========= =========
</TABLE>
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 ERP vendors such as SAP, Baan and Peoplesoft who are new entrants to
the applications space, specialized application vendors such as Hyperion, CorVu
and Sapling through to traditional multidimensional database and analysis
vendors such as Oracle Corporation, Information Advantage, Inc. and
MicroStrategy, Inc.
14
<PAGE>
The Company competes on the basis of various factors, including it's unique
partnering model, product quality, product performance, ease of use, customer
support and cost/benefit considerations. The partnering model involves utilizing
domain experts and consulting firms to deliver the best in class solution. The
Company believes it competes favorably with respect to each of these factors.
However, the Company's market is still evolving and there can be no assurance
that the Company will be able to compete successfully against current and future
competitors and the failure to do so successfully would have a material adverse
affect upon the Company's business, operating results and financial condition.
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 support 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 Merant's Data-Direct Connect 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, 1998, the Company had a total of 220 employees, including
62 in research and development, 69 in sales and marketing, 61 in customer
consulting and support services, 26 in finance and administration and 2 in
senior management. Of these employees, 115 were located in the United Kingdom,
53 were located in the United States, 12 in Australia and New Zealand, 30 in
Europe, 9 in South Africa and 1 in Hong Kong. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company believes its relationship with its
employees is 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 Chairman of the Board, Timothy Jones, its Chief
Technology Officer, Steve Fluin, its Chief Executive Officer, and Nick Bray, its
Chief Financial Officer, the loss of any of whom 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 CASH POSITION. The Company's ability to satisfy its cash requirements
for the coming year is dependent on meeting
15
<PAGE>
certain revenue targets, cash collection targets and containing operating
expenses. The Company has, in the past, been unable to meet similar targets,
particularly license revenue targets. There can be no assurance that the
Company will meet its projected revenue or other targets, and the failure of
the Company to do so (or to obtain additional sources of financing, which may
not be available on suitable terms to the Company, if at all) will have a
material adverse effect on the Company's business and financial condition and
the value of the Company's American Depositary Shares ("ADS").
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 its transition 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
term. If revenue levels continue to fall below expectations, operating results
are likely to be 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 (including analytical applications that
incorporate K.wiz technology) 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, (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.
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
16
<PAGE>
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 1999 and for the foreseeable future thereafter. As a
result, the Company's future operating results are dependent upon continued
market acceptance of Gentia and enhancements thereto. A decline in demand for,
or market acceptance of, Gentia as a result of competition, technological change
or other factors would have a material adverse effect on the Company's business,
operating results and financial condition.
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
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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."
YEAR 2000 ISSUE. The Year 2000 issue concerns the potential exposures we and
other companies have because certain computer systems, computer chips and
hardware use two digits, rather than four, to define the applicable year. On
January 1, 2000, these systems and programs may recognize the date as January 1,
1900 and may process data incorrectly or stop processing data altogether.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. The Company
has fully completed the assessment stage of the process and has taken corrective
action where needed as discussed below.
The Company's State of Readiness
The Company commenced its assessment of both the readiness of its internal
business information systems and non IT systems for handling the Year 2000 and
the compliance of products sold by the Company during the third quarter of the
1998 financial year. The Company determined that it will need to modify or
replace portions of its internal business information systems so that the
systems will function properly with respect to dates in the Year 2000 and
beyond. The Company anticipates that it will have successfully addressed Year
2000 issues relating to its business information and non IT systems by the end
of fiscal 1999.
The Company believes that its current products such as Gentia 4.0 and RBSC
are Year 2000 compliant. However, prior versions of Gentia, and other products
currently installed at certain customer sites will require upgrading or other
modifications to become Year 2000 compliant. The Company believes that it is not
legally responsible for costs incurred by these customers to achieve Year 2000
compliance. However, there can be no assurance that these customers will not
assert claims against the Company with respect to Year 2000 issues and, in the
event such claims are asserted and adjudicated in favor of these customers, the
Company's liability could be material. The Company has taken steps to identify
affected customers and persuade them to upgrade to Year 2000 compliant software.
The Company may incur increasing costs regarding customer satisfaction
related to these actions over the next few years. Since the Company's 'Millenium
Compliance Project' is currently ongoing, the scope of any resulting Year 2000
issues is not fully known and potential liability resulting from these issues is
unclear, the potential impact on the Company's business, operating results and
financial condition with respect to these matters is not known at this time.
Third Party Compliance
The Company has held discussions with its vendors and service providers to
evaluate IT and non IT Year 2000 issues, if any, relating to the interaction of
their systems or products with the Company's internal systems. The Company has
received written compliance information from some of these third parties. Based
on the replies received from and discussions held with all third parties, the
risk to which the Company is exposed appears to be minimal as all major
suppliers have implemented Year 2000 readiness projects or have checked the
products they supply. Therefore from the information received, the Company is
unaware of a third party with a Year 2000 issue, at the end of March 1999, that
would materially affect the Company's results of operations, liquidity or
capital resources. However, the Company has no means of ensuring that the
external agents will complete their Year 2000 resolution process in a timely
fashion and this could materially affect the Company's operations. The effect of
the external agent not complying is not determinable.
Costs to Address the Company's Year 2000 Issues
To date, the Company has deployed staff to address the Year 2000 issue, but
has not incurred any material expenditure in connection with remediating Year
2000 compliance issues. Most of its expenses have related to the opportunity
cost of time spent by employees of the Company evaluating the Company's internal
business information systems, the products sold by the Company and the
interaction of the Company's internal business information systems with the
internal systems of third parties. The Company does not expect incremental costs
relating to Year 2000 compliance to exceed $380,000, although the amount is
being regularly revised. Although the Company is not aware of any single
material operational issue or cost associated with the preparation of its
internal business information systems or its products for the Year 2000, there
can be no assurances that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in the Company's internal business information
systems or products the Company sells. Such
18
<PAGE>
unanticipated negative consequences and/or material costs, if incurred, could
have a material adverse effect on the Company's business, operating results or
financial condition.
Risks of the Company's Year 2000 Issues
The Company has commenced its 'Millennium Compliance Project', expected to
be completed in July 1999, in order to assess both the readiness of its internal
business information systems, as well as its non IT systems, for handling the
Year 2000, and the compliance of products sold by the Company. There can be no
assurance that the 'Millennium Compliance Project' will identify all material
Year 2000 compliance issues or that remedial actions taken in connection
therewith will be successful. In the event that the Company fails successfully
to assess Year 2000 compliance issues facing it or take remedial action
necessary in connection therewith, there can be no assurance that the Company's
business, operating results or financial condition will not be adversely
effected. In addition, there can be no assurance that the ability of third
parties with which the Company interacts to comply with Year 2000 issues will
not have a material adverse effect on the Company's business, operating results
or financial condition.
The Company's Year 2000 Contingency Plan
The Company is still in the process of setting up a contingency plan which
it intends to have in place by August 1999.
While the Company believes that its planning efforts are adequate to address
known or identified Year 2000 issues on a timely basis, there can be no
assurance that there will not be a delay in, or increased costs associated with
changes to third party systems, which could have a material adverse effect on
the Company's business, operating results or financial condition.
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 commencement 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, 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 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."
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NEED TO MANAGE LIMITED FINANCIAL RESOURCES. The Company has limited
financial resources, principally in the form of cash on hand and accounts
receivable. There can be no assurance that the amounts currently on hand will be
sufficient to expand the business or support its continued operation. Failure to
manage these resources would have a material adverse effect upon the Company's
business, operating results and financial condition.
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 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 owned approximately 32.7% of the outstanding
Ordinary Shares as at May 31, 1999, and assuming all existing outstanding
options are exercised, all present directors, executive officers and principal
shareholders would beneficially own approximately 30.9% 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 May 31, 1999 the Company had outstanding
10,232,930 Ordinary Shares, of which 6,715,863 were owned of record by the
Depositary (as defined) representing an equal number of ADSs. Of the remaining
3,517,067 Ordinary Shares outstanding, 167,067 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 all such 3,350,000 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
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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 9,036 square feet in Boston, USA and approximately 11,600 square
feet in London, England pursuant to leases which expire in 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, Chicago, and New York 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 cancelled the New York, San
Francisco, and Chicago leases as well as reduced the square footage of both the
London and Boston offices in an effort to consolidate operations.
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 for Arbor Software
Corporation ("Arbor") asserting that Gentia infringes several of the claims of a
United States patent held by Arbor (the "Arbor patent"). (In 1998, Arbor merged
with Hyperion Software Corporation.) Gentia has investigated Arbor's patent and
in 1996 filed a declaratory judgment action in the U.S. District Court for the
District of Massachusetts asserting both that Gentia does not infringe any
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 retained Arnold White & Durkee PC as its
counsel. In November 1996, the Company's declaratory judgment action was
transferred to the U.S. District Court for the Northern District of California
and consolidated with Arbor's infringement action. Discovery in the consolidated
action has been completed but the case is not currently scheduled for trial.
Arbor's patent is presently undergoing re-examination in the U.S. Patent &
Trademark Office, where the claims have been initially found to be unpatentable.
The Company is vigorously pursuing its defense against Arbor 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
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 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
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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.
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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, 1998 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) .............. 3,300,000 32.3%
All directors and officers as a group
(11 persons) (iv)............... 3,350,000 32.7%
</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 10,232,930 Ordinary Shares outstanding as of May 31, 1999.
(iii) The recorded owner is Kappa Ltd, 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 1,038,084 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 May 31, 1999, of
6,715,863 Ordinary Shares, representing 65.63% 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 "GNTI".
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>
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
Second Quarter 7.875 5.188
Third Quarter 5.938 3.031
Fourth Quarter 4.125 2.625
1999:
First Quarter 3.688 2.625
</TABLE>
On May 31, 1999, the last sale price for the ADSs as reported on the Nasdaq
National Market was $2.094.
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.
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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.
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.
UNITED STATES FEDERAL INCOME TAX AND UNITED KINGDOM TAX CONSEQUENCES TO PERSONS
WHO ARE OWNERS OF ORDINARY SHARES OR ADSS
The following generally summarizes certain U.S. federal and U.K. tax
consequences of the purchase, ownership and disposition of Ordinary Shares or
ADSs by a beneficial owner of Ordinary Shares or ADSs that is (a) a citizen or
resident of the U.S. for U.S. federal income tax purposes, (b) a corporation or
partnership created or organized under the laws of the U.S. or any State
thereof, (c) estates, the income of which is subject to U.S. federal income
taxation regardless of its source, or (d) a trust if (i) a court within the U.S
is able to exercise primary supervision over the administration of the trust,
and (ii) one or more U.S. persons have the authority to control all substantial
decisions of the trust (collectively, "U.S.Holders"). this summary does not
address tax consequences arising under the laws of any state, locality or other
taxing jurisdiction other than the U.S. or the U.K.
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 Annual 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 U.S. and the U.K. (the
"Conventions"), occurring after such date and (ii) in part, on representations
of the Depositary, and assume that each obligation in the Deposit Agreement (the
"Deposit Agreement") entered into by the Company, the Depositary, and the
registered holders of ADRs and the owners of a beneficial interest in bank entry
ADRs, and any related agreement will be performed in accordance with its terms.
No assurance can be given that taxing authorities or the courts will agree with
this analysis.
This summary is of a general nature only and does not discuss all aspects of
U.S. and U.K. taxation that may be relevant to a particular investor. This
summary deals only with Ordinary Shares or ADSs held as capital assets and does
not address special classes of purchasers, such as dealers in securities,
persons who hold Ordinary Shares or ADSs as part of a larger integrated
financial transaction or straddle, U.S. Holders whose functional currency is not
the U.S. dollar and certain U.S. Holders (including, but not limited to,
insurance companies, tax exempt organizations, financial institutions and
persons subject to the alternative minimum tax) who may be subject to special
rules not discussed below. In particular, the following summary does not address
the adverse tax treatment of U.S. Holders who own, directly or by attribution,
10% or more of the Company's outstanding voting share capital in the event that
the Company were to be classified as a "controlled foreign corporation" for U.S.
federal income tax purposes. Although the Company was not a controlled foreign
corporation as of December 31, 1998, there can be no assurance that it will not
be a controlled foreign corporation in the future. This summary foes not address
the U.S. federal income tax consequences to the Company or any U.S. Holder if
the Company is determined to be a foreign personal holding company or a personal
holding company as such terms are defined for U.S. federal income tax purposes.
OWNERS AND PROSPECTIVE PURCHASERS OF ADSs ARE ADVISED TO CONSULT WITH THEIR
OWN TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES, AS WELL AS WITH RESPECT TO THE TAX CONSEQUENCES IN THE UNITED
KINGDOM AND OTHER JURISDICTIONS, OF THE OWNERSHIP OF ADSs AND THE ORDINARY
SHARES REPRESENTED THEREBY APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS.
For purposes of the Conventions and the U.S. Internal Revenue Code of 1986,
as amended (the "Internal Revenue Code"), U.S. Holders will be treated as the
beneficial owners of the Ordinary Shares represented by ADSs evidenced by ADRs.
TAXATION OF DIVIDENDS
United Kingdom
Under current U.K. law, if dividends are paid by the Company, U.K. resident
individual shareholders will receive a notional (non-refundable) tax credit
equal to one-ninth of the net cash dividend (10% of the gross dividend) such
that the individual's
24
<PAGE>
lower and basic rate tax liability on the amount of the dividend and notional
tax credit will be satisfied. Only higher rate taxpayers will be required to pay
any further income tax (equivalent to 25% of the dividend received).
Different rules and rates apply to shareholders who are trustees of U.K.
resident trusts.
Dividends paid by U.K. resident companies to other U.K. resident companies
carry a tax credit (currently one-ninth) in respect of the amount of the
divided. The divided and tax credit will constitute franked investment income in
the hands of the recipient company and normally a UK resident company will not
be liable to UK tax on any such dividends. For dividends paid on or after April
6, 1999, UK companies are no longer entitled to claim a refund of the tax credit
in any circumstances.
Holders who satisfy conditions prescribed by the Convention relating to
income taxes (the "Income Tax Convention") and current UK tax legislation
("Eligible U.S. Holders") are entitled to claim from the UK 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 UK for UK tax purposes would have been
entitled had he received the divided (the Tax Credit Amount), subject to a UK
withholding tax of 15% of the sum of the dividend paid and the related Tax
Credit Amount. However, the reduction in the rate of the tax credit from April
6, 1999 to one-ninth of the amount of any dividend means that Eligible US
Holders have ceased to be able to obtain a Treaty Payment as from that date. It
should be noted that the US Treasury announced on October 1, 1998, its intention
to hold a round of talks with the UK for the purpose of updating the Income Tax
Convention to reflect tax law developments in the respective countries. It is
not anticipated that any new Income Tax Convention will be effective prior to
January 1, 2000. United States
Subject to the discussion below under the heading "Passive Foreign
Investment Company Considerations", for US federal income tax purposes, the
gross amount of a divided plus the Tax Credit Amount (i) will be included in
gross income by an Eligible US 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 US federal income tax purposes.
Subject to certain limitations including certain minimum holding periods, the
15% UK withholding tax will be treated as a foreign income tax eligible for
direct credit against such Eligible US Holder's US 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 US Holders' income
and the deductions appropriately allocated or apportioned thereto. No
dividends received deduction will be allowed with respect to dividends paid
by the Company. Of dividends paid by the Company were to exceed its current
and accumulated earnings and profits as determined for US federal income tax
purposes, such excess will be treated as non taxable return of capital to the
extent of the US Holder's adjusted basis in the ADSs, and any excess will be
treated as a capital gain. To determine the portion of any distribution that
constitutes a dividend for US federal income tax purposes, the Company will
maintain a set of books and records in accordance with US tax principles.
As mentioned above, certain minimum holding periods must be met in order for
a US Holder to credit the foreign tax imposed on foreign source dividends. A US
Holder will be denied a foreign tax credit for foreign withholding taxes imposed
on a divided if the US Holder has not held the ordinary share or ADS for more
than 15 days in the 30-day holding period beginning 15 days before the
ex-dividend date. Any days during which a US Holder has substantially diminished
its risk of loss on the Ordinary Share or ADS are not counted toward meeting the
holding period required by statute. A US Holder that is under an obligation to
make related payments with respect to the Ordinary Shares or ADSs (or
substantially similar or related property) also is not entitled to claim a
foreign tax credit with respect to a foreign tax imposed on a divided. US
Holders that fail to meet the holding period requirements are instead allowed a
deduction equal to the foreign tax credits disallowed.
Taxation of Capital Gains
United Kingdom
A US Holder who is not resident or ordinarily resident in the UK (and would
not be treated as "temporarily non resident), for UK tax purposes will not be
liable for UK tax on capital gains realizes or accrued on the sale or other
disposal of ADSs unless the ADSs are held in connection with a trade or business
carried on by such US Holder in the UK through a branch or agency which
constitutes a permanent establishment or fixed base, and the ADEs are or have
been used, held or acquired for the purposes of such trade or business of such
branch or agency.
An individual is treated as temporarily non resident if he leaves the UK
after March 16, 1998 and (a) four out of the seven years of assessment
immediately preceding the year of departure were years for which the individual
satisfied the residence requirements and (b) there are fewer than five years of
assessment falling between (and not including) the year of departure and the
year of return. Individuals should consult their own tax advisor if they believe
that these circumstances could be applicable to them.
UNITED STATES
Subject to the discussion below under the heading "Passive Foreign
Investment Company Considerations", a US Holder will be liable for US federal
income tax on such gains to the same extent as on any other gains from sales or
dispositions of
25
<PAGE>
stock. In the case of individual US Holders, such gains may be eligible for
preferential capital gains rates depending on holding period, date of sale, and
the individual's marginal federal income tax rate. Generally, any capital gain
will be subject to a maximum tax rate of 20% for shares held for more than one
year. Shares held less than one year will be treated as short-term capital gain
and taxed as ordinary income at the US Holder's marginal income tax rate.
Capital gains and losses realised on the disposition of ordinary shares
generally will be US source gains and losses for purposes of the US foreign tax
credit limitations.
A US Holder that is liable for both UK and US tax on a gain on the disposal
of the ADSs should generally be entitled, subject to certain limitations and
pursuant to the Income Tax convention, to credit the amount of UK capital gains
or corporation tax, as the case may be, paid in respect of such gain against
such US Holder's US federal income tax liability in respect of such gain. US
Holders should consult their own tax advisors to determine their entitlement to
credit UK tax against their US federal income tax liability.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
If the Company were deemed to be a passive foreign investment company (a
PFIC) for US federal income tax purposes, any gain recognized by a US Holder
upon the sale of ADSs (or receipt of certain distributions) would be treated as
ordinary income, such income would be allocated over the holding period of the
US Holder and an interest charge would be imposed on the amount of deferred tax
on such income allocated to prior taxable years. The Company will be classified
as a PFIC for a taxable year if either (i) 75% or more of its gross income for
the taxable year is passive income or (ii) on average for the taxable year, 50%
or more of its assets by value produce or are held for the production of passive
income. The Company has determined that it was not a PFIC for its taxable year
ended December 31, 1998 and intends to manage its business so as not to become a
PFIC. If the Company were determined to be a PFIC, however, a US Holder could
elect to treat his or her ADSs as an interest in a qualified electing fund (a
QEF Election), in which case, the US Holder would be required to include in
income his or her proportionate share of the Company's income and net capital
gain in years in which the Company is a PFIC. Alternatively, the US Holder could
make an election (a Mark-to-Mark Election) pursuant to which a US Holder would
be required to include in income the excess of the fair market value of the ADSs
over the US Holder's basis therein. If a US Holder makes either a QEF Election
of a Mark-to-Mark Election , then any gain recognized upon the sale by such US
Holder of his or her ADSs generally would be taxed as a capital gain. The
Company will continue to monitor its status and will, promptly following the end
of each taxable year, notify US Holders if it believes that it is properly
classified as a PFIC for that taxable year to enable US Holders to consider
whether to make a QEF Election or a Mark-to Mark Election. In addition, the
Company intends to comply with the applicable information reporting requirements
for US Holders to make a QEF Election. US Holders should consult with their own
tax advisers regarding the eligibility, nor and advisability of making the QEF
Election or Mark-to-Mark Election if the Company is treated as a PFIC.
UNITED KINGDOM INHERITANCE TAX
An ADS beneficially owned by an individual US Holder who is domiciled in the
US for the purposes of the Convention relation to estate and gift taxes (the
Estate and Gift Tax Convention) is not subject to United Kingdom inheritance tax
on the individual's death or on a gift made by the individual during his
lifetime, except where the ADS is part of the business property of a United
Kingdom permanent establishment of the individual or pertains to a United
Kingdom fixed base of an individual used for the performance of independent
personal services. The Estate and Gift Tax Convention generally provides of tax
paid in the United Kingdom to be credited against tax payable in the United
Kingdom, based on priority rules set forth in that Convention, in a case where
an ADS is subject to both United Kingdom inheritance tax and United States
federal gift or estate tax. There are special rules applying to trusts.
UNITED STATES GIFT AND ESTATE TAXES
An individual US Holder will be subject to United States gift and estate
taxes with respect to the ADSs in the same manner and to the same extent as with
respect to other types of personal property.
United Kingdom Stamp Duty and Stamp Duty Reserve Tax
The acquisition or transfer of Ordinary Shares is subject to UK stamp duty
at (pound)0.50 per (pound)100 (or part thereof) of the amount or value of the
consideration price. There is also a charge to UK Stamp Duty Reserve Tax (SDRT)
at 0.5% of the consideration on the agreement to transfer Ordinary Shares but a
refund of SDRT may be obtained if an instrument to transfer the Ordinary Shares
is executed and stamp duty is paid within six years of the date of the agreement
(or, in the case of a conditional agreement, when the condition is satisfied).
Stamp duty or SDRT at (pound)1.50 per (pound)100 (or part thereof) of the
amount or value of the consideration price arise on the deposit of ordinary
Shares with the Custodian of a Depository (or certain persons providing
clearance services ) or their nominees or agents and will be payable by the
Depository or such person, under the Deposit Agreement. In accordance with the
terms of the Deposit Agreement, holders of ADSs must pay an amount in respect of
such tax to the Depository.
There is no UK Stamp Duty on the acquisition or transfer of an ADS provided
that any agreement to transfer the ADS
26
<PAGE>
is executed and retained outside the UK. The transfer of Ordinary Shares by the
Custodian of the Depository (or its nominee) to the ADS holder will attract a
fixed stamp duty of (pound)0.50 only provided the ADS holder is not transferring
beneficial ownership.
If the pending United Kingdom Finance Bill is enacted, the fixed stamp duty
of (pound)0.50 only will increase to (pound)5.00 with effect from October 1,1999
and additionally, interest (at a variable rate to be fixed by the Government
regulations) will become payable on stamp duty due on any instrument which is
not paid within 30 days of execution of the instrument. This will also apply to
instruments executed outside the UK if they are later brought into the UK,
thereby becoming liable to stamp duty, in which case interest on unpaid stamp
duty will accrue by reference to the date of execution. Penalties may also
become chargeable in respect of stamp duty not paid by the due date. Equivalent
rules are already in force to charge interest and penalties in respect of SDRT,
that is not paid by the seventh day of the calendar month following the month in
which the instrument was executed, wherever execution takes place.
27
<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
ENDED
DECEMBER YEAR ENDED
YEAR ENDED MARCH 31, 31, DECEMBER 31,
---------------------- ----------- ---------------------------------------------
---------------------- ----------- ---------------------------------------------
1994 1995 1995 1995(i) 1996 1997 1998
---------- ----------- ----------- ------------ --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License ......................... $ 2,931 $ 6,364 $ 7,657 $ 10,227 $ 16,861 $ 14,985 $ 16,173
Services and other .............. 3,134 4,398 4,918 6,163 9,104 12,186 13,359
--------- --------- --------- --------- --------- --------- ---------
Total revenues .............. 6,065 10,762 12,575 16,390 25,965 27,171 29,532
--------- --------- --------- --------- --------- --------- ---------
Cost of revenues:
License ......................... 128 148 103 171 804 1,179 1,809
Services and other .............. 980 2,455 2,816 3,580 4,937 6,800 8,400
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenues ...... 1,108 2,603 2,919 3,751 5,741 7,979 10,209
--------- --------- --------- --------- --------- --------- ---------
Gross profit ....................... 4,957 8,159 9,656 12,639 20,224 19,192 19,323
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing ............. 2,340 3,782 4,301 5,801 10,271 14,308 19,720
Research and development ........ 551 1,113 1,284 1,663 3,185 4,698 6,831
General and administrative ...... 2,062 2,517 3,017 3,711 3,926 6,279 4,367
Purchased research and
development ................... -- -- -- -- -- -- 1,037
Restructuring costs ............. -- -- -- -- -- -- 2,869
Goodwill amortization ........... -- -- -- -- 122 372 596
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses .... 4,953 7,412 8,602 11,175 17,504 25,657 35,420
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ...... 4 747 1,054 1,464 2,720 (6,465) (16,097)
Other income (expense) ............. (74) (77) 4 (45) 965 1,235 681
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes...... (70) 670 1,058 1,419 3,685 (5,230) (15,416)
(Provision) credit for income taxes (12) (254) (384) (521) (1,216) 1,247 (185)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) .................. $ (82) $ 416 $ 674 $ 898 $ 2,469 $ (3,983) $(15,601)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share (ii)
- basic ... $ (0.01) $ 0.06 $ 0.10 $ 0.14 $ 0.31 $ (0.44) $ (1.57)
- diluted . $ (0.01) $ 0.06 $ 0.09 $ 0.12 $ 0.24 $ (0.44) $ (1.57)
========= ========= ========= ========= ========= ========= =========
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 9,950,201
- diluted . 6,459,167 6,459,167 7,340,156 7,186,190 10,491,703 9,154,673 9,950,201
========= ========= ========= ========= ========== ========= =========
</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.
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS OF US DOLLARS)
MARCH 31, DECEMBER 31,
----------------- -------------------------------------
1994 1995 1995 1996 1997 1998
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ...................... $ 21 $ 720 $ 2,280 $25,228 $ 20,332 5,314
Working capital ................................ 87 329 1,606 26,709 22,144 4,875
Total assets ................................... 3,200 6,091 7,755 41,551 36,394 26,548
Short-term debt ................................ 534 850 475 194 105 78
Long-term debt, excluding current portion ...... 15 82 175 225 109 59
Total shareholders' equity ..................... 456 879 2,490 32,004 27,859 13,910
</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.
The Company's ability to satisfy its cash requirements for the coming
year is dependent on meeting projected revenue targets, cash collection
targets and containing operating expenses. The Company has in the past, been
unable to meet similar targets, particularly license revenue. Failure to meet
anyone of the three requirements will result in the company having
insufficient cash to finance operations. The company will attempt to obtain
additional sources of financing, which may not be available on suitable terms
to the company, if at all. This will have a material adverse effect on the
Company's business and financial condition and the value of the American
Depositary Shares ("ADS"). The Company has taken steps to restructure the
organization to enable the Company to operate off a lower, more flexible
operating cost base. This restructuring involves the consolidation of various
functions within the organization, reducing headcount and the number of
facilities, which the Company operates from. See "Item 9: Restructuring."
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 eight 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, 1998,
the Company's gross profit on $16,173,000 of license revenues was 88.8% and its
gross profit on $13,359,000 of services and other revenues was 37.1%. The
Company's total gross profit for that period was $19,323,000 or 65.4% 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
$17,862,000 or 60.5%.
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 sold has decreased from approximately $136,000 for the year
ended December 31, 1997 to approximately $120,000 for the year ended December
31, 1998.
29
<PAGE>
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, doubtful accounts, 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 220
as of December 31, 1998, 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".
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 other comprehensive income in
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."
30
<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>
YEAR ENDED NINE MONTHS
MARCH 31, ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------- ------------- ------------------------------------
--------------- ------------- ------------------------------------
1994 1995 1995 1995 1996 1997 1998
----- ----- ----- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees .............................. 48.3% 59.1% 61.0% 62.4% 64.9% 55.2% 54.8%
Services and other ........................ 51.7 40.9 39.0 37.6 35.1 44.8 45.2
----- ----- ----- ----- ----- ----- -----
Total revenues ......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License fees .............................. 2.1 1.4 0.8 1.1 3.1 4.4 6.1
Services and other ........................ 16.2 22.8 22.4 21.8 19.0 25.0 28.4
----- ----- ----- ----- ----- ----- -----
Total cost of revenues ................. 18.3 24.2 23.2 22.9 22.1 29.4 34.5
----- ----- ----- ----- ----- ----- -----
Gross profit ................................ 81.7 75.8 76.8 77.1 77.9 70.6 65.5
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing ....................... 38.6 35.1 34.2 35.4 39.5 52.6 66.8
Research and development .................. 9.0 10.3 10.2 10.1 12.3 17.3 23.1
General and administrative ................ 34.0 23.4 24.0 22.7 15.2 23.1 14.8
Purchased research & development .......... -- -- -- -- -- -- 3.5
Restructuring cost ........................ -- -- -- -- -- -- 9.7
Goodwill amortization ..................... -- -- -- -- 0.4 1.4 2.0
----- ----- ----- ----- ----- ----- -----
Total operating expenses .............. 81.6 68.8 68.4 68.2 67.4 94.4 119.9
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations ............... 0.1 7.0 8.4 8.9 10.5 (23.8) (54.5)
Other income (expense) ...................... (1.2) (0.7) -- (0.2) 3.7 4.5 2.3
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
income taxes ........................... (1.1) 6.3 8.4 8.7 14.2 (19.3) (52.2)
(Provision) credit for income taxes ......... (0.3) (2.4) (3.0) (3.2) (4.7) 4.6 (0.6)
----- ----- ----- ----- ----- ----- -----
Net income (loss) ........................... (1.4)% 3.9% 5.4% 5.5% 9.5% (14.7)% (52.8)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
The Company's total revenue increased 8.5% from $27.2 million for the year
ended December 31, 1997 to $29.5 million for the year ended December 31, 1998.
The increase in revenue was split evenly over license revenue and consulting
maintenance and other services. License revenue increased by 8% while consulting
maintenance and other services increased by 9.6%.
Revenues for the year ended December 31, 1998 were $8.1 million in the
United Kingdom, $10.3 million in North America, $0.9 million in Australia and
New Zealand and $8.1 million from the rest of Europe and $2.1 million from the
rest of the world. 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 New Zealand and $5.9 million from the rest of Europe and $1.5
million from the rest of the world.
LICENSE REVENUES. License revenues increased 8% from $15.0 million for the
year ended December 31, 1997 to $16.2 million for the year ended December 31,
1998. The increase is primarily due to the Renaissance Balanced Scorecard and
core Gentia products. License revenues decreased from 55.2% of total revenues
for the year ended December 31, 1997 to 54.8% for the year ended December 31,
1998.
SERVICES AND OTHER REVENUES. Services and other revenues increased 10% from
$12.2 million in the year ended December 31, 1997 to $13.4 million in the year
ended December 31, 1998. This was due to increased maintenance and support
revenues, together with increased consulting assignments from the growing Gentia
customer base. With the increase in license revenues, services and other
revenues only increased from 44.8% of total revenues for the year ended December
31, 1997 to 45.2% for the year ended December 31, 1998.
31
<PAGE>
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues were $1.2 million and
$1.8 million in the years ended December 31, 1997 and 1998, respectively,
representing 8.0% and 11.2% of license 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
$6.8 million and $8.4 million in the years ended December 31, 1997, and 1998,
respectively, representing 55.8% and 62.9% of service and other revenues for
those periods. The percentage increase is due to an increase in the utilization
of third party consultants.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased by 37.8% from
$14.3 million for the year ended December 31, 1997 to $19.7 million for the year
ended December 31, 1998. The principal components of this increase are marketing
and bad debts. The Company increased its marketing expenditure during the year
to develop product awareness around its newly released Balance Scorecard
Application. The Company also recorded a one time allowance for doubtful
accounts of $2.7 million. The Company believes that it will spend substantially
less during 1999 to maintain its market awareness of the Balance Scorecard
Application. As a percentage of total revenues, sales and marketing expenses
increased from 52.7% to 66.8% of total revenues for the years ended December 31,
1997 and 1998, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
44.7% from $4.7 million for the year ended December 31, 1997 to $6.8 million for
the year ended December 31, 1998. This increase was attributable to the purchase
of Compression Sciences Limited (see Note 12 of Notes to the Consolidated
Financial Statements) and a general increase in research expenditure. As a
percentage of total revenues, research and development expenses were 17.3% and
23.1% of total revenues for the years ended December 31, 1997 and 1998,
respectively. This increase can be attributed to Compression Sciences Limited
research expenditure with no related revenue in 1998. 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 decreased
30.2% from $6.3 million for the year ended December 31, 1997 to $4.4 million for
the year ended December 31, 1998. General and administrative expenses
represented 23.1% and 14.8% of total revenues for the years ended December 31,
1997 and 1998, respectively.
RESTRUCTURING COSTS. During 1998, the Company recorded restructuring
charges of $6.6 million, which included restructuring costs of $2.9 million,
provision for doubtful accounts of $2.7 million and in-process research and
development of $1.0 million. An additional charge of $500,000 was incurred in
quarter one of 1999 and a further $1.0 million is anticipated in quarter two
of 1999 as these charges did not meet the accounting criteria for inclusion
in 1998. The combined effect of the reductions in work force and facility
closures is expected to lower the Company's annual operating costs by
approximately $8.0 million.
Restructuring costs aggregating $2.9 million consisted of costs
associated with the exit from certain businesses of $1.5 million, goodwill
impairment of $733,000 and employee severance costs $618,000. The severance
costs relate to 11 employees, mainly upper management, in the administration
and sales function. Of the employee severance cost, $316,000 had been paid
prior to year-end. The sublease and lease abandonment losses primarily
covered office space in Wakefield and Chicago in the United States and
Wimbledon in the United Kingdom. The asset write-offs were primarily goodwill
relating to the closure of Germany, South Africa and cancellation of
distribution agreements in Asia. The fair value of the goodwill was
determined based on the estimated disposal value of the subsidiary.
The provision for doubtful debts was principally made against debts in
the United States, Netherlands and United Kingdom. Provision was made for
overdue disputed debts that were considered irrecoverable as at December 31,
1998.
GOODWILL AND OTHER INTANGIBLES AMORTIZATION
Goodwill and other intangibles amortization increased by $224,000 an
increase of 60.2% on the 1997 expense. The increase is attributable to the
purchase of Technical and Computer Management Services Limited and
Compression Sciences Limited which generated goodwill of $1.9 million and
the purchase of existing technology of $2.6 million.
INCOME (LOSS) FROM OPERATIONS
The loss from operations for the year ended December 31, 1998 was $15.6
million, comprising a loss from operations of $7.5 million in the United
Kingdom, $3.7 million in North America and loss from operations of $709,000 in
Australia and New
32
<PAGE>
Zealand, $3.0 million in the rest of Europe and $713,000 in the rest of the
world. Income from operations for the year ended December 31, 1997 was $16.5
million, comprising income from operations of $1.5 million in the United
Kingdom; $4.2 million in North America, $91,000 in Australia, $491,000 in the
rest of Europe and $71,000 in the rest of the world.
OTHER INCOME
Other income was $1.2 million and $681,000 in years ended December 31, 1997
and 1998, respectively, and relates primarily to interest earned on interest
bearing deposits of funds raised by the Company's initial public offering in
April 1996.
CREDIT (PROVISION) FOR INCOME TAXES
The provision for income taxes was $1.2 million credit in the year ended
December 31, 1997, and a $185,000 debit in the year ended December 31, 1998,
representing the write off of deferred tax assets.
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, 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.
33
<PAGE>
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.
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,
1997 and the year ended December 31, 1998, 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.
34
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- --------- -------- -------- -------- ------- -------- -------
CONSOLIDATED STATEMENT OF (IN THOUSANDS OF US DOLLARS)
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License ..................... $ 3,956 $ 5,018 $ 3,796 $ 2,215 $ 2,878 $ 4,779 $ 4,419 $ 4,097
Services and other .......... 3,045 3,088 2,745 3,308 3,039 2,960 3,588 3,772
------- ------- ------- ------- ------- ------- ------- -------
Total revenues ......... 7,001 8,106 6,541 5,523 5,917 7,739 8,007 7,869
------- ------- ------- ------- ------- ------- ------- -------
Cost of Revenues:
License ..................... 167 116 751 145 75 472 452 810
Services and other .......... 1,515 1,662 1,729 1,894 1,782 2,045 2,140 2,433
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues . 1,682 1,778 2,480 2,309 1,857 2,517 2,592 3,243
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ..................... 5,319 6,328 4,061 3,484 4,060 5,222 5,415 4,626
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing ......... 3,114 3,591 3,719 3,884 4,115 4,175 4,351 7,079
Research and development .... 1,215 1,005 1,187 1,291 1,639 2,034 1,512 1,646
General and administrative .. 1,117 1,163 1,456 2,543 1,082 1,021 1,106 1,158
Purchased research and
development ........... -- -- -- -- -- -- -- 1,037
Restructuring costs ........ -- -- -- -- -- -- -- 2,869
Goodwill amortization ....... 88 91 90 103 102 128 153 213
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 5,534 5,850 6,452 7,821 6,938 7,358 7,122 14,002
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations .... (215) 478 (2,391) (4,337) (2,878) (2,136) (1,707) (9,376)
Other (expense) income ........... 303 295 287 350 246 215 144 76
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes ................. 88 773 (2,104) (3,987) (2,632) (1,921) (1,563) (9,300)
(Provision) credit for income taxes (29) (229) 631 874 -- -- -- (185)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ............... $ 59 $ 544 $ (1,473) $(3,113) $(2,632) $(1,921) $(1,563) $(9,485)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
35
<PAGE>
The following table sets forth, as a percentage of revenues, certain line
items in the Company's Consolidated Statement of Operations for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License ........................ 56.9% 61.9% 58.0% 40.1% 48.6% 61.8% 55.2% 52.1%
Services and other ............. 45.5 38.1 42.0 59.9 51.4 38.2 44.8 47.9
--------- ------- ------- ------- ------- ------- ------- -------
Total revenues ............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- ------- ------- ------- ------- ------- ------- -------
Cost of Revenues:
License ........................ 2.4 1.4 11.5 2.6 1.3 6.1 5.6 10.3
Services and other ............. 21.6 20.5 26.4 34.3 30.1 26.4 26.7 30.9
--------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues .... 24.0 21.9 37.9 36.9 31.4 32.5 34.4 41.2
--------- ------- ------- ------- ------- ------- ------- -------
Gross profit ........................ 76.0 78.1 62.1 63.1 68.6 67.5 67.6 58.8
--------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing ............ 44.4 44.3 56.9 70.3 69.5 53.9 54.3 90.0
Research and development ....... 17.4 12.4 18.1 23.4 27.7 26.3 18.9 20.9
General and administrative ..... 16.0 14.4 22.2 46.0 18.3 13.2 13.8 14.7
Purchased research and
development ............... -- -- -- -- -- -- -- 13.2
Restructuring costs ............ -- -- -- -- -- -- -- 36.5
Goodwill amortization .......... 1.2 1.1 1.4 1.9 1.7 1.7 1.9 2.7
--------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses .. 79.0 72.2 98.6 141.6 117.2 95.1 88.9 178.0
--------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations ....... (3.0) 5.9 (36.5) (78.5) (48.6) (27.6) (21.3) (119.2)
Other (expense) income .............. 4.3 3.6 4.3 6.3 4.2 2.8 1.8 1.0
--------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
Income taxes .................... 1.3 9.5 (32.2) (72.2) (44.4) (24.8) (19.5) (118.2)
(Provision) credit for income taxes . (0.4) (2.8) 9.7 15.8 -- -- -- (2.4)
--------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ................... 0.9% 6.7% 22.5% (56.4%) (44.4%) (24.8%) (19.5%) (120.6%)
========= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as demand for 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, (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 $9.8 million in its operating activities in the
year ended December 31, 1998 and used cash of $3.1 million in the year ended
December 31, 1997.
As a result of the cash utilized in operations, the company ended the
year with a cash balance of $5.3 million. It is anticipated that the company
will end quarter two of 1999 with a remaining cash balance of $650,000. Steps
taken to address the net utilization of cash are discussed under "Item 9:
Overview" and "Item 9: Restructuring". The company is reliant on meeting
projected revenue targets, cash collection targets and containing operating
expenses. The Company has in the past, been unable to meet similar targets,
particularly license revenue. Failure to meet anyone of the three
requirements will result in the company having insufficient cash to finance
operations. The company will attempt to obtain additional sources of
financing, which may not be available on suitable terms to the company, if at
all. This will have a material adverse effect on the Company's business and
financial condition and the value of the American Depositary Shares ("ADS").
The Company has taken steps to restructure the organization to enable the
Company to operate off a lower, more flexible operating cost base. This
restructuring involves the consolidation of various functions within the
organization, reducing headcount and the number of facilities, which the
Company operates from. See "Item 9: Restructuring."
On April 30, 1996, the Company completed an initial public offering of
3,450,000 ADSs, representing 3,450,000 Ordinary Shares at $16.00 per share, of
which 2,000,000 shares were sold by the Company and 1,450,000 were sold by
certain shareholders.
In May 1998, the Company acquired the issued share capital of Technical
and Computer Management Services Ltd ("TCMS Ltd"), a U.K. Company for $1.0
million in cash and 166,667 Ordinary shares valued at approximately $1.0
million. TCMS Ltd is a technical consulting firm operating in both the U.S.
and U.K. with extensive experience in the implementation of enterprise-wide,
web-based analytical applications using Gentia technology.
In November 1998, Compression Sciences Limited (CSL) was acquired for $1.3
million in cash and $2.3 million for absorbed liabilities. Compression Sciences
has developed K.Wiz, a totally Java-based knowledge discovery and data mining
36
<PAGE>
solution. K.wiz independently analyzes large quantities of data and
automatically highlight key trends. K.wiz components offer data transformation,
visualization, and discovery algorithms that deliver complementary value-added
analytical capabilities to client/server and Internet-deployed applications.
Both acquisitions were accounted for under the purchase method. Goodwill of
approximately $1.9 million arose on the purchase of TCMS Limited. On acquisition
of CSL, $2.6 million was paid for existing technology and $1 million for
in-process research and development. The in-process research and development was
written off on acquisition.
Goodwill acquired in respect of acquisitions accounted for under the
purchase method are amortized over their estimated useful life of 10 years.
Purchased existing technology is amortized over the estimated useful life of 5
years.
The Company's investing activities for the year ended December 31, 1998, in
addition to the acquisitions, consisted of purchases of property and equipment,
primarily computer equipment and office furniture and equipment, which amounted
to $1.2 million, compared to $1.1 million for the year ended December 31, 1997.
The combination of losses over the year and the acquisition of TCMS and CSL
caused the Company's cash to decrease from $20.3 million at December 31, 1997 to
$5.3 million at December 31, 1998; the Company's working capital decreased from
$22.1 million at December 31, 1997 to $4.9 million; and the Company's total
assets decreased from $36.4 million at December 31, 1997 to $26.5 million at
December 31, 1998.
As of December 31, 1998, 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'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 cash collections and has increased its bad
debt reserve for the year ended December 31, 1998 by $2.0 million.
There was no significant impact as a result of inflation on the Company's
operations during 1996, 1997 or 1998.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
37
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The directors and executive officers of the Company, and their respective
ages and positions as of June 25, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
DIRECTORS
<S> <C> <C>
Paul R. Rolph ......... 55 Chairman of the Board and Director
Timothy S. Jones ...... 44 Chief Technology Officer and Director
R. Alan Wallman ...... 53 Founder and Non-executive Director
OFFICERS
Steve Fluin ........... 44 Chief Executive Officer
Nick Bray ............. 34 Chief Financial Officer and Company Secretary
Ian W. Rawlings ....... 40 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. Rolph
resigned as the Chief Executive Officer as of the 5 May 1999 and has maintained
his position as Chairman of the Board.
Mr. Steve Fluin was elected as Chief Executive Officer on Mr. Rolph's
resignation, May 5, 1999. Mr. Fluin joined Gentia in January 1999 after
serving two years as Retek Information Systems's Vice President of Europe,
Africa and the Middle East. Retek is a Minneapolis, MN, based software
company and subsidiary of HNC Software. Mr. Fluin was charged with creating
Retek's European Division from the ground up. Previously, Mr. Fluin held a
variety of positions with Comshare, during his 15 years with the Company. He
joined Comshare as a consultant in 1981 and rose to Vice President for Europe
in 1991, a position he held until his departure in 1996. Mr. Fluin holds a
Higher National Diploma in Business Studies and is an active member of the
Institute of Directors.
Mr. Bray was appointed as Chief Financial Officer, replacing Mr Sprenkle,
effective from May 22, 1999. Prior to his appointment at Gentia Mr. Bray served
as Comshare, Inc.'s Senior Director of Finance & Chief Accounting Officer.
Comshare develops, markets, and supports financial analytic applications
software. Prior to his three- year tenure with Comshare, Mr. Bray worked for
Lotus Software, Inc., as well as Price Waterhouse. He is a Chartered Accountant
and holds a first class honors degree.
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. 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. 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.
Subsequent to the resignation of Messrs. James R. H. Buchanan and Anthony
K. Fox on April 23, 1999, the Company has had the services of one non-executive
director, Mr. Wallman. The Company is current actively seeking an additional
non-executive director to meet the requirements laid down by NASDAQ.
All directors held office until the annual general meeting of shareholders
or until their successors were duly elected and qualified. All of the Company's
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 and Bray. The Company is currently actively seeking an additional
non-executive director to serve on the Compensation Committee. The Compensation
Committee establishes salaries, incentives and other forms of compensation for
officers and other employees of the Company, and
38
<PAGE>
administers the incentive compensation and benefit plans of the Company.
The Audit Committee of the Board of Directors consists of Mr. Wallman. The
Company is current actively seeking an additional non-executive director to
serve on the Audit Committee. 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, 10 persons as a group, for the year ended December 31,
1998, compared to 11 persons for the year ended December 31, 1997, was $1.3
million, compared to $924,000 for the year ended December 31, 1997. The
Chairman, who was the highest paid director, received $344,000 compared to
$314,000 in the prior year. Payments made to companies, in which directors held
an interest, for services rendered and costs related thereto, were $42,000 in
the current year compared to $285,000 in the prior year. 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, 1998 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, 1998, options under the 1994 Plan for the purchase of
1,035,332 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, 1998 exchange rate of $1.6638 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, 1998, options under the 1994 Plan for the purchase of 538,334
Ordinary Shares were held by those directors and executive officers of the
Company as a group at December 31, 1998. See Note 6 of Notes to Consolidated
Financial Statements.
As of May 31, 1999, options under the 1994 Plan for the purchase of 997,332
Ordinary Shares by employees of the Company were outstanding at exercise prices
ranging from 21p to 60p ($0.34 to $0.96) per share, payable in pounds sterling.
The May 31, 1999 exchange rate of $1.6033 to (pound)1.00 has been used for
purposes of calculating the dollar value of these exercise prices. As of May 31,
1999 options under the 1994 Plan for the purchase of 538,334 Ordinary Shares
were held by the directors and executive officers of the Company as a group
holding office at December 31, 1998.
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
4,000,000 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, 1998, options under the
1996 Plan for the purchase of 3,215,174 Ordinary Shares were outstanding at
exercise prices ranging from $2.875 to $5.25 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 December 31, 2005. As of December 31, 1998,
options under the 1996 Plan for the purchase of 499,750 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, 1999, options under the 1996 Plan for the purchase of
2,527,487 Ordinary Shares were outstanding at an exercise price from $2.875
to $5.25 per share, payable in U.S. dollars. As of May 31, 1999, options
under the 1996 Plan for the purchase of 363,000 Ordinary Shares were held by
the directors and executive officers of the Company as a group at December
31, 1998.
39
<PAGE>
The number of Ordinary Shares underlying options held by the Company's
directors as at December 31, 1998 and December 31, 1997 (or appointment), which
are disclosed in the Company's UK statutory accounts, are as follows:
<TABLE>
<CAPTION>
AT 31 DECEMBER 1998 AT 31 DECEMBER 1997
------------------- -------------------
<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 125,000 50,000
S G Silk 143,750 150,000 (resigned)
P T Martin 92,000 105,334
T S Jones 25,000 -
S Fluin - -
</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.
WARRANTS
Gentia has issued First Albany Coporation warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $3 per share.
The issue of the warrants is in lieu of financial advisory and investment
banking services. The warrants will expire on January 5, 2002. As at
December 31, 1998 no warrants had been exercised.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
None.
40
<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-21 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.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ........................................................ F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 .......................... F-2
Consolidated Statements of Operations
for the years ended December 31, 1998,1997 and 1996 ................................... F-3
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1998, 1997 and 1996 ........................... F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 .................................. F-5
Notes to Consolidated Financial Statements ............................................ F-6
Schedule I - Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996 (other schedules are omitted as the information is not
required, is not applicable or the information is presented in the financial
statements or related notes thereto) .................................................. S-1
</TABLE>
b) Exhibits
None.
41
<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:
-------------------------------------
Nick Bray
Chief Financial Officer
Dated: June 30, 1999
42
<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, 1998 and 1997, and the related consolidated
statements of operations, cash flows and changes in shareholders' equity for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1998 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
London, England
June 29, 1999
F-1
<PAGE>
GENTIA SOFTWARE PLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets
Cash ................................................................................... $ 5,314 $ 20,332
Accounts receivable, net of allowance $3,801 (1997: $1,819) ............................ 10,565 7,758
Prepaid expenses ....................................................................... 1,363 1,921
Taxes recoverable ...................................................................... 212 --
Current portion of deferred tax assets ................................................. -- 285
-------- --------
Total current assets .............................................................. 17,454 30,296
Property and equipment, net ............................................................ 2,192 2,037
Goodwill and other intangibles on acquisitions, net of amortization $1,789
(1997: $494) ........................................................................ 6,902 3,602
Long-term portion of deferred tax assets ............................................... -- 459
-------- --------
Total assets ...................................................................... $ 26,548 $ 36,394
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of lease obligations ................................................... $ 78 $ 105
Accounts payable ....................................................................... 2,203 1,743
Accrued liabilities .................................................................... 3,778 1,337
Deferred revenue ....................................................................... 4,754 3,630
Other accounts payable ................................................................. 1,766 1,337
-------- --------
Total current liabilities ......................................................... 12,579 8,152
-------- --------
Non-current liabilities
Deferred taxation ...................................................................... -- 274
Long-term portion of lease obligations ................................................. 59 109
-------- --------
Total non-current liabilities ..................................................... 59 383
-------- --------
Total liabilities ................................................................. 12,638 8,535
-------- --------
Shareholders' equity
Preference Shares L1.00 par value:
2,000,000 shares authorized, none issued and outstanding ........................... -- --
Ordinary Shares, 15p par value:
30,000,000 shares authorized, 10,194,930 issued and outstanding at
December 31, 1998 (1997: 9,609,751) ............................................... 2,445 2,300
Additional paid-in capital ...................................................................... 28,881 27,406
Retained earnings (deficit) ..................................................................... (16,837) (1,236)
Cumulative translation adjustment ............................................................... (579) (611)
-------- --------
Total shareholders' equity ........................................................ 13,910 27,859
-------- --------
Total liabilities and shareholders' equity ........................................ $ 26,548 $ 36,394
======== ========
</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>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
License ...................... $ 16,173 $ 14,985 $ 16,861
Services and other ........... 13,359 12,186 9,104
---------- ---------- ----------
Total revenues ......... 29,532 27,171 25,965
---------- ---------- ----------
Cost of revenues:
License ...................... 1,809 1,179 804
Services and other ........... 8,400 6,800 4,937
---------- ---------- ----------
Total cost of revenues . 10,209 7,979 5,741
---------- ---------- ----------
Gross profit ............................. 19,323 19,192 20,224
---------- ---------- ----------
Operating expenses:
Sales and marketing .......... 19,720 14,308 10,271
Research and development ..... 6,831 4,698 3,185
General and administrative ... 4,367 6,279 3,926
Purchased research
& development .............. 1,037 -- --
Restructuring costs .......... 2,869 -- --
Goodwill amortization ........ 596 372 122
---------- ---------- ----------
Total operating expenses 35,420 25,657 17,504
---------- ---------- ----------
Income (loss) from operations ............ (16,097) (6,465) 2,720
Other income (expense) ................... 681 1,235 965
---------- ---------- ----------
Income (loss) before provision for
income taxes ........................ (15,416) (5,230) 3,685
(Provision) credit for income taxes ...... (185) 1,247 (1,216)
---------- ---------- ----------
Net income (loss) ........................ $ (15,601) $ (3,983) $ 2,469
========== ========== ==========
Net income (loss) per share - Basic ...... $ (1.57) $ (0.44) $ 0.31
- Diluted .... $ (1.57) $ (0.44) $ 0.24
========== ========== ==========
Shares used to compute net income (loss)
per share - Basic .......... 9,950,201 9,154,673 7,845,962
- Diluted ........ 9,950,201 9,154,673 10,491,703
========== ========== ==========
</TABLE>
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 DATA)
<TABLE>
<CAPTION>
SHARE CAPITAL ADDITIONAL CUMULATIVE TOTAL
ORDINARY SHARES OF PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
15P EACH CAPITAL (i) EARNINGS (i) ADJUSTMENT EQUITY
--------------------- ----------- ------------ ---------- -------------
SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ................ 6,459,167 $ 1,565 $ 715 $ 278 $ (68) 2,490
Exchange translation adjustments ........ (9) (9)
Net income .............................. 2,469 2,469
----------
Comprehensive income .................... 2,460
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
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ............... 8,999,167 2,152 27,182 2,747 (77) 32,004
Exchange translation adjustments ........ (534) (534)
Net loss ................................ (3,983) (3,983)
----------
Comprehensive income ................... (4,517)
Issuance of shares pursuant to exercise
of options:
Employees .......................... 610,584 148 224 372
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .............. 9,609,751 2,300 27,406 (1,236) (611) 27,859
Exchange translation adjustments ....... 32 32
Net loss ............................... (15,601) (15,601)
----------
Comprehensive income ................... (15,569)
Issuance of shares pursuant to exercise
of options:
Employees .......................... 418,512 120 500 620
Issuance of shares pursuant to
acquisition ............................ 166,667 25 975 1,000
---------- ---------- ---------- --------- --------- ---------
Balance at December 31, 1998 ............... 10,194,930 $ 2,445 $ 28,881 $(16,837) $(579) $13,910
========== ========== ========== ========== ========== =========
</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, 1998 such distributable profits
amounted to $ nil (1997: $1,825).
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>
YEAR ENDED
DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ............................................... $(15,601) $ (3,983) $ 2,469
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization ............................. 991 836 598
Goodwill and intangibles .................................. 1,329 372 122
In-process research and development ....................... 1,037 -- --
Changes in operating assets and liabilities:
Accounts receivable ................................... (4,789) 854 (6,140)
Provision for bad and doubtful debts .................. 1,982 1,341 188
Prepaid expenses, recoverable taxes and other
assets ............................................ 346 (1,100) (439)
Accounts payable ...................................... 460 95 1,102
Accrued payroll and related expenses and other
accrued liabilities ......................... 3,340 (2,159) 2,188
Deferred revenues ..................................... 1,124 661 1,002
-------- -------- --------
Net cash (used in) provided by operating activities ............. (9,781) (3,083) 1,090
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and assets ......... 118 70 104
Purchases of property and equipment ................... (1,248) (1,070) (1,428)
Costs of acquisitions ................................. (4,827) (586) (2,722)
-------- -------- --------
Net cash used in investing activities ................. (5,957) (1,586) (4,046)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayment) of capital lease obligations ........... (77) (205) (160)
Net proceeds from issuance of shares ................... 620 372 26,464
Decrease in bank overdraft ............................. -- -- (391)
-------- -------- --------
Net cash provided by financing activities .............. 543 167 25,913
Effect of exchange rate changes on cash ......................... 177 (394) (9)
Net (decrease) increase in cash ................................. (15,018) (4,896) 22,948
Cash at beginning of period ..................................... 20,332 25,228 2,280
-------- -------- --------
Cash at end of period ........................................... $ 5,314 $ 20,332 $ 25,228
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest received, net ..................................... $ (693) $ (1,262) $ (922)
Taxes paid ................................................. $ 9 $ 477 $ 310
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment through
capital leases ........................................... $ 76 $ 26 $ 360
Shares issued for acquisition .............................. $ 1,000 $ -- $ 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
networked 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
licenses. 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 registered 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 L0.15 par value of the Company for every
thirty shares of L0.05 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) 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, Asia, Australia,
Belgium, France, Germany, Guernsey, Hong Kong, the
Netherlands, New Zealand and South Africa. All material
inter-company balances and transactions have been eliminated
on consolidation.
(b) 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.
(c) 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, 1998, 1997 and 1996 have been prepared and the
auditors have given unqualified audit reports thereon. Such
accounts have been, and for the year ended December 31, 1998,
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 potential 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
Net income (loss) per share is presented in accordance with
SFAS No. 128, "Earnings 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 and software - 4 years
Furniture, fixtures and office equipment - 4 years
Leasehold improvements - period of lease
Motor vehicles - 4 years
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 apart from purchased existing technology.
(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,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Computer equipment ..................... 4,265 3,236
Furniture, fixtures and office equipment 955 792
Leasehold improvements ................. 560 520
Motor vehicles ......................... 212 267
-------- --------
5,992 4,815
Less: accumulated depreciation ......... 3,800 2,778
-------- --------
$2,192 $2,037
======== ========
</TABLE>
5. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Accrued expenses and other current liabilities:
Accrued commissions ........... 375 461
Other ........................ 3,403 876
-------- --------
$3,778 $1,337
======== ========
</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 Chargeable Gains Act 1992.
Details of options under the 1994 PLAN are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -------------------
<S> <C> <C> <C>
Balance at January 1, 1996 .................. 2,507,000 L 0.23 $ 0.40 (i)
Exercised in year ....................... (500,000) 0.21 0.36
----------
Balance at December 31, 1996 ................ 2,007,000 0.24 0.41
Exercised in year ....................... (596,334) 0.21 0.35
Lapsed in year .......................... (117,333) 0.36 0.60
----------
Balance at December 31, 1997 ................ 1,293,333 0.24 0.40
Exercised in year ....................... (239,667) 0.21 0.35
Lapsed in year .......................... (18,334) 0.60 1.00
---------- ------- ------
Balance at December 31, 1998 ................ 1,035,332 L 0.24 $ 0.40
========= ======= ======
Exercisable at December 31, 1998 ............ 1,035,332 L 0.24 $ 0.40
========= ======= ======
</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.
The following table summarizes information about the Company's share
options outstanding and exercisable at December 31, 1998 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 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISE PRICE
---------------- ------------------ ------------------ ------------------ --------------- -------------------
<S> <C> <C> <C> <C> <C>
21p 956,333 36 months 21p 956,333 21p
60p 78,999 45 months 60p 78,999 60p
---------------- ------------------ ------------------ ------------------ --------------- -------------------
21p - 60p 1,035,332 37 months 24p 1,035,332 24p
================ ================== ================== ================== =============== ===================
</TABLE>
F-10
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
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 4,000,000 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, 1998, options under the 1996 Plan for the purchase
of 3,215,174 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 $5.25 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.
Details of options under the 1996 PLAN are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
<S> <C> <C>
Granted in 1996 ............. 910,000 $ 3.00
Lapsed in year .............. (76,650) 3.00
------------
Balance at December 31, 1996 ... 833,350 3.00
Granted in 1997 ............. 1,619,250 3.00
Exercised in year ........... (14,250) 3.00
Lapsed in year .............. (843,750) 3.00
------------
Balance at December 31, 1997 ... 1,594,600 3.00
Granted in 1998 ............. 2,392,200 3.46
Exercised in year ........... (178,845) 3.15
Lapsed in year .............. (592,781) 3.61
------------ -------------
Balance at December 31, 1998 ... 3,215,174 $ 3.23
============= =============
Exercisable at December 31, 1998 1,022,749 $ 3.22
============= =============
</TABLE>
The following table summarizes information about the Company's share
options outstanding and exercisable at December 31, 1998 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 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISE PRICE
--------------- --------------- ---------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.00 119,975 50 months $3.00 89,981 $3.00
$ 3.00 1,017,374 70 months $3.00 508,687 $3.00
$ 2.88 - $5.25 2,077,825 105 months $3.35 424,081 $3.38
--------------- --------------- ---------------- ---------------- --------------- --------------
$ 2.88 - $5.25 3,215,174 92 months $3.22 1,022,749 $3.22
=============== =============== ================ ================ =============== ==============
</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)
c) As permitted under FAS 123, the Company has elected to follow
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB No. 25") in accounting for stock-based
awards to employees. Under APB No. 25, the Company generally
recognizes no compensation expense with respect to such awards. Pro
forma information regarding net income (loss) and net income (loss)
per share is required by FAS 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 1998:
- risk-free interest rates of 5% (1997 : 5%),
- dividend yield of 0% (1997 : 0%),
- volatility factor of 1.0 (1997 : 0.3), and
- an expected life of the option of two years for 1996
option plan and four years for the 1994 option plan.
The weighted average fair value of options, calculated using the
Black-Scholes option pricing model, granted during the year ended
December 31, 1998 was $1.88 and during the year ended December 31,
1997 was $0.65 during the year ended December 31, 1996 was $3.91.
The pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Pro forma net income (loss) ........................... $ (16,401) $ (4,933) $ 2,045
=============== =============== ===============
Pro forma net income (loss) per share - basic........ $ (1.65) $ (0.54) $ 0.26
- diluted...... $ (1.65) $ (0.54) $ 0.19
=============== =============== ===============
</TABLE>
7. EMPLOYEE PENSION PLANS
The Company sponsors and contributes to a number of defined
contribution pension plans. All employees of the Company are required
to be a member of one of the pension funds. The assets of these plans
are held separately from those of the Company in independently
administered funds. Contributions are calculated as a percentage of the
employees salary (percentages vary from country to country) and are
expensed as they become payable. The amount of contributions expensed
was $283 for the year ended December 31, 1998, $275 for the year ended
December 31, 1997 and $241 for the year ended December 31, 1996.
8. INCOME TAXES
Income (loss) before income taxes is analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
<S> <C> <C> <C>
United Kingdom ................................ $ (4,849) $ (2,349) $ 1,868
Overseas ...................................... (10,567) (2,881) 1,817
================== =================== ==================
$ (15,416) $ (5,230) $ 3,685
================== =================== ==================
</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)
Significant components of the (credit) provision for income taxes are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
United Kingdom .......................... $ -- $ (715) $ 732
United States ........................... (154) (181) 293
Other ................................... 81 -- 347
------- ------- -------
Total current ........................... $ (73) $ (896) $ 1,372
Deferred:
United Kingdom .......................... -- (4) (12)
United States ........................... 494 (229) (144)
Other ................................... (236) (118) --
------- ------- -------
Total provision (credit) for income taxes $ 185 $(1,247) $ 1,216
======= ======= =======
</TABLE>
The following table analyzes the difference between the U.K. tax rate
and the effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
U.K. Statutory rate ......................... 31.0% 31.5% 33.0%
Permanent disallowables for U.K. tax ........ (3.9) 0.3 1.2
Utilization of net operating losses ......... -- 2.8 1.1
Deferred tax valuation adjustments .......... (28.9) (14.4) (3.6)
Other - net ................................. 0.6 3.6 1.3
------- ------- -------
Effective tax rate .......................... (1.2)% 23.8% 33.0%
======= ======= =======
</TABLE>
Significant components of the deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
Liabilities:
Fixed asset temporary differences ....... $ 49 $ 55
Other ................................... 145 219
-------- -------
194 274
Assets:
Fixed asset temporary differences ....... 45 2
Net operating loss carry forwards ....... 4,328 1,066
Deferred revenue ........................ 293 362
Accrued expenses ........................ 37 120
Accounts receivable ..................... 1,041 --
-------- -------
5,744 1,550
Less: valuation allowance .................. (5,550) (806)
-------- -------
Deferred tax assets after valuation
allowance................................ $ 194 $ 744
-------- -------
Total net deferred tax asset ......... $ -- $ 470
======== =======
</TABLE>
F-13
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
At December 31, 1998, the Company had net operating loss carry forwards
in the United States of $5,637 (December 31, 1997: $ 2,865) 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
$8,324 (December 31, 1997: $493).
9. COMMITMENTS
The Company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2009. 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,
---------------------
1998 1997
----- -----
<S> <C> <C>
Computer equipment ....................... $ 272 $ 264
Furniture, fixtures and office equipment . 56 56
Motor vehicles ........................... 191 231
----- -----
519 551
Less: accumulated depreciation .......... (374) (364)
----- -----
$ 145 $ 187
===== =====
</TABLE>
Future minimum annual lease payments under all non-cancelable operating
and capital leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital leases
YEAR ENDING DECEMBER 31, leases
------------- -----------
<S> <C> <C>
1999 $ 1,143 $ 60
2000 712 51
2001 451 26
2002 143 13
2003-2009 311 -
--------- ---------
Total minimum payments $ 2,760 150
=========
Less: amounts representing interest 13
---------
Present value of capital lease obligation 137
Less: current portion 78
---------
Lease obligations, long-term $ 59
=========
</TABLE>
Rental expenses under operating leases totaled $1,473 for the year
ended December 31, 1998, $1,135 for the year ended December 31, 1997
and $945 for the year ended December 31, 1996.
F-14
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
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 risks 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 three years ended December 31, 1998 no customer accounted
for more than 10% of the Company's net sales.
F-15
<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>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUE FROM UNAFFILIATED CUSTOMERS:
United Kingdom ..................... $ 11,433 $ 12,307 $ 13,947
Less: Inter-area eliminations (i) . (3,345) (3,994) (4,455)
-------- -------- --------
8,088 8,313 9,492
Rest of Europe ..................... 8,055 5,910 3,234
North America (ii) ................. 10,337 9,833 10,154
Australia and New Zealand .......... 868 1,665 1,713
Rest of World ...................... 2,184 1,450 1,372
-------- -------- --------
Total revenue ...................... $ 29,532 $ 27,171 $ 25,965
======== ======== ========
UNITED KINGDOM INCLUDES EXPORTS TO:
Rest of Europe ..................... $ -- $ 193 $ 622
Rest of World ...................... 525 52 --
-------- -------- --------
$ 525 $ 245 $ 622
======== ======== ========
INCOME FROM OPERATIONS:
United Kingdom (i) ................. $ (3,103) $ (1,509) $ 2,350
Rest of Europe ..................... (3,025) 491 609
North America (ii) ................. (3,647) (4,238) 586
Australia and New Zealand .......... (709) 91 1
Rest of World ...................... (713) 71 448
Corporate costs (United Kingdom) ... (4,404) (1,371) (1,274)
-------- -------- --------
Income (loss) from operations ...... $(15,601) $ (6,465) $ 2,720
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
TOTAL ASSETS :
United Kingdom ..................... $ 13,026 $ 9,463 $ 9,056
Rest of Europe ..................... 6,720 3,386 1,538
North America (ii) ................. 3,999 5,386 5,217
Australia and New Zealand .......... 324 559 683
Rest of World ...................... 2,479 17,600 25,057
-------- -------- --------
Total assets (iii) ................. $ 26,548 $ 36,394 $ 41,551
======== ======== ========
</TABLE>
----------------
(i) Inter-area eliminations consist of intra-group royalties
payable by the Company's overseas subsidiaries to the United
Kingdom operations in respect of license sales and support and
maintenance revenues. Such royalties are based upon 25%-35% of
the relevant customer sales for all reported periods.
(ii) North America consists primarily of the United States.
(iii) Corporate assets are insignificant.
F-16
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
12. ACQUISITIONS AND PURCHASED IN-PROCESS RESEARCH & DEVELOPMENT
In May 1998, the Company acquired all of the outstanding issued share
capital of Technical and Computer Management Services Ltd (TCMS Ltd), a
private limited company incorporated in England and Wales for
consideration of $1.0 million cash and 166,667 Ordinary Shares valued
at approximately $1.0 million. TCMS was a technical consulting firm
with extensive experience in the implementation of enterprise wide, web
based analytical applications using Gentia technology. Upon
acquisition, TCMS management assumed the day to day operating
responsibilities for the Company's worldwide technical consulting
business.
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 are being amortized on a
straight-line basis over their useful life of ten years. The purchase
price allocation was as follows:
<TABLE>
<S> <C>
Net tangible assets $ 267
Goodwill 1,882
---------
Total purchase price $ 2,149
=========
</TABLE>
TCMS Ltd's results of operations have been included in the
consolidated results of operations from the effective date of
acquisition.
In November 1998, the Company acquired all of the issued share
capital of Compression Sciences Limited (CSL), a private limited
company incorporated in England and Wales for a consideration of
$1.3 million cash and absorbed liabilities of $2.3 million. CSL
developed a Java-based knowledge discovery and data mining product
called K.wiz. K.wiz can independently analyze large quantities of
data and automatically highlight key trends, making it critical to
the Company's strategy to develop intelligent analytical
applications. K.wiz components offer data transformation,
visualization and discovery algorithms that deliver complementary
value-added analytical capabilities to client/server and
Internet/Intranet/Extranet deployed applications.
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 existing technology and
intangible assets acquired in the above transaction are being amortized
on a straight-line basis over its useful life of five years. The
purchase price allocation was as follows:
<TABLE>
<S> <C>
Net tangible assets $ 9
In-process research and development 1,037
Existing technology 2,610
--------
Total purchase price $ 3,656
========
</TABLE>
Included in the $3.6 million acquisition cost was $1.0 million of
purchased in-process research and development. The Company determined
the fair value of the purchased in-process research and development
based on a valuation report prepared for the Company by a valuation
expert. The experts were provided with a business plan for Compression
Sciences Limited and with these assumptions, used the income approach
to determine a fair value of the acquired assets. Value was assigned to
the in-process research and development based on a risk adjusted, net
present value of the expected after tax cash flows. Since the
in-process research and development had not reached technological
feasibility and had no alternative uses as of the date of acquisition,
the projects were capitalized and immediately expensed. This technology
will require varying additional development, coding and testing efforts
over the next year before technological feasibility can be determined.
The remaining purchase price was allocated to tangible assets and
intangible assets, including existing technology, less liabilities
assumed.
F-17
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The unaudited pro forma effect of the acquisitions set forth above,
assuming each of the acquisitions was consummated at the beginning of
the respective year of acquisition and the immediately preceding year,
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues ..................................... $ 30,643 $ 32,248
========== ==========
Net loss ..................................... (16,824) (4,411)
========== ==========
Net loss per share - basic ................... (1.69) (0.48)
- diluted ................. (1.69) (0.48)
========== ==========
</TABLE>
13. INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Numerator:
Net income (loss) .............. $ (15,601) $ (3,983) $ 2,469
========= ========= ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares ............. 9,950,201 9,154,673 7,845,962
Effect of dilutive securities:
Share options ...................... -- -- 2,645,741
Denominator for diluted earnings per share -
adjusted weighted average shares .... 9,950,201 9,154,673 10,491,703
========== ========== ==========
Net income (loss) per share - Basic ........ $ (1.57) $ (0.44) $ 0.31
- Diluted ...... $ (1.57) $ (0.44) $ 0.24
========== ========== ==========
</TABLE>
F-18
<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
In April, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities." The statement is effective for fiscal years
beginning after December 15, 1998. The statement requires costs of
start-up activities and organization costs to be expensed as incurred.
The Company is required to adopt SOP 98-5 effective August 1, 1999. The
adoption of SOP 98-5 is not expected to have a material impact on the
Company's consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use"
("SOP 98-1"). SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use. This
pronouncement identifies the characteristics of internal use software
and provides guidance on new cost recognition principles. SOP 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998. Gentia Software has adopted SOP 98-1 for all general
and administrative computer software developed or obtained for internal
use.
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
respect to Certain Transactions" was issued in December 1998 and
addresses software revenue recognition as it applies to certain
multiple-element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral
of Effective Date of a Provision of SOP 97-2", to extend the deferral
of application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning
after March 15, 1999. The Company will comply with the requirements of
this SOP as they become effective and this is not expected to have a
material effect on the Company's revenues and earnings.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes new accounting and reporting standards for
derivative financial instruments and for hedging activities. SFAS 133
requires an entity to measure all derivatives at fair value and to
recognize them in the balance sheet as an asset or liability, depending
on the entity's rights or obligations under the applicable derivative
contract. The recognition of changes in fair value of a derivative that
affect the income statement will depend on the intended use of the
derivative. If the derivative does not qualify as a hedging instrument,
the gain or loss on the derivative will be recognized currently in
earnings. If the derivative qualifies for special hedge accounting, the
gain or loss on the derivative will either (1) be recognized in income
along with an offsetting adjustment to the basis of the item being
hedged or (2) be deferred in other comprehensive income and
reclassified to earnings in the same period or periods during which the
hedged transaction affects earnings. SFAS 133 may not be applied
retroactively to financial statements of prior periods. SFAS 133 is not
expected to have a material impact on the consolidated results of
operations, financial position or cash flows.
15. RESTRUCTURING CHARGES AND OTHER COSTS
During 1998, the Company recorded restructuring charges of $6,620,
which included restructuring costs of $2,869, provision for doubtful
accounts of $2,714 and a write-off of in-process research and
development of $1,037. An additional charge of $500 was incurred in
quarter one of 1999 and a further $1,000 is expected to be recorded in
quarter two of 1999 as these charges did not meet the accounting
criteria for inclusion in 1998. The combined effect of the reductions
in work force and facilities is expected to lower the Company's annual
operating costs by approximately $8 million.
F-19
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Restructuring:
Restructuring costs aggregating $2,869 consisted of costs associated
with the exit from certain businesses of $1,518, goodwill impairment of
$733 and employee severance costs $618. The severance costs relate to
11 employees, mainly senior management, in the administration and sales
function. Of the employee severance cost, $316 had been paid prior to
year-end. The sublease and lease abandonment losses primarily covered
office space in Wakefield and Chicago in the United States and
Wimbledon in the United Kingdom. The asset write-offs were primarily
goodwill relating to the closure of Germany, South Africa and
cancellation of distribution agreements in Asia. The fair value of the
goodwill was determined based on the estimated disposal value of the
subsidiary.
Provision for doubtful debts:
The provision for doubtful debts was principally made against debts in
the United States, Netherlands and United Kingdom. Provision was made
for overdue disputed debts that were considered irrecoverable as at
December 31, 1998.
In-process research and development:
A once off write off of $1,037 was made against in-process research and
development resulting from the purchase of Compression Sciences Limited
in November 1998. (Refer Note 12)
16. RELATED PARTY TRANSACTIONS
During the year the Company paid $42 (1997 - $285) to businesses owned
or controlled by directors, for services rendered by these companies
and costs related thereto.
17. OPERATIONS TO BE DISCONTINUED
In December 1998, the Company's Board of Directors adopted a plan
to discontinue its operations in Germany, New Zealand and South
Africa. As of April 30, 1999, an agent has been appointed for both
New Zealand and South Africa. Provision of $694 was made for losses
on discontinuation, and is principally against goodwill and debt to
the holding company. A further provision of $100 was made in
quarter one 1999 for employee severance costs as they were not
aware of the impending restructure as at December 31, 1998.
Results of operations to be discontinued for year ended December 31,
1998:
<TABLE>
<CAPTION>
Germany New Zealand South Africa
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 120 $ 28 $ 368
============== ============== ==============
Net loss (819) (132) (545)
============== ============== ==============
</TABLE>
F-20
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
18. 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-21
<PAGE>
SCHEDULE I
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> <C>
DESCRIPTION
Allowance for doubtful debts
Year ended December 31, 1998: $1,819 $2,586 $ (5)(a) $(599) $3,801
Year ended December 31, 1997: $ 478 $1,474 $(27)(a) $(106) $1,819
Year ended December 31, 1996: $ 290 $ 175 $ 66 (a) $ (53) $ 478
</TABLE>
- --------------------
a) Exchange adjustments
S-1
