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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, 1999.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from __________ to
__________
Commission File Number: 0-28300
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GENTIA SOFTWARE PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
Tuition House, St George's Road, Wimbledon, London SW19 4EU
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
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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 L0.15 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, 1999 was 10,347,376
Ordinary Shares, nominal value L0.15 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
PART I
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Item 1. Description of Business.......................................................... 3
Item 2. Description of Property.......................................................... 21
Item 3. Legal Proceedings................................................................ 22
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.......................................................... 27
Item 9. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.............................................................. 28
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 1983 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.
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 applications from technology-based 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. K.wiz is the underlying
software upon which the Company's THINKCRA-TM- applications have been built.
In April 2000, the Company acquired ebi Solutions LLC ("EBI"). EBI is a
privately held provider of eBusiness applications and services. In conjunction
with the acquisition, Gentia has formed a new US-based subsidiary,
thinkAnalytics Corporation, to focus on the delivery of Customer Relationship
Analytic applications, including the recently announced product suite,
thinkCRA(TM). Integration of thinkCRA and ebi's OASIS offers an advanced
solution set encompassing the ability to analyze both online and offline
commerce. The result is an intelligent and predictive solution that optimizes
the ability to understand, respond to and manage customer relationships.
During 1998, the Company began development of several analytical
applications that were subsequently released as the Impact Suite of analytical
applications in 1999. These applications together with the Balanced Scorecard
form the core products of the Company's Enterprise Performance Management (EPM)
Division.
- 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 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 under-performing operations via an enterprise-wide
solution.
During 1999, the Company began development of several analytical
applications that were released as THINKCRA, a suite of integrated
applications focused on Customer Relationship Analytics (CRA) during the
second quarter of 2000. These applications form the core products of the CRA
Division.
The THINKCRA suite is comprised of four analytical applications:
- THINKCustomer - automatically segments customers, using multiple
techniques, to provide a comprehensive view of the full range of customer
interaction and attributes. Automated rule extraction enables organizations
to validate and enrich existing customer knowledge.
- THINKLoyalty - predicts propensity to churn factors and time-scaled
attrition measures through various techniques. In conjunction with the
THINKCustomer and THINKProduct applications, lifetime-value and
value-at-risk calculations are more easily identified.
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- THINKProduct - models true product value and product mix and related
associations. In conjunction with the THINKCustomer and THINKMarketing
applications, cost effective up-sell and cross-sell campaigns can be
planned and targeted to appropriate customer groups, enhancing the identity
of current and life-time customer valuations.
- THINKMarketing - analyzes channel and marketing effectiveness. In
conjunction with the THINKLoyalty and THINKCustomer applications,
churn-reduction and direct-marketing programs can be more effectively
monitored and tracked.
As noted above, the Company now operates under two separate divisions,
Enterprise Performance Management (EPM) and Customer Relations Analytics (CRA).
The EPM division develops, markets and supports high performance, business
intelligence software and applications for business performance management and
decision making. The products employs a multidimensional database and a highly
flexible end-user environment, which empowers business managers throughout a
networked enterprise to perform, report and share complex analyses of business
data. Gentia and Gentia-based business intelligence applications enable the
enterprise-wide integration of structured and unstructured data contained in
operational databases, data warehouses and external data sources and allow 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.
Today, the Company is recognized as one of the leaders in Balanced Scorecard
and associated Performance Management Applications. The Company's goal is to
retain the leading position in that market and benefit from its growth, and to
expand into new software markets where the analytical capabilities of its
technologies provide competitive advantage. The above investments are aimed
towards profitably growing the business. 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 continue to adopt this approach in the months and years ahead.
The CRA division has been formed out of the acquisition of Compression Science
Limited (CSL) in November 1998. In 1999, the Company developed a suite of
software for the analysis of customer relationships. The Company's customer
relationship software, based on elaborate data mining and knowledge discovery
techniques, supports analysis of customer data in a similar manner. THINKCRA,
the Company's customer analysis applications, provide similar capabilities for
customer data sources and touch points, while in addition providing complex
analysis capabilities stemming from intelligent software algorithms including
neural networks and data mining techniques. THINKCRA applications distribute
sophisticated customer information to users throughout the enterprise, at the
same time feeding enriched information into front-office customer applications
to be used for more informed customer interactions. The Company launched
the CRA product suite at the end of June 2000.
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 organization. In this
context, effective corporate decision making is becoming more dependent upon the
ability to rapidly collect, organize analyze and distribute 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 have invested in powerful
enterprise resource planning ("ERP") systems. The proliferation of
high-capacity mass data storage and distributed enterprise computer systems
has created a flood of data about operations and customers. Commercial use of
the Internet and Intranets has added yet another factor for corporate MIS
personnel to consider when integrating ERP systems, customer data and legacy
applications as they seek to provide enterprise-wide solutions demanded by
end users. Increasingly businesses are leveraging these technologies to
become more customer focused and evolve towards a more relevant business
model, incorporating such factors as globalization of markets and the impact
of the Internet. As companies embed customer strategies into their business
plans, they require sophisticated information on their customers in order to
understand which are most profitable and most likely to buy more.
ERP and its customer-focused counter-part, Customer Relationship Management
(CRM) systems, record and store transactions that can later be used to
understand the business both internally and as it relates to customers. The data
collected and stored in these systems are essential for companies to improve
efficiency and quality of service to customers, but collection and storage are
only the first steps; the data must be analyzed and available to decision makers
in order to become useful, actionable information. Companies that have invested
in these data collection systems are finding that the querying and analysis
capabilities built into these products do not support changing business needs,
including changes in strategic focus, market conditions and customer needs.
Companies have now realized that to obtain value from the investment in the
underlying systems such as ERP and CRM they have to utilize the intelligent
analytical applications such as those provided by our EPM and CRA divisions. In
particular
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the market has applied these advanced analytic applications to manage customer
relationships more effectively and create customer-centric organizations.
The Company believes that the monitoring and evaluation of business
performance and customer relationships is crucial in developing and maintaining
competitive advantage. The Balanced Scorecard, a Gentia 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 worldwide recognition as a mechanism that can influence the ability of
an organization to predict and respond to changing business requirements.
Similar approaches are now been developed in parallel for customer relationship
management and are based on database segmentation and knowledge discovery. 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
corporate technology infrastructure designed to provide up-to-date relevant
information on strategic measures to its decision makers. The Company believes
that their Balanced Scorecard application, introduced in early 1998, removes
these limiting factors.
ENTERPRISE PERFORMANCE MANAGEMENT SUITE
Enterprise Performance Management (EPM) drives business success at senior
management and operational levels by enabling analysis, measurement and
communication of critical information throughout the organization, leading to
strategic alignment of corporate objectives, organizational resources and
employee actions. Gentia has developed, together with domain partners from
world-class consulting companies like Renaissance Worldwide and Arthur Andersen,
an integrated portfolio of intelligent applications that fully covers the EPM
requirements for success in today's competitive markets.
GENTIA BALANCED SCORECARD
Gentia's Balanced Scorecard application is the only enterprise solution for
translating strategy into action. This Balanced Scorecard application enables
businesses to monitor the determinants of shareholder value, such as customer
satisfaction, quality of service, response time and long-term strategic vision.
Using Gentia's scorecard application, business performance is driven from the
top throughout all levels of the organization, linking employee action to
corporate strategy and vision.
Gentia's web-enabled scorecard application embeds the Balanced Scorecard in
day-to-day business activities, adds comprehensive analytics to strategy
management, delivers strategic initiative management, and affords a high-level
snapshot of the effectiveness and success of corporate strategy.
GENTIA PERFORMANCEIMPACT
With Gentia PerformanceImpact , a powerful performance management
application, companies can effectively measure and manage their business
operations. This application provides executives, managers and workers
with the information and insight necessary to capitalize on new opportunities
and quickly resolve business challenges before they affect the bottom line.
PerformanceImpact transforms the data buried in corporate systems into useful,
actionable information.
Gentia PerformanceImpact integrates all corporate data sources to one point
of analysis, available to executives and decision-makers on the Internet,
corporate Intranets, or client/server.
GENTIA PROFITIMPACT
Gentia ProfitImpact is an integrated profitability analysis application,
combining a powerful Activity-Based Costing engine with comprehensive analysis.
Designed with the benefit of Arthur Andersen's significant experience in Cost
Management and Gentia's analytical capabilities, it provides detailed knowledge
about customer, product and channel profitability.
Gentia ProfitImpact arms executives with the power to adjust product mix,
set prices and change selling strategy based on accurate, detailed profitability
information.
THE GENTIA APPLICATION SOLUTION
The Company develops and supports Gentia, a network centric applications
development environment which utilizes a multidimensional OLAP database for
building 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 organization.
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The following are the principal characteristics of Gentia based business
applications and a discussion of the relevant benefits:
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 deployment. 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 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
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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
Gentia's strategy is to deliver Intelligent Applications that give a high
Return On Investment in business areas that require Massive Data Integration and
Complex Analysis with the ability to deliver Predictive Business Scenarios.
The Company seeks to differentiate its products and services by providing
customers with enterprise-wide "Intelligent" business applications. Gentia is
able to integrate data from multiple sources, including multidimensional OLAP
databases, relational databases and external information sources such as on-line
news services. The Aplications are highly scaleable, secure and multi-platform,
enabling 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 EPM products
through its direct sales force in the United States, the United Kingdom,
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 Singapore, 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. The Company will leverage all of the above sales
channels for the THINKCRA suite of applications.
EXPAND GENTIA USAGE WITHIN CUSTOMER BASE. The Company currently has over
420 customers. Customers are typically large international organizations,
which use Gentia applications 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 scalability of Gentia applications allows the Company to meet
its customers' evolving needs for decision support applications.
CONTINUE PRODUCT INNOVATION. The Company's use of object oriented
programming techniques provides Gentia with a highly flexible architecture that
facilitates ongoing product innovation. The latest versions of Gentia include
multi lingual versions of the core Gentia product and customer developed
applications, across both single and double byte languages. For example using
Gentia, a French developer could develop an application using a French based
version of the software, and could deploy it in English, French and German.
During 1999, a new version of the Balanced Scorecard application was released as
part of the Company's continued effort to remain the market leading scorecard
vendor. These products make extensive use of Java technology and can utilize the
Secure Sockets Layer for secure web-based deployment. All Java applets for
Gentia have been accredited by Sun Microsystems as 100% Java compatible.
The acquisition of Compression Science Limited, which developed and markets
a knowledge discovery product known as K.wiz, provided the Company with a data
mining capability that provides application intelligence through the use of
machine
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learning algorithms. The Company has created the THINKCRA applications
from the K.wiz technology and also seeks 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
all applications 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 applications
are also designed to integrate data from the customers' existing information
systems, including ERP systems, CRM 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 customization, 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 EPM PRODUCTS
At the heart of the EPM suite is the Company's core product, Gentia, 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.
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:
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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
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AGENCY SYSTEM. Communications across all client and server platforms running
in a local or wide area network environment are facilitated by Gentia's Agency
System, which forms the backbone of the Gentia networked architecture. Because
the Agency System considers clients and servers to be peers, applications can be
deployed in any fashion ranging from standalone clients to multiple distributed
servers. Applications are easily distributed to end users by providing them
access to applications, with the Agency System managing which server does what.
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.
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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 and a related scripting language
for GentiaDB allow 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 and the Renaissance Balanced Scorecard application for
the Web. As part of that effort, Gentia objects were enhanced to add
Web-specific functionality without the need to embed or write HTML. As a result,
applications can be developed for the Web which include virtually any
client-based capability while guaranteeing quality and reliability.
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.
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
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have the ability to store and use 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.
GENTIA APPLICATION COMPONENTS
Gentia sells and markets an Enterprise Performance Management suite of
applications which consists of the Renaissance Balanced Scorecard ,
PerformanceImpact and ProfitImpact . Gentia also offers numerous other solutions
in areas such as Human Resources, Logistics, Value-Based Management and Project
information. These applications and solutions have been developed within
Gentia's Application Framework, which provides a single, unified environment for
business analysis. In addition, the Gentia Development Environment can be used
to create custom applications using the Application Framework to extend analytic
capabilities and provide integration and navigation between applications as well
as consistent, shared functionality.
RENAISSANCE BALANCED SCORECARD POWERED BY GENTIA
The Renaissance Balanced Scorecard (RBSC) is the only enterprise solution
for translating strategy into action at all levels of the organization. The RBSC
enables businesses to monitor the determinants of long-term corporate success
such as customer satisfaction, quality of service, efficiency of operations and
long-term strategic vision. The application provides a framework for
communicating, tracking and evaluating the implementation of business strategy.
Gentia's RBSC has been awarded the designation of Balanced Scorecard
Collaborative Certified.-TM-
PROFITIMPACT
Gentia's ProfitImpact is an integrated profitability analysis application
combining a powerful Activity Based Costing engine with comprehensive analysis.
It provides detailed knowledge about customer, product and channel
profitability. The application conducts comprehensive, accurate profitability
analyses, and replaces multiple, disparate systems by providing all pertinent
information within a single analytic environment and a single software
application.
PERFORMANCEIMPACT
PerformanceImpact is a powerful performance management application to
effectively measure and manage business operations. It provides a complete
solution for tracking, monitoring and managing key performance indicators. The
application includes functionality for performance thresholds, charting,
benchmarking, trend analyses, commentary, combining metrics, drill-down
analysis, ad-hoc and multi-dimensional analysis. PerformanceImpact also
seamlessly integrates with other Gentia applications in a single analytic
environment.
CUSTOMER RELATIONSHIP ANALYTICS SUITE
THINKCRA -TM- is a suite of integrated applications focused on Customer
Relationship Analytics (CRA) that provides organizations with the predictive
intelligence to interact with customers more effectively and add value to the
Customer Relationship Management (CRM) process. THINKCRA provides the required
scalability, data integrity and knowledge sharing essential to successfully
analyze the undoubted inter-activity between customer attributes, products
purchased, loyalty demonstrated and the resulting impact and receptivity to
marketing initiatives. This approach is referred to as Integrated Customer
Intelligence.
INTEGRATED APPLICATION SUITE
The THINKCRA suite is comprised of four analytical applications:
- THINKCustomer - automatically segments customers, using multiple
techniques, to provide a comprehensive view of the full range of customer
interaction and attributes. Automated rule extraction enables organizations
to validate and enrich existing customer knowledge.
- THINKLoyalty - predicts propensity to churn factors and time-scaled
attrition measures through various techniques. In conjunction with the
THINKCustomer and THINKProduct applications, lifetime-value and
value-at-risk calculations are more easily identified.
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- THINKProduct - models true product value and product mix and related
associations. In conjunction with the THINKCustomer and THINKMarketing
applications, cost effective up-sell and cross-sell campaigns can be
planned and targeted to appropriate customer groups, enhancing the identity
of current and life-time customer valuations.
- THINKMarketing - analyzes channel and marketing effectiveness. In
conjunction with the THINKLoyalty and THINKCustomer applications,
churn-reduction and direct-marketing programs can be more effectively
monitored and tracked.
APPLICATION MANAGEMENT
- THINKAnalyst - a wizard-driven interface that enables business
professionals to define and validate business scenarios. The integrated
application suite allows business users to analyze a complete customer view
using the THINKCustomer, THINKLoyalty, THINKProduct and THINKMarketing
applications. Customer analytics are aligned with strategic goals of the
organization and are communicated enterprise-wide to promote
cross-functional analysis and collaboration.
- THINKAdmin - controls the THINKCRA environment. The flexible security model
enables organizations to control the environment based on data access
rights, reports, scenarios, and user groups. The application server
configuration is controlled within this environment, providing system
administrators with total control of this enterprise-wide application
suite.
- THINKData - controls the extraction, cleansing and transformation of data
from multiple sources. A wizard-driven interface enables business
professionals to collect and prepare customer, product and channel data.
The Business Data Dictionary provides a central library of data sources,
data schemas and field attributes to be shared throughout the THINKCRA
environment.
INFORMATION DEPLOYMENT
THINKCRA efficiently analyzes vast data volumes from unlimited ranges of
enterprise, legacy and e-commerce applications. CRM and e-commerce have
generated extensive volumes of customer data, which can be of significant
benefit once enhanced by knowledge discovery. THINKCRA uncovers important,
hidden, relationships in the data and allows potential problems and
opportunities to be identified. Such information is instantly pushed to
appropriate parties, formatted to their personal preferences, via web browsers,
mobile phones, e-mail and PDAs.
- MYCRA -TM- arranges for appropriate customer information to be deployed to
various business users throughout an organization utilizing web browsers,
mobile phones, e-mail and PDAs. The customer analytics are available in
different formats, including text, tabular and graphical forms using
standard reporting, OLAP and data mining techniques. Reports are
personalized to an individual or role-based.
APPLICATION INTELLIGENCE
- THINKNow enables the deployment of customer analytical models into CRM
front-office and e-commerce solutions. The analytical models generated
through the use of thinkCustomer, THINKLoyalty, THINKProduct and
THINKMarketing can be used to provide real-time analytics, such as customer
scoring and product affinity.
- THINKKnowledge provides the CRA platform that drives the THINKCRA
application suite. The advanced statistical, data mining and visualization
techniques, coupled with the data extraction, transformation, integration
and analytical components, provide THINKCRA with a unique solution to
complex business problems. The graphical point-and-click, drag-and-drop
interface provides maximum flexibility and customization levels.
THINKCRA AT THE CORE
At the heart of THINKCRA is the predictive intelligence of THINKKnowledge, a
distributed, scalable component technology. THINKKnowledge delivers a new
solution for data mining and knowledge discovery and includes the patented
database compression technology AIME (Array Indexed Minimum Entropy).
THINKCRA is an open application suite utilizing industry standards, such as
HTML, XML, JDBC and CORBA. The suite is written entirely in Java and is the
first application to benefit from the robust integration platform provided by
THINKKnowledge, an architecture that enables future applications to be easily
incorporated. THINKKnowledge provides THINKCRA with an extensive range of
technologies, including neural networks, decision trees, rule-induction,
association and clustering, as well as components for data extraction,
transformation, loading and validation. The open data, CORBA compliant
extraction abilities of THINKCRA enable seamless integration with major
middleware and EAI products to obtain web log data, market data and disparate
legacy data throughout an enterprise.
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SUPPORTED PLATFORMS
The thinkCRA suite is currently supported on the following platforms:
<TABLE>
<CAPTION>
CLIENTS SERVERS
<S> <C>
Netscape 4.0 Windows-TM-2000
Internet Explorer 4.0 Windows-TM-NT 4.0
Windows-TM-95,98, 2000 Solaris-TM-2.6/2.7
Windows-TM-NT 4.0 HP-UX-TM-11.0
Solaris-TM-2.6/2.7 AIX 4.3.3
HP-UX-TM-11.0 Linux Intel based (x86)
</TABLE>
The THINKCRA suite requires the SUN Java 2 Runtime Environment (JRE) to be
installed on both the client and server machines. The JRE is provided on the
THINKCRA installation CD
CUSTOMERS
The Company sells its products to a variety of businesses, governments and
organizations worldwide. As of December 31, 1999 the Company had over 420 active
customers across a broad range of industries in over 20 countries, including the
United States, the United Kingdom, Australia, Belgium, 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, 1999:
<TABLE>
<CAPTION>
TECHNOLOGY
<S> <C> <C>
AirTouch Cellular Inc Schweppes France plc Kimberly-Clark Ltd
AT&T Inc Whitbread plc Liebherr SA
Bell Atlantic Inc Yates Brothers Wine Lodges plc SCA Molnycke AB
Bell South Telecomunications, Inc Young & Co's Brewery pl Outokumpu Copper Products Oy
Bull Information Systems Ltd Raychem Corp
Cap Volmac BV TRANSPORTATION Rover Portugal SA
Ceridian Corp Sanyo Australia (Pty) Ltd
Colt Telecommunications Ltd BAA plc Tetra Pak International SA
Gartner Group Cast Europe NV Trelleborg AB
McDonnell Information Systems Group DHL International Ltd. Vantona Viyella Ltd
Motorola Inc El Al Israeli Airlines Volvo Data AB
Oki Europe Ltd Northgate Motors Ltd Volkswagen AG
Pioneer NV Singapore MRT Ltd WD & HO Wills Holdings Ltd
Siemens Nixdorf Information Systems Ltd South African Airways Corp
Sprint Corporation Stena Data AB ENERGY
Sun Microsystems Inc American Electric Power Co
Walker Financial Solutions Ltd INSURANCE COMPANIES Ashland Petroleum Co
Espoo SahKo Oy
MORTGAGE LENDERS African Life Assurance Co Ltd Foster Wheeler Ltd
Automobile Association Israeli Electricity Company
Halifax Building Society Bayerische Reinsurance AG Midlands Electricity Board
Nationwide Building Society Britannic Assurance plc Petroleos Mexicana (PEMEX) Corp
Northern Rock Building Society Canada Maritime Ltd Public Service Company of Colorada
Norwich and Peterborough Building Society Cologne Reinsurance AG Sydney Water Corp
Portman Building Society AXA Insurance Ltd Washington Gas Light Company
Yorkshire Building Society GIO Australia Ltd
Goudse Verzekeringen BV BANKING AND FINANCE
RETAIL Hartford Insurance Inc
Independence Blue Cross Inc ABSA Bank
Auchan SA QBE Insurance Ltd ABN Amro
Diamond Shamrock Co Sun & Royal Insurance plc ADP
Focus Do-It-All Ltd Sun Life Assurance of Canada Inc ANWB
Heineken BV Suncorp Insurance & Finance Pty Australia & New Zealand Banking Group
Karstadt AG Swiss Reinsurance Banco Essi
Metro Cash and Carry Ltd Zurich Australia Insurance Ltd Banco Investimento
Specsavers Optical Group Ltd Banco del Sur
T&S Stores plc MANUFACTURING Bank of New Zealand
The Boots Co plc Bank of Tyrol
Walgreens Co ABB Industries Barclays Bank plc
Aerostructure Corp Barclays Capital
FOOD AND BEVERAGE Audi AG Services Ltd
Avery Dennison BV Credit Suisse First Boston
Allied Mills Ltd Beazer Homes USA Inc DEVK
Campbell Soup Co Ltd Continental Tyres AG Information Security Forum Ltd
General Biscuits NV Dow Agrosciences FGH Bank
Gilbeys Inc Eastman Chemical Inc First Tennessee National Bank
Greene King plc Emirates Petroleum Products Fortis Nederland BV
McDonald's Restaurants European Vinyl Corp Interpay Nederland
Tip Top Bakeries Pty Fletcher Challenge Forests Pty BV JP Morgan
Reckitt & Coleman Ltd Ford Motor Co. of Australia Ltd M&G Ltd
R.Twining & Co Ltd Gallaher plc Postcheque
Giat Industries SA Standard Chartered Bank
ICI Europe Ltd Swiss Mobilar SA
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Trendwick (UK) Underwriting Ltd Botswana Police Swedish Post
Union Bank of Switzerland City of Helsinki Healthcare Dept Thames Valley Police
United Mizrahi Bank Dutch Post Office UK Post Office
VR Leasing AG Helsinki Police Department United States Department of Energy
VSB Group Instituto de Informatica University of Melbourne
Israeli Airforce West Mercia Constabulary
HEALTH AND PHARMACEUTICALS Israeli Army (Manpower) West Midlands Police
Johannesburg City Council Wright Paterson Air Force Base
Chase Farm Hospitals NHS Trust Kingston Upon Hull City Council
Medscheme (Pty) Ltd Leicestershire Police MEDIA AND ENTERTAINMENT
Medtronics Inc Ministry Of Tourism
Molnlycke Healthcare Northamptonshire Police CentreParcs Ltd
National Blood Service (UK) Northwest Provincial Government Murdoch Magazines (Pty) Ltd
North Essex Health Authority (S.Africa) Thompsons
Pacificare Health Systems Port of Singapore Authority Trinity International Holdings Ltd
Parkside Health NHS Trust Portugese Air Force Victoria Racing Club
Siemens Healthcare Portugese Post
Smith & Nephew Ltd Royal Australian Air Force
St. Josephs Hospital Sheffield City Council
South Glamorgan County Council
GOVERNMENT South Lanarkshire County Council
South Wales Police
Birmingham City Council South Yorkshire Police
</TABLE>
No single customer accounted for more than 10% of the Company's revenues
during the fiscal years ending December 31, 1999, 1998 and 1997 and one customer
accounted for approximately 15% of the Company's revenue during the nine month
period ended December 31, 1995.
SALES AND MARKETING
The Company markets software and services in the United States, the United
Kingdom and Europe through its direct sales organization and markets worldwide
through agents, 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,
--------------- --------------- ---------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
North America............ 22% 35% 36%
United Kingdom........... 31% 27% 31%
Rest of Europe........... 37% 28% 22%
Rest of World............ 10% 10% 7%
--------------- --------------- ---------------
Total.................... 100% 100% 100%
=============== =============== ===============
</TABLE>
In December 1998 the Company initiated the first in a series of strategic
actions aimed at returning the Company to profitability with a $2.9 million
restructuring charge. In the first quarter of 1999 the Company provided for a
further restructuring of $0.5 million. A final restructuring charge of $1.4
million was incurred in the second quarter of 1999 to ensure the preservation of
financial resources.
The December 1998 charge of $2.9 million 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. Employee severance costs
accounted for the $0.5 million charge in the first quarter of 1999 and the final
restructuring costs of $1.4 million in the second quarter comprised of $1.1
million for employee severance and $300,000 for facility closure costs.
The employee severance charge included the charge for 11 senior executives,
redundancies relating to the centralization of sales and marketing as well as
the finance and administration function. As at December 31, 1998 the total
worldwide head count was 220 compared
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to a level of 136 at the end of December 1999. The Company has achieved its goal
of reducing operating costs to a minimum level from where profitability can be
achieved. This is has principally been achieved through the reduction in
employee head count.
Facility closures were principally in the United States and United Kingdom,
where as a result of the reduced staffing levels the Company has reduced
facility costs through relocation to smaller premise or centralization in
existing premises. The Company now utilizes professionally managed office
facilities that provide the required flexibility for growth without the up front
capital commitment. This has provided the lower cost base required as well as
the flexibility required for future growth.
Costs to exit certain businesses relate to the Australian, South African and
French subsidiaries as well as the Hong Kong distributor. With the appointment
of the new management team at the end of the second quarter of 1999, the Company
took the step to dispose of the Australian and South African operation. These
have been converted into an agency arrangement, ensuring the Company of a
positive contribution from the regions. The France and German operations have
not been disposed of as the new management believes these areas to contain an
untapped market. The staff complement has however been reduced in France to
mirror the level of revenue generated in that region. The agreement with the
previous distributor in Hong Kong has been cancelled and costs relating to this
have been allocated against the restructuring accrual. The Company has appointed
a new distributor in the region.
At this time, the Company believes that the restructure plan has reduced 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
maintain or grow the license revenues in line with expenditure growth, the
Company's operating results and financial condition would be adversely affected.
The Company's sales and marketing organization consisted of 33 employees as
of December 31, 1999 (69 at December 31, 1998). 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 Atlanta, Denver, Chicago,
New York and San Francisco in the United States, Antwerp in Belgium, Paris in
France, Frankfurt in Germany and Hertogenbosch in the Netherlands.
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 its software applications
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 the software applications 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
the software applications.
The principal purpose of the Company's consulting services is to facilitate
the optimal use of the applications by its clients. As of December 31, 1999, the
consulting services group consisted of 47 technical professionals (December 31,
1998: 61; 1997: 50; 1996: 48). 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 telephone support service based in Ipswich, England
for customers worldwide. Customers may also submit queries via e-mail or online
through our Extranet web site. 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 their licensed
software at no additional cost.
PRODUCT DEVELOPMENT : ENTERPRISE PERFORMANCE MANAGEMENT
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.
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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. 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
provides 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 became 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 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 became fully compliant. In the fourth quarter
of 2000, 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.
As of December 31, 1999, the Company's Enterprise Performance Management
(EPM) research and development organization of 29 full-time employees (1998 :
34; 1997: 60; 1996: 48) consisted of a combination of development engineers,
quality assurance engineers, product managers and technical support personnel.
The Company's total EPM research and development expense was approximately $3.5
million for the year ended December 31, 1999, (1998 : $6,7 million; 1997: $4.7
million; 1996 : $3.2 million). 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.
PRODUCT DEVELOPMENT : CUSTOMER RELATIONS ANALYTICS
In the second half of 1998 the Company acquired Compression Science Limited
(CSL), 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 has now embedded this K.wiz technology into its
thinkCRA suite of applications and also seeks 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.
Customer Relationship Analytics (CRA) provides valuable, actionable
information to help organizations better understand their customers by analyzing
customer touch point data from various sources, including front - office CRM,
data warehouses, e-commerce and other corporate systems.
The THINKCRA Application Suite is an integrated solution, the essential
component necessary to enable the complete customer picture to be understood.
This is the first packaged application based on the K.Wiz technology. Four
integrated components combine to enrich existing information and enable
targeted marketing to the most appropriate customers only. As a result,
every person in an organization can become armed with the critical data
needed to quickly identify customer value. The suite enables you to
effectively plan, execute, measure and refine activities to maximize customer
value in line with strategic goals. The THINKCRA Application Suite includes
the following applications:
- THINKCustomer - Customer Understanding
- THINKLoyalty - Customer Loyalty
- THINKProduct - Product Understanding
- THINKMarketing - Marketing Effectiveness
THINKCRA enhances Customer Relationship Management by:
- Rapidly analyzing massive volumes of data necessary to deliver timely and
detailed information essential for effective customer marketing;
- Providing critical information needed to plan, execute, measure and define
activities to maximize individual customer values;
- Including all necessary functions to discover knowledge and predict
outcomes;
- Employing the most advanced techniques available to analyze large data
volumes and support large user populations;
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<PAGE>
- Distributing customer knowledge through a variety of media: web, e-mail,
mobile, PDA, desktop and reports;
- Increasing information value through a closed-loop process that enriches
customer transaction data;
- Providing a robust platform and open interface to back, front and
web-office applications.
THINKCRA delivers business benefits to your executives and enables them to:
- Improve customer satisfaction levels by identifying effective interactions
and marketing, based on a complete understanding of customer relationships
and dynamics;
- Predict successful future products, customers and channels;
- Perform intelligent and profitable customer transactions;
- Maximize the return on investment from CRM initiatives.
The THINKCRA -TM- Application Suite was released in June 2000.
As of December 31, 1999, the Company's CRA research and development
organization of 18 full-time employees (1998: 16) consisted of a combination of
development engineers, quality assurance engineers and product managers. The
divisions total research and development expense was approximately $1.7 million
for the year ended December 31, 1999, compared to $0.1 million for the two
months ended December 31, 1998. 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. 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.
DISCONTINUED OPERATIONS
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, Australia and South Africa.
With the appointment of a new Board of Directors, a decision was taken to
dispose of the Australian operation, along with the South African operation, and
continue operations in Germany. The South African operation was sold on June 23,
1999 for a loss of $2,107. The full value of the loss was offset against the
restructuring reserve. On August 31, 1999 the Company disposed of the operations
in Australia for a profit of $7. The operations have signed agency agreements
and continue to sell and support the Gentia product range. 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.
COMPETITION
The market in which the EPM Division competes is intensely competitive,
highly fragmented and characterized by rapidly changing technology and evolving
industry standards. The EPM Division'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. in the EPM market sector.
The CRA Division will compete in the primary market described by the term
`Customer Relationship Analytics (CRA)'; other terms used to describe this
market include `CRM Analytics', `Customer Analytics' and `Customer Behavior
Modeling (CBM)'. Current competitors in this market include Customer
Relationship Management application vendors such as E.piphany, Business
Objectives, Broadbase and Xchange. The Business Intelligence / OLAP and Data
Mining vendors are also moving into the CRA market with application templates
and software / services solutions. The vendors include Hyperion, MicroStrategy,
SAS and SPSS. Their solutions are based on their core technology; reporting,
OLAP or data mining.
The market in which the CRA Division competes is intensely competitive,
subject to rapid change and is significantly affected by new product
introductions and other market activities of industry participants. The
Company's integrated software competes against various vendors' software
tools designed to accomplish specific elements of a complete process,
including extracting data and analyzing data. The CRA Division's competitors
include companies that sell:
- data management and data analysis software tools such as Accrue, Brio
Technology, Broadbase, Business Objects, E.piphany, Informatica,
Microstrategy and Sagent Technology, and
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- enterprise application software such as Oracle, PeopleSoft, SAP and Siebel
Systems.
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, 1999, the Company had a total of 136 employees, including
47 in research and development, 33 in sales and marketing, 38 in customer
consulting and support services, 16 in finance and administration and 2 in
senior management. Of these employees, 89 were located in the United Kingdom, 24
were located in the United States and 23 in Europe. None of the Company's
employees are 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 Robin Lodge, 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 certain projected revenue targets,
cash collection targets, raising additional sources of short-term finance and
containing operating expenses. The
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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.
In the year ended December 31, 1997 the Company experienced a decrease in
license revenues compared to prior years 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". For the year ended December 31, 1999, the Company has
experienced a decrease in license revenue compared to prior years, due
primarily to the restructuring activities undertaken to return the Company to
profitability. 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 products, 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 the products are 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 existing products (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 existing products or new products 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 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
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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 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 2000. The Company's planned launch of the new "THINKCRA" application, could
effect the product sales mix and future profitability of the Company, however
until the "THINKCRA" application has been launched and market reaction to the
new product measured, the impact of the application on both revenue and
operating results can not be predicted. As a result, the Company's future
operating results are dependent upon continued market acceptance of existing
Gentia products 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
Company has in the past experienced minor delays in the release dates of
enhancements to Gentia. If release dates of any future enhancements are delayed
or if they fail to achieve market acceptance when released, the Company's
business, operating results and financial condition may be materially adversely
affected. There can be no assurance that the introduction or announcement of new
product offerings by the Company or the Company's competitors will not cause
customers to defer or forego purchases of current versions of Gentia, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See Item 1 - "Description of Business -
Industry Background, - Gentia Software, - Customers, - Sales and Marketing and -
Research and Development" and Item 9 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK OF SOFTWARE DEFECTS. Software products as internally complex as Gentia
frequently contain errors or defects, especially when first
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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 13 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."
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."
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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 28.1% of the outstanding
Ordinary Shares as at May 31, 2000, and assuming all existing outstanding
options are exercised, all present directors, executive officers and principal
shareholders would beneficially own approximately 28.4% 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, 2000 the Company had outstanding
12,130,279 Ordinary Shares, of which 8,563,893 were owned of record by the
Depositary (as defined) representing an equal number of ADSs. Of the remaining
3,566,386 Ordinary Shares outstanding, 54,164 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 3,566,386 Ordinary Shares may
be sold pursuant to an effective registration statement under Securities Act or
an applicable exemption from registration thereunder, including Rule 144 (which
permits resales of securities subject to limitations depending on the holding
period of such securities and in the case of shares held by affiliates of the
Company).
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Articles of
Association may have the effect of restricting the possibility of a change in
control of the Company. The Company's directors have staggered terms of office;
one third of the directors is elected annually. Moreover, nominations by
shareholders for election of directors must be made in writing not less than 10
nor more than 35 days prior to the annual general meeting of shareholders. A
director may be removed by ordinary resolution of the shareholders but only if
notice of such resolution is given to the Company at least 28 days before the
meeting at which the resolution is to be moved. Any of these provisions may make
it difficult for the Company's shareholders to replace the Board of Directors.
In addition, the Company's Articles of Association prohibit the transfer of
shares which would result in the accumulation of a stake of 20% or more of the
voting rights in the Company without either a 75% shareholders' resolution or
the proposed transferee making an offer to purchase the equity share capital of
the Company. The London City Code on Takeovers and Mergers also requires a
general offer for all the equity and voting non-equity share capital of the
Company to be made in certain circumstances, including on the acquisition by any
person or persons acting in concert of shares which (together with shares
already held by them) carry 30% or more of the voting rights of the Company.
The Company's Board of Directors has the authority to issue up to 2,000,000
Preference Shares and to determine the price, rights, conversion ratios,
preferences and privileges of those shares without any further vote or action by
the Company's shareholders. The rights of the holders of Ordinary Shares and
ADSs will be subject to and may be adversely affected by, the rights of the
holders of the Preference Shares. Any issuance of Preference Shares, while
providing desirable flexibility in connection with possible acquisitions,
financing 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 8,795 square feet in London, England pursuant to a lease that
expires in January 2001. In addition, the Company leases research and
development facilities in Ipswich, England and Glasgow, Scotland. The Company
operates satellite office facilities in the metropolitan areas of Atlanta,
Boston, Chicago and Denver in the United States, s-Hertogenbosch in the
Netherlands, Antwerp in Belgium, Paris in France, Frankfurt in Germany, Hong
Kong, and Guernsey. The Company cancelled the New York lease as well as
relocating to more appropriate premises in Atlanta, Boston, Chicago and San
Francisco in the USA. The Company has also reduced the square footage of the
London office in an effort to consolidate operations.
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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. On January 25, 2000, the
Company announced with Hyperion Solutions Corporation that they had settled
their patent lawsuit. As a result of the settlement, the Company has agreed to
remove from its software products the ability to select the number of dense
dimensions that can be employed in its databases, and will instead provide a
pre-set default value. The Company will supply software to its customers that
will bring existing installed-base applications into compliance with the terms
of this settlement.
From the knowledge the Company has about how its current customer base
uses the Company's products and services, the Company has concluded that the
terms of the settlement should have little impact. Customers using the
Company's software and services to implement business strategy, track
operational performance or build custom applications should not be
compromised. The settlement is not expected to affect the Company's financial
results for the most recent quarter or the fiscal year.
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 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.
22
<PAGE>
ITEM 4. CONTROL OF REGISTRANT
To the Company's knowledge, it is not directly or indirectly owned or
controlled by another corporation or by any foreign government. The table below
sets forth certain information with respect to the beneficial ownership of the
Ordinary Shares of the Company, nominal value L0.15 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, 1999 and (b) all officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
IDENTITY OF PERSON OR GROUP AMOUNT OWNED (i) PERCENT OF CLASS (ii)
<S> <C> <C>
R Alan Wallman (iii).................. 3,410,775 28.1%
All directors and officers as a group
(6 persons) (iv).................... 3,410,775 28.1%
</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 12,130,279 Ordinary Shares outstanding as of May 31, 2000.
(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 1,528,381 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, 2000, of
8,563,893 Ordinary Shares, representing 70,6% 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.
<TABLE>
<CAPTION>
HIGH LOW
$ $
<S> <C> <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
Second Quarter 7.875 5.188
Third Quarter 2.594 1.750
Fourth Quarter 7.625 2.000
2000:
First Quarter 12.625 6.063
</TABLE>
On May 31, 2000, the last sale price for the ADSs as reported on the Nasdaq
National Market was $5.375.
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
23
<PAGE>
Depositary.
Under the terms of the Deposit Agreement (the "Deposit Agreement") dated as
of April 30, 1996, among the Company, the Depositary, and the holders from time
to time of ADRs, Ordinary Shares may be deposited with the London office of Bank
of New York, as custodian (the "Custodian"), or any successor or successors to
such Custodian. The Depositary provides a variety of services to investors, as
more fully set forth in the form of Deposit Agreement filed as an exhibit to the
Company's Registration Statement on Form F-6 filed with the Securities and
Exchange Commission on April 30, 1996.
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, 1999, there can be no assurance that it will not be a controlled
foreign corporation in the future. This summary does 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 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).
24
<PAGE>
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 dividend (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, 2001.
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. If 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 realized 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 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.
25
<PAGE>
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 in 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 for 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 L0.50 per L100 (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 L1.50 per L100 (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 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 L0.50 only
provided the ADS holder is not transferring beneficial ownership.
If the pending United Kingdom Finance Bill is enacted, the fixed stamp duty
of L0.50 only will increase to L5.00 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.
26
<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
31, YEAR ENDED DECEMBER 31,
--------- ----------- ---------- ----------- ---------- -------------
1995 1995(i) 1996 1997 1998 1999
--------- ---------- ---------- ----------- ---------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License........................ $ 7,657 $ 10,227 $ 16,861 $ 14,985 $ 16,173 $ 10,433
Services and other............. 4,918 6,163 9,104 12,186 13,359 13,682
---------- ---------- ---------- ---------- ----------- ------------
Total revenues.......... 12,575 16,390 25,965 27,171 29,532 24,115
---------- ---------- ---------- ---------- ----------- ------------
Cost of revenues:
License........................ 103 171 804 1,179 1,809 1,971
Services and other............. 2,816 3,580 4,937 6,800 8,400 7,716
---------- ---------- ---------- ----------- ----------- ------------
Total cost of revenues.. 2,919 3,751 5,741 7,979 10,209 9,687
---------- ---------- ---------- ----------- ----------- ------------
Gross profit...................... 9,656 12,639 20,224 19,192 19,323 14,428
---------- ---------- ---------- ----------- ----------- ------------
Operating expenses:
Sales and marketing............ 4,301 5,801 10,271 14,308 19,720 12,812
Research and development....... 1,284 1,663 3,185 4,698 6,831 5,197
General and administrative..... 3,017 3,711 3,926 6,279 4,367 3,335
Purchased research and development - - - - 1,037 -
Restructuring costs............ - - - - 2,869 1,876
Goodwill amortization.......... - - 122 372 596 1,105
---------- ---------- ---------- ----------- ----------- ------------
Total operating expenses. 8,602 11,175 17,504 25,657 35,420 24,325
---------- ---------- ---------- ----------- ----------- ------------
Income (loss) from operations..... 1,054 1,464 2,720 (6,465) (16,097) (9,897)
Other income (expense)............ 4 (45) 965 1,235 681 39
---------- ---------- ---------- ----------- ----------- ------------
Income (loss) before provision
for income taxes..... 1,058 1,419 3,685 (5,230) (15,416) (9,858)
(Provision) credit for income taxes (384) (521) (1,216) 1,247 (185) -
---------- ---------- ---------- ----------- ----------- ------------
Net income (loss)................. $ 674 $ 898 $ 2,469 $ (3,983) $ (15,601) $ (9,858)
=========== =========== ========== ========== ============ ==========
Net income (loss) per share (ii)
- basic..... $ 0.10 $ 0.14 $ 0.31 $ (0.44) $ (1.57) $ (0.96)
- diluted.. $ 0.09 $ 0.12 $ 0.24 $ (0.44) $ (1.57) $ (0.96)
=========== =========== ========== ========== ============ ==========
Shares used to compute net income
(loss) per share - basic.... 6,459,167 6,459,167 7,845,962 9,154,673 9,950,201 10,222,115
- diluted.. 7,340,156 7,186,190 10,491,703 9,154,673 9,950,201 10,222,115
=========== =========== ========== ========== ============ ==========
</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.
27
<PAGE>
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 2,280 $25,228 $20,332 $ 5,314 $ 2,968
Working capital 1,606 26,709 22,144 4,875 (3,160)
Total assets 7,755 41,551 36,394 26,548 18,268
Short-term debt 475 194 105 78 4,490
Long-term debt, excluding current portion 175 225 109 59 121
Total shareholders' equity 2,490 32,004 27,859 13,910 3,703
</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, Gentia-based performance management
applications 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. In November 1998, the Company acquired Compression
Sciences Limited (CSL), a UK-based software company, specializing in the
development of compression and knowledge discovery technology. The Company
has developed of new customer relationship analysis applications
incorporating this technology. To date substantially all revenues have been
derived from sales of the EPM products. The Company currently expects that
this revenue stream will be supplemented by revenues derived from the sale of
thinkCRA applications from quarter three 2000. The Company's future operating
results are dependent upon continued market acceptance of EPM products
including the base Gentia technology and in particular the Balanced Scorecard
and enhancements thereto and acceptance of the new thinkCRA suite of
applications.
The Company's ability to satisfy its cash requirements for the coming year
is dependent on meeting projected revenue targets, cash collection targets,
raising additional sources of short-term finance and containing operating
expenses. The Company has in the past, been unable to meet similar targets,
particularly license revenue. There can be no assurance that the Company will
meet its projected revenue targets and failure of the Company to do so (or
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 value of the Company's American
Depositary Shares. 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 involved 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 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
28
<PAGE>
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, 1999,
the Company's gross profit on license revenues was 81.1% on license revenues of
$10,433,000 and its gross profit on $13,682,000 of services and other revenues
was 43.6%. The Company's total gross profit for that period was $14,428,000 or
59.8% of total revenues.
The price of a Gentia license (including Balanced Scorecard) depends in part
upon the number of users contracted for by the customer. The 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
$120,000 for the year ended December 31, 1998 to approximately $98,000 for the
year ended December 31, 1999.
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
and expenses represents the net of interest income, interest expense and foreign
exchange gains or losses.
As a result of the strategic actions taken in the world-wide restructuring
from December 31, 1998 through to June 30, 1999, the Company has reduced
costs across the board to enabling it to achieve a cost base from where it can
be profitable at the current revenue levels. The worldwide restructuring has
resulted in a reduced head count from 220 as of December 31, 1998 to 136 as of
December 31, 1999. This has been achieved through the centralization of
functions previously duplicated geographically within the sales and marketing
operation, as well as in the finance and administration operation. As a result,
for the first time since 1993 the Company's operating expenses have decreased in
absolute dollar amounts. See Item 1 - "Descriptions of Business - Sales and
Marketing".
Although the Company has experienced lower levels of total revenues in
1999 compared to that of prior years, there can be no assurance that the
current levels of revenue are sustainable or that growth from the current
levels can be achieved. 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 that 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."
29
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by the respective line items in the Company's Consolidated Statements of
Operations for the periods indicated.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
DECEMBER
31, YEAR ENDED DECEMBER 31,
--------- ----------- ---------- -------- --------- --------
1995(i) 1995 1996 1997 1998 1999
--------- ----------- ---------- -------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees 61.0% 62.4% 64.9% 55.2% 54.8% 43.3%
Services and other 39.0 37.6 35.1 44.8 45.2 56.7
--------- ----------- ---------- -------- --------- --------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0
--------- ----------- ---------- -------- --------- --------
Cost of revenues:
License fees 0.8 1.1 3.1 4.4 6.1 8.2
Services and other 22.4 21.8 19.0 25.0 28.4 32.0
--------- ----------- ---------- -------- --------- --------
Total cost of revenues 23.2 22.9 22.1 29.4 34.5 40.2
--------- ----------- ---------- -------- --------- --------
Gross profit 76.8 77.1 77.9 70.6 65.5 59.8
--------- ----------- ---------- -------- --------- --------
Operating expenses:
Sales and marketing 34.2 35.4 39.5 52.6 66.8 53.1
Research and development 10.2 10.1 12.3 17.3 23.1 21.6
General and administrative 24.0 22.7 15.2 23.1 14.8 13.8
Purchased research & development - - - - 3.5 -
Restructuring cost - - - - 9.7 7.8
Goodwill amortization - - 0.4 1.4 2.0 4.6
--------- ----------- ---------- -------- --------- --------
Total operating expenses 68.4 68.2 67.4 94.4 119.9 100.9
--------- ----------- ---------- -------- --------- --------
Income (loss) from operations 8.4 8.9 10.5 (23.8) (54.5) (41.1)
Other income (expense) - (0.2) 3.7 4.5 2.3 0.2
--------- ----------- ---------- -------- --------- --------
Income (loss) before provision for
income taxes 8.4 8.7 14.2 (19.3) (52.2) (40.9)
(Provision) credit for income taxes (3.0) (3.2) (4.7) 4.6 (0.6) -
--------- ----------- ---------- -------- --------- --------
Net income (loss) 5.4% 5.5% 9.5% (14.7)% (52.8)% (40.9)%
========= =========== ========== ======== ========= ========
</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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
The Company's total revenue decreased 18.3% from $29.5 million for the year
ended December 31, 1998 to $24.1 million for the year ended December 31, 1999.
The decrease in revenue is due to the decrease in license revenue sales in 1999.
The Company has achieved constant revenue levels in 1999 averaging $6.0 million
per quarter in 1999, down from $7.4 million average in 1998.
Revenues for the year ended December 31, 1999 were $8.2 million in the
United Kingdom, $5.4 million in North America, $0.8 million in Australia and New
Zealand and $8.9 million from the rest of Europe and $0.8 million from the rest
of the world. 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.
LICENSE REVENUES. License revenues were $10.4 million in the year ended
December 31, 1999, a decrease of 35.8% compared to license revenues of $16.2
million for the year ended December 31, 1998. The decrease in license revenue
sales is primarily a result of the Company's global restructuring program within
world-wide sales, which commenced in December 1998. License revenues decreased
from 54.8% of total revenues for the year ended December 31, 1998 to 43.3% for
the year ended December 31, 1999.
30
<PAGE>
SERVICES AND OTHER REVENUES. Services and other revenues increased 2.4%
from $13.4 million in the year ended December 31, 1998 to $13.7 million in
the year ended December 31, 1999. Last year's first and second quarter
results did not include the full benefit of the acquisition of the Technical
and Computer Management Services Limited that was acquired in late May 1998.
The increased revenue as a result of the acquisition is partially offset
through the reduced revenue as a result of the sale of the South African and
Australian operations combined with the reduced revenue sources as a result
of reduced license revenue sales during the year. Services and other revenue
comprised 56.7% of total revenues for the year ended December 31,1999,
compared to 45.2% for the year ended December 31, 1998. The change is
attributable to a decrease in license revenue sales relative to total revenue.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues were $1.8 million and
$2.0 million in the years ended December 31, 1998 and 1999, respectively,
representing 11.2% and 18.9% of license revenues for those periods. The increase
was primarily due to the move towards lower margin channel sales as a result of
our restructuring program.
COST OF SERVICES AND OTHER REVENUES. Cost of services and other revenues
was $8.4 million and $7.7 million in the years ended December 31, 1998, and
1999, respectively, representing 62.9% and 56.4% of service and other
revenues for those periods. The decreased costs relative to revenue is a
result of improved utilization in our services division and the reduced costs
relating to the centralization of the customer support functions from the
restructuring program.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing costs were $12.8 million in the
year ended December 31, 1999, a decrease of 35.0% compared to $19.7 million
in the year ended December 31, 1998. Excluding the provision for doubtful
accounts of $1.7 million made in the three months ended June 30, 1999 the
sales and marketing expenditure has reduced to $11.1 million for the year
ended December 31, 1999. Similarly, excluding the $2.0 million provision for
doubtful accounts made in December 1998, sales and marketing costs (excluding
provisions for doubtful accounts) have decreased by $6.6 million in 1999 for
the year ended December 31, 1999. The decrease in expenditure is attributed
to the strategic actions taken through the restructure program. The cost
savings are attributed to the elimination of duplicated resources,
centralization of corporate functions and the sale of the Australian and
South African operations.
RESEARCH AND DEVELOPMENT. Research and development costs decreased by 23.9%
from the $6.8 million recorded in the year ended December 31, 1998 to $5.2
million in the year ended December 31, 1999. As a percentage of total revenues,
research and development expenses were 23.1% and 21.5% of total revenues for the
years ended December 31, 1998 and 1999, respectively. This decrease in research
and development costs can be attributed to the cost savings relating to
reduction in legal costs relating to the Arbour dispute (see Item 3 : Legal
Proceedings) and consolidation of facilities as a result of the restructuring
program. 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.) In addition the Company
will require further resources to successfully develop the new Customer
relationship analytic application.
GENERAL AND ADMINISTRATIVE. General and administrative costs were $3.3
million in the year ended December 31, 1999, compared to $4.4 million for the
year ended December 31, 1998. The 25% reduction in costs can be attributed to
the centralization of the finance function in the United Kingdom with savings
resulting from the closure of facilities and termination of staff. General and
administrative expenses represented 14.8% and 13.8% of total revenues for the
years ended December 31, 1998 and 1999, respectively.
RESTRUCTURING COSTS. During 1999, the Company recorded a further
restructuring charge of $1.9 million, which comprised employee severance charges
of $0.5 million in the first quarter of 1999. An additional charge of $1.4
million was made at the end of the second quarter in 1999. The second charge
comprised a $1.1 million employee severance charge and a $300,000 facility
closure charge.
GOODWILL AND OTHER INTANGIBLES AMORTIZATION
Goodwill and other intangibles amortization increased by $0.5 million from
$0.6 million for the year ended December 31, 1998 to $1.1 million for the year
ended December 31, 1999. 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.
31
<PAGE>
LOSS FROM OPERATIONS
The loss from operations for the year ended December 31, 1999 is $9.9
million, comprising a loss from operations of $6.4 million in the United
Kingdom, $1.0 million in North America, loss from operations of $23,000 in the
rest of the world and $2.5 million from rest of Europe. Loss from operations for
the year ended December 31, 1998 was $15.6 million, comprising loss from
operations of $7.5 million in the United Kingdom, $3.7 million in North America
and $1.4 million in the rest of world and $3.0 million in the rest of Europe.
OTHER INCOME
Other income was $681,000 and $39,000 in years ended December 31, 1998 and
1999, respectively, and relates primarily to net interest earned on interest
bearing deposits of funds raised by the Company's initial public offering in
April 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes was a $185,000 debit in the year ended
December 31, 1998, representing the write off of deferred tax assets.
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.
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. 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
32
<PAGE>
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 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.
LOSS FROM OPERATIONS
The loss from operations for the year ended December 31, 1998 was $16.1
million, comprising a loss from operations of $8.0 million in the United
Kingdom, $3.7 million in North America and loss from operations of $709,000 in
Australia and New Zealand, $3.0 million in the rest of Europe and $713,000 in
the rest of the world. Loss from operations for the year ended December 31, 1997
was $6.5 million, comprising loss 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.
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,
1998 and the year ended December 31, 1999, 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
33
<PAGE>
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.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- ---------- --------- ---------- -------- --------- -------- ----------
CONSOLIDATED STATEMENT OF (IN THOUSANDS OF US DOLLARS)
OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
License ................... $ 2,878 $ 4,779 $ 4,419 $ 4,097 $ 2,294 $ 2,366 $ 2,760 $ 3,013
Services and other ........ 3,039 2,960 3,588 3,772 3,657 3,586 3,367 3,072
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues ......... 5,917 7,739 8,007 7,869 5,951 5,952 6,127 6,085
-------- -------- -------- -------- -------- -------- -------- --------
Cost of Revenues:
License ................... 75 472 452 810 132 868 575 396
Services and other ........ 1,782 2,045 2,140 2,433 2,615 2,303 1,523 1,275
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues . 1,857 2,517 2,592 3,243 2,747 3,171 2,098 1,671
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ................... 4,060 5,222 5,415 4,626 3,204 2,781 4,029 4,414
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing ....... 4,115 4,175 4,351 7,079 3,658 4,778 2,134 2,242
Research and development .. 1,639 2,034 1,512 1,646 1,589 1,547 948 1,113
General and administrative 1,082 1,021 1,106 1,158 988 1,025 632 690
Purchased research and
Development ........ - - - 1,037 - - - -
Restructuring costs ....... - - - 2,869 500 1,376 - -
Goodwill amortization ..... 102 128 153 213 199 384 260 262
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 6,938 7,358 7,122 14,002 6,934 9,110 3,974 4,307
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations .. (2,878) (2,136) (1,707) (9,376) (3,730) (6,329) 55 107
Other (expense) ................ 246 215 144 76 41 28 - (30)
income
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before provision . (2,632) (1,921) (1,563) (9,300) (3,689) (6,301) 55 77
for income taxes
(Provision) credit for income
taxes .......................... - - - (185) - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............... $ (2,632) $ (1,921) $ (1,563) $ (9,485) (3,689) (6,301) 55 77
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
34
<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,
1998 1998 1998 1998 1999 1999 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License ..................... 48.6% 61.8% 55.2% 52.1% 38.5% 39.8% 45.0% 49.5%
Services and other .......... 51.4 38.2 44.8 47.9 61.5 60.2 55.0 50.5
---- ---- ---- ---- ---- ---- ---- ----
Total revenues ......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
---- ----- ----- ----- ----- ----- ----- ----
Cost of Revenues:
License ..................... 1.3 6.1 5.6 10.3 2.2 14.6 9.4 6.5
Services and other .......... 30.1 26.4 26.7 30.9 43.9 38.7 24.9 21.0
---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenues . 31.4 32.5 32.3 41.2 46.1 53.3 34.3 27.5
---- ---- ---- ---- ---- ---- ---- ----
Gross profit ..................... 68.6 67.5 67.7 58.8 53.9 46.7 65.7 72.5
---- ---- ---- ---- ---- ---- ---- ----
Operating expenses:
Sales and marketing ......... 69.5 53.9 54.3 90.0 61.5 80.3 34.8 36.8
Research and development .... 27.7 26.3 18.9 20.9 26.7 26.0 15.5 18.3
General and administrative . 18.3 13.2 13.8 14.7 16.6 17.2 10.3 11.3
Purchased research and
Development ............ - - - 13.2 - - - -
Restructuring costs ......... - - - 36.5 8.4 23.1 - -
Goodwill amortization ....... 1.7 1.7 1.9 2.7 3.3 6.5 4.2 4.3
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses 117.2 95.1 88.9 178.0 116.5 153.1 64.8 70.7
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from operations .... (48.6) (27.6) (21.3) (119.2) (62.6) (106.4) 0.9 1.8
Other (expense) income ........... 4.2 2.8 1.8 1.0 0.7 0.5 - (0.5)
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) before provision
for income taxes ................. (44.4) (24.8) (19.5) (118.2) (61.9) (105.9) 0.9 1.3
(Provision) credit for income
taxes ............................ - - - (2.4) - - - -
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss) ................ (44.4)% (24.8)% (19.5)% (120.6)% (61.9)% (105.9)% 0.9% 1.3%
====== ====== ===== ===== ===== ===== ===== =====
</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 $6.3 million in its operating activities in the
year ended December 31, 1999 and used cash of $9.8 million in the year ended
December 31, 1998. Cash generated by financing activities was up from $0.5
million in the year ended December 31, 1998 to $4.7 million in the year ended
December 31, 1999. This is due mainly to the short-term loan finance of $4.4
million acquired during the year. Of the short-term loan, $4.0 million was
converted to equity on March 24, 2000.
As a result of the cash utilized in operations, the company ended the year
with a cash balance of $3.0 million. Steps taken to address the net utilization
of cash are discussed under "Overview" and "Restructuring". The company is
reliant on meeting projected revenue targets, cash collection targets and
containing operating expenses. The Company's ability to satisfy its cash
requirements for the remainder of the year is dependent on meeting certain
projected revenue targets, cash collection targets,
35
<PAGE>
raising additional sources of short term finance and containing operating
expenses. The Company has, at times 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 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.
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 involved 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 25, 2000 the Company purchased ebi Solutions entity for a
consideration of $1.95 million plus $50 expenses which was met by issuing
400,000 shares in Gentia Software plc to the partners of the limited
liability company. ebi Solutions LLC was a privately held provider of
eBusiness applications and services. The integration of Gentia's new product
suite, thinkCRA and ebi's OASIS offers an advanced solution set encompassing
the ability to analyze both online and offline commerce. The result is an
intelligent and predictive solution that optimizes the ability to understand,
respond to and manage customer relationships.
The acquisition of ebi Solutions was accounted for under the purchase method
and the assets and liabilities were recorded at their provisional fair values on
the date of acquisition. Results of operations of the acquired business are
included from the date of acquisition. The intangible assets acquired in the
transaction are being amortized on a straight-line basis over their useful life
of five years.
Goodwill acquired in respect of acquisitions accounted for under the
purchase method are amortized over their estimated useful life of between 5 to
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, 1999
consisted of purchases of property and equipment, primarily computer equipment,
office furniture and equipment and motor vehicles, which amounted to $0.4
million, compared to $1.2 million for the year ended December 31, 1998.
On March 24, 2000 loan agreements totaling an aggregate of US$2.0 million
entered into by the Company with each of Robin W.I.Lodge, Marshall Services,
Alan McGahan, and Rhone Venture Capital Limited were converted into shares of
the Company at a price of US$2.25 per share. The loans with Robin Lodge and
Marshall Services Ltd. totalling $1.0 million were entered into on August 26,
1999, the balance of the loans of $1.0 million were entered into on November
22, 1999. In addition warrants have been issued in connection with the loan
agreements for the number of shares into which the loan may be converted
multiplied by 1.25, at US$2.25 per share.
On March 24, 2000 loan agreements totaling an aggregate of US$2.0 million
entered into by the Company on December 9, 1999, with each of Finsbury
Technology Trust PLC, Pulsar Technology Fund, Grange Nominees Ltd. and Banco
Nominees (Guernsey) Limited were converted into shares of the Company at a
price of US$4.65 per share. In addition warrants have been issued in
connection with the loan agreements for the number of shares into which the
loan may be converted multiplied by 0.5, at US$4.65 per share.
The combination of losses over the year caused the Company's cash to
decrease from $5.3 million at December 31, 1998 to $3.0 million at December 31,
1999; the Company's working capital decreased from $4.9 million at December 31,
1998 to negative net working capital of $3.2 million at December 31, 1999.
Excluding the short-term finance to be converted to equity, the Company's net
working capital at December 31, 1999 amounts to $0.8 million. The Company's
total assets decreased from $26.5 million at December 31, 1998 to $18.3 million
at December 31, 1999.
As of December 31, 1999, 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 11 of 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 and extended receivable terms on certain contracts. 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, 1999 by $1.7 million.
There was no significant impact as a result of inflation on the Company's
operations during 1996, 1997, 1998 and 1999.
36
<PAGE>
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 23, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
DIRECTORS
<S> <C> <C>
Robin W. I. Lodge............ 56 Chairman of the Board and Director
R. Alan Wallman ............. 54 Founder and Non-executive Director
Steve Fluin ................. 45 Chief Executive Officer
Nick Bray ................... 35 Chief Financial Officer and Company Secretary
Timothy S. Jones............. 45 Chief Technology Officer and Director
Kenneth Volet ............... 53 Director
</TABLE>
Mr. Lodge was elected as Chairman of the Board July 20, 1999. Mr. Lodge has
over 30 years experience in the information technology sector. Mr. Lodge is
non-executive chairman of D.C.S. Group plc, Tenet Technology Ltd and the Lanner
Group plc. In addition he holds non-executive directorships of other public and
private companies.
Mr. Fluin was elected as Chief Executive Officer on, 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. Bray was appointed as Chief Financial Officer, 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. Volet was appointed as a director on May 17, 2000. Mr. Volet has over 20
years experience in the software industry. Mr. Volet co-founded ebi Solutions, a
software applications development company in December 1998. Prior to joining
ebi, Mr. Volet was Senior Vice President, Worldwide Sales & Marketing for
Seagate Software, a multi-national software development and services company.
Prior to joining Seagate Software, Mr. Volet was President and CEO of Holistic
Systems, Inc., a software development company with significant presence in the
business intelligence marketplace. In 1996 Holistic Systems was acquired by
Seagate Software.
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.
Lodge, Wallman and Fluin. The Compensation Committee establishes salaries,
incentives and other forms of compensation for officers and other employees of
the Company, and administers the incentive compensation and benefit plans of the
Company.
The Audit Committee of the Board of Directors consists of Mr. Lodge, Wallman
and Bray. 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.
38
<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation paid by the Company to all of its
directors and officers, 11 persons as a group, for the year ended December
31, 1999, compared to 10 persons for the year ended December 31, 1998, was
$1,1 million, compared to $1,3 million for the year ended December 31, 1998.
Included in the amount paid for 1999 are payments made to three directors for
compensation for loss of office amounting to $250,000. Payments made to
companies, in which directors held an interest, for services rendered and
costs related thereto, were $26,000 in the current year compared to $42,000
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 Company did not set aside or accrue any amounts to provide pension,
retirement or similar benefits for officers and directors of the Company for the
year ended December 31, 1999. 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, 1999, options under the 1994 Plan for the purchase of
668,663 Ordinary Shares by employees of the Company were outstanding at exercise
prices ranging from 21p to 60p ($0.33 to $0.95) per share, payable in pounds
sterling. The December 31, 1999 exchange rate of $1.5787 to L1.00 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, 1999, no options under the 1994 Plan for the purchase of Ordinary Shares
were held by those directors and executive officers of the Company as a group at
December 31, 1999. See Note 8 of Notes to Consolidated Financial Statements.
As of May 31, 2000, options under the 1994 Plan for the purchase of 530,330
Ordinary Shares by employees of the Company, none of whom were directors or
executive officers, were outstanding at exercise prices ranging from 21p to 60p
($0.31 to $0.90) per share, payable in pounds sterling. The May 31, 2000
exchange rate of $1.4947 to L1.00 has been used for purposes of calculating the
dollar value of these exercise prices
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
10,000,000 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, 1999, options under the
1996 Plan for the purchase of 4,566,956 Ordinary Shares were outstanding at
exercise prices ranging from $2.25 to $5.25 per share, payable in U.S. dollars.
Options issued under the 96 plan expire between five and seven years the date of
issue, the latest expiry date of the options outstanding at December 31,1999 is
November 22, 2006. As of December 31, 1999, options under the 1996 Plan for the
purchase of 1,402,381 Ordinary Shares were held by all directors and executive
officers of the Company as a group. See Note 8 of Notes to Consolidated
Financial Statements.
As of May 31, 2000, options under the 1996 Plan for the purchase of
4,740,890 Ordinary Shares were outstanding at an exercise price from $2.25 to
$6.1875 per share, payable in U.S. dollars. As of May 31, 2000, options under
the 1996 Plan for the purchase of 1,528,381 Ordinary Shares were held by the
directors and executive officers of the Company as a group at December 31,1999.
The number of Ordinary Shares underlying options held by the Company's
directors as at December 31, 1999 and December 31, 1998 (or appointment), which
are disclosed in the Company's UK statutory accounts, are as follows:
<TABLE>
<CAPTION>
AT 31 DECEMBER 1999 AT 31 DECEMBER 1998
------------------- -------------------
<S> <C> <C>
R Lodge 877,381 -
S Fluin . 320,000 -
N Bray .. 180,000 -
T S Jones 25,000 25,000
</TABLE>
39
<PAGE>
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 options 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 issued warrants to First Albany Corporation to purchase 100,000
shares of the Company's common stock at an exercise price of $3 per share. The
issue of the warrants was in lieu of financial advisory and investment banking
services. The warrants will expire on January 5, 2002. As at December 31, 1999
no warrants had been exercised
During 1999 the Company obtained loans from a number of institutions, the
terms of the loans were such that they could be converted into Ordinary Shares
and Warrants at the request of the lender. On March 24, 2000 the loans were
converted in to Ordinary Shares and 1,327,329 warrants were issued. Of the total
number of warrants issued, 416,667 were issued to a related party with an
exercise price of US$2.25, exercisable between March 24,2000 and November 22,
2006. A further 694,445 warrants were issued with an exercise price of US$2.25,
exercisable between March 24,2000 and August 26, 2006. The balance of 216,217
warrants were issued at an exercise price of US$4.625 and may be exercised
between March 24, 2000 and December 9, 2006. At May 31, 2000 none of the warrant
had be exercised.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
During 1999, the Company obtained loans from a number of institutions including
a loan of $750 from the Chairman. At December 31, 1999, the capital amount of
these loans was $4.0 million accruing interest at 2% above the UK Libor rate.
The terms of the loans were such that they could be converted into Ordinary
Shares and Warrants at the request of the lender. On March 24, 2000, these loans
were converted into Ordinary shares and 1,327,329 warrants were issued, of which
416,667 were issued to the Chairman.
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-22 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 II - Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997..................................... S-1
Other schedules are omitted as the information is not
required, not applicable or the information is presented in
the financial statements or related notes thereto.
b) Exhibits
None.
</TABLE>
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, 2000
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1999 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 30, 2000
F-1
<PAGE>
GENTIA SOFTWARE PLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
----------------------
1999 1998
--------- ----------
Current assets
<S> <C> <C>
Cash................................................................... $ 2,968 $ 5,314
Accounts receivable: .................................................. 7,757 10,565
Trade accounts receivable ................................... 11,214 14,366
Allowance for doubtful accounts ............................. 3,457 3,801
Prepaid expenses ...................................................... 559 1,363
Taxes recoverable ..................................................... -- 212
--------- ----------
Total current assets ............................................. 11,284 17,454
Property and equipment, net ........................................... 1,153 2,192
Purchased software, net of amortization of $610 (1998: $25) ........... 2,000 2,551
Goodwill, net of amortization $2,284 (1998:$1,764) .................... 3,831 4,351
--------- ----------
Total assets ..................................................... $ 18,268 $ 26,548
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of lease obligations .................................. $ 46 $ 78
Accounts payable ...................................................... 2,784 2,203
Accrued liabilities ................................................... 2,624 3,778
Deferred revenue ...................................................... 3,259 4,754
Other accounts payable ................................................ 1,289 1,766
Short-term loans ...................................................... 4,442 --
--------- ----------
Total current liabilities ........................................ 14,444 12,579
--------- ----------
Noncurrent liabilities
Long-term portion of lease obligations ................................ 121 59
--------- ----------
Total noncurrent liabilities ..................................... 121 59
--------- ----------
Total liabilities ................................................ 14,565 12,638
--------- ----------
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, 10,347,376 issued and outstanding at
December 31, 1999 (1998: 10,194,930) ............................. 2,481 2,445
Additional paid-in capital ..................................................... 29,009 28,881
Retained deficit ............................................................... (26,695) (16,837)
Accumulated other comprehensive loss ........................................... (1,092) (579)
--------- ----------
Total shareholders' equity ....................................... 3,703 13,910
--------- ----------
Total liabilities and shareholders' equity ....................... $ 18,268 $ 26,548
========= ==========
</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,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
License .................................................. $ 10,433 $ 16,173 $ 14,985
Services and other ....................................... 13,682 13,359 12,186
------------ ------------ ------------
Total revenues .................................... 24,115 29,532 27,171
------------ ------------ ------------
Cost of revenues:
License .................................................. 1,971 1,809 1,179
Services and other ....................................... 7,716 8,400 6,800
------------ ------------ ------------
Total cost of revenues ............................. 9,687 10,209 7,979
------------ ------------ ------------
Gross profit ......................................................... 14,428 19,323 19,192
------------ ------------ ------------
Operating expenses:
Sales and marketing ...................................... 12,812 19,720 14,308
Research and development ................................. 5,197 6,831 4,698
General and administrative ............................... 3,335 4,367 6,279
Purchased research & development ......................... -- 1,037 --
Restructuring costs ...................................... 1,876 2,869 --
Goodwill amortization .................................... 1,105 596 372
------------ ------------ ------------
Total operating expenses ........................... 24,325 35,420 25,657
------------ ------------ ------------
Loss from operations ................................................. (9,897) (16,097) (6,465)
Other income ......................................................... 39 681 1,235
------------ ------------ ------------
Loss before income taxes ............................................. (9,858) (15,416) (5,230)
Credit/(provision) for income taxes .................................. -- (185) 1,247
------------ ------------ ------------
Net loss ............................................................. $ (9,858) $ (15,601) $ (3,983)
============ ============ ============
Net loss per share - Basic and diluted ............................... $ (0.096) $ (1.57) $ (0.44)
------------ ------------ ------------
Shares used to compute net loss per share -
Basic and diluted ................................ 10,222,115 9,950,201 9,154,673
============ ============ ============
</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
ORDINARY SHARES OF ADDITIONAL CUMULATIVE TOTAL
15P EACH PAID-IN RETAINED TRANSLATION SHAREHOLDERS
SHARES AMOUNT CAPITAL (i) EARNINGS (i) ADJUSTMENT EQUITY
------- ------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 .......... 8,999,167 2,152 27,182 2,747 (77) 32,004
Exchange translation adjustments.. (534) (534)
Net loss ......................... (3,983) (3,983)
------------
Comprehensive loss ............... (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 loss ............... (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
Exchange translation adjustments . (513) (513)
Net loss ......................... (9,858) (9,858)
------------
Comprehensive loss ............... (10,371)
------------
Issuance of shares pursuant to
exercise of options:
Employees ................... 152,446 36 128 164
---------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1999 ........ 10,347,376 $ 2,481 $ 29,009 $ (26,695) $ (1,092) $ 3,703
========== =========== ============ ============ ============ ============
</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, 1999 such distributable profits
amounted to $ nil (1998: nil) due to the large retained loss
from prior years.
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,
-----------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................................... $ (9,858) $(15,601) $ (3,983)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .......................... 882 991 836
Goodwill and other intangibles ......................... 1,105 1,329 372
In-process research and development .................... -- 1,037 --
Loss on disposal of assets ............................. 3 -- --
Loss on disposal of subsidiary ......................... 2 -- --
Changes in operating assets and liabilities:
Accounts receivable ................................ 3,032 (4,789) 854
Allowance for bad and doubtful debts ............... (344) 1,982 1,341
Prepaid expenses, recoverable taxes and other assets 988 346 (1,100)
Accounts payable ................................... 597 460 95
Accrued payroll and related expenses and other
accrued liabilities ...................... (1,497) 3,340 (2,159)
Deferred revenues .................................. (1,214) 1,124 661
-------- -------- --------
Net cash used in operating activities ........................ (6,304) (9,781) (3,083)
Cash flows from investing activities
Proceeds from disposal of property and assets ...... 87 118 70
Purchases of property and equipment ................ (390) (1,248) (1,070)
Proceeds on sale of subsidiary ..................... 59 -- --
Costs of acquisitions .............................. -- (4,827) (586)
-------- -------- --------
Net cash used in investing activities .............. (244) (5,957) (1,586)
Cash flows from financing activities
Net movement on capital lease obligations ........... 122 (77) (205)
Short-term loan acquired ............................ 4,442 -- --
Net proceeds from issuance of shares ................ 164 620 372
-------- -------- --------
Net cash provided by financing activities ........... 4,728 543 167
Effect of exchange rate changes on cash ...................... (526) 177 (394)
-------- -------- --------
Net decrease in cash ......................................... (2,346) (15,018) (4,896)
Cash at beginning of year .................................... 5,314 20,332 25,228
-------- -------- --------
Cash at end of year .......................................... $ 2,968 $ 5,314 $ 20,332
======== ======== ========
Supplemental disclosure of cash flow information
Interest received, net .................................. $ (62) $ (693) $ (1,262)
Taxes paid .............................................. $ -- $ 9 $ 477
Non-cash investing and financing activities
Acquisition of property and equipment through
Capital leases ........................................ $ 200 $ 76 $ 26
Shares issued for acquisition ........................... $ -- $ 1,000 $ --
</TABLE>
The accompanying notes are an integral part of these statement
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, prior to July 1, 1997 registered as Planning
Sciences International plc, develops, markets and supports
Internet enabled, business analysis software, designed to
implement "enterprise performance management" and "customer
relationship analytics," for large companies. Its principal
applications are marketed under the Renaissance Balanced
Scorecard, ProfitImpact and ThinkCRA names. The Company's
revenues are derived from license fees for these business
applications as well as software support and maintenance,
training and consulting revenues from implementation.
Renaissance Balanced Scorecard ("Balanced Scorecard"),
powered by Gentia, was developed jointly with Renaissance
Solutions inc, ("Renaissance") under the terms of an
agreement signed on December 19, 1997. ProfitImpact was
developed jointly with Arthur Andersen, under the terms of
an agreement signed on April 7, 1999. Kwiz Solutions Ltd, a
wholly owned subsidiary of Gentia, develops ThinkCRA.
Information on the Company's operations by geographic area
is included in Note 13.
Substantially all of the Company's revenues have been derived
from the enterprise performance management software (Balanced
Scorecard and ProfitImpact). Customer relationship analytics
software is expected to provide revenue during 2000. As a
result, the Company's future operating results are dependant
upon continued market acceptance of Balanced Scorecard and
Activity Based Cost Management as well as acceptance of
Customer Relationship Analytics. A decline in demand for, or
market acceptance of, Balanced Scorecard, Activity Based
Management or Customer Relationship Management, would have a
material adverse effect on the Company's business, operating
results and financial condition.
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. During the year
ended December 31, 1999 the Australian and South African
subsidiaries were sold and have therefore only been
consolidated up to the date of sale which was August 31 and
June 23, respectively. 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
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
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 and 1997 have been prepared and the auditors
have given unqualified audit reports thereon. Statutory
Accounts for December 31, 1999 have not yet been prepared.
Such accounts have been, and for the year ended December 31,
1999, will be, delivered to the Registrar of Companies for
England and Wales.
F-6
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
3. SIGNIFICANT ACCOUNTING POLICIES
(A) REVENUE RECOGNITION
License revenues are recognized upon shipment of the product
providing that there is evidence of a contract, the fee is
fixed or determinable, no significant vendor obligations
remain and collection of the resulting receivable is probable.
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 over the term of the contract, which
is typically twelve months. Revenues from training and
consultancy are recognized when the services are performed.
(B) TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN ENTITIES
The US dollar is the functional currency of the company as
it is the currency of the principle economic environment in
which the company conducts its operations.
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.
The financial statements of the subsidiaries have been
translated into US dollars in accordance with FASB Statement
No. 52.
Results of operations of subsidiaries which have their local
currencies as their 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 which forms part of comprehensive income, a
component of shareholders' equity.
The Company cannot pay dividends at present as it has no
distributable profit; however, were it to pay dividends in the
future, 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 FASB Statement 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) EARNINGS PER SHARE
Earnings per share is presented in accordance with FASB
Statement No. 128. Basic earnings per share is computed using
the weighted average number of shares outstanding during the
period. Diluted earnings per share reflects the per share
effect of dilutive stock options and other dilutive common
stock equivalents. At the current time, there is no dilutive
effect due to losses made during the years presented.
F-7
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(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 for financial purposes and by accelerated methods for
income taxes purposes. Estimated useful lives for financial
reporting purposes are as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment and software - 4 years
Furniture, fixtures and office equipment - 4 years
Leasehold improvements - period of lease
Motor vehicles - 4 years
</TABLE>
(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. FASB 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 grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of
the shares at the date of the grant. The Company uses the
intrinsic value method set out in APB Opinion No. 25
"Accounting for Stock Issued to Employees" to account for
options granted. This method is used as an alternative to that
under FASB Statement No 123 because FASB 123 requires the use
of option valuation models that are not developed for use in
valuing employee stock options. The pro forma effect of using
the fair value method for such options of FASB No. 123 is
shown in Note 8.
Under APB 25, because the exercise price of the Company's
employee stock options is equal to the market price of the
underlying stock on the date of the grant, no compensation
expense is recognized.
(K) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
F-8
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consists mainly of
cash and cash equivalents, accounts receivable, accounts
payable and short term loans. In view of their nature, the
fair values of these financial instruments do not
significantly vary from their carrying amount.
(M) GOODWILL ARISING ON BUSINESS COMBINATIONS
The excess of the purchase prices paid over the net assets of
the businesses acquired is being amortized over the estimated
useful life of ten years on the straight line method. The
Company reviews the recoverability of goodwill when there is a
change in circumstances indicating that the carrying value may
not be recoverable from the anticipated future cash flows of
the related businesses. A loss is recognized for the
difference between the carrying value and the estimated fair
value of the asset.
(N) IDENTIFIABLE INTANGIBLE ASSET
The intangible asset arose on the acquisition of K.Wiz
Solutions Ltd, formerly Compression Sciences Ltd, during
November 1998. It is stated at cost and consists of purchased
software. The identifiable intangible asset is amortized using
the straight line method over the estimated useful life of
five years.
(O) IMPAIRMENT OF LONG LIVED ASSETS
In accordance with SFAS No. 121, the Company reviews its
long-lived assets for impairment when events or changes in
circumstances indicate that the carrying value of the assets
may not be recoverable. The review consists of a comparison of
the carrying value of the assets with the expected future
undiscounted cash flows of the assets. The expected future
cash flows are estimated by management based on reasonable and
supported projections. If the expected future cash flows
exceed the carrying value then no impairment is recognized,
however if the carrying value exceeds the expected future cash
flows an impairment exists measured by the excess of the
carying value over the expected cash flows. Any impairment
provisions recognized are permanent and may not be restored in
future years.No impairment expense was recognized during 1999
and 1997, however $733 was expensed in 1998.
(P) SEGMENTAL REPORTING
During the periods ended December 31, 1999 and 1998, the
Company operated as two operating segments, namely Enterprise
Performace Management (EPM) and Customer Relationship
Analytics (CRA). Both of the operating segments incorporate
the building, deployment and management of enterprise
analytical applications, while EPM focuses on monitoring and
understanding the business's performance, CRA focuses on
understanding businesses customers and potential customers.
During the period ended December 31, 1997 the Company operated
as a single segment.
F-9
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
4. PROPERTY AND EQUIPMENT
Property and equipment comprises:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Computer equipment..................................................... 3,641 4,265
Furniture, fixtures and office equipment ..............................
Leasehold improvements................................................. 906 955
Motor vehicles......................................................... 449 560
265 212
----------- -----------
5,261 5,992
Less: Accumulated depreciation......................................... (4,108) (3,800)
----------- -----------
$ 1,153 $ 2,192
=========== ===========
</TABLE>
Included in the figures for the year ended December 31, 1999 is the
write off of certain computer equipment identified as being obsolete or
no longer in use as a result of the restructuring of the Company. The
write off amounted to $158 all of which related to computer equipment
in the Enterprise Performance Management (EPM) division of the Company.
5. INTANGIBLE ASSETS
Intangible assets consists of Purchased software and Goodwill.
Purchased software arose on the acquisition of Compression Sciences
Ltd, now K.wiz Solutions Ltd, during 1998. Purchased software is
being amortized on the straight line method over a five-year period.
Goodwill arose on the acquisition of the other subsidiaries and is
being amortized over a ten-year period. The recoverability and
impairment of the intangibles is assessed by considering the
expected future revenue from the subsidiaries to which the goodwill
relates.
Intangible assets comprise:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Purchased software
Original cost ............................................... $ 2,576 $ 2,576
Purchased ................................................... 34 -
----------- -----------
Total cost .................................................. 2,610 2,576
Less: Total amortized ....................................... (610) (25)
----------- -----------
$ 2,000 $ 2,551
=========== ===========
Goodwill
Cost at beginning of the year................................ $ 6,115 $4,096
Purchased.................................................... - 2,019
----------- -----------
Total cost................................................... 6,115 6,115
Less: Total amortized........................................ (2,284) (1,764)
----------- -----------
3,831 4,351
=========== ===========
</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)
6. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Accrued expenses and other current liabilities:
Restructure provision............................................. 414 1,833
Vacation accrual.................................................. 147 -
Audit and legal fee accruals...................................... 260 136
Accrued commissions............................................... 295 449
Other............................................................. 1,508 1,360
----------- ----------
$ 2,624 $ 3,778
=========== ==========
</TABLE>
7. SHORT TERM LOANS
During 1999, the Company obtained loans from a number of institutions.
At December 31, 1999, the total amount of these loans was $4,442. The
terms of the loans were such that they could be converted into Ordinary
Shares and Warrants at the request of the lender.
The loans were converted into Ordinary shares and Warrants on March
24, 2000. The number of warrants issued to the lenders and the
exercise dates are detailed below.
The interest rates on the loans were set at 2% above the UK Libor
rate. Interest accrued daily and was payable quarterly.
The short-term loan was repaid during February 2000 with interest at
3% above the UK Libor rate.
<TABLE>
<CAPTION>
NUMBER OF
ORDINARY NUMBER OF DATE WARRANTS
AMOUNT OF SHARES WARRANTS CONVERTIBLE
LOAN LOAN CONVERTIBLE TO ISSUED UNTIL
--------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Loan with warrants exercisable at $2.25 $ 2,035 888,888 1,111,112 (i)
Loan with warrants exercizable at $4.625 2,035 432,432 216,217 (ii)
Short-term loan 372 - -
--------------- ---------------- -------------
Total $ 4,442 1,321,320 1,327,329
--------------- ---------------- -------------
</TABLE>
(i) 416,667 warrants issued on conversion of a loan of $750, which was received
from a related party, may be exercised at US$2.25 between March 24, 2000
and November 22, 2006, and the remaining 694,445 warrants may be exercised
between March 24, 2000 and August 26, 2006.
(ii) All 216,217 warrants issued at an exercise price of US$4.625 may be
exercised between March 24, 2000 and December 9, 2006.
F-11
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
8. 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 plan.
Outstanding options under the prior plan were exchanged for the
equivalent number of options under the new 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, 1997 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 0.24 0.40
Exercised in year ...... (113,333) 0.26 0.41
Lapsed in year ......... (253,336) 0.21 0.33
-------------------------------------
Balance at December 31, 1999 668,663 L 0.25 $ 0.39
=====================================
</TABLE>
The following table summarizes information about the Company's share
options outstanding and exercisable at December 31, 1999 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 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
---------------- ------------------ ------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
21p 604,997 20 months 21p 604,997 21p
60p 63,666 31 months 60p 63,666 60p
---------------- ------------------ ------------------ ------------------ ----------------- ------------------
21p - 60p 668,663 21 months 23p 668,663 23p
================ ================== ================== ================== ================= ==================
</TABLE>
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 10,000,000 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, 1999, options under the 1996 Plan for the purchase
of 4,566,956 Ordinary Shares by directors, employees and persons
providing services to the Company had been granted and were
outstanding at an exercise price from $2.25 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.
F-12
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Details of options under the 1996 PLAN are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ------------------
<S> <C> <C>
Balance at January 1, 1997 ...... 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
Granted in 1999 .............. 2,898,382 2.34
Exercised in year ............ (39,113) 3.00
Lapsed in year ............... (1,507,487) 3.22
------------
Balance at December 31, 1999 .... 4,566,956 $ 2.68
------------ ------------
Exercisable at December 31, 1999 947,899 $ 3.22
============ ============
</TABLE>
The following table summarizes information about the Company's share
options outstanding and exercisable at December 31, 1999 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 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
---------------- ----------------- ------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 3.00 71,100 38 months $3.00 71,100 $3.00
$ 3.00 - $3.75 448,499 58 months $3.08 339,374 $3.08
$ 2.88 - $5.25 1,148,975 70 months $3.36 510,425 $3.37
$ 2.25 - $ 3.63 2,898,382 85 months $2.34 27,000 $2.79
---------------- ----------------- ------------------- ------------------ ----------------- ------------------
$ 2.25 - $5.25 4,566,956 76 months $2.68 947,899 $3.22
================ ================= =================== ================== ================= ==================
</TABLE>
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 loss and net 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
- risk-free interest rate used for 1999 equals the 5 year market
T-bill rate at the date of the grant (1998: 5%, 1997: 5%)
- dividend yield rate used for the year ended 1999 is 0% (1998 :
0%, 1997: 0%),
- volatility factor of 1.026 has been used for 1999 (1998 : 1.0,
1997 : 0.3), and
- an expected life of the option of seven years for 1994 option
plan and five years for the 1996 option plan.
F-13
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The weighted average fair value of options, calculated using the
Black-Scholes option pricing model, granted during the year ended
December 31, 1999 at an exercise price equal to the stock price on the
date of issue was $1.79. The fair value of those options issued at an
exercise price greater than the stock price on the date of issue was
$1.63. The fair value during the year ended December 31, 1998 was $1.88
and during the year ended December 31, 1997 was $0.65. The pro forma
information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Pro forma net loss ..................................... $(10,370) $(16,401) $ (4,933)
=============== =============== ===============
Pro forma net loss per share - basic and diluted ....... $ (1.01) $ (1.65) $ (0.54)
=============== =============== ===============
</TABLE>
9. EMPLOYEE PENSION PLANS
The Company sponsors and contributes to a number of defined
contribution pension plans. The assets of these plans are held
separately from those of the Company in independently administered
funds. Contributions are 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 $358 for
the year ended December 31, 1999, $283 for the year ended December 31,
1998 and $275 for the year ended December 31, 1997.
10. INCOME TAXES
Loss before income taxes is analyzed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
------------------ ------------------- ------------------
<S> <C> <C> <C>
United Kingdom ............................. $ (5,863) $ (4,849) $ (2,349)
Overseas ................................... (3,995) (10,567) (2,881)
------------------ ------------------- ------------------
$ (9,858) $ (15,416) $ (5,230)
================== =================== ==================
</TABLE>
Significant components of the (credit) provision for income taxes are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- --------- -----------
<S> <C> <C> <C>
Current:
United Kingdom .................................. $ -- $ -- $ (715)
United States ................................... -- (154) (181)
Other ........................................... -- 81 --
------- --------- -----------
Total current ................................... $ -- $ (73) $ (896)
Deferred:
United Kingdom .................................. -- -- (4)
United States ................................... -- 494 (229)
Other ........................................... -- (236) (118)
------- --------- -----------
Total provision (credit) for income taxes ....... $ -- $ 185 $(1,247)
======= ========= ===========
</TABLE>
F-14
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The following table analyzes the difference between the U.K. tax rate and the
effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ------- ------
<S> <C> <C> <C>
U.K. Statutory rate .......................... 30.3% 31.0% 31.5%
Permanent disallowables for U.K. tax.......... (1.8) (3.9) 0.3
Utilization of net operating losses.......... -- -- 2.8
Deferred tax valuation adjustments ........... (26.5) (28.9) (14.4)
Other -- net ................................. (2.0) 0.6 3.6
------ ------- ------
Effective tax rate ........................... 0.0% (1.2)% 23.8%
====== ======= ======
</TABLE>
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- ---------
<S> <C> <C>
Liabilities:
Fixed asset temporary differences ......... $ 59 $ 49
Other ..................................... 145 145
-------- ---------
204 194
Assets:
Fixed asset temporary differences ......... -- 45
Net operating loss carry forwards ......... 6,582 4,328
Deferred revenue .......................... 293 293
Accrued expenses .......................... 37 37
Accounts receivable ....................... 1,041 1,041
-------- ---------
7,953 5,744
Less: valuation allowance .................... (7,749) (5,550)
-------- ---------
Deferred tax assets after valuation allowance 204 194
-------- ---------
Total net deferred tax asset ........... $ -- $ --
======== =========
</TABLE>
At December 31, 1999, the Company's estimated net operating loss carry
forwards in the United States were $7,475 (December 31, 1998 estimate: $5,637)
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 $14,464
(December 31, 1998: $8,324).
The company has taken a valuation allowance against the deferred tax asset as
it is considered more likely than not that this asset will not be realized in
the future.
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. COMMITMENTS
The Company leases its facilities under non-cancelable operating lease
agreements which expire at various dates through 2008. In addition, the
Company leases certain equipment under long-term lease agreements that
are classified as capital leases. These capital leases terminate at
various dates through 2003. Total property and equipment acquired under
these capitalized leases, which collateralize such borrowings, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Computer equipment .................................................... $ -- $ 272
Furniture, fixtures and office equipment .............................. -- 56
Motor vehicles ........................................................ 245 191
------- -------
245 519
Less: accumulated depreciation ....................................... (53) (374)
------- -------
$ 192 $ 145
======= =======
</TABLE>
Future minimum annual lease payments under all non-cancelable
operating and capital leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES CAPITAL LEASES
---------- --------------
<S> <C> <C>
2000 .................................................................. $ 977 $ 46
2001 .................................................................. 496 58
2002 .................................................................. 218 36
2003 .................................................................. 59 104
2004-2008 ............................................................. 301 --
--------- -------
Total minimum payments ................................................ $2,051 244
=========
Less: amounts representing interest ................................... 77
-------
Present value of capital lease obligation.............................. 167
Less: current portion ................................................. 46
------
Lease obligations, long term .......................................... $ 121
======
</TABLE>
Rental expenses under operating leases totaled $1,097 for the year
ended December 31, 1999, $1,473 for the year ended December 31, 1998
and $1,135 for the year ended December 31, 1997.
Not all the leases have specific renewal terms.
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. FINANCIAL INSTRUMENTS
(A) 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 and does
not limit exposure to any one institution.
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 the majority of its
business.
During the three years in the period ended December 31, 1999
no customer accounted for more than 10% of the Company's
sales.
(B) CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash
and cash equivalents approximates its fair value.
(C) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts reported in the balance sheet for
accounts receivable and accounts payable approximate their
fair value. Accounts receivable and payable are not subject
to interest rate risk as they are interest free.
(D) SHORT-TERM DEBT
The carrying amount of the Company's short-term debt reported
in the balance sheet approximates its fair value.
Financial instrument carrying values are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------ ----
<S> <C> <C>
Accounts receivable $7,757 $10,565
Accounts payable 2,784 2,203
Cash and cash equivalents 2,968 5,314
Short-term loans 4,442 -
</TABLE>
F-17
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
13. INDUSTRY AND GEOGRAPHIC SEGMENTAL INFORMATION
The Company and its subsidiaries have two operating segments, namely
Enterprise Performace Management (EPM) and Customer Relationship
Analytics (CRA). Both of the operating segments incorporate the
building, deployment and management of enterprise analytical
applications, while EPM focusses on monitoring and understanding the
business's performance, CRA focusses on understanding business's
customers and potential customers. One of the Company's subsidiaries,
K.wiz Solutions Ltd, formerly Compression Sciences Ltd which was
acquired during November 1998, forms the basis of the Company's CRA
division, and therefore there was only one operating segment in 1997.
EPM derives its revenue from the sale of Gentia, Balance Scorecard and
the related packages while CRA generates its revenue from the sale of
K.wiz and in the future from ThinkCRA. There is no intersegment revenue
between the EPM and CRA operations and expenses are split between the
two operating segments on an actual basis.
Information about the Company's operations by operating segment is as
follows:
<TABLE>
<CAPTION>
EPM CRA TOTAL
-------- -------- --------
<S> <C> <C> <C>
YEAR ENDED AND AT DECEMBER 31, 1999
Revenue from external customers ............... $ 23,496 $ 619 $ 24,115
Restructuring costs ........................... 1,890 (14) 1,876
Depreciation charge ........................... 842 40 882
Amortization of purchased goodwill and software 1,105 -- 1,105
Loss from operations .......................... (7,234) (2,663) (9,897)
Long Lived assets:
Property, plant and equipment .......... 1,144 9 1,153
Intangible assets ...................... 5,831 -- 5,831
Total Assets .................................. 23,493 (5,225) 18,268
======== ======== ========
YEAR ENDED AND AT DECEMBER 31, 1998
Revenue from external customers ............... $ 29,507 $ 25 $ 29,532
Depreciation charge ........................... 991 -- 991
Amortization of purchased goodwill and software 1,295 -- 1,295
Loss from operations .......................... (16,005) (92) (16,097)
Long Lived assets:
Property, plant and equipment : ........ 2,192 -- 2,192
Intangible assets ...................... 6,902 -- 6,902
Total Assets .................................. 26,542 6 26,548
======== ======== ========
</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)
The Company operates in numerous geographical segments determined
according to the country in which the office making the sale or
incurring the costs is situated. Information about the Company's
operations by geographic area is as follows:
<TABLE>
<CAPTION>
REST OF REST OF
UK EUROPE USA WORLD TOTAL
--------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenue from external customers $ 8,235 $ 8,866 $ 5,382 $ 1,632 $ 24,115
Export sales to:
Rest of Europe - - - - -
Rest of World 614 - - - 614
Inter segment revenue (i) 3,491 - - - 3,491
Restructure charges 1,966 (201) 32 79 1,876
Depreciation charge 669 80 97 36 882
Amortization of purchased goodwill and software 1,012 83 - 10 1,105
Loss from operations (6,325) (2,525) (1,024) (23) (9,897)
Long Lived assets:
Property, plant and equipment 832 112 209 - 1,153
Intangible assets 5,797 34 - - 5,831
Total Assets 27,803 (4,952) (4,700) 117 18,268
=============== =============== ============= ============= =============
YEAR ENDED DECEMBER 31, 1998
Revenue from external customers $ 8,088 $ 8,055 $ 10,337 $ 3,052 $ 29,532
Export sales to:
Rest of Europe - - - - -
Rest of World 525 - - - 525
Inter segment revenue (i) 3,345 - - - 3,345
Restructure charges 1,157 900 486 326 2,869
Purchased research and development 1,037 - - - 1,037
Depreciation charge 614 70 218 89 991
Amortization of purchased goodwill and software 1,199 130 - - 1,329
Loss from operations (10,440) (195) (4,328) (1,134) (16,097)
Long Lived assets:
Property, plant and equipment 1,412 151 427 202 2,192
Intangible assets 6,087 735 - 80 6,902
Total Assets 14,895 6,720 3,999 934 26,548
=============== =============== ============= ============= =============
YEAR ENDED DECEMBER 31, 1997
Revenue from external customers $ 8,313 $ 5,910 $ 9,833 $ 3,115 $ 27,171
Export sales to:
Rest of Europe 193 - - - 193
Rest of World 52 - - - 52
Inter segment revenue (i) 3,994 - - - 3,994
Restructure charges - - - - -
Depreciation charge 446 40 246 104 836
Amortization of purchased goodwill and software 148 223 - 1 372
Loss from operations (2,880) 491 (4,238) 162 (6,465)
Long Lived assets:
Property, plant and equipment 1,259 114 415 249 2,037
Intangible assets 2,659 764 - 179 3,602
Total Assets 9,463 3,386 5,386 18,159 36,394
=============== =============== ============= ============= =============
</TABLE>
F-19
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(i) Inter-segment 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 were based upon
25%-35% of the relevant customer sales for all reported
periods.
14. DISPOSAL OF SUBSIDIARIES
The South African subsidiary was disposed of on June 23, 1999 for two
thousand South African rand , being the equivalent of $0.32. A loss of
$2 was calculated as follows:
<TABLE>
<S> <C>
Investment in subsidiary $ (10)
Retained loss in subsidiary 902
Intercompany loans (821)
Cumulative translation adjustment (73)
------------------
(2)
Proceeds on disposal of subsidiary -
------------------
Loss on disposal of subsidiary $ (2)
==================
</TABLE>
The Australian subsidiary was disposed of on August 31, 1999 for the
net asset value of the company. The net asset value was calculated as
total assets less total liabilities excluding the intercompany loan
accounts and one half of the deferred revenue balance at August 31,
1999. The intercompany loans were forgiven and one half of the deferred
revenue was transferred to the purchaser for no charge. The profit on
disposal was calculated as follows:
<TABLE>
<S> <C>
Fixed assets $ 133
Current assets (345)
Current liabilites (including deferred revenue of US$288) (357)
Long term liabilities (29)
------------------
(598)
Add: Intercompany loans 656
Half of the deferred revenue 144
------------------
Net assets as defined 202
Proceeds on disposal of subsidiary 202
------------------
Profit on disposal of subsidiary $ -
==================
</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)
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
--------------- ------------------ ----------------
<S> <C> <C> <C>
Numerator:
Net loss............................ $ (9,858) $ (15,601) $ (3,983)
=============== ================== ================
Denominator:
Denominator for basic earnings per share -
Weighted average shares ............ 10,222,115 9,950,201 9,154,673
Effect of dilutive securities:
Share options....................... - - -
---------------- ----------------- ----------------
Denominator for diluted earnings per share -
Adjusted weighted average shares .... 10,222,115 9,950,201 9,154,673
================ ================== ================
Net loss per share - Basic and diluted $ (0.96) $ (1.57) $ (0.44)
---------------- ----------------- ----------------
</TABLE>
16. RECENT PRONOUNCEMENTS
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 is effective for
accounting periods beginning after June 15, 2000. The impact of SFAS
133 on the Group's financial position and results has not been fully
determined and is currently under review.
During December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation
and disclosure of revenue in the financial statements. Implementation
of guidance prescribed in the Bulletin and which all registrants are
expected to apply, will not result in a change in the Company's revenue
recognition policy.
17. RESTRUCTURING CHARGES AND OTHER COSTS
During 1999, the Company incurred costs of $1,876, $500 in the three
months ended March 31, 1999 and $1,376 in the three months ended June
30, 1999 in order to complete the restructure plan started in the last
quarter of 1998. The $1,876 consists of employee severance costs
amounting to $1,600 and facility closure costs of $276. During 1998,
the Company recorded 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.
In total, 71 employees were retrenched consisting of finance and
marketing staff at each offices except the UK where the accounting
function was to be operated from, a layer of senior management and the
balance being sales staff. The total amount expensed in the income
statement for employee severance amounted to $2,200. A provision of
$414 for outstanding severance costs remained at December 31, 1999.
F-21
<PAGE>
GENTIA SOFTWARE PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
18. RELATED PARTY TRANSACTIONS
During the year the Company paid $26 (1998 - $42) to businesses owned
or controlled by directors, for services rendered by these companies
and costs related thereto.
19. CONTINGENCIES
On January 26, 2000, the Company announced with Hyperion Solutions
Corporation that they had settled their patent lawsuit, which
originated in April 1996. As a result of the settlement, the Company
has agreed to remove from its software products the ability to select
the number of dense dimensions that can be employed in its databases,
and will instead provide a pre-set default value. The Company will
supply software to its customers that will bring existing
installed-base applications into compliance with the terms of this
settlement. Other terms of the agreement are confidential.
From the knowledge the Company has about how its current customer base
uses the Company's products and services, the Company has concluded
that the terms of the settlement should have little impact on
the Company's future profits. Customers using the Company's software
and services to implement business strategy, track operational
performance or build custom applications should not be compromised.
The settlement is not expected to affect the Company's financial
results for the most recent quarter or the fiscal year.
All legal costs associated with the litigation have been written off as
incurred.
20. SUBSEQUENT EVENTS
SHORT-TERM LOANS
On February 15, 2000 the short-term loan of $372, inclusive of interest
amounting to $7 was repaid.
CONVERSION OF LOANS TO EQUITY
On March 24, 2000 short-term loans amounting to $4,070 were converted
into shares. 1,321,320 shares with a par value of (pound)0.15 were
issued increasing share capital by $312 and paid in capital by $3,688.
1,327,329 warrants were issued in connection with the conversion of
loans to equity. Refer to note 7.
ACQUISITION OF EBI SOLUTIONS
On April 25, 2000 the Company purchased ebi Solutions entity for a
consideration of $1.9 million plus $50 expenses which was met by
issuing 400,000 shares in Gentia Software plc to the partners of the
limited liability company. ebi Solutions LLC was a privately held
provider of eBusiness applications and services. The integration of
Gentia's new product suite, thinkCRA and ebi's OASIS offers an
advanced solution set encompassing the ability to analyze both
online and offline commerce. The result is an intelligent and
predictive solution that optimizes the ability to understand,
respond to and manage customer relationships.
The acquisition of ebi Solutions was accounted for under the purchase
method and the assets and liabilities were recorded at their
provisional fair values on the date of acquisition. Results of
operations of the acquired business are included from the date of
acquisition. The intangible assets acquired in the transaction are
being amortized on a straight-line basis over their useful life of five
years.
F-22
<PAGE>
The purchase price allocation was as follows:
<TABLE>
<S> <C>
Fixed assets $ 197
Bank and cash 3
Trade receivables 78
Other current assets 54
Trade accounts payable (37)
Other current liabilities (131)
Goodwill 1,830
---------------
Total purchase price $ 1,994
===============
</TABLE>
ebi Solutions LLC's results of operations have been included in the
consolidated results of operations from the effective date of
acquisition.
F-23
<PAGE>
SCHEDULE II
GENTIA SOFTWARE PLC
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
------------- ------------------------------ ------------------------------
DESCRIPTION
<S> <C> <C> <C> <C> <C>
Allowance for doubtful debts
Year ended December 31, 1999: $ 3,801 $ 1,580 $ (153)(a) $ (1,771) $ 3,457
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
</TABLE>
a) Exchange adjustments
S-1