SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
[ ] 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 April 30, 2002.
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 0-21978
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FUTUREMEDIA PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
MEDIA HOUSE, ARUNDEL ROAD, WALBERTON, ARUNDEL, WEST SUSSEX BN18 0QP, ENGLAND
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares (each representing one Ordinary Share)
Ordinary Shares of 1 1/9 p each
Redeemable Warrants
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of period covered by the annual report:
29,648,374 Ordinary Shares of 1 1/9 p each.
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:
Yes X No
---- ----
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 Item 18 X
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TABLE OF CONTENTS
EXPLANATORY NOTE 2
WARNINGS REGARDING FORWARD LOOKING STATEMENTS 3
PART I 4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS 4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
ITEM 3. KEY INFORMATION 4
ITEM 4. INFORMATION ON THE COMPANY 14
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 21
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 31
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 38
ITEM 8. FINANCIAL INFORMATION 41
ITEM 9. THE OFFER AND LISTING 41
ITEM 10. ADDITIONAL INFORMATION 44
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 47
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 47
PART II 48
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 48
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS 48
ITEM 15. CONTROLS AND PROCEDURES 48
ITEM 16. [RESERVED] 48
PART III 49
ITEM 17. FINANCIAL STATEMENTS 49
ITEM 18. FINANCIAL STATEMENTS 49
ITEM 19. EXHIBITS 50
SIGNATURES AND CERTIFICATIONS 52
i
EXPLANATORY NOTE
As used herein, except as the context otherwise requires, the terms "Company"
and "Futuremedia PLC" refer to Futuremedia Public Limited Company and its
subsidiaries. The Company is organized under the laws of England and Wales. The
Company's offices are located at Media House, Arundel Road, Walberton, Arundel,
West Sussex BN18 0QP, England. The Company's telephone number is
011-44-1243-555000. The Company does not have offices in the United States.
Except as the context otherwise requires, "Ordinary Shares" or "Shares" refers
to the Ordinary Shares of 1 1/9 pence each of the Company.
The Company's American Depositary Shares ("ADSs") have traded since May 29,
1996, on the Nasdaq SmallCap Market under the symbol FMDAY. Each ADS represents
the right to receive one Ordinary Share of the Company. ADSs are evidenced by
American Depositary Receipts ("ADRs"). ADSs evidenced by ADRs are issued by the
Bank of New York as Depositary (the "Depositary") of the Company's ADR facility
in accordance with the terms of a deposit agreement between the Company and the
Depositary.
The Company publishes its Consolidated Financial Statements expressed in United
Kingdom ("UK") pounds sterling. Such financial statements are prepared in
conformity with United States generally accepted accounting principles ("US
GAAP"). In this document, references to "US dollars", "US$", "cents" or "$" are
to United States ("US") currency and references to "pounds sterling",
"sterling", "GBP", "pence" or "p" are to UK currency. Solely for convenience,
this Report contains translations of certain pound sterling amounts into US
dollars at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such US
dollar amounts or could have been or could be converted into US dollars at the
rates indicated or any other rates. Unless otherwise indicated, the translation
of pounds sterling into US dollars have been made at the rate of GBP1.00 =
$1.4631, the Noon Buying Rate in New York City for cable transfers in pounds
sterling as certified for customs purposes, by the Federal Reserve Bank of New
York (the "Noon Buying Rate") on April 30, 2002. On November 14, 2002 the Noon
Buying Rate was GBP 1=$1.5872. For information regarding rates of exchange
between pounds sterling and US dollars from fiscal 1997 to the present see "Item
3 Selected Financial Data - Exchange Rates."
The Company's Fiscal year ends on April 30 of each year. References in this
document to a particular year are to the fiscal year unless otherwise indicated.
References in this annual report to the "Companies Act" are to the Companies Act
1985, as amended, of Great Britain; references to the "EU" are to the European
Union.
The Company furnishes the Depositary with annual reports containing audited
consolidated financial statements and an opinion thereon by independent
auditors. The Company also furnishes to the Depositary all notices to
shareholders of the Company. The Depositary makes such notices, reports and
communications available for inspection by record holders of ADRs and, at the
Company's request and expense, the Depositary mails such notices and
communications to all record holders of ADRs. Only persons in whose names ADRs
are registered on the books of the Depositary will be treated by the Depositary
and the Company as holders of ADRs.
Information contained on any of the Company's Internet websites, or any other
websites referred to herein, does not constitute part of this report and is not
incorporated by reference herein
2
WARNINGS REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Report and in the documents
incorporated by reference are forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
In essence, forward-looking statements are predictions of future events.
Although the Company would not make forward-looking statements unless it
believed it had a reasonable basis for doing so, the Company cannot guarantee
the accuracy of such statements and actual results may differ materially from
those anticipated due to a number of uncertainties, many of which we are not
aware of.
The Company has no plans to update its forward-looking statements. The
Company's forward-looking statements are accurate only as of the date of this
Report, or in the case of forward-looking statements in documents incorporated
by reference, as of the date of those documents. The Company identifies
forward-looking statements with the words "plans," "expects," "anticipates,"
"estimates," "will," "should" and similar expressions. Examples of the
Company's forward-looking statements may include statements related to:
- - the Company's plans, objectives, expectations and intentions;
- - the timing, availability, cost of development and functionality of products
and solutions under development or recently introduced; and
- - the anticipated growth rate of the market for Internet-based learning
technologies and products in general and the Company's products and
solutions in particular.
Factors that could cause or contribute to differences in the Company's future
financial results include those discussed in the Risk Factors set forth in Item
3.D. below as well as those discussed elsewhere in this Report.
Based on its current operations and financial position, the Company anticipates
that it will need to seek additional financing by the end of the third fiscal
quarter of 2003. Management are considering a number of options which are
explained in further detail in other sections of this Report (see "Recent
Developments" in Item 4).
3
PART I
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
- ---------------------------------------------------------------
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.ITEM
- --------------------------------------------------
Not Applicable
ITEM 3. KEY INFORMATION
- --------------------------
A. SELECTED CONSOLIDATED FINANCIAL DATA.
- -------------------------------------------
The selected consolidated financial data as of April 30, 2001 and 2002 and for
the years ended April 30, 2000, 2001 and 2002 have been derived from the
audited consolidated financial statements of the Company included elsewhere in
this Report. The selected consolidated financial data as of April 30, 1998,
1999 and 2000, and for the years ended April 30, 1998 and 1999 have been derived
from the audited consolidated financial statements of the Company, which are not
included in this Report.
The information set forth below should be read in conjunction with, and is
qualified in its entirety by reference to, the Company's audited consolidated
financial statements and notes thereto and the discussion thereof included
herein.
Income Statement Data Years Ended April 30
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2002(1) 2002 2001 2000 1999 1998
------- ---- ---- ---- ---- ----
(in thousands, except per share data)
$ GBP GBP GBP GBP GBP
Net Sales 1,333 911 743 867 1,534 2,700
Operating loss . (2,967) (2,028) (3,812) (2,672) (1,060) (777)
Loss before
income taxes (2,944) (2,012) (3,697) (2,645) (1,122) (886)
Net loss (2,944) (2,012) (3,697) (2,645) (1,122) (886)
Net loss per share - basic and
diluted (9.65)c (6.60)p (12.71)p (11.17)p (5.77)p (5.58)p
- --------------------------------------------------------------------------------------
4
Balance Sheet Data At April 30,
-------------------------------------------------------------------
2002(1) 2002 2001 2000 1999 1998
-------- ---- ---- ---- ---- ----
(in thousands except number of shares)
$ GBP GBP GBP GBP GBP
Cash and cash equivalents 651 445 2,547 2,612 435 43
Total assets. 3,056 2,089 4,713 4,437 2,461 1,970
Total current liabilities 2,227 1,522 2,208 845 366 722
Long-term debt and capital lease obligations - - 442 384 850 818
Net Assets 829 567 2,063 3,208 1,245 430
Shareholders' equity 82998 567 2,063 3,208 1,245 430
Share Capital . 481 329 329 305 230 191
Number of Shares 29,648,374 29,648,374 29,648,374 27,416,152 20,684,522 17,229,976
Shares to be issued . 10,346,979 10,346,979 - -
(1) US dollar amounts have been translated solely for convenience at the Noon
Buying Rate on April 30, 2002 of GBP1.00 = $1.4631.
EXCHANGE RATES
The Company publishes its financial statements in Pounds Sterling. The majority
of the Company's revenues are denominated in Pounds Sterling and U.S. dollars
and the majority of the Company's expenses and debt are denominated in Pounds
Sterling.
The following sets forth the exchange rate between the Company's financial
reporting currency, the Pound Sterling, and the US dollar, using the Noon Buying
Rate. Such rates are not used by the Company in the preparation of its
Consolidated Financial Statements:
(a) The exchange rate as of July 31, 2002, the end of the Company's first
fiscal quarter, was GBP1=$1.5744, and at November 14, 2002 was
GBP1=$1.5872.
(b) The high and low exchange rates for each month during the previous six
months expressed in US dollars per pound sterling were as follows:
SEVEN MONTHS ENDED OCTOBER 31, 2002 HIGH LOW
----------------------------------- ----- -----
October, 2002 1.5801 1.5475
September, 2002 1.5614 1.5413
August, 2002 1.5704 1.5210
July, 2002 1.5866 1.5234
June, 2002 1.5320 1.4600
May, 2002 1.4700 1.4528
April, 2002 1.4631 1.4257
5
(c) For the five most recent fiscal years, the average rates for each
period, calculated by using the average of the exchange rates on the
last business day of each month during the period, were as follows:
Year Ended April 30 Average
1998 1.6457
1999 1.6210
2000 1.6113
2001 1.4676
2002 1.4339
B. CAPITALIZATION AND INDEBTEDNESS.
- -------------------------------------
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
- ----------------------------------------------------
Not Applicable
D. RISK FACTORS.
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This Report contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following Risk Factors and elsewhere in this
Report.
Financial Condition and Liquidity; Need for Additional Financing
As of July 31, 2002 the Company had working capital deficit of GBP379,000
($555,000). At November 14, 2002, the Company's cash resources and available
borrowings are insufficient to fund the current level of operations for the next
twelve months. As stated in the auditor's opinion to the financial statements,
these factors raise substantial doubt about the Company's ability to continue as
a going concern. Management believes that the steps taken to reduce its cost
base during the latter part of the fiscal year ended April 30, 2002, together
with the strong forward order book and active sales prospects it is pursuing,
supported by the recruitment of new sales staff in October and November 2002,
will enable the Company to return to eventual profitable trading, and therefore
has prepared these financial statements on a going concern basis. The
availability of bridging finance in anticipation of the sale of the Company's
premises at Arundel Road, Walberton, West Sussex will provide funds to discharge
the balance on the Loan Stock Agreement and further working capital. There is
significant reliance therefore on the generating of funds through profitable
trading. If the Company is unsuccessful in achieving its anticipated revenues in
its third fiscal quarter of the current year, management recognises that there
will be a need to secure additional funding through debt or equity capital
before the end of the fiscal year to April 30, 2003.
6
There can be no assurance that the Company will be successful in implementing
these plans. The Company's financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcaome of this uncertainty.
Listing Maintenance Criteria for Nasdaq System; Disclosure Relating to
Low-Priced Stocks
The Company's ADSs, as evidenced by ADRs, which in turn evidence the Company's
Ordinary Shares, are currently traded on the Nasdaq SmallCap Market. No
assurance can be given that an orderly trading market will be sustained in the
future. Moreover, the National Association of Securities Dealers, Inc., (the
"NASD") which administers Nasdaq, requires that, in order for a company's
securities to continue to be listed on the Nasdaq SmallCap Market, the company
must maintain either a minimum stockholder's equity $2,500,000, $35,000,000 in
market capitalization or net income of $500,000 in the most recently completed
fiscal year or in two of the last three most recently completed fiscal years.
The Company had stockholder's equity of $870,000 as of September 30, 2002, net
loss for the financial year ended April 30, 2002 of $2,944,000 and a market
capitalization of $3.8 million on September 30, 2002. In addition, continued
inclusion requires that the Company maintain two registered and active
market-makers. The failure to meet these listing maintenance criteria in the
future may result in the de-listing of the Company's ADSs from the Nasdaq
SmallCap Market. In such an event, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Company's Ordinary Shares.
In addition, in the event the Company's ADSs are delisted from the SmallCap
Market, the Company's ADSs and Ordinary Shares may become subject to the "penny
stock" rules of the United States Securities and Exchange Commission (the
"Commission"). A "penny stock" is generally an equity security with a market
price of less than $5 per share which is not quoted through the Nasdaq system or
a national securities exchange in the US. Due to the risks involved in an
investment in penny stocks, US securities laws and regulations impose certain
requirements and limitations on broker/dealers who recommend penny stocks to
persons other than their established customers and accredited investors,
including making a special written suitability determination for the purchaser,
providing purchasers with a disclosure schedule explaining the penny stock
market and its risks and obtaining the purchaser's written agreement to the
transaction prior to the sale. These requirements may limit the ability of
broker/dealers to sell penny stocks. Also, because of these requirements and
limitations, many broker/dealers may be unwilling to sell penny stocks at all.
In the event the Company's Ordinary Shares become subject to the Commission's
rules relating to penny stock, the trading market for the ADSs may be materially
adversely affected.
Dependence on Market for e-learning
Substantially all of the Company's revenues are directly or indirectly related
to expenditures of large corporate businesses on emerging net-based learning
technologies and associated services. These large businesses may be subject to
significant fluctuations as a consequence of general economic conditions,
industry patterns or other factors affecting such expenditures. Expenditures for
products and services such as the Company's are directly affected by these
fluctuations. The Company expects that its operations will continue to depend on
these expenditures. Fluctuations, downturns or slowdowns in these large
businesses could have a material adverse effect on the Company's business,
financial condition and results of operations.
7
New Products and Technological Change
The Company's business will be significantly impacted by technological changes
and innovations. The market for the Company's products is characterized by
rapidly changing technology, evolving industry standards and frequent
introductions of new products. The Company has historically derived a
significant portion of its revenues from the sale of new and enhanced products.
The Company's future success will depend upon its ability to enhance its
existing products and to develop and introduce, on a timely and cost-effective
basis, new competitive products with features that meet changing customer
requirements and address technological developments.
The Company's products could be rendered obsolete by new customer requirements
or the emergence of new technologies. The failure of the Company to develop,
manufacture and sell new products and product enhancements in quantities
sufficient to offset a decline in revenues from existing products or to manage
product and related inventory transitions successfully, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Because of the complexity of the Company's products, significant delays can
occur between a product's initial introduction to the market and wide market
acceptance. In addition, new products or enhancements may contain errors or
performance problems when first introduced, when new versions are released or
even after such products or enhancements have been used for a period of time.
Despite testing by the Company, such defects may be discovered only after a
product has been installed and used by customers. Such errors or performance
problems could avoid detection in future shipments of the Company's products and
result in expensive and time consuming design modifications, damaged customer
relationships and a loss of market share.
As new products are introduced, the Company must attempt to monitor closely the
range of its products to be replaced and to phase out their production and
distribution in a controlled manner. There can be no assurance, however, that
such product transitions will be executed without adversely affecting overall
product sales or that the Company will be successful in identifying, developing,
and marketing new products or enhancing its existing products.
The development of new products has required, and will continue to require, the
Company to expend significant financial and management resources. The Company's
business would be materially adversely affected if the Company were to incur
delays in developing new products or enhancements or if such products or
enhancements did not gain market acceptance. In addition, there can be no
assurance that products or technologies developed by one or more of the
Company's present or potential competitors could not render obsolete both
present and future products of the Company.
Limited Product Life
There is no assurance that the useful life of any product will be long enough to
enable the Company to recover its development costs. In addition, sales of
certain of the Company's products generally may tend to decline over time unless
the products are enhanced or repackaged.
Changing Customer Preferences
Customer preferences for instructional programs, entertainment and other
software products are continually changing. There can be no assurance that the
Company's products will receive and/or maintain substantial market acceptance.
Changes in customer preferences could adversely affect levels of market
acceptance of the Company's products and its operating results.
8
Competition
The net-based learning business is new and rapidly evolving with a growing
number of competitors and subject to rapid technological change. The Company
currently competes both with smaller UK based companies as well as larger
multinational firms in the development and implementation of net-based learning
products. Many of these competitors are more established, better capitalized and
have a larger market position than the Company.
In addition, these competitors may have the ability to respond more quickly to
new or emerging technologies, may adapt more quickly to changes in customer
requirements and may devote greater resources to the development, promotion and
sale of their products and services than the Company. The Company may also be
operating at a cost disadvantage compared to competitors who have greater direct
buying power from suppliers or who have lower cost structures.
Early Stage of Market Development
The markets for most of the Company's products are at a relatively early stage
of development and customer acceptance. Broader acceptance of the Company's
products will be dependent upon customer and end-user reaction to those products
and the price and performance of the Company's and its competitors' products.
The Company believes that the development of these markets will be, in part,
dependent on the success of the Company's efforts to inform and demonstrate to
its customers the perceived efficacy of the Company's products. These markets
may never develop further and the Company's products may not achieve broader
market acceptance.
Reliance on Corporate Customers; Lengthy Sales Cycle
A substantial portion of the Company's revenues is derived from sales of its
products and services to large corporate customers who use the Company's
products on their own network infrastructure. These customers demand highly
reliable products and often require up to several months to evaluate and test
the effectiveness of Company's products before deciding whether to committing to
purchase. Such evaluations are commonly based on the provision by the Company of
demonstration material based on existing solutions produced for other customers
and frequently require significant pre-sales activity.
If a corporate customer decides to purchase the Company's products, the sales
volume of these products will be significantly dependent upon the timing and
effectiveness of the efforts of that customer in incorporating the Company's
products into the customer's infrastructure. Some of the Company's customers may
also source third party e-learning content products that compete with the
Company's products. These customers could give higher priority to the use of
competing products. Some of the Company's customers do not have exclusive or
long-term purchase obligations with the Company. The failure of customers to
decide to purchase the Company's products after the Company expends significant
marketing resources and the possibility that customers may source third party
competing products could each have a material adverse impact on the Company's
business, financial condition and results of operations.
Reliance on Significant Customers
For the fiscal year ended April 30, 2002, the Company's two largest customers
together represented approximately 78% of gross sales of the Company. The loss
of either of these major customers could have a material adverse effect on the
Company's business.
Overseas Customers
9
Some of the Company's products are supplied to customers located outside the UK.
Action for the recovery of debts from these customers may prove more difficult
and more expensive, if it is possible at all, than from customers located within
the jurisdiction of English courts. In addition, claims against the Company may
be brought in overseas courts, and may prove more costly or difficult to defend
than claims brought in English courts.
Dependence on Limited Sources of Supply
The Company relies on one or only a limited number of suppliers for certain key
software components, hosting services and e-learning content. These suppliers
are located in various countries. As a result, the Company's relationships with
these suppliers are subject to political, legal, economic and other
uncertainties, in addition to general risks associated with reliance on limited
sources of supply. A change of control of a supplier could also adversely affect
the Company's ability to obtain supplies and provide continuity of service on
the same or other favorable terms, if at all. The Company does not have
long-term purchasing arrangements with all of its suppliers. Obtaining an
alternative source of supply of critical software components, hosting services
and e-learning content could involve significant delays and other costs, may not
be available to the Company on reasonable terms, if at all, and may have a
material adverse effect on the Company's business, financial condition and
results of operations. The failure of a software component supplier, service
provider or e-learning content provider to provide acceptable quality and timely
updates and/or support at an acceptable price, or an interruption of supplies,
hosting services or support from such a supplier or provider as a result of a
fire, natural calamity, strike or other significant event could materially and
adversely affect the Company's business, financial condition and results of
operations.
Dependence on Outside Contractors
The Company has limited in-house content production capabilities and relies on
subcontractors for the majority of its bespoke content production. Reliance on
outside contractors reduces the Company's control over quality and delivery
schedules. The ability of the Company to provide its customers with products on
a timely basis depends, in part, on the ability of the contractors to deliver
such products to the Company on a timely basis. Any interruption in or
termination of these supplies, a material change in the purchase terms,
including pricing or a reduction in their quality or reliability, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Partnerships
Some of the Company's products are built on a model that seeks to bring together
the best available content, technology and services from the best in class
vendors. A significant proportion of the Company's proposition is therefore
based on the strength of its partnership relations and the Company cannot
guarantee that it will be able to maintain the required ongoing relationships
with its partners.
Absence of Patent Protection
The Company's ability to compete successfully will depend on (i) its ability to
protect its proprietary technology, and (ii) the ability of the Company's
suppliers to protect the technology of the products distributed by the Company
on their behalf. The Company has no patents with respect to its product design
or production processes.
10
In choosing not to seek patent protection, the Company instead has relied on the
complexity of its technology, its trade secret protection policies, common law
trade secret laws, copyrights, and confidentiality and/or license agreements
entered into with its employees, suppliers, sales agents, customers and
potential customers.
As a part of its trade secret protection policies, the Company tries to limit
access to, and distribution of, its software, related documentation and other
proprietary information. There can be no assurance that such strategy will
prevent or deter others from using the Company's products to develop equivalent
or superior products or technology, or from doing so independently.
Further, there can be no assurance that the Company will seek or obtain patent
protection for future technological developments or that any patents that may be
granted in the future would be enforceable or would provide the Company with
meaningful protection from competitors.
Moreover, litigation by the Company to enforce or defend its proprietary rights
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not such litigation
results in a favorable outcome for the Company. In order to avoid such expense
or diversion of resources, the Company could agree to enter into a license
agreement or other settlement arrangement, notwithstanding the Company's
continuing belief in its position.
In addition, there can be no assurance that the Company's products do not, and
that its proposed products will not, infringe any patents or rights of others.
If a patent infringement claim is asserted against the Company, whether or not
the Company is successful in defending such claim, the defense of such claim may
be very costly.
While the Company is unable to predict what costs, if any, would be incurred if
the Company were obliged to devote substantial financial or management resources
to patent litigation, its ability to fund its operations and to pursue its
business goals may be substantially impaired.
Dependence on Licensing Arrangements
In addition to its internally generated products, the Company markets, as a
distributor, a number of products under license from several suppliers and under
varying terms of exclusivity and tenure. While management is confident that
such licensing arrangements will continue and, if considered in the Company's
best interest, will be renewed, there can be no assurance that licenses will be
extended on terms satisfactory to the Company, if at all. While the Company
believes that the failure to extend licensing arrangements with respect to one
or a small number of products would not substantially affect the Company, the
failure to renew a significant number of the present licenses could have an
adverse effect on the future profitability of the Company.
Seasonality and Product Shortages
The demand for the Company's products is generally expected to be stronger in
the second half of the fiscal year (which ends on April 30) and weaker in the
first half due to seasonal buying patterns in the UK and the rest of Europe.
Foreign Trade Regulations
While the Company sells non-UK-produced products, it generally purchases them
from EU subsidiaries of foreign suppliers. The Company's ability to remain
competitive with respect to the pricing of the imported components could be
adversely affected by increases in tariffs or duties, currency fluctuations,
11
changes in trade treaties, strikes in air or sea transportation, and possible
future European legislation with respect to pricing and import quotas on
products from non-EU countries. The Company's ability to be competitive in or
with the sales of imported components also could be affected by other
governmental actions related to, among other things, anti-dumping legislation
and international currency fluctuations.
Absence of Dividends
The Company has not paid cash dividends during its history with the exception of
a dividend paid in 1990. It is unlikely that the Company will declare or pay
cash dividends in the foreseeable future. The Company intends to retain
earnings, if any, to expand its business operations.
Continued Control By Existing Shareholders
The present directors of the Company and their affiliates beneficially own
approximately 33% of the Company's outstanding capital shares (excluding
outstanding warrants and options) and, accordingly, they will be in a position
to influence the election of the Company's directors and direct its affairs.
Changes in Exchange Rates
A majority of the Company's revenues to date have been received in pounds
sterling and the Company maintains its financial statements in pounds sterling.
However, revenues and proceeds of funding activities are sometimes received in
US dollars, Euro and other European currencies, which are translated into pounds
sterling as the Company's functional currency. Fluctuations in the value of the
pound sterling against the euro and other European currencies have caused, and
are likely to cause, amounts translated into pounds sterling to fluctuate in
comparison with previous periods. The Company currently does not engage in any
hedging transactions that might have the effect of minimizing the consequences
of currency exchange fluctuations. Such fluctuations may adversely affect the
Company's results of operations.
Risks of Possible Future Acquisitions
The Company may pursue potential acquisitions of businesses, products or
technologies that could complement or expand the Company's business. If the
Company identifies an acquisition candidate, the Company cannot assure that the
Company would be able to integrate such acquired businesses, products or
technologies into the Company's existing business and products. The negotiation
of potential acquisitions as well as the integration of an acquired business
could cause diversion of management's time and resources. Any potential
acquisition, whether or not consummated, could have a material adverse effect on
the Company's business, financial condition and results of operations. If the
Company consummates one or more significant acquisitions in which consideration
consists of Ordinary Shares, stockholders of the Company could suffer
significant dilution of their interests in the Company. In addition, the Company
could incur or assume substantial debt in connection with an acquisition. Such
debt could adversely affect the Company's ability to obtain financing for
working capital or other purposes, make the Company more vulnerable to economic
downturns and competitive pressures and have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Issuance of Additional Shares
The Company presently has outstanding options and warrants, pursuant to which an
aggregate of 7,486,846 Ordinary Shares may be issued upon exercise thereof.
The issuance of any additional Ordinary Shares, whether upon the exercise of
derivative securities, including options and/or warrants, in connection with a
12
financing or otherwise, including additional Ordinary Shares issuable as a
consequence of any anti-dilution provisions set forth in the instruments
evidencing such derivative securities, would reduce the proportionate ownership
and voting power of then-existing Shareholders.
Risks Associated with Incorporation in England and Wales
The Company is incorporated under English law. The rights of holders of the
Shares are largely governed by English law, including the Companies Act 1985,
and by the Company's Memorandum and Articles of Association. These rights differ
in certain respects from the rights of shareholders in typical US corporations.
Although certain provisions of English law resemble various provisions of the
corporation laws of the United States and other European countries, principles
of law relating to such matters as the fiduciary duties of management and the
rights of the Company's stockholders may differ from those that would apply if
the Company were incorporated in another country. In addition, English
employment law imposes substantial severance obligations on companies.
Service and Enforcement of Legal Process
All of the Company's assets are located in the United Kingdom. Most of the
Company's executive officers and directors, and certain of the experts named
herein are not residents of the United States, and all or substantial portions
of the assets of such persons are located outside the United States. As a
result, it may not be possible to effect service of process within the United
States upon such persons or to enforce against such persons or the Company any
judgments of United States courts predicated upon the civil liability provisions
of the securities or other laws of the United States.
Volatility of Stock Price
The market price for the Ordinary Shares has been and may continue to be highly
volatile. Factors such as the announcement of technological innovations or new
products by the Company or its competitors, variations in anticipated or actual
operating results, market conditions and general economic conditions may have a
significant impact on the market price of the Ordinary Shares.
13
ITEM 4. INFORMATION ON THE COMPANY
- ---------------------------------------
A. HISTORY AND DEVELOPMENT OF THE COMPANY.
- -----------------------------------------------
The legal and commercial name of the Company is "Futuremedia Public Limited
Company" or "Futuremedia PLC".
The Company was incorporated in England and Wales as a private limited company
in 1982.
The Company is domiciled in England and Wales. It is incorporated in and under
the legislation of England and Wales. The address of the Company's registered
office is Media House, Arundel Road, Walberton, Arundel, West Sussex, BN18 0QP,
England and the telephone number of the Company's registered office is
00-44-1243-555000.
The Company provides e-learning solutions to the corporate market. The main
elements of the services provided by the company are; (i) the development and
distribution of its web-based Learning Management System, "Solstra "; (ii) the
development and distribution of its complete e-learning solution, "easycando ";
(iii) project management and instructional design of e-learning content; (iv)
aggregation, brokerage and distribution of leading e-learning content and
applications technologies from leading third party vendors; and (v) consulting
and other professional services to support the development and the successful
implementation of e-learning solutions.
Following its pioneering of interactive laserdisc technology, the Company
re-registered as an English public limited company and completed its initial
public offering on Nasdaq in 1993. During the period 1993 to 1996, the Company
expanded into Germany, the Netherlands and the US, but withdrew from these
markets in 1997 and 1998, choosing to concentrate its management focus on the UK
home market and the development of new Internet-enabled solutions.
Recognizing the potential impact on the learning market of the developments
being made in Intranet and Internet environments, the Company commenced the
development of Solstra in 1997 with BT Group PLC ("BT"), launching the first
version of the product in February 1998. In March 2000, the Company launched
easycando, its Internet learning portal.
Since April 30, 1999, the Company has invested in capital expenditure totaling
GBP338,000 ($495,000) for edit suite equipment (since disposed), upgrades to its
accounting system, network servers, backup system, power supplies, internal
telephone system and fire alarm systems together with the routine upgrading and
provision of desktop and laptop computers and accessories as required. During
the year ended April 30, 2002, investments in capital expenditure used
GBP137,000 ($200,000) of cash. The Company continues to outsource a portion of
its production activity and consequently the equipment now used comprises
network hardware, fiber optic cabling, desktop personal computers, laptops and
servers required to support the ongoing business. Where appropriate, the
Company owns its capital equipment, and it endeavors to maintain a program of
upgrading to ensure the cost-effective provision of desktop and laptop tools to
its employees. All equipment acquired for this purpose is industry-standard.
For servers to support its Internet portal business, the Company constantly
reviews the buy/lease options available and has in the past considered leasing
the most cost-effective option and has therefore contracted with third parties
to provide these items, though it does not rule out the possibility of
purchasing such items outright in the future. This equipment is typically
located in secure co-location sites. During fiscal 2000, the Company invested
GBP71,000 in capital expenditure, in fiscal 2001 it invested a further
GBP130,000 and in the fiscal year ended April 30, 2002, it invested a further
GBP137,000 ($200,000).
14
The Company intends to continue to invest in computer and other equipment to
support its business, but as of November 14, 2002, does not have any principle
capital expenditures in progress. The Company's premises at Arundel Road, West
Sussex, are currently being offered for sale in order that the proceeds of sale
may be used to enable the repayment of the Loan Stock Agreement and will also
provide additional working capital. The sale will also facilitate the
relocation of the business to an area where there is better access to local
transport links and to skilled resource pools. This relocation will result in
the incurrence of rental expense for the leasing of approximately 4,000 square
feet of suitable accommodation at commercial rates.
RECENT DEVELOPMENTS
In March 2002, the Company acquired the assets of Palm Teach Limited, a small
learning content production company, in a stock transaction at a net value of
GBP53,000 ($78,000). The three staff formerly employed were transferred to the
Company, securing their skills in the analysis of learning requirement, course
design and project management of bespoke software development activities.
Subsequent to the year end, in May 2002, the Company completed the acquisition
of C2W limited, a small UK based consultancy company specializing in resource
management, in a stock transaction at a net value of GBP29,000 ($45,000), though
the three personnel associated with that company had been employed by the
Company since the beginning of April 2002. It is anticipated that the
acquisition will greatly assist the growth of the Company's knowledge management
capabilities, leveraging the contacts C2W has in the resource, environmental and
property sectors.
In April 2002, the Company had contracted with another private UK investor for
the issue of a total of 7,646,154 Ordinary shares at a price of $0.065 per
Ordinary share for a total purchase price of GBP350,000 ($497,000), payable by
installments by the end of September 2002. In September 2002, it became apparent
that the GBP350,000 would not be fully paid, but that only some GBP90,000 would
be provided by the original source. Alternative investors were sought and found
for the remaining GBP260,000 ($380,000) during October 2002. As at November 14,
2002, GBP224,000 of the GBP260,000 had been received, with the balance due
before the end of November 2002.
In October 2002, the Company completed a new investment round from existing
investors, raising a further GBP150,000 ($230,000), represented by the issuance
of a further 2.7 million (approximately) shares at a price of $0.085 per share,
at market rate.
Also in October 2002, the Company sought and was offered in principle a bridging
loan facility in order that it could repay the balance under the Loan Stock
Agreement 2002, which fell due for repayment on the 28th July 2002. The loan
was not repaid on the due date due to a lack of available funds, but the loan
stockholder agreed to defer repayment until the Company had either sold its
premises, or secured additional financing to enable it to do so. Under the
contractual terms of the Loan Stock Agreement, 2002, interest is payable at 20%
per annum beyond the contractual settlement date. It is anticipated that the
necessary paperwork associated with the new bridging loan facility will be
completed by mid November 2002, at which time the current loan will be repaid.
The basic interest rate of the new facility under consideration will be 16.5%
per annum. The bridging loan will be secured by way of a charge on the
premises, and is due for repayment after twelve months.
The Company's premises at Arundel Road, West Sussex, are currently being offered
for sale in order that the proceeds of sale may be used to enable the repayment
of the Loan Stock Agreement and also provide additional working capital. The
sale will also facilitate the relocation of the business to an area where there
is better access to local transport links and to skilled resource pools.
15
B. BUSINESS OVERVIEW.
- ----------------------
THE INTERACTIVE LEARNING AND COMMUNICATIONS INDUSTRY
e-Learning is the emerging industry term for Internet-enabled and technology
distributed education and training. The key components of e-Learning are
content, technology and services.
e-Learning content ranges from basic Hyper Text Markup Language ("HTML") pages
and documents to fully interactive events and simulations. It includes bespoke
content development and off the shelf courseware. There is currently a major
drive to web-enable existing content from various formats such as Instructor led
classes, paper based materials, CD ROM's, and existing intellectual assets.
e-Learning technologies have emerged to enable the creation, distribution,
tracking and administration of training and learning content. e-Learning
technologies also encompass compelling collaborative tools. The core piece of
e-Learning infrastructure is known as the learning management system ("LMS").
The LMS supports and delivers the e-Learning content and can incorporate
assessment and competency frameworks. The LMS provides the ability to track,
manage and report on learning activity and it can integrate with other
enterprise systems such as Enterprise Resource Planning ("ERP") and Human
Resources applications.
The Internet allows many exciting forms of communication and e-Learning
facilitates multiple forms of collaboration between peers, instructors, mentors
and experts. Collaboration can be self-paced using threaded discussion
capabilities and email, or they can be real-time using the live web-based
delivery of events and collaborative learning provided by leading suppliers of
such technology.
e-Learning services are available to support and improve the effectiveness of
e-Learning. Consulting services serve to understand learning requirements, to
prepare e-Learning strategies and to ensure successful implementation. Content
development services are available to convert legacy content for optimal
delivery over the Internet. Hosting services are available to reduce the
technological hurdles to e-Learning. Service providers can host technology and
content on an ASP model, removing any hardware or software requirements for the
organization.
THE COMPANY'S PRODUCTS
The Business Setting
The e-Learning market has established itself as a major segment of the overall
learning and training market.
According to the International Data Corporation, as stated in their "European
Corporate e-Learning Market Forecast and Analysis 2001-2002" published in 2002,
the total spend by West European Corporations on e-Learning is expected to grow
from $409 million in 2001 to $3,246 million in 2006. The majority - 52% - of
this spend will be on e-Learning content, while 32% will be on related services
and the remaining 16% on e-Learning infrastructure.
The e-Learning Setting
The Company has continued to expand its products and service range and is now
marketing and selling a complete e-learning solution including consulting,
16
e-learning content production, content brokerage of published e-learning
content, software integration services, hosting and management of e-learning
systems.
The main objective underpinning the increased product and service range is to
allow the Company to provide customers with a complete solution to selected
business issues, and to increase the total amount of revenue and profit derived
from the customer.
Following the acquisitions in March and May 2002, in order to recognize and
manage the increased range of products and services the Company has re-organized
itself with effect from May 1, 2002 into three business activities:
1. Futuremedia Professional Services (FMPS) provides consulting services for
clients to develop e-learning strategies and solutions, conduct learning needs
analysis and migration plans from existing learning delivery method to
e-learning. FMPS was established around the acquisition of C2W Limited in May
2002.
2. Futuremedia Content Studio (FMCS) designs and builds customized
e-learning content to address client business needs such as knowledge transfer
to support the launch of a new product, deliver and track training to comply
with regulatory requirements. FMCS was established around the asset purchase of
PalmTeach Limited in March 2002.
3. To provide the total resource and support to those clients to whom the
Company is providing a complete e-learning solution based upon its Learning
Management System, a combination of Futuremedia Content Brokerage (FMCB), which
operates as a reseller for our library of over 4,000 titles of generic
e-learning content from companies such as SkillSoft, SmartForce, NETg, and
Intellexis International; Futuremedia Software Services (FMSS) which develops
and supports our learning management system (Solstra) and provides software
integration services to customers andFuturemedia Service Delivery (FMSD), which
provides project management, hosting and support services to our customers for
all e-learning solutions hosted and managed by the Company.
The Company is promoting and selling the increased product and service range
both as a complete solution as well as independent modules.
NEW PRODUCTS AND TECHNOLOGICAL CHANGES
The markets for the Company's products and services are highly competitive and
subject to rapid change. The Company's success will depend upon its ability to
enhance its existing products and services and to introduce new competitive
products with features that continue to meet customer requirements and
differentiate it from its competitors. The challenges of a competitive market
will be addressed to a significant extent by the partnership approach adopted by
the Company.
A significant portion of the Company's business is built on an aggregation model
that continually attempts to bring to the solution the best available content,
technology and services from the best in class vendors. There is associated risk
in this strategy, as a significant proportion of the Company's proposition is
based on the strength of its partnership structure, and the Company cannot
guarantee that it will be able to maintain the required ongoing relationship
with its partners.
As new products are introduced, the Company must attempt to monitor closely the
range of its products to be replaced and to phase out their production and
distribution in a controlled manner. There can be no assurance, however, that
there will be sufficient financial resources available for this purpose or that
17
such product transitions will be executed without adversely affecting overall
product sales or that the Company will be successful in identifying, developing,
and marketing new products or in enhancing its existing products.
The Company continues to invest in the production of the Company's own products,
predominantly for business-to-business markets.
The Company will continue to address key business to business markets including
corporates and government. The corporate market has been segmented vertically
based on a number of market filters. Target vertical markets include
pharmaceutical, manufacturing and financial services.
In terms of geographic market scope, the direct sales effort of the Company
focuses on the UK and Europe. The Company is attempting to recruit re-sellers to
support greater business development across Europe, the US and the rest of the
world. The Company is also committed to broader global penetration through
existing customers and positioning in specific niche markets.
The Company will seek to leverage partnership agreements into co-marketing
opportunities wherever possible. This will be particularly appropriate where the
Company provides a re-seller function for its network of content and
applications providers under the easycando solution.
As of November 14, 2002, the Company employed three sales and marketing people
out of a total of 20 employees.
LICENSE AGREEMENTS
In addition to its internally generated products, the Company markets, as a
distributor, a number of products under license from several suppliers and under
varying terms of exclusivity and tenure. While management is confident that
such licensing arrangements will continue and, if considered in the Company's
best interest, will be renewed, there can be no assurance that licenses will be
extended on terms satisfactory to the Company, if at all. While the Company
believes that the failure to extend licensing arrangements with respect to one
or a small number of products would not substantially affect the Company, the
failure to renew a significant number of the present licenses could have an
adverse effect on the future profitability of the Company.
REVENUE STREAMS
During fiscal 2002, the Company derived approximately 5% of its gross revenues
from its interactive production capability and approximately 95% of its gross
revenues from product and services sales in the UK, the rest of Europe and the
US.
The Company's revenues from its operations analyzed by geographic region were as
follows:
Year Ended April 30,
------------------------------------------
2002 2001 2000
------------------- --------- ------------
(GBP (GBP (GBP
($000) 000) % 000) % 000) %
United Kingdom 1,242 849 93.2 491 66.1 592 68.3
Rest of Europe 5 3 0.3 149 20.0 57 6.6
Rest of the World 86 59 6.5 103 13.9 218 25.1
----- ----- ----- ----- ----- ----- -----
TOTALS 1,333 911 100.0 743 100.0 867 100.0
----- ----- ----- ----- ----- ----- -----
18
The Rest of the World consists predominantly of sales to the US. Certain orders
placed by UK companies have been for products that will be used globally.
SEASONALITY
The demand for the Company's products is generally expected to be stronger in
the second half of the fiscal year (which ends on April 30) and weaker in the
first half due to seasonal buying patterns in the UK and the rest of Europe.
CUSTOMERS AND SUPPLIERS
The Company markets its products primarily to commercial end users in a diverse
and growing range of industries, including financial institutions, fast-moving
consumer goods manufacturers, automobile companies and manufacturing, commercial
and service organizations, mainly through its direct sales force. The Company
provides technical assistance and support to purchasers of its products. The
technical assistance involves providing answers to questions ranging from
specifications and installation to availability of supporting software. In
fiscal 2002, the Company's two largest customers accounted for 69% and 9% of
the Company's revenues, respectively, representing an aggregate of 78% of
revenues (compared to 20% and 20% for an aggregate of 40% in fiscal 2001 and 30%
and 21% for an aggregate of 51% in 2000).
The sales process for the Company's products usually involves a team drawn from
sales, marketing, engineering and senior management to provide planning and
product customization and to assure open communications and support throughout
the selling process and after a sale is made. The Company's marketing activities
include participation in trade shows, publication of articles in trade journals,
participation in industry forums and distribution of sales literature.
The Company provides support for its products through its own support staff
operating out of the Company's office in the UK.
The Company has entered into contracts in the normal course of its business with
certain of its customers and suppliers, on some of which its financial results
are materially dependent. The Company believes that it has complied and
continues to comply in all material respects with the terms, and that it has
performed and continued to perform its obligations in respect, of all such
contracts.
COMPETITION
e-learning is a nascent market that has exhibited a huge growth in market
entrants as a result of low perceived barriers to entry. Although the
competitive landscape remains fragmented there are clear signs of consolidation.
Market leadership is still not clearly defined, but significant merger and
acquisition activity is occurring and several vendors are beginning to build
prominent brands and market share.
Developments in the market since April 30, 2000 have clearly demonstrated the
limited viability of the business to consumer e-learning opportunity at this
time. The Company remains wholly focused on the business to business opportunity
and therefore competition specific to this sphere is a critical concern.
Leading e-Learning companies include SmartForce, Skillsoft, NETg, Docent and
Saba Software. Major consulting companies such as PricewaterhouseCoopers,
19
Accenture and KPMG are developing and integrating major e-learning solutions and
some are creating separate branded initiatives, e.g. Ernst & Young (Intellinex).
Global technology companies such as IBM and Hewlett-Packard are moving into
e-learning from a major customer base in classroom based training. ERP vendors
are adding learning management system modules to their overall solutions.
Content companies such as major publishers are developing e-learning strategies,
and will bring significant resources to this arena. These companies tend to be
more established, better capitalized and have a larger market position than the
Company. Because such companies have greater financial and marketing resources
than the Company, as well as substantially larger research and development
facilities, they represent significant competition to the Company. Many of these
companies at present focus mainly on the US marketplace, but some are beginning
to build a European and global presence, with varying degrees of success.
The Company plans to differentiate itself by building on its existing presence
and proven record in specific vertical markets, and by developing a detailed
understanding of the business conditions and technology environment in those
industries. The Company also plans to broaden its product and service range to
address specific markets, for example industry specific content aggregation and
technology integration to meet industry compliance requirements. The Company
expects that its emphasis on a complete solution, incorporating technology,
content and services will mitigate the risk associated with focus solely on one
segment of the e-learning market, such as technology.
In addition, the Company sells foreign-produced products, which are generally
purchased from EU subsidiaries of foreign suppliers. The ability to remain
competitive with respect to the pricing of the imported components could be
adversely affected by increases in tariffs or duties, changes in trade treaties,
strikes in air or sea transportation, and possible future European legislation
with respect to pricing and import quotas on products from non-EU countries.
The Company's ability to be competitive in, or with, the sales of imported
components could also be adversely affected by other government actions related
to, among other things, anti-dumping legislation and international currency
fluctuations. While the Company does not believe that such factors adversely
impact its business at present, there can be no assurance that such factors will
not materially adversely affect the Company in the future.
INTELLECTUAL PROPERTY
The Company's ability to compete successfully will depend on its ability to
protect its proprietary technology, and on the ability of the Company's
suppliers to protect the technology of the products distributed by the Company
on their behalf. Although the Company believes that its technology is
proprietary, the Company has no patents with respect to its product design or
production processes.
In choosing not to seek patent protection, the Company instead has relied on the
complexity of its technology, its trade secret protection policies, common law
trade secret laws, copyrights, and confidentiality and/or license agreements
entered into with its employees, suppliers, sales agents, customers and
potential customers. As part of its trade secret protection policies, the
Company limits access to, and distribution of, its software, related
documentation and other proprietary information. There can be no assurance,
however, that such a strategy will prevent or deter others from using the
Company's products to develop equivalent or superior products or technology, or
from doing so independently. Further, there can be no assurance that the
Company will seek or obtain patent protection for future technological
developments, nor that any patents that may be granted in the future would be
enforceable or would provide the Company with meaningful protection from
competitors.
The "Solstra" trade name is a registered trademark owned by BT and licensed to
the Company. The Company and BT have jointly registered the solstra.com domain
20
name on the World Wide Web. The Company has registered the futuremedia.co.uk
and easycando.com domain names on the World Wide Web.
The Company has licenses to certain software on a normal commercial basis. It
uses this software variously for its normal business purposes and for product
development. Certain elements of the Company's products are dependant on such
licenses. The Company believes that it has complied and continues to comply in
all material respects with the terms of all such licenses.
C. ORGANIZATIONAL STRUCTURE.
- -----------------------------
The Company is the principal operating business of the group. It also has the
following wholly-owned subsidiaries:
NAME COUNTRY OF INCORPORATION
---- --------------------------
Lasermedia UK Ltd England
Lasermedia International Ltd. England
Futuremedia Interactive Ltd. England
Futuremedia America Inc. United States
Easycando.com Ltd. England
Futuremedia (BVI) Ltd British Virgin Islands
D. PROPERTY, PLANT AND EQUIPMENT.
- ------------------------------------
The Company's main office is located in Arundel, West Sussex, England, and
consists of approximately 7,000 square feet of office space located on
approximately six acres of land. The Company owns the freehold of the property,
which is subject to a charge associated with the Loan Stock Agreement which
matured in July, 2002. The property is currently being offered for sale and
carries, for commercial and/or residential use, approval from the appropriate
planning authorities for an extension of the offices of approximately 5,800
square feet, which is valid for construction to begin at any time through
September 2003, and the conversion of the main premises into four separate
residential properties, valid until December 2006.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
- ---------------------------------------------------------
The following Operating and Financial Review and Prospects contains
forward-looking statements, which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under ''Risk Factors'' in Item 3.D. and elsewhere in this Report.
A. OPERATING RESULTS.
- ----------------------
OVERVIEW
For the fiscal years ended April 30, 2000, 2001 and 2002, the Company reported
net losses of GBP2,645,000, GBP3,697,000 and GBP2,012,000 ($2,944,000),
respectively, on revenues of GBP867,000, GBP743,000 and GBP911,000 ($1,333,000),
21
respectively. As a consequence of the Company's operating results, the Company
has encountered significant cash constraints on its operations for most of
fiscal years 2000, 2001 and 2002. Since April 30, 2002, the Company has
continued to sustain trading losses, with a consequent impact on its cash
position.
2002 COMPARED WITH 2001
Revenues
The Company achieved sales of GBP911,000 ($1,333,000) in the year ended April
30, 2002 an increase of 22% when compared to GBP743,000 in the previous year.
The improvement in revenues has resulted from the successful transition away
from CD-Rom based product sales following implementation of the Company's
strategy to focus on the provision of internet-based solutions. The success of
this strategy is demonstrated by the fact that in 2002 95% of the total revenues
came from the provision of e-learning products and services compared with 59% in
2001. At April 30, 2002, the Company had a backlog of customer orders of
approximately GBP1,122,000 ($1,642,000), compared with GBP1,429,000 at April 30,
2001, the 2001 number being higher as a result of the inclusion of the major
Consignia order covering a period of two years, which is therefore not renewable
until March 2003.
Cost of Sales
The Company's cost of sales as a percentage of revenues decreased to 169% in
2002 from 241% in 2001. The decrease in percentage for the current year
reflects not only the increase in revenues but also the reduction in actual
costs year on year of 14% resulting from management's implementation of an
aggressive cost reduction policy in the latter half of fiscal year 2002.
Gross Loss
Gross loss as a percentage of revenues improved from (141)% in 2001 to (69)% in
2002. Cost of sales includes a significant element of cost which may be
regarded as fixed by nature, since it represents the cost of permanent staff
whose function is to provide the resources necessary to ensure the availability
and effectiveness of the services offered by the Company to its customers. The
reduction to a degree of these fixed costs as a result of the Company's cost
reduction plans, together with increased revenues, has resulted in the reduced
Gross Margin percentage loss.
Operating Expenses
Operating expenses reduced by 49% to approximately GBP1.4 million ($2.1
million), or 154% of total revenues in 2002 from approximately GBP2.8 million or
372% of total revenues in 2001. The decrease in actual expenditure in 2002
results from management's cost reduction policies implemented during the year,
mainly as a result of reductions in staff made in April/May 2001 and again in
November 2001, and the closure of the office in London resulting in a
substantial reduction in facilities expense.
Interest Income and Expense
Net interest income for 2002 was GBP3,000 ($5,000) compared to GBP84,000 in
2001, as a result of the reduction of the amount of cash available for
investment.
Foreign Currency Gains/Losses
22
Financial gains from exchange rate movements amounted to GBP13,000 ($19,000) in
2002 compared with a gain of GBP31,000 in 2001. Gains arose primarily from the
marginal strengthening of the GBP sterling against the US$ throughout the
fiscal year, which was lower than the previous year.
Income Tax Expense
There was no tax charge in 2002 and in 2001. The Company possesses significant
tax losses in the UK that are available for offset against future profits
without limit of time. At April 30, 2002, potential deferred tax assets
amounted to GBP4,142,000 ($6,060,000), of which GBPnil ($nil) was recognized,
compared to GBP3,592,000 of which GBPnil was recognized.
2001 COMPARED WITH 2000
Revenues
The Company achieved sales of GBP743,000 ($1,069,000) in the year ended April
30, 2001 a reduction of 14% when compared to GBP867,000 in the previous year.
The lower revenues have resulted from the continued decline in the CD-Rom based
delivery medium, underpinning the Company's strategy to move away from that
business and to re-focus the business onto Internet-based solutions. The new
business strategy is subject to different revenue recognition rules whereby
revenues are booked over the relevant subscription period. As a consequence
there was a significant increase in order backlog, most of which the Company
expects to recognize as revenue over an extended period of time. At April 30,
2001, the Company had a backlog of customer orders of approximately GBP1,429,000
($2,056,000), compared with GBP149,000 at April 30, 2000.
Cost of Sales
The Company's cost of sales as a percentage of revenues increased to 241% in
2001, from 205% in 2000. The increase in percentage for the current year
reflects the reduction in revenues, since the major part of the Company's cost
of sales in 2001 were personnel related.
Gross Loss
Gross loss as a percentage of revenues increased from (105)% in 2000 to (141)%
in 2001, due primarily to the reduced revenues.
Operating Expenses
Operating expenses increased by 57% to approximately GBP2.8 million ($4.0
million), or 372% of total revenues in 2001 from approximately GBP1.8 million or
203% of total revenues in 2000. The increase in actual expenditure in the
current year results from continued investments made by the Company in pursuit
of its new business direction and primarily comprises selling, marketing, legal,
professional expenses and recruitment fees.
Interest Income and Expense
Interest income improved to a net GBP84,000 ($121,000) in 2001 compared with
net interest expense in 2000 of GBP44,000, as a result of a reduction in
interest expense following the substantial reduction in long-term borrowings
made in the previous year, together with improved income from interest earned on
cash deposits held.
23
Foreign Currency Gains/Losses
Financial gains from exchange rate movements amounted to GBP31,000 ($44,000) in
2001 compared with a gain of GBP71,000 in 2000. Gains arose primarily from the
strengthening of the GBP sterling against the US$ throughout the fiscal year,
but were lower than the previous year, when the Company completed more GBP
sterling/US$ transactions, including a number of private fundings.
Income Tax Expense
There was no tax charge in 2001 and in 2000. The Company possesses significant
tax losses in the UK that are available for offset against future profits
without limit of time. At April 30, 2001, potential deferred tax assets amounted
to GBP3,592,000 ($5,167,000), of which GBPnil was recognized, compared to
GBP2,491,000 of which GBP65,000 was recognized in expectation of profits to be
earned for the year to April 30, 2001 at the end of April 2000.
The Company is not aware of governmental economic, fiscal, monetary or political
policies or factors that have materially affected, or could materially affect
its operations.
B. LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------------
INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY
During July 1997, additional funding was secured by way of issue of Variable
Rate Unsecured Loan Stock 2002 (the "Loan Stock") by Futuremedia (B.V.I.)
Limited, a wholly owned subsidiary of Futuremedia PLC, to the value of $600,000
for the purpose of funding group capital investment in support of the agreed
business plan. The Loan Stock was issued pursuant to a loan stock agreement
between the Company and Futuremedia (B.V.I) Limited (the "Loan Stock
Agreement"). At the same time, warrants granting the right to obtain one
Ordinary Share for each $0.28125 of Loan Stock outstanding at a price per share
of $0.28125 per Ordinary Share were issued. The Loan Stock was repayable on
July 28, 2002 unless the Loan Stockholder exercises, in part or in full, the
warrants noted above, an offer is made for the Company, or the Company sells
more than 20% of its net assets. The Loan Stockholder has given an undertaking
that, should an offer be made for the Company, it will waive the right to
immediate repayment in exchange for the creation of a legal charge on the
freehold property and defer until the sale of the property is concluded. The
proceeds from the exercise of the warrants can only be used to repay the
equivalent amount of Loan Stock. Interest is payable on amounts drawn down at
commercial rates. At the discretion of the warrant holder, interest is payable
either in cash or in warrants aggregated to the principal sum advanced. In
January 2000, 711,111 of the outstanding warrants were exchanged for ordinary
shares at $0.28125 per ordinary share for a total value of GBP127,097
($200,000). In January, 2001, the warrantee requested that interest be paid in
cash until further notice. Consequently the interest accrued for the period
from January 2001 to date has been paid in cash, leaving a balance of warrants
outstanding at April 30, 2002 of GBP2,133,332.
The loan was not repaid on the due date due to a lack of available funds, but
the loan stockholder agreed to defer repayment until the Company had secured
additional financing to enable it to do so. Under the contractual terms of the
loan, interest is payable at 20% per annum beyond the contractual settlement
date. With the exception of the rate of interest, all terms and conditions
remain unchanged during the extended operiod of the loan. Subsequent to the
year end, in October 2002, the Company sought and was offered in principle a
bridging loan facility of up to GBP500,000 in order that it could repay the
balance under the Loan Stock Agreement 2002 and provide additional working
24
capital. It is anticipated that the necessary paperwork associated with the new
facility will be completed by mid November 2002, at which time the current loan
will be repaid. The basic interest rate of the new facility will be 16.5% per
annum. The loan will be secured by way of a charge on the premises, and will be
due for repayment after twelve months.
Since its initial public offering 1993, the Company has undertaken a series of
private placements to fund its working capital and to allow investment in
product developments. Between January 1998 and April 2001, the Company issued an
aggregate of 13,460,065 Ordinary Shares to approximately 20 non-US persons in
reliance on Regulation S, representing aggregate gross proceeds to the Company
of approximately GBP7.0 million $(10.2 million). During the year ended April 30,
2002, the Company also contracted and received payment for the issue of a
further 7,979,333 shares in reliance of Regulation S, representing aggregate
gross proceeds of GBP423,000 ($618,000). A further GBP350,000 ($512,000) was
contracted in April 2002 for the issue of 7,646,154 Ordinary shares, payable in
instalments due before the end of September 2002. In September, it became clear
that the original investors subscribing to the GBP350,000 were not able to meet
their commitment in full, and replacement new investors were found to take up
the shortfall. GBP280,000 of the GBP350,000 was paid by the due date in
September, and the remaining GBP70,000 paid in November 2002.
Subsequent to the year end, in October, the Company completed a new investment
round from existing investors and affiliates, raising a further GBP150,000
($230,000), represented by the issuance of a further 2.7 million (approximately)
shares at a market rate price of $0.085 per share.
The Company's property at Arundel Road is currently being offered for sale and
carries, for commercial and/or residential use, approval from the appropriate
planning authorities for an extension of the offices of approximately 5,800
square feet, which is valid for construction to begin at any time through
September 2003, and the conversion of the main premises into four separate
residential properties, valid until December 2006. It is anticipated that the
sale proceeds will enable the repayment of the current loan facility and will
provide further working capital.
At November 14, 2002, the Company's cash resources and available borrowings are
insufficient to fund the current level of operations for the next twelve months.
As stated in the auditor's opinion to the financial statements, these factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management believes that the steps taken to reduce its cost base
during the latter part of the fiscal year ended April 30, 2002, together with
the strong forward order book and active sales prospects it is pursuing,
supported by the recruitment of new sales staff in October and November 2002,
will enable the Company to return to profitable trading during the third quarter
of the fiscal year to April 30, 2003, and therefore has prepared these financial
statements on a going concern basis. The availability of bridging finance in
anticipation of the sale of the Company's premises at Arundel Road, Walberton,
West Sussex will provide funds to discharge the balance on the Loan Stock
Agreement and further working capital. There is significant reliance therefore
on the generating of funds through profitable trading. If the Company is
unsuccessful in achieving its anticipated revenues in its third fiscal quarter
of the current year, managment recognises that there will be a need to secure
additional funding through debt or equity capital before the end of the fiscal
year to April 30, 2003.
There can be no assurance that the Company will be successful in implementing
these plans. The Company's financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
25
SOURCES AND AMOUNTS OF CASH FLOWS
On September 30, 2002, the latest date available at time of filing, the total
amount of cash and cash equivalents on hand was GBP381,000 ($587,000) compared
with a total of cash and cash equivalents at April 30, 2002 of GBP445,000. This
reduction primarily represents losses incurred in the five months to September
30, 2002, net of gross investment receipts of GBP280,000 ($431,000).
On April 30, 2002, the total amount of cash and cash equivalents on hand was
GBP445,000 ($651,000) as compared to cash and cash equivalents of GBP2,547,000
as at April 30, 2001. This reduction primarily represents the effect of the
losses sustained in the year, offset by the funding initiative undertaken by the
Company in April, 2002 and cash generated as a result of up-front payments from
clients for the provision of the Company's services. The Company's ratio of
current assets to current liabilities stood at 0.6 at April 30, 2002, compared
with 1.6 at April 30, 2001, the entire balance outstanding on the Loan Stock
being current as at April 30, 2002. As at September 30, 2002 this ratio was
0.8.
Cash balances have been constrained primarily as a result of investment in new
products and capital assets and also operating losses. This has resulted in the
Company suffering periods of severe constraints on its operations arising from
the requirement to maintain its cash flow. The Company expects to continue to
experience constraints because of these requirements.
As of April 30, 2002, the Company had no long-term obligations, following the
discharge of the mortgage on its property and the Loan Stock Agreement becoming
current with its maturity in July 2002.
At April 30, 2002, the Company had no material commitment for capital
expenditure. As of November 14, 2002 the Company had no material commitments for
capital expenditures.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES,ETC.
- -----------------------------------------------------------
COMPANY SPONSORED RESEARCH AND DEVELOPMENT
The Company is committed to appropriate ongoing product research and development
in an effort to continually upgrade, modify and improve its products to meet
changing market and consumer needs. The Company has been a beta test site for
hardware products and software developed by a number of companies and has also
developed software and hardware itself for internal purposes and for the open
market. Research and development work is undertaken by the development team
whose focus has been on SolstraTM and easycando, supported by other members of
production staff as required.
During the fiscal year ended April 30, 2002, a total of GBP311,000 ($455,000) of
research and development costs was expensed. During the fiscal years ended April
30, 2001 and 2000, GBP608,000 and GBP259,000, respectively, of research costs
were expensed. The significant increase in the fiscal year ended April 30, 2001
reflects the end of the research and development project financed by BT,
amounting to GBP340,000 in the year ended April 30, 2000. No liability arises
from the termination or this arrangement. An average of four staff were
employed on research and development activities in the year ended April 30,
2002.
STRATEGIC RELATIONSHIPS
The Company, when it determines it to be advantageous, enters into agreements
with others for joint financing of products. The Company believes that these
relationships can help to widen the Company's product range. The Company's
joint development of Solstra with BT is an example of this type of relationship.
26
The Company also intends to develop commercial arrangements with providers of
on-line learning courses for the re-sale of their products through easycando.
To date, the Company has contracted with KnowledgePool Ltd. (England),
Intellexis International Ltd. (London, England), SmartForce Ltd (UK), Xebec
McGraw-Hill, (UK), and SkillSoft (US).
D. TREND INFORMATION.
- ----------------------
At September 30, 2002, the Company had a forward order book of customer orders
of approximately GBP914,000 ($1,408,000), compared with GBP1,122,000 at April
30, 2002. The decrease reflects delays in the closing of orders during the first
five months of the fiscal year.
E. RECENT ACCOUNTING PRONOUNCEMENTS
- -- ----------------------------------
In June 2001, the Financial Accounting Standards Board finalized FASB Statement
No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if they meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. Accordingly, the Company
accounted for the acquisition as described in Note 8 in accordance with SFAS
141.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. This Statement changes the accounting for goodwill
from an amortization method to an impairment-only method. The amortization of
goodwill, including goodwill recorded in past business combinations will cease
upon adoption of this Statement, which will begin with the Company's fiscal year
beginning May 1, 2002. However, goodwill and intangible assets acquired after
June 30, 2001 will be subject to immediate adoption of the Statement. The
adoption of this standard will not have a material effect on the consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", in that it removes goodwill from its impairment scope and
allows for different approaches in cash flow estimation. However, SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for (a) recognition and
measurement of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of. SFAS No. 144 also supersedes the business
segment concept in APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in
that it permits presentation of a component of an entity, whether classified as
held for sale or disposed of, as a discontinued operation. However, SFAS No.144
retains the requirement of APB Opinion No. 30 to report discontinued operations
separately from continuing operations. The Company is required to adopt the
provision of SFAS No. 144 beginning with its fiscal year that starts May 1,
2002. The Company is still evaluating the effect of the standard on its
consolidated financial statements.
27
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement provides guidance on the classification of gains and
losses from the extinguishment of debt and on the accounting for certain
specified lease transactions. The adoption of this statement will not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring activities. SFAS No.
146 also addresses recognition of certain costs related to terminating a
contract that is not a capital lease, costs to consolidate facilities or
relocate employees, and termination benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Given that SFAS No. 146 was issued in June
2002 and is not yet effective, the impact on the Company's financial position or
results of operations from adopting SFAS No. 146 has not been determined.
F. CRITICAL ACCOUNTING POLICIES
- ----------------------------------
The Company considers certain accounting policies relating to revenue
recognition and capitalization of research and development costs to be critical
to its business operations.
Revenue Recognition. For the year ended April 30, 2002, the major part of the
Company's revenues, 95%, derived from the provision of e-learning facilities
materials and services under service contracts with clients over typically one
and two year periods. All revenues, including once-off setup charges, and costs
associated with these sales are recognized over the subscription period. The
remaining revenues derive from fixed price contracts which require the accurate
estimation of the cost and duration of each engagement. The revenue and related
cost for each of these projects is recognized on percentage of completion, using
the time-to-completion method to measure the percent complete, with revisions to
estimates reflected in the period in which the changes become known. If the
Company does not accurately estimate the resources required or does not manage
its projects properly within the planned periods of time, future margins may be
adversely affected.
Capitalized software research and development costs. Ongoing changes and
periodic alterations to current products that are actively being sold in the
marketplace are not capitalized, but expensed when incurred.
G. RELATED PARTY TRANSACTIONS
- --------------------------------
On March 9, 2000, the Company entered into a Finder's Agreement with Noesis
Capital Corporation. The Agreement contemplated that Noesis would make
introductions on behalf of the Company to facilitate possible future business
transactions. The agreement was terminated on July 13, 2000. The Company has
made no payments in connection with the Finder's Agreement and it does not
expect to make any such payments. Mr. N. Letschert, a former non-employee
director of the Company and Mr. C. Wit, a serving non-employee director of the
Company, are directors of Noesis Capital Corporation.
28
Since its initial public offering in 1993, the Company has undertaken a number
of private placements to fund its working capital and to allow investment in
product developments. These private placements include the following
transactions each of which was completed in reliance on Regulation S:
- - In June 1998, Profrigo N.V. purchased 2,000,000 Ordinary Shares at a price
of $1.00 per share, representing an aggregate purchase price of $2.0
million. One of the Company's non-employee directors, Mr. J. Vandamme, is
also a director of Profrigo N.V.
- - In April 1999, the Company issued an aggregate of 454,547 Ordinary Shares
at a price of $0.616 per share, representing an aggregate purchase price of
approximately $280,000. The following individuals and entities purchased
the number of Ordinary Shares indicated in connection with this private
placement: Noesis N.V. (123,377 shares); Profrigo N.V. (99,026 shares); Mr.
M. Johansson (6,088 shares); and Ms. M. Blake , the spouse of Mr. M.
Johansson (6,088 shares). Mr. Johansson is a director and executive officer
of the Company.
- - In July 1999, the Rennes Foundation purchased 1,153,845 Ordinary Shares at
a price of $0.65 per share, representing an aggregate purchase price of
approximately $750,000.
- - In October 1999, the Company issued an aggregate of 3,199,999 Ordinary
Shares at a price of $0.55 per share, representing an aggregate purchase
price of approximately $1.8 million. The following individuals and entities
purchased the number of Ordinary Shares indicated in connection with this
private placement: the Rennes Foundation (2,227,272 shares); Noesis N.V.
(363,636 shares); Profrigo N.V. (181,818 shares).
- - In February 2000, the Rennes Foundation purchased 1,666,667 Ordinary Shares
at a price of $3.00 per share, representing an aggregate purchase price of
approximately $5.0 million. See "Major Shareholders".
- - In July 2000, the Company completed an additional private placement under
Regulation S pursuant to which the Rennes Foundation purchased 1,944,444
Ordinary Shares at a price of $1.80 per share for an aggregate purchase
price of approximately $3.5 million in cash. See "Major Shareholders".
- - In March 2002, the Company contracted and received the cash for the issue
of an aggregate of 4,702,410 Ordinary Shares at a price of $0.083 per
Ordinary Share representing an aggregate purchase price of approximately
$390,000. The following individuals and entities purchased the number of
Ordinary Shares indicated in connection with this private placement: the
Rennes Foundation (1,204,819 shares); Noesis NV (301,205 shares); Mr. M
Johansson (361,446 shares) and Mrs M Pillinger, wife of S Pillinger, a then
Director of the Company (100,000 shares).
- - In March 2002, the Company contracted for the issue of an aggregate of
759,700 Ordinary Shares at a market price of $0.07 per Ordinary Share
pursuant to the stock transaction for the acquisition of the assets of Palm
Teach Limited, together with the issue of an aggregate 702,900 Ordinary
shares at a market price of $0.07 per Ordinary share to four key
individuals on their joining the Company. The following individuals and
entities received the number of Ordinary Shares indicated in connection
with this transaction: Mr. P Copeland as beneficial shareholder of Palm
Teach Limited (759,700 shares); Mr. S Pillinger (209,450 shares).
- - In April 2002, the Company contracted and received the cash for the issue
of 3,276,923 Ordinary shares at a price of $0.065 per Ordinary Share
representing an aggregate purchase price of approximately $213,000. At the
29
same time, the following entity contracted for the purchase of the number
of Ordinary Shares indicated in connection with this private placement:
Silverdash Limited (7,646,154 shares). In September, 2002, it became
apparent that this GBP350,000 ($512,000) investment, payable in instalments
by the end of September 2002, would not be fully paid, but that only some
GBP90,000 would be provided by the original source. Alternative investors
were sought and found for the remaining GBP260,000 ($380,000) during
October 2002. At the time of filing, GBP224,000 of the GBP260,000 had been
received, with the balance due before the end of November 2002.
- - Also in April 2002, the Company contracted for the issue of 803,046
Ordinary Shares at a price of $0.07 per Ordinary Share under a Salary
sacrifice arrangement, representing an aggregate purchase price of $56,000.
The following individual purchased the number of Ordinary Shares indicated
in connection with this transaction: Mr. M Johansson (648,183 shares). At
the same time, Mr. J Vandamme agreed to accept 102,000 Ordinary Shares at a
price of $0.07 per Ordinary Share in settlement of outstanding invoiced
charges for work done for the Company.
- - Subsequent to the year end, in October 2002, the Company completed a new
investment round from existing investors and affiliates, raising a further
GBP150,000 ($230,000), represented by the issuance of a further 2.7 million
(approximately) ordinary shares at a price of $0.085 per share, at market
rate. The following individuals/entities purchased the number of shares
indicated in connection with this transaction: Rennes Foundation
(1,176470,109 shares), M Johannson (181,176 shares), S Cohen (452,941
shares), J Copeland (452,941 shares) and S Copeland (452,941 shares).
H. COMMITMENTS
- ---------------
The Company has secured the provision of its Internet Service Provider (ISP)
service requirements with Siemens UK Ltd. for a period of three years commencing
September 2001. The terms of the contract allow termination on three months
notice after the completion of the first year. In April 2001, the Company
contracted with Consignia Plc (UK) for the provision of a learning management
system comprising a hosted service together with learning content for a period
of 22 months commencing June 1, 2001. The total value of the contract was
approximately GBP1,000,000 ($1,438,600).
30
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
- -------------------------------------------------------
A. DIRECTORS AND SENIOR MANAGEMENT.
- --------------------------------------
The Company's directors and senior management, and any employees such as
scientists or designers upon whose work the Company is dependent as of the date
of this Report are as follows:
<BTB>
DIRECTOR
NAME AGE SINCE POSITION WITH THE COMPANY
- --------------- ----- -------- ----------------------------
BOARD MEMBERS:
David Bailey(1)(2) 43 2002 Non-employee Director from April 2002
Peter Copeland MBE 55 2002 Non-employee Director from April 2002
Mats Johansson(3) 44 1996 CEO Futuremedia PLC from December 2000
Rolf Felix Herter 39 2001 Non-employee Director
Cornelis Wit(1)(2) 56 1997 Non-employee Director
Jan Vandamme(1)(2) 43 1998 Non-employee Director and Chairman
SENIOR MANAGEMENT:
Peter Machin 53 - Company Secretary and Chief Accounting Officer
Stephen Pillinger(4) 59 - Director (April 2002 to July 2002) and Chief
Operating Officer since April 2002 to October
2002
(1) Member of the Audit Committee.
(2) Member of the Remuneration Committee
(3) Resigned as Director January 2002, re-appointed April 2002
(4) Resigned as Chief Operating Officer October 31, 2002
Mr. Johansson has served as Managing Director, Futuremedia eLearning since July
1998, and succeeded Mr. Agertoft as CEO in December 2000. Mr. Machin has served
as Company Secretary and Chief Accounting Officer since April 1999. On
September 25, 2001 Mr. Herter was appointed to the Board of Directors of the
Company. In April 2002, Mr. D Bailey, Mr. S Pillinger and Mr. P. Copeland were
appointed to the board, replacing earlier resignations. At the same time, Mr.
Vandamme was appointed Chairman. Mr. Pillinger replaced Mr. Walker as Chief
Operating Officer, but in July 2002 resigned from the board effective
immediately, and from his position as Chief Operating Officer with effect from
the end of October 2002, but will continue to be associated with the
professional services activity under contract.
David Bailey. Mr. Bailey has formerly worked for both Ernst & Young and Coopers
& Lybrand, specialising in the turnaround market and business development, and
now has his own independent consultancy business providing advice on business
growth strategies and delivering profitability to largely bank-led clients
Peter Copeland. Dr. P Copeland MBE, original founder of Futuremedia PLC,
rejoins the Board in a non-executive capacity as President, actively
representing and promoting the company in all areas of the UK and European
e-learning community. Dr. Copeland is a recognised pioneer of media-based
learning in Europe. He received his Ph.D for research in the development of
interactive media and holds several honorary positions in the field.
31
Rolf F Herter Mr. Herter is an Attorney at Law and a senior partner with
Dietrich Baumgartner & Partners, a Swiss Legal firm. Mr. Herter is also a Board
member of the Rennes Foundation and the Jobelin Foundation, Swiss investment
funds.
Mats Johansson Mr. Johansson joined Futuremedia in 1996, was promoted to
Managing Director in 1998, and appointed CEO in December 2000. Previously Mr.
Johansson has held senior management positions at Studentlitteratur AB, American
Express Inc., and subsequently co-founded a national catalogue and retail
business in the US. Mr. Johansson has an MBA from Harvard Business School.
Jan Vandamme. Mr. Vandamme is a director of Profrigo NV, a listed Belgian
investment fund, specializing in Internet related activities. Mr. Vandamme also
holds directorships in UCI Web USA OmniCom Systems USA and Didital Diagnostic
Imaging SA, Belgium.
Cornelis F Wit. Mr. Wit is President, Corporate Finance at Noesis Capital Corp,
Florida, USA, an international investment banking firm. Until 1994, he was
President and CEO of DMV Inc. He has held senior positions in pharmaceutical
companies in South America and Europe. He holds directorships in Whitehall
Specialitites, USA, OmniCom Systems, USA, UCI Web, USA, IVC, Madrid, and
K.D.Pharma, Germany.
Peter Machin. Mr. Machin joined the Company in 1996 and holds a UK accounting
qualification and has extensive experience of financial management in computing
services providers such as International Computers Ltd.
Mr. Bailey was appointed to the board on the nomination of a private UK
investor. Mr. Wit was appointed to the Board on the nomination of Noesis NV.
Mr. Vandamme was appointed to the Board on the nomination of Profrigo NV.
B. COMPENSATION.
- ----------------
The total remuneration (excluding pension contributions) paid to the Company's
directors and executive officers (a total of seven persons) for fiscal 2002 was
GBP332,000 ($486,000).
The Company may reimburse non-employee directors for their costs and expenses
incurred in attending Board meetings and may enter into contracts for services
with non-employee directors.
In October 1997, non-executive director Mr. Wit was granted options to purchase
5,000 Ordinary shares at a price of $0.594 per Ordinary share, and in November
1998, was granted options to purchase a further 100,000 Ordinary Shares at a
price of $1.00 per Ordinary Share under the Unapproved Executive Share Option
Plan. These options were cancelled in February 2002 and replaced with options
to purchase 52,250 Ordinary Shares at a price of $0.10 per ordinary shares and
52,250 Ordinary Shares at $0.15 per Ordinary Share, which vested in July 2002
and expire at the end of February 2010. At the same time, further options to
purchase 150,000 Ordinary Shares at $0.10 per ordinary share and 150,000
Ordinary Shares at $0.15 per Ordinary Share were granted to Mr. Wit.
In November 1998, non-executive director Mr. Vandamme was granted options to
purchase 100,000 Ordinary Shares at a price of $1.00 per Ordinary Share. These
options were cancelled in February 2002 and replaced with options to purchase
50,000 Ordinary Shares at a price of $0.10 per ordinary shares and 50,000
32
Ordinary Shares at $0.15 per Ordinary Share, which vested in July 2002 and
expire at the end of February 2010. At the same time, further options to
purchase 250,000 Ordinary Shares at $0.10 per ordinary share and 250,000
Ordinary Shares at $0.15 per Ordinary Share were granted to Mr. Vandamme.
In February 2002, a total of 745,000 options to purchase Ordinary Shares at
various prices ranging from $0.594 to $3.00 per Ordinary Share previously
granted to Mr. Johansson were cancelled and replaced with options to purchase
372,500 Ordinary Shares at a price of $0.10 per ordinary shares and 372,500
Ordinary Shares at $0.15 per Ordinary Share, which vested in July 2002 and
expire at the end of February 2012. At the same time, a further grant was made
to Mr. Johansson to purchase 150,000 ordinary shares at a price of $0.10 per
Ordinary Share and 150,000 Ordinary Shares at a price of $0.15 per Ordinary
Share vesting in February and March 2003, which will expire in February 2010.
In April 2002, Mr. Johansson agreed to sacrifice GBP31,433 ($45,990) of salary
over the period January 2002 to August 2002 in exchange for the issue of 648,183
Ordinary Shares at a value of $0.07 per Ordinary Share.
On taking up his post of Director of Operations in April 2002, Mr. Pillinger was
granted options to purchase 105,002 Ordinary Shares at a price of $0.10 per
Ordinary Share and 210,004 Ordinary Shares at a price of $0.15 per Ordinary
Share, vesting at the end of March 2003 and expiring at the end of March 2010.
At November 14, 2002 none of the above options had been exercised.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with all of its employees and
employee-directors, subject to customary terms and conditions.
The employment contract with Mr. Johansson, which commenced on November 12,
1996, is a continuous full-time employment contract, was amended in April 2002
such that it can be terminated by either party upon three months' written
notice. The employment contract with Mr. Pillinger which commenced in April
2002 was of two years' duration and could be terminated by either party upon
three month's written notice. In July 2002, Mr. Pillinger gave such notice,
and consequently his employment with Futuremedia terminated on October 31, 2002.
It is likely that his services in support of the Futuremedia professional
services activity will continue under a different arrangement. The employment
contract with Mr. Machin, which commenced in July 1997, is a continuous
full-time employment contract that can be terminated by either party upon three
months' written notice.
33
C. BOARD PRACTICES.
- --------------------
Directors hold office until removed by a resolution of the shareholders of the
Company, removal by all of the members of the Board, resignation or death, or
until the expiration of their terms. The Company's executive officers are
appointed by, and serve at the pleasure of, the Board.
At every Annual General Meeting of the shareholders of the Company, the terms of
all of the directors expire.
Any director may be removed from the Board by unanimous vote of the other
directors.
Under section 303 of the Companies Act 1985, shareholders may remove any
director, by ordinary resolution (subject to special notice of the resolution
being given to the director and the right of the director to attend the
shareholder meeting where the vote will be cast) adopted by the affirmative vote
of a majority of the shares voting at an Annual or Extraordinary General
Meeting.
Mr. Johansson has a service contract with the Company, which provides for three
months' notice of termination of employment or payment in lieu of notice. This
contract is subject to English employment law, and on termination other than by
mutual consent the employee may be entitled to additional compensation for loss
of employment, including without limitation statutory redundancy pay and other
compensation.
The Audit Committee is responsible for, among other things: recommending to the
Board of Directors the nomination of the Company's independent auditor;
reviewing and monitoring the Company's financial reporting process and internal
control systems; reviewing the Company's annual financial statements, the scope
of the audit and the role and performance of the independent auditor; reviewing
the independence of the independent auditors; and providing a channel for
communication between the independent auditor, management and the Board of
Directors.
The Remuneration Committee is responsible for, among other things, reviewing,
monitoring and approving the remuneration of the executive directors and senior
management of the Company.
D. EMPLOYEES.
- -------------
At November 14, 2002, the Company employed 19 persons, one of whom was an
executive. Of the remainder, twelve were engaged in technology delivery and
support, three in sales and marketing and three in administrative and financial
matters.
As of April 30, 2002, the Company employed 20 persons, two of whom were
executives. Of the other employees as of April 30, 2002, 13 were engaged in
technology delivery and support, two in sales and marketing and three in
administrative and financial matters.
As of April 30, 2001, the Company employed 26 persons.
As of April 30, 2000, the Company employed 35 persons.
In addition, it is Company policy to employ contract staff from time to time to
support specialized production requirements and to increase its production
capacity and flexibility and to reduce lead times. The Company may offer
34
permanent employment to individual contractors when management can reasonably
foresee a continuing commercial requirement for the contractor's skills. The
average number of temporary employees during the year ending April 30, 2002 was
three.
None of the Company's employees is covered by a collective bargaining agreement.
All of the Company's employees are employed in the UK. The Company believes
that its relations with its employees are good.
The Company's ability to achieve its business objectives is, in part, dependent
on its ability to recruit the specialist skills it requires, both on a permanent
and a contract basis.
Management of the Company has developed a collaborative style of decision
making, which they believe allows them to draw on the talent and skills of their
executive personnel. The Company normally carries out monthly reviews of its
operations, including its profits and losses, sales, marketing, and production.
The Company has introduced incentives to the staff through profit-related
bonuses, merit-based promotions and issues of share options. See "Employee
Profit Sharing and Option Plans."
35
E. SHARE OWNERSHIP.
- --------------------
SHARE OWNERSHIP
With respect to the share ownership in the Company of the officers and directors
of the Company, see the disclosure in "Major Shareholders".
EMPLOYEE PROFIT-SHARING AND OPTION PLANS
In July 1993, the Company adopted three employee profit share or share option
plans: the "Approved Executive Option Scheme," the "Unapproved Executive Share
Option Scheme," and the "Employee Share Ownership Plan".
Under the Company's "Approved Executive Share Option Scheme," options to acquire
the Company's Ordinary Shares may be granted to all or selected employees. Any
full-time employee, other than a director, of the Company who is not within two
years of his or her due date of retirement and who, within one year preceding
the grant, did not hold more than 10% of the share capital of the Company, is
eligible to participate. The exercise price of the options must be no less than
85% of the fair market value of the Company's ADSs on the date of grant. The
aggregate value of shares underlying the options granted to any employee may not
exceed the greater of GBP100,000 ($162,000) or four times earnings.
Under the Company's "Unapproved Executive Share Option Scheme," options to
acquire Ordinary Shares may be granted to selected full-time employees,
including directors, based on their performance. Such options may also be
granted to non-employee directors. The exercise price of the options granted
must be at or above the fair market value of the Company's ADSs. The value of
options to be granted is not subject to any financial limit, although the number
of shares over which options may be granted is subject to an overall
restriction, as described below.
In August 1993, options to purchase an aggregate of 45,186 Ordinary Shares at
$4.25 per Ordinary Share were granted to employees under the Approved Executive
Share Option Scheme. In May 1995, options to purchase 44,647 Ordinary Shares at
$2.55 per Ordinary Share were granted to employees under the Approved Executive
Share Option Scheme. In February 1998, options to purchase 121,000 Ordinary
Shares at $0.90625 per Ordinary Share were granted to employees under the
Approved Share Option Scheme. In July 2000, options to purchase 90,000 Ordinary
shares at $1.5938 per Ordinary Share were granted under the Approved Share
Option Scheme. No options have been exercised under the Approved Executive
Share Option Scheme. Taking into consideration options that have lapsed prior to
exercise and upon termination of employment, options to purchase an aggregate of
2,616 Ordinary Shares at $4.25 per Ordinary Share, options to purchase an
aggregate of 3,907 Ordinary Shares at $2.55 per Ordinary Share, options to
purchase 20,500 Ordinary shares at $0.90625 per Ordinary Share and options to
purchase 13,500 Ordinary shares at $1.5938 per Ordinary share respectively
remained outstanding and unexercised as at November 14, 2002.
36
The following options have been issued as of November 14, 2002, under the
Company's "Unapproved Executive Share Option Scheme."
No of Subscription Date Expiry Exercisable when the
Shares Price Exercisable Date Market Price at least equals
- --------- ------------ ----------- --------- ---------------------------
5,000 $0.53 Current Oct 2007 No Restriction
5,000 $0.19 Current Jan 2007 No Restriction
100,000 $1.00 Current Sep 2010 No Restriction
69,750 $0.35 05/01/03 May 2011 No Restriction
69,750 $0.35 11/01/03 May 2011 No Restriction
69,750 $0.35 05/01/04 May 2011 No Restriction
69,750 $0.35 11/01/04 May 2011 No Restriction
100,000 $0.25 Current Oct 2006 $1.00
5,000 $0.19 Current Sep 2010 No Restriction
5,000 $0.59 Current Sep 2010 No Restriction
474,750 $0.15 07/01/02 Feb 2012 No Restriction
1,213,355 $0.15 03/01/03 Feb 2012 No Restriction
474,750 $0.10 07/01/02 Feb 2012 No Restriction
1,369,390 $0.10 03/01/03 Feb 2012 No Restriction
50,000 $0.09 10/16/03 Oct 2012 No Restriction
50,000 $0.09 10/16/04 Oct 2012 No Restriction
50,000 $0.09 10/16/05 Oct 2012 No Restriction
25,000 $0.09 10/16/03 Oct 2012 See (1) below
25,000 $0.09 10/16/04 Oct 2012 See (1) below
25,000 $0.09 10/16/05 Oct 2012 See (1) below
50,000 $0.09 10/16/03 Oct 2012 See (1) below
50,000 $0.09 10/16/04 Oct 2012 See (1) below
50,000 $0.09 10/16/05 Oct 2012 See (1) below
66,667 $0.09 11/03/03 Nov 2012 No Restriction
66,667 $0.09 11/03/04 Nov 2012 No Restriction
66,666 $0.09 11/03/05 Nov 2012 No Restriction
25,000 $0.09 11/03/03 Nov 2012 See (1) below
25,000 $0.09 11/03/04 Nov 2012 See (1) below
25,000 $0.09 11/03/05 Nov 2012 See (1) below
50,000 $0.09 11/03/03 Nov 2012 See (1) below
50,000 $0.09 11/03/04 Nov 2012 See (1) below
50,000 $0.09 11/03/05 Nov 2012 See (1) below
- ---------
4,831,245
=========
(1) Excercisable provided that the grantee achieves specific personal sales
targets.
The Company's "Employee Share Ownership Plan" (also known as the Approved Net
Profit Sharing Scheme) was terminated with effect from September 2000. No
payments were due and no monies were set aside at the termination of the scheme.
37
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
- ----------------------------------------------------------------
A. MAJOR SHAREHOLDERS.
- -----------------------
The following table sets forth certain information, to the extent that it is
known to the Company or can be ascertained from public filings, as of the date
of this Report with respect to the beneficial ownership of the Company's ADSs by
(i) each director, senior manager and key employee, and (ii) each person known
by the Company to own 5% or more of the Company's ADSs. This information is
based upon information received from or on behalf of the named individuals.
Number of
Share
Number of Percentage Number of
Name of Beneficial ADSs Benefically share options
Owner* Benefically Owned Beneficially
Owned* owned(2)
Rennes Foundation R Herter Board Representative (1) 9,600,218 20.0 -
Jobelin Foundation R Herter Board Representative (1) 447,778 0.9 -
Profrigo NV J Vandamme Board Representative (1) 2,280,844 4.7
C Witt Board Member 404501 0.8 -
D Bailey Board Member 611,692 1.3 -
P Copeland Board Member 2,415,173 5.0 -
M Johansson Board Member & C.E.O 2,110,846 4.3 300,000
J Vandamme Board Member 202,001 0.4 500,000
P Machin CFO and Company Secretary 169,271 0.4 128,333
* For purposes of US securities laws only, persons may be deemed to be the
beneficial owners of securities reflected in this table. It should be noted,
however, that the meaning of beneficial ownership is significantly different
under English law, and no inference is intended, nor should it be construed, as
to the status of beneficial ownership of these securities under the laws of
England.
(1) Beneficially owned by entities of which directors or executive
officers of the Company are also directors, executive officers or
shareholders. The directors and executive officers of the Company
disclaim beneficial ownership of these shares.
(2) Includes options to purchase Ordinary Shares granted pursuant to the
Company's share option plans at prices varying from $0.10 to $1.00.
See "Share Ownership".
At November 14, 2002, the Rennes Foundation, a Swiss-based investment fund, held
a total of 9,600,218 shares in the Company, representing a holding of 18.9%.
During the last three years, it acquired 1,153,845 ordinary shares in July 1999,
2,227,272 ordinary shares in October 1999, 1,666,667 ordinary shares in February
2000, 1,944,444 ordinary shares in July 2000 and 1,204,819 ordinary shares in
March 2002, 1,176,470 ordinary shares in October 2002 under Regulation S and has
also acquired a further 226,701 on the open market in the same period.
38
Except for the status as director(s) and/or officer(s) of certain of the major
shareholders listed above, to the knowledge of the Company the Company's major
shareholders do not have voting rights different from other shareholders.
As of November 14, 2002, the Company had approximately eight shareholders of
record, one of whom acts as Depositary for the Company's ADR facility and is a
US resident. At November 14, 2002, the Depositary had approximately 60 holders
of record of ADRs. Based on information received from the Depositary, the
Company believes that there are approximately 3,200 beneficial owners of ADRs.
There are no arrangements, known to the Company, which may operate at a
subsequent date to cause a change in control of the Company.
B. RELATED PARTY TRANSACTIONS
On March 9, 2000, the Company entered into a Finder's Agreement with Noesis
Capital Corporation. The Agreement contemplated that Noesis would make
introductions on behalf of the Company to facilitate possible future business
transactions. The agreement was terminated on July 13, 2000. The Company has
made no payments in connection with the Finder's Agreement and it does not
expect to make any such payments. Mr. N. Letschert, a former non-employee
director of the Company and Mr. C. Wit, a serving non-employee director of the
Company, are directors of Noesis Capital Corporation.
Since its initial public offering in 1993, the Company has undertaken a number
of private placements to fund its working capital and to allow investment in
product developments. These private placements include the following
transactions each of which was completed in reliance on Regulation S:
In June 1998, Profrigo N.V. purchased 2,000,000 Ordinary Shares at a price of
$1.00 per share, representing an aggregate purchase price of $2.0 million. One
of the Company's non-employee directors, Mr. J. Vandamme, is also a director of
Profrigo N.V.
In April 1999, the Company issued an aggregate of 454,547 Ordinary Shares at a
price of $0.616 per share, representing an aggregate purchase price of
approximately $280,000. The following individuals and entities purchased the
number of Ordinary Shares indicated in connection with this private placement:
Noesis N.V. (123,377 shares); Profrigo N.V. (99,026 shares); Mr. M. Johansson
(6,088 shares); and Ms. M. Blake , the spouse of Mr. M. Johansson (6,088
shares). Mr. Johansson is a director and executive officer of the Company.
In July 1999, the Rennes Foundation purchased 1,153,845 Ordinary Shares at a
price of $0.65 per share, representing an aggregate purchase price of
approximately $750,000.
In October 1999, the Company issued an aggregate of 3,199,999 Ordinary Shares at
a price of $0.55 per share, representing an aggregate purchase price of
approximately $1.8 million. The following individuals and entities purchased
the number of Ordinary Shares indicated in connection with this private
placement: the Rennes Foundation (2,227,272 shares); Noesis N.V. (363,636
shares); Profrigo N.V. (181,818 shares).
In February 2000, the Rennes Foundation purchased 1,666,667 Ordinary Shares at a
price of $3.00 per share, representing an aggregate purchase price of
approximately $5.0 million. See "Major Shareholders".
39
In July 2000, the Company completed an additional private placement under
Regulation S pursuant to which the Rennes Foundation purchased 1,944,444
Ordinary Shares at a price of $1.80 per share for an aggregate purchase price of
approximately $3.5 million in cash. See "Major Shareholders".
In March 2002, the Company contracted and received the cash for the issue of an
aggregate of 4,702,410 Ordinary Shares at a price of $0.083 per Ordinary Share
representing an aggregate purchase price of approximately $390,000. The
following individuals and entities purchased the number of Ordinary Shares
indicated in connection with this private placement: the Rennes Foundation
(1,204,819 shares); Noesis NV (301,205 shares); Mr. M Johansson (361,446
shares) and Mrs M Pillinger, wife of S Pillinger, a then Director of the Company
(100,000 shares).
In April 2002, the Company contracted for the issue of an aggregate of 1,462,600
Ordinary Shares at a price of $0.10 per Ordinary Share pursuant to the stock
transaction acquisition of the assets of Palm Teach Limited. The following
individuals and entities received the number of Ordinary Shares indicated in
connection with this transaction: Mr. P Copeland as beneficial shareholder of
Palm Teach Limited (759,700 shares); Mr. S Pillinger (209,450 shares).
Also in April 2002, the Company contracted and received the cash for the issue
of 3,276,923 Ordinary shares at a price of $0.065 per Ordinary Share
representing an aggregate purchase price of approximately $213,000. At the same
time, the following entity contracted for the purchase of the number of Ordinary
Shares indicated in connection with this private placement: Silverdash Limited
(7,646,154 shares). In September, 2002, it became apparent that this GBP350,000
($512,000) investment, payable in instalments by the end of September 2002,
would not be fully paid, but that only some GBP90,000 would be provided by the
original source. Alternative investors were sought and found for the remaining
GBP260,000 ($380,000) during October 2002. At the time of filing, GBP224,000 of
the GBP260,000 had been received, with the balance due before the end of
November 2002.
Also in April 2002, the Company contracted for the issue of 803,046 Ordinary
Shares at a price of $0.07 per Ordinary Share under a Salary sacrifice
arrangement, representing an aggregate purchase price of $56,000. The following
individual purchased the number of Ordinary Shares indicated in connection with
this transaction: Mr. M Johansson (648,183 shares). At the same time, Mr. J
Vandamme agreed to accept 102,000 Ordinary Shares at a price of $0.07 per
Ordinary Share in settlement of outstanding invoiced charges for work done for
the Company.
Subsequent to the year end, in October 2002, the Company completed a new
investment round from existing investors and affiliates, raising a further
GBP150,000 ($230,000), represented by the issuance of a further 2.7 million
(approximately) ordinary shares at a price of $0.085 per share, at market rate.
The following individuals/entities purchased the number of shares indicated in
connection with this transaction: Rennes Foundation (1,176,470 shares), M
Johannson (181,176 shares), S Cohen (452,941 shares), J Copeland (452,941
shares) and S Copeland (452,941 shares).
C. INTERESTS OF EXPERTS AND COUNSEL.
- ----------------------------------------
Not Applicable
40
ITEM 8. FINANCIAL INFORMATION.
- ---------------------------------
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
- ----------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated Financial Statements and Other Financial Information of the
Company are listed under Item 18 in this Report.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
DIVIDEND POLICY
Holders of Futuremedia ordinary shares may, by ordinary resolution, declare
dividends, but may not declare dividends in excess of the amount recommended by
the directors. The directors may also pay interim dividends. No dividend may
be paid other than out of profits available for distribution. Futuremedia has
not in the past declared or paid any dividends to holders of its ordinary
shares, and there is no present intention to declare or pay any such dividend.
B. SIGNIFICANT CHANGES.
- ------------------------
Not Applicable.
ITEM 9. THE OFFER AND THE LISTING.
- ---------------------------------------
A. OFFER AND LISTING DETAILS.
- --------------------------------
The Company's ADSs have traded since May 29, 1996, on the Nasdaq SmallCap Market
under the symbol FMDAY.
The Company's warrants were traded on the Nasdaq SmallCap Market under the
symbol FMDYW from May 29, 1996 until June 25, 1997. Since then they have been
quoted on the OTC Bulletin Board. From August 19, 1993 until May 29, 1996 the
Company's ADSs and warrants traded on the Nasdaq National Market. The Company
agreed to extend the warrants issued on August 19, 1993, for a further twelve
months to August, 2003.
The closing bid prices of the Company's securities have been within the
following ranges during the periods shown. The quotations set forth below are
inter-dealer quotations, without retail mark-ups, mark-downs or commissions, and
do not necessarily represent actual transactions.
(1) The five most recent full financial years:
41
ADS PRICE
---------
YEAR ENDING APRIL 30,
HIGH LOW
------ -----
$ $
------ ------
1998 1.781 0.250
1999 1.563 0.438
2000 3.844 0.469
2001 3.125 0.160
2002 0.38 0.05
WARRANTS PRICE
--------------
YEAR ENDING APRIL 30,
HIGH LOW
------ -----
$ $
------ ------
1998 0.031 0.031
1999 0.031 0.031
2000 0.031 0.031
2001 0.031 0.031
2002 0.031 0.031
(2) Each full financial quarter for the two most recent full financial
ADSs: FMDAY High Low
----- -----
Year ended April 30
- -------------------
2001 First quarter 3.125 1.313
Second quarter 1.250 0.375
Third quarter 0.563 0.188
Fourth quarter 0.406 0.156
2002 First quarter 0.380 0.190
Second quarter 0.250 0.060
Third quarter 0.330 0.050
Fourth quarter 0.160 0.070
2003 First quarter 0.120 0.070
Second quarter 0.140 0.060
Warrants FMDYW High Low
----- -----
$ $
2001 First quarter 0.031 0.031
Second quarter 0.031 0.031
Third quarter 0.031 0.031
Fourth quarter 0.031 0.031
2002 First quarter 0.031 0.031
Second quarter 0.031 0.031
Third quarter 0.031 0.031
Fourth quarter 0.031 0.031
2003 First quarter 0.031 0.031
Second quarter 0.031 0.031
42
(3) Each month for the most recent six months:
ADS PRICE
----------
HIGH LOW
------ -----
$ $
------ -----
October 2002 0.10 0.07
September 2002 0.10 0.09
August 2002 0.14 0.06
July 2002 0.10 0.06
June 2002 0.11 0.08
May 2002 0.13 0.10
April 2002 0.16 0.08
WARRANTS PRICE
----------------
HIGH LOW
------ -----
$ $
------ -----
October 2002 0.031 0.031
September 2002 0.031 0.031
August 2002 0.031 0.031
July 2002 0.031 0.031
June 2002 0.031 0.031
May 2002 0.031 0.031
April 2002 0.031 0.031
The share price of the Ordinary Shares on July 31, 2002, the end of the
Company's first fiscal quarter, was $0.07, the last reported sale price of the
Ordinary Shares on November 14, 2002 on the Nasdaq SmallCap Market was $0.13.
B. PLAN OF DISTRIBUTION.
- --------------------------
Not Applicable
C. MARKETS.
- -----------
The Company's ADSs are listed on the Nasdaq SmallCap Market under the symbol
"FMDAY". The Company's Warrants are traded on the OTC Bulletin Board under the
symbol "FMDYW".
D. SELLING SHAREHOLDERS.
- -------------------------
Not Applicable
43
E. DILUTION.
- ------------
Not Applicable
F. EXPENSES OF THE ISSUE.
- ----------------------------
Not Applicable
ITEM 10. ADDITIONAL INFORMATION
- ----------------------------------
A. SHARE CAPITAL.
- ------------------
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
- ----------------------------------------------
Incorporated by reference to the Company's Registration Statement on Form F-1
(Registration No. 33-639941) and by reference to Exhibit 3.1 to the Company's
Annual Report on Form 20-F for the year ended April 30, 2000.
C. MATERIAL CONTRACTS.
- -----------------------
The Company has secured the provision of its Internet Service Provider (ISP)
service requirements with Siemens UK Ltd. for a period of three years commencing
September 2001. The terms of the contract allow termination on three months
notice after the completion of the first year. In April 2001, the Company
contracted with Consignia Plc (UK) for the provision of a learning management
system comprising a hosted service together with learning content for a period
of 22 months commencing June 1, 2001. The total value of the contract was
approximately GBP1,000,000 ($1,438,600).
D. EXCHANGE CONTROLS.
- ----------------------
There are currently no UK foreign exchange control restrictions on the import or
export of capital, including the availability of cash and cash equivalents for
use by the Company, or on payment of dividends on securities of the Company.
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
owners to hold or vote the Company's securities.
E. TAXATION.
- ------------
UNITED KINGDOM INCOME TAX
44
The following discussion of taxation is intended only as a descriptive summary
and it does not purport to be a complete technical analysis or listing of all
potential tax effects relevant to the Ordinary Shares or ADSs. The statements
of United Kingdom and United States tax law set forth below are based (i) on the
laws and the UK Inland Revenue practice and published Statements of Practice in
force as of the date of this report; and (ii) assumes that each obligation in
the deposit agreement among the Company, the Depositary and the holders from
time to time of ADSs and any related agreement will be performed in accordance
with its terms. The statements herein are subject to any changes occurring
after the date of this report in UK or US law, or in the double taxation
conventions between the US and the UK with respect to income and capital gains
taxes (the "Income Tax Convention") and with respect to estates and gifts taxes
(the "Estate Tax Convention").
The Company anticipates that if any cash dividends are paid by the Company, the
dividends would be paid in pounds sterling. As a result, fluctuations in the
exchange rate between sterling and US dollars will affect the US dollar amounts
received by holders of ADSs upon conversion by the Depositary of dividend
payments into US dollars.
The Company does not expect to pay cash dividends for the foreseeable future,
but rather, to retain earnings to finance the expansion of the business.
Up to April 5, 1999, an individual shareholder resident in the UK is for UK
income tax purposes treated as having taxable income equal to the sum of the
dividend paid to him plus a tax credit equal to 1/4 of the amount of the net
dividend. The tax credit is available to be set against the individual's tax
liability on the dividend, which for a shareholder within the lower and basic
tax rate bands will satisfy this tax liability on UK dividends, and in
appropriate cases may be refunded to him.
From April 6, 1999, the rate of tax credit has reduced to 10% and refunds of tax
credits are no longer possible. However, an individual shareholder whose income
is within the lower or basic tax rate bands will be liable to tax at 10% on his
individual income. As such, the tax credit will continue to satisfy the tax
liability on UK dividends. For higher rate taxpayers, the dividend income will
be liable to UK tax at 32.5% (which after relief for the reduced tax credit
leaves the tax effect unchanged for higher rate taxpayers).
Under the current Income Tax Convention, a US resident individual or corporate
holder of an Ordinary Share or ADS who or which satisfied the following
conditions (an "Eligible US Holder"):
(i) is resident in the US for the purposes of the Income Tax Convention (and,
in the case of a corporation, not also resident in the UK for UK tax
purposes);
(ii) is not a corporation which, alone or together with one or more associated
corporations, controls, directly or indirectly, 10% or more of the voting
stock of the Company;
(iii) whose holding of the Ordinary Shares or ADSs is not effectively connected
with a permanent establishment in the UK through which such holder carries
on a business or with a fixed base in the UK from which such holder
performs independent personal services; and
(iv) under certain circumstances, is not an investment or holding company 25% or
more of the capital of which is owned, directly or indirectly, by persons
that are neither individual residents nor citizens of the US, will
generally be entitled under the current Income Tax Convention to receive,
in addition to any dividend paid by the Company, an amount equal to the tax
credit available to UK resident shareholders in respect of such dividend,
but subject to a withholding tax equal to 15% of the sum of the dividend
paid and the tax credit.
45
For example, with the tax credit at the rate of 1/4 of the net dividend, a
dividend of GBP80.00 will entitle such a holder to receive, upon compliance with
the refund procedures described below an additional payment of GBP5.00 (i.e.,
the tax credit of GBP20.00 less withholding tax of GBP15.00). The refund may
not be available in certain circumstances if the holder is exempt from US tax on
the dividend received.
Arrangements have been made by the Depositary so that, subject to certain
exemptions, the tax credit will be refunded, net of the withholding tax, to a US
ADS holder if the ADS holder completes the declaration on the reverse of the
dividend check and presents the check for payment within three months from the
date of issue of the check. The exceptions include certain investment or
holding companies.
ADS holders who do not satisfy the foregoing requirements, and holders of
Ordinary Shares, must, in order to obtain a refund of tax credit (net of the
withholding tax), file in the manner and at the time described in US Revenue
Procedure 80-18, 1980-1 C.B. 623, and US Revenue Procedure 81-58, 1981-2 C.B.
678, a claim for refund of tax credit identifying the dividends with respect to
which the tax credit was paid. Claims for refund of tax credit must be made
within six years of the UK year of assessment (the 12-month period ending April
5 in each year) in which the related dividend was paid. The first claim for a
refund of tax credit is made by sending the appropriate UK form in duplicate to
the Director of the Internal Revenue Service Center with which the holder's last
federal income tax return was filed. Forms may be obtained from the IRS
Assistant Commissioner (International), 950 L'Enfant Plaza South, S.W.,
Washington, DC 20024, Attention: Taxpayers Service Division. Because a refund
claim is not considered made until the UK tax authorities receive the
appropriate form from the Internal Revenue Service, forms should be sent to the
Internal Revenue Service well before the end of the applicable limitation
period. Any claim for refund of tax credit by a US holder after the first claim
should be filed directly with the UK Inspector of Foreign Dividends, Lynwood
Road, Thames Ditton, Surrey, KT7 0DP, England.
Dividends (including amounts in respect of the tax credit and any amounts
withheld) must be included in gross income by a US holder, and will generally
constitute foreign source "passive" or "financial services" income for purposes
of applying the foreign tax credit limitations. Such dividends will generally
not be eligible for the dividends received deduction allowed to US corporations.
Subject to certain limitations, the applicable UK withholding tax will be
treated as a foreign tax eligible for credit against such holder's US federal
income tax.
UNITED KINGDOM TAXATION ON CAPITAL GAINS
Under the current Income Tax Convention, the US and the UK each may, in general,
tax capital gains in accordance with the provisions of its domestic law. Under
current UK law, residents of the US who are not resident or ordinarily resident
in the UK will not be liable to UK capital gains tax on capital gains made on
the disposal of their ADSs or Ordinary Shares unless those ADSs or Ordinary
Shares are held in connection with a trade carried on through a permanent UK
establishment. A US holder of an ADS or Ordinary Share will be liable for US
federal income tax on such gains to the same extent as on any other gains from
sales of stock.
UNITED KINGDOM INHERITANCE TAX
Under the current Estate Tax Convention, ADSs or Ordinary Shares held by an
individual who for the purpose of the convention is domiciled in the US and is
not a national of the UK will not, provided any tax chargeable in the US is
paid, be subject to UK inheritance tax on the disposal of ADSs or Ordinary
Shares by way of gift or upon the individual's death unless the ADSs or Ordinary
Shares are part of the business property of a permanent UK establishment of the
individual or, in the case of a holder who performs independent personal
services, pertain to a fixed base situated in the UK. In the exceptional case
where the ADSs or Ordinary Shares are subject both to UK inheritance tax and to
46
US federal gift or estate tax, the Estate Tax Convention generally provides for
double taxation to be relieved by means of credit relief.
UNITED KINGDOM STAMP DUTY AND STAMP DUTY RESERVE TAX
Transfer of ADSs are not subject to UK stamp duty provided that the transfer
instrument is not executed in, and at all times remains outside of, the UK In
addition, with effect from July 1, 1996, stamp duty is not chargeable on an
instrument where the transferee is a member of an electronic transfer system.
Under the Finance Act 1986, a stamp duty reserve tax ("SDRT") of 1.5% is payable
on all transfers to the Depositary, or its nominee, of Ordinary Shares for
inclusion in ADSs. Such SDRT is calculated on the purchase price or market value
of the Ordinary Shares so transferred.
F. DIVIDENDS AND PAYING AGENTS.
- ----------------------------------
Not Applicable
G. STATEMENT BY EXPERTS.
- --------------------------
Not Applicable
H. DOCUMENTS ON DISPLAY.
- --------------------------
Copies of this Annual Report on Form 20-F, including the exhibits hereto, may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, NW, Washington, D.C. 20549, and copies of all or any part thereof may be
obtained from the Commission upon payment of certain fees prescribed by the
Commission.
I. SUBSIDIARY INFORMATION.
- ---------------------------
Not Applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ---------------------------------------------------------------------------
Not applicable.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
- -----------------------------------------------------------------------
Not Applicable
47
PART II
-------
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
- -----------------------------------------------------------
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
- --------------------------------------------------------------------------------
PROCEEDS.
- ---------
None.
ITEM 15. CONTROLS AND PROCEDURES.
- ------------------------------------
15 a) Not applicable as reference period ended prior to August 29, 2002.
15 b) In the year ended April 30, 2002, the Company did not make any
significant changes in, nor take any corrective actions regarding, the Company's
internal controls or other factors that could significantly affect these
controls. Management of the Company plans to conduct regular evaluations of the
Company's disclosure controls and procedures.
ITEM 16. [RESERVED].
- ---------------------
48
PART III
--------
ITEM 17. FINANCIAL STATEMENTS. ITEM 17. FINANCIAL STATEMENTS
- --------------------------------
Not Applicable
ITEM 18. FINANCIAL STATEMENTS. ITEM 18. FINANCIAL STATEMENTS
- --------------------------------
The following audited consolidated financial statements, together with the
independent auditors' reports, are filed as part of this Annual Report on Form
20-F.
FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F1
Report of Previous Independent Auditors F3
Audited Financial Statements
Consolidated Balance Sheets at April 30, 2001 and 2000 F5
Consolidated Statements of Income for the fiscal years ended
April 30, 2002, 2001 and 2000 F7
Consolidated Statements of Changes in Shareholders' Equity for
the fiscal years ended April 30, 2002, 2001 and 2000 F8
Consolidated Statements of Cash Flows for the fiscal years ended
April 30, 2002, 2001 and 2000 F9
Notes to Consolidated Financial Statements F10
Financial Statement Schedule
All other Schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
49
ITEM 19. EXHIBITS.
- -------------------
The following exhibits are filed as part of this Annual Report on Form 20-F.
Exhibit Exhibit Description
Number --------------------
- -------
1.1 Memorandum and Articles of Association of the Registrant, as amended
(previously filed as Exhibit 3.1 to the Company's Annual Report on Form
20-F for the year ended April 30, 2000 (the "2000 20-F"), and incorporated
herein by reference).
2.1 Description of the Registrant's Ordinary shares (included in the
Registrant's Memorandum and Articles of Association, as amended, previously
filed as Exhibit 3.1 to 2000 20-F and incorporated herein by reference)
2.2 Form of Warrant Agreement (including form of Warrant Certificate), as
amended (previously filed as Exhibit 4.3 to the Company's Registration
Statement on Form F-1 (File No. 33-63994) (the "F-1 Registration
Statement") and incorporated herein by reference).
2.3 Form of Deposit Agreement, as amended (including specimen American
Depositary Receipt), as amended (previously filed as Exhibit 4.5 to the F-1
Registration Statement and incorporated herein by reference).
2.4 Form of Registration Rights Agreement (previously filed as Exhibit 10.17 to
the F-1 Registration Statement and incorporated herein by reference).
2.5 Loan Stock Agreement between the Registrant and Futuremedia (BVI) Limited
(the "Loan Stock Agreement") (previously filed as Exhibit 4.5 to 2000 20-F
and incorporated herein by reference).
2.6 Form of Warrant issued in connection with the Loan Stock Agreement
(previously filed filed as Exhibit 4.6 to 2000 20-F and incorporated herein
by reference).
4.1 Blanket Purchase Order between Ford Motor Company Limited and Futuremedia
Limited, dated May 19, 1986, and amendment dated July 1, 1991 (previously
filed as Exhibit 10.7 to the F-1 Registration Statement and incorporated
herein by reference).
4.2 License Agreement between Ford Motor Company Limited and Futuremedia
Limited, dated May 19, 1986, and amendment dated July 1, 1991 (previously
filed as Exhibit 10.8 to the F-1 Registration Statement and herein
incorporated by reference).
4.3 Approved Executive Share Option Scheme, as Amended (previously filed as
Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 filed
April 12, 2000 (File No. 33 - 11828)(the "S-8 Registration Statement") and
incorporated herein by reference).
4.4 Unapproved Executive Share Option Scheme (previously filed as Exhibit 99.2
to the S-8 Registration Statement) and incorporated herein by reference).
4.5 Approved Net Profit Sharing Scheme, as Amended (previously filed as Exhibit
10.20 to the F-1 Registration Statement and incorporated herein by
reference).
4.6 Incentive Profit Sharing Scheme (previously filed as Exhibit 10.6 to 2000
20-F).
4.7 Amendment dated May 2, 1996 to Exhibit 10.1 (previously filed as exhibit
10.22 to the Company's Annual Report on Form 20F for the year ended April
30, 1997 and incorporated herein by reference).
4.8 Agreement dated January 9, 1998 between the Registrant and British
Telecommunications PLC (previously filed as Exhibit 10.28 to the Company's
50
Annual Report on Form 20-F for the year ended April 30, 1998 and
incorporated herein by reference).
4.11 Agreement dated September 17, 1999 between the Registrant and National
Westminster Bank PLC (filed as Exhibit 10.30 to the Company's Annual Report
on Form 20-F for the year ended April 30, 1999 (the "1999 20-F")).
4.12 Agreement dated May 1, 1999 between the Registrant and Mentor Management
Consulting (previously filed as Exhibit 10.31 to 1999 20-F and incorporated
herein by reference).
8.1 List of Subsidiaries of the Registrant (previously filed as Exhibit 8.1 to
the Company's Annual Report on Form 20-F for the year ended April 30, 2001,
and incorporated herein by reference).
10.1 Consents of BDO Stoy Hayward and Ernst & Young LLP, Independent Auditors
(filed herewith - see pages F2 and F4 of this Report).
10.2 Chief Executive Officer Certification.
10.3 Chief Accounting Officer Certification.
51
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
FUTUREMEDIA PLC.
(Registrant)
By: /s/ Mats A I Johansson
Name: Mats A I Johansson
Title: Chief Executive Officer and
Authorized Signatory
Date: 14 November 2002.
52
CERTIFICATIONS
I, Mats Johansson, Chief Executive Officer of Futuremedia Plc, certify that:
1. I have reviewed this annual report on Form 20-F of Futuremedia Plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: 14 November 2002
/s/ Mats A I Johansson
- --------------------------
Mats A I Johansson
Chief Executive Officer
53
I, Peter Machin, Chief Accounting Officer of Futuremedia Plc, certify that:
1. I have reviewed this annual report on Form 20-F of Futuremedia Plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: 14 November 2002
/s/ Peter Machin
- ------------------
Peter Machin
Chief Accounting Officer
54
FUTUREMEDIA PLC AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Futuremedia PLC
We have audited the accompanying consolidated balance sheet of Futuremedia PLC
as of April 30, 2002 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance 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 provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Futuremedia PLC at
April 30, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has negative cashflows from operations and has a working capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO Stoy Hayward
London, England
November 11, 2002
F1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-11828) of our report dated November 11, 2002,
relating to the consolidated financial statements of Futuremedia PLC appearing
in the Company's Annual Report on Form 20-F for the year ended April 30, 2002.
Our report contains an explanatory paragraph regarding the Company's ability to
continue as a going concern.
/s/ BDO Stoy Hayward
BDO Stoy Hayward
London, England
November 14, 2002
F2
FUTUREMEDIA PLC AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Futuremedia PLC
We have audited the consolidated balance sheet of Futuremedia PLC as at April
30, 2001 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the two years in the period
ended April 30, 2001. 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 and
United States generally accepted standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance 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 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 Futuremedia PLC at
April 30, 2001 and the consolidated results of its operations and its
consolidated cash flows for each of the two years in the period ended April 30,
2001 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.
The accompanying financial statements have been prepared assuming that
Futuremedia will continue as a going concern. The Company has incurred
recurring operating losses, has a working capital deficiency, and is dependent
upon raising additional capital to continue operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Ernst & Young LLP
/s/ Ernst & Young LLPSouthampton, England
November 14, 2001
F3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-11828) of Futuremedia PLC of our report dated November 14, 2001 on
the consolidated financial statements and schedule included in this Annual
Report (Form 20-F) for the year ended April 30, 2002.
Ernst & Young LLP
/s/ Ernst & Young LLP
Southampton, England
November 14, 2002
F4
FUTUREMEDIA PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30,
--------------------------
2002 2002 2001
---- ---- ----
($'000) (GBP000) (GBP'000)
ASSETS
Current assets
Cash and cash equivalents 651 445 2,547
Accounts receivable, less allowance of GBP59,000
($86,000) in 2002 and GBP201,000 in 2001 for doubtful
accounts 164 112 475
Amounts recoverable on contracts 22 15 133
Other current assets 4 3 36
Inventories -finished goods 3 2 3
Prepaid expenses 575 393 444
----- ----- ------
Total current assets 1,419 970 3,638
Property held for Sale 1,328 908 908
Property and equipment
Land and buildings 86 59 59
Audio visual and computer equipment 606 414 280
Office equipment 104 71 71
----- ----- ------
796 544 410
Accumulated depreciation 565 386 243
----- ----- ------
231 158 167
Other assets
Goodwill 78 53 -
----- ----- ------
Total assets 3,056 2,089 4,713
===== ===== ======
See accompanying notes to the consolidated financial statements.
F5
FUTUREMEDIA PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30,
----------------------------
2002 2002 2001
---- ---- ----
($'000) (GBP'000) (GBP'000)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Fees received in advance 1,018 696 908
Accounts payable 287 196 662
Other taxes and social security costs 120 82 131
Other accounts payable 28 19 126
Other accrued expenses 174 119 381
Convertible Loan 600 410
------- ------ ------
Total current liabilities 2,227 1,522 2,208
Long-term debt less current portion - - 442
------- ------ ------
Total liabilities 2,227 1,522 2,650
Shareholders' equity
Ordinary shares of 1 1/9p each
Authorized - 75,000,000
Issued and outstanding- 29,648,374 at April 30, 2002,
29,648,374 at April 30, 2001 481 329 329
Shares to be issued 10,346,979 at April 30, 2002 . 740 506 -
Preference shares of 2p each
Authorized - 2,000,000
None issued - - -
Additional paid-in capital 21,686 14,822 14,822
Retained deficit (21,980) (15,023) (13,011)
Other comprehensive loss - cumulative translation adjustment (98) (67) (77)
------- ------ ------
Total shareholders' equity 829 567 2,063
------- ------ ------
Total liabilities and shareholders' equity 3,056 2,089 4,713
======= ====== ======
See accompanying notes to the consolidated financial statements.
F6
FUTUREMEDIA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended April 30,
( in 000's except share data)
-----------------------------
2002 2002 2001 2000
---- ---- ---- ----
$ GBP GBP GBP
Net sales 1,333 911 743 867
Cost of sales 2,247 1,536 1,789 1,776
Gross loss (914) (625) (1,046) (909)
Operating expenses
Sales and marketing 241 165 558 329
General and administrative 1,719 1,175 2,051 1,355
Facilities expenses 92 63 157 79
Total operating expenses 2,053 1,403 2,766 1,763
Operating loss . (2,967) (2,028) (3,812) (2,672)
Interest income 47 32 120 18
Interest expense (42) (29) (36) (62)
Foreign currency gains 19 13 31 71
Net loss (2,944) (2,012) (3,697) (2,645)
Loss per share basic and
diluted. (9.65)c (6.60)p (12.71)p (11.17)p
Weighted average shares
Outstanding 30,501,619 30,501,619 29,098,429 23,675,761
See accompanying notes to the consolidated financial statements.
F7
FUTUREMEDIA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<BTB>
Number of Share Additional Shares Cumulative Total
Ordinary Capital Paid-in to be Retained Translation Shareholders
Shares Amount Capital Issued Deficit Adjustment Equity
----------------------------------------------------------------------
GBP GBP GBP GBP GBP GBP
'000 '000 '000 '000 '000 '000
At April 30, 1999 20,684,522 230 7,707 - (6,669) (23) 1,245
Exchange translation
adjustments - - - - - (13) (13)
Net loss - - - - (2,645) - (2,645)
Comprehensive loss (2,658)
Issuance of shares (net
of issuance
costs of GBP178,000) 6,731,630 75 4,546 - - 4,621
----------------------------------------------------------------------
At April 30, 2000 27,416,152 305 12,253 - (9,314) (36) 3,208
Exchange translation
adjustments - - - - - (41) (41)
Net loss - - - - (3,697) - (3,697)
Comprehensive loss (3,738)
Issuance of shares (net
of issuance
costs of GBP69,000) 2,232,222 24 2,569 - - - 2,593
----------------------------------------------------------------------
At April 30, 2001 29,648,374 329 14,822 - (13,011) (77) 2,063
Exchange translation
adjustments - - - - - 10 10
Net loss - - - - (2,012) - (2,012)
Comprehensive loss - - (2,002)
Shares to be issued (net
of issuance costs
of GBP64,000) 10,346,979 - - 506 - 506
----------------------------------------------------------------------
At April 30, 2002 39,995,353 329 14,822 506 (15,023) (67) 567
======================================================================
See accompanying notes to the consolidated financial statements.
F8
FUTUREMEDIA PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended April 30,
2002 2002 2001 2000
----------------------------------
GBP GBP GBP GBP
'000 '000 '000 '000
Operating activities
Net loss (2,944) (2,012) (3,697) (2,645)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation 215 147 111 111
Shares issued for services 137 94 - -
Loss/(profit) on disposal of fixed assets (1) (1) 16 (8)
Amortization of deferred production costs - - 109 83
Accounts receivable 531 363 (236) 17
Amounts recoverable on contracts 173 118 (9) 158
Other current assets 48 33 96 10
Inventories - - 1 -
Prepaid expenses 75 51 (365) (38)
Deferred production costs - - - (15)
Fees received in advance . (310) (212) 903 (5)
Accounts payable (682) (466) 389 94
Other accounts payable (156) (107) 99 -
Other taxes and social security costs (72) (49) 7 19
Other accrued liabilities (383) (262) (35) 345
Deferred tax valuation allowance - - 65 -
Income taxes payable - - - -
-------- ------- ------- -------
Net cash used by operating activities (3,369) (2,303) (2,546) (1,874)
-------- ------- ------- -------
Investing activities
Investing activities
Capital expenditures (200) (137) (130) (71)
Proceeds on disposal of fixed assets 1 1 - 16
-------- ------- ------- -------
Net cash used by investing activities (199) (136) (130) (55)
-------- ------- ------- -------
Financing activities
Proceeds of share issues 618 423 2,661 4,721
Share issue costs (93) (64) (69) (178)
Long-term debt (including current portion) (47) (32) 58 (435)
-------- ------- ------- -------
Net cash provided by financing activities 478 327 2,650 4,108
-------- ------- ------- -------
Effects of exchange rate changes 14 10 (39) (2)
-------- ------- ------- -------
Net (decrease)/increase in cash and cash equivalents (3,076) (2,102) (65) 2,177
Cash and cash equivalents at beginning of period 3,727 2,547 2,612 435
-------- ------- ------- -------
Cash and cash equivalents at end of period 651 445 2,547 2,612
======== ======= ======= =======
Supplemental disclosure of cashflow information
Interest paid during the period 43 29 36 62
======== ======= ======= =======
Supplemental disclosure of non-cash transactions
Issuance of shares in acquisition 78 53 - -
Issuance of shares for services 137 94 - -
See accompanying notes to the consolidated financial statements.
F9
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Futuremedia PLC was incorporated in England in 1982 as Futuremedia Limited and
re-registered as a public company in 1993. The Company's principal activity is
the provision of Internet and Intranet learning and communications products and
services. Futuremedia also produces learning and communications material on
other media, such as CD-ROM.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and all its subsidiaries (together the "Company"). All inter-company
accounts and transactions have been eliminated.
FINANCIAL RESOURCES AND GOING CONCERN
In the course of its operations the Company has sustained continuing operating
losses which have resulted in the Company requiring short-term bank and other
loans and equity and loan stock finance to sustain its operations.
Since its initial public offering ("IPO"), the Company has incurred net losses
and experienced negative cash flows from operating activities. Net losses since
its IPO have resulted in an accumulated deficit of GBP15,023,000 as of April 30,
2002. At November 14, 2002, the Company's cash resources and available
borrowings are insufficient to fund the current level of operations for the next
twelve months. Management believes that the steps taken to reduce its cost base
during the latter part of the fiscal year ended April 30, 2002, together with
the strong forward order book and active sales prospects it is pursuing,
supported by the recruitment of new sales staff in October and November 2002,
will enable the Company to return to eventual profitable trading, and therefore
has prepared these financial statements on a going concern basis. The
availability of bridging finance in anticipation of the sale of the Company's
premises at Arundel Road, Walberton, West Sussex will provide funds to discharge
the balance on the Loan Stock Agreement and further working capital. There is
significant reliance therefore on the generating of funds through profitable
trading. If the Company is unsuccessful in achieving its anticipated revenues
in its third fiscal quarter of the current year, managment recognises that there
will be a need to secure additional funding through debt or equity capital
before the end of the fiscal year to April 30, 2003.
There can be no assurance that the Company will be successful in implementing
these plans. The Company's financial statements do not include any adjustments
to reflect the possible future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcaome of this
uncertainty.
F10
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES -(CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with US generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Management believes that the
estimates are reasonable.
CONVENIENCE TRANSLATIONS
Translation of the financial statements at April 30, 2002 and for the year then
ended from sterling into US dollars is for informational purposes only and has
been made at the April 30, 2002 Noon Buying Rate of GBP1.00 to $1.4631.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and short-term deposits with maturities
of less than three months at inception.
INVENTORIES
Inventories are stated at the lower of cost, determined on the basis of the
first in, first out method, and market value.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation is charged on a
straight-line basis to costs and expensed over the expected useful lives of the
assets. Depreciation is provided at the following annual rates:
Freehold buildings 2%
Freehold land Nil
Property improvements 20%
Audio visual and computer equipment
Long-term 15%
Mid-term 20%
Short-term 33%
Office equipment 20%
Leasehold improvements are amortized over the shorter of their estimated lives
and the non-cancelable term of the lease.
Freehold land and buildings are held for sale at the lower of cost less
depreciation and fair value less cost to sell.
The freehold buildings have not been depreciated since they were put on the
market.
F11
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES -(CONTINUED)
NET SALES
Net sales represent the value of goods and services delivered, excluding value
added tax. Generic or bespoke product revenues are recognized on the basis of
goods delivered or the value of work completed, and are invoiced either on
delivery or on the achievement of agreed milestones. Consultancy revenues are
recognized and invoiced as they are delivered. Service contract revenues, which
usually comprise initial setup fees, product customisation to the customer's
specification, the provision of learning materials together with license fees
and hosting fees, are aggregated and recognized evenly over the period of the
license agreement. Invoicing for such contracts may be periodic during the
license period or, more usually, will be invoiced as a single payment in
advance.
Contracts for the supply of products to the customer's specification which take
several months to produce are deemed long term contracts. Profit on long-term
contracts is taken as the work is carried out if the final outcome can be
assessed with reasonable certainty. The profit included is calculated on a
percentage-of-completion basis to reflect the proportion of work carried out at
the year-end, by recording sales and related costs as contract activity
progresses. Sales are calculated as that proportion of total contract value
that costs incurred to date relate to total expected costs for that contract.
Revenues derived from variations on contracts are recognized only when they have
been accepted by the customer. Amounts not billable at the balance sheet date,
which are billable either at agreed dates or on the achievement of agreed
benchmarks, are shown separately on the balance sheet. Full provision is made
for losses on all contracts in the year in which they are first foreseen.
PENSIONS
The Group operates a number of defined contribution pension plans.
Contributions are charged to income as they become payable in accordance with
the rules of the plans.
RESEARCH AND DEVELOPMENT
Expenditure on research and development is written off as incurred, unless,
where it is deemed appropriate and meets the relevant criteria, development
expenditure is carried forward in the balance sheet as deferred production
costs. For the years ended April 30, 2000, 2001 and 2002 the amounts written
off were GBP259,000, GBP608,000 and GBP311,000 ($455,000), respectively. None
of the expenditure in the year to April 2002 was capitalized, since the
expenditure was incurred on routine/periodic alterations to the current product.
DEFERRED PRODUCTION COSTS
Costs incurred in the production of new titles, the future recoverability of
which can reasonably be regarded as assured, are deferred until marketing of the
title commences. These costs include product design and development and
comprise direct labor and certain overheads and the cost of materials. Deferred
production costs are amortized in line with the expected future sales of the
title to a maximum of three years. Deferred costs are regularly reviewed for
impairment and, as appropriate, their amortization is accelerated or they are
expensed.
F12
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES -(CONTINUED)
FOREIGN CURRENCY TRANSLATION
Transactions in non-functional currencies are recorded at the rates ruling at
the date of the transactions. Gains and losses resulting from non-functional
currency translations, and the remeasurement of non-functional currency balances
are included in the determination of net income in the period in which they
occur, in accordance with the requirements of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation."
Assets and liabilities of overseas subsidiaries are translated at the exchange
rate in effect at the year end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in a separate component of shareholder's equity.
LONG-LIVED ASSETS
Long lived assets are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through the estimated undiscounted future cash flows resulting from
the use of these assets, when any such impairment exists, the related assets
will be written down to fair value.
EARNINGS PER SHARE
Earnings per share figures have been calculated using the method required by
Statement of Financial Standards No. 128 "Earnings per Share". Under the
provisions of SFAS No. 128, basic net earnings per share is computed by dividing
the net earnings available to common shareholders for the period by the weighted
average number of shares of common stock outstanding during the period, which
included shares to be issued. The calculation of diluted net earnings per share
gives effect to common stock equivalents, however, potential common shares are
excluded if their effect is anti-dilutive. The calculation also excludes a
total of 2,987,572 warrants to purchase an equivalent number of Ordinary shares,
together with 4,499,274 options to purchase Ordinary shares outstanding as at
April 30, 2002 under the Company's Executive Approved and Unapproved Share
Option Schemes.
INCOME TAXES
The Company accounts for income taxes using the liability method required by
statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
F13
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES -(CONTINUED)
ADVERTISING COSTS
All advertising costs incurred in the promotion of the Company's products and
services are expensed as incurred. Advertising costs were GBP9,000, GBP65,000,
and GBP16,000 for the years ended April 30, 2000,2001 and 2002.
2. LOANS
The aggregate amount of bank loans (secured) was as follows:
April 30,
--------------------
2002 2001
---- ----
(GBP'000)
Bank loan accounts: Long term - 22
--------- ---------
- 22
The bank loan was repaid in November, 2001.
Interest was charged at 2.0% over base rate during the period May 1, 2001 until
the loan was repaid in November 2001.
The aggregate amount of unsecured loans were as follows:-
<BTB>
April 30,
---------------
2002 2001
---- ----
(GBP'000)
Convertible Variable Rate Unsecured Loan Stock 2002 410 420
-------- --------
410 420
======== ========
During July 1997, additional funding was secured by way of issue of Variable
Rate Unsecured Loan Stock 2002 by Futuremedia (B.V.I.) Limited, a wholly owned
subsidiary of Futuremedia PLC, amounting to GBP381,000 ($600,000) for the
purpose of funding group capital investment in support of the agreed business
plan. At the same time, warrants granting the right to obtain one Ordinary Share
for each $0.28125 of Loan Stock outstanding at a price per share of $0.28125 per
Ordinary Share were issued. In February 2000, 711,111 ordinary shares were
issued in exchange for the same number of warrants at the agreed value of
$0.28125 per ordinary share. The proceeds from the exercise of the warrants can
only be used to repay the equivalent amount of Loan Stock. Under the
arrangement, there remains a further GBP254,000 ($400,000) available to be drawn
down at the Company's sole option. Interest is payable on amounts drawn down at
commercial rates. At April 30, 2002, the interest rate was 6.0%.
The loan was due for repayment in July, 2002, but was not repaid on the due date
due to a lack of available funds, but the loan stockholder agreed to defer
repayment until the Company had secured
F14
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. LOANS - (CONTINUED)
additional financing to enable it to do so. Under the contractual terms of the
loan, interest is payable at 20% per annum beyond the contractual settlement
date. Subsequent to the year end, in October 2002, the Company sought and was
offered in principle a bridging loan facility of up to GBP500,000 in order that
it could repay the balance under the Loan Stock Agreement 2002 and provide
additional working capital. It is anticipated that the necessary paperwork
associated with the new facility will be completed by mid November 2002, at
which time the current loan will be repaid. The basic interest rate of the new
facility will be 16.5% per annum. The loan will be secured by way of a charge
on the premises, and will be due for repayment after twelve months.
FAIR VALUES OF FINANCIAL INSTRUMENTS
April 30
----------------------------------------------
2002 2001
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
(GBP'000) (GBP'000) (GBP'000) (GBP'000)
Cash and cash equivalents . 445 445 2,547 2,547
Floating rate long-term . . . . . . . 410 410 442 442
The carrying value of these financial instruments approximates fair value due to
the short period until maturity.
3. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Group's deferred tax liabilities and assets are as follows:
April 30,
------------------
2002 2001
---- ----
(GBP'000)
Book over tax depreciation 97 64
Operating losses carried forward 4,005 3,424
Other differences and tax benefits of
exceptional pension charge 40 104
-------- -------
4,142 3,592
Less: valuation allowance (4,142) (3,592)
-------- -------
Net deferred tax assets - -
======== =======
F15
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES - (CONTINUED)
There is no time limit for the utilization of the operating losses carried
forward (tax value GBP4,005,000) which are specific to certain companies and
cannot be relieved against profits in other Group companies.
For financial reporting purposes, loss before income taxes includes the
following components:
Year ended April 30,
-------------------------
2002 2001 2000
---- ---- ----
(GBP'000)
United Kingdom (1,985) (3,664) (2,613)
Overseas (27) (33) (32)
------- ------- -------
(2,012) (3,697) (2,645)
The reconciliation of income tax computed at the UK statutory tax rate to the
effective rate is:
Year ended April 30,
----------------------------------------------------
2002 2001 2000
(GBP'000) % (GBP'000) % (GBP'000) %
Statutory rate (604) (30.0) (1,110) (30.0) (793) (30.0)
Unrelievable UK tax losses 550 27.3 1,094 29.6 781 29.5
Non deductible expenses 54 2.7 - - - -
Other sundry items - - 16 0.4 12 0.5
-------- -------- --------- ------- ----- ------
- - - - - -
It is anticipated that no charge to taxation will arise on the repatriation of
overseas retained earnings to the United Kingdom due to the relevant double tax
treaties between the United Kingdom and the United States where the Group has a
presence.
F16
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LEASE COMMITMENTS
OPERATING AND CAPITAL AGREEMENTS
The future minimum rental payments under non-cancelable operating leases at
April 30, 2002 are:
Motor
Vehicles
and
Equipment
---------
(GBP'000)
2003 9
2004 2
2005 1
2006 --
---------
2007 --
---------
Rental expense was GBP40, GBP105 and GBP71for the years ended April 30, 2000,
2001 and 2002.
5. RELATED PARTY TRANSACTIONS
On March 9, 2000, the Company entered into a Finder's Agreement with Noesis
Capital Corporation. The Agreement contemplated that Noesis would make
introductions on behalf of the Company to facilitate possible future business
transactions. The agreement was terminated on July 13, 2000. The Company has
made no payments in connection with the Finder's Agreement and it does not
expect to make any such payments.
6. SEGMENT INFORMATION, EXPORT SALES AND MAJOR CUSTOMERS
The Group currently operates in one principal industry segment, the training
market. The Group's sales were divided by geographical location of customer as
follows:
Year ended April 30,
---------------------------------
2002 2001 2000
---- ---- ----
(GBP'000)
United Kingdom 849 491 592
Rest of Europe 3 149 57
Rest of the World 59 103 218
------- -------- --------
911 743 867
======= ======== ========
During the year ended April 30, 2002, one customer accounted for 69% of sales
and another for 9% of sales; during the year ended April 30, 2001, two customers
each accounted for 20% of sales; and during the year ended April 30, 2000, one
customer accounted for 30% and another for 21% of sales.
F17
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION, EXPORT SALES AND MAJOR CUSTOMERS - (CONTINUED)
At April 30, 2002 the major customers identified above accounted for 8% of the
amounts receivable, 23% in 2001 and 13% in 2001.
Information about the Group's operations by geographic area is as follows:
United Rest of Eliminations Consolidated
Kingdom the World ------------- ------------
--------- ---------
YEAR ENDED APRIL 30, 2002 (GBP'000)
Net sales
Customers 911 - - 911
------- --------- --------- ----------
Total 911 - - 911
======= ========= ========= ==========
Operating loss (2,028) - - (2,028)
Net interest income and foreign
currency gains and losses 45 (29) - 16
------- --------- --------- ----------
Loss before income taxes (1,983) (29) - (2,012)
======= ========= ========= ==========
Identifiable assets 2,089 255 (255) 2,089
YEAR ENDED APRIL 30, 2001
Net sales
Customers 743 - - 743
------- --------- --------- ----------
Total 743 - - 743
======= ========= ========= ==========
Operating loss (3,812) - - (3,812)
Net interest expense and foreign
currency gains and losses 148 (33) - 115
------- --------- --------- ----------
Loss before income taxes (3,664) (33) - (3,697)
======= ========= ========= ==========
Identifiable assets 4,947 287 (287) 4,947
======= ========= ========= ==========
YEAR ENDED APRIL 30, 2000
Net sales
Customers 867 - - 867
------- --------- --------- ----------
Total 867 - - 867
Operating loss (2,672) - - (2,672)
======= ========= ========= ==========
Net interest expense and foreign
currency gains and losses 59 (32) - 27
------- --------- --------- ----------
Loss before income taxes (2,613) (32) - (2,645)
======= ========= ========= ==========
Identifiable assets 4,437 269 (269) 4,437
======= ========= ========= ==========
Inter-company sales between geographic areas are accounted for at cost plus
handling and other similar expenses. Identifiable assets are those used in the
Group's operation in each area.
F18
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PENSION PLANS
The Group operates various defined contribution pension plans on behalf of the
directors and other staff. Contributions payable are charged to income as
incurred. Contributions by the Group are determined in accordance with the
rules of the pension plans. Contributions aggregated GBP43,000 ($63,000) in
2002, GBP51,000 in 2001, and GBP46,000 in 2000. The Group has no obligations
in respect of post retirement benefits other than the pension obligations
described above.
8. ACQUISITION OF ASSETS AND BUSINESS
The Company acquired, on March 1, 2002, the assets and business of Palm Teach
Limited for a total consideration of GBP53 ($78) The consideration of GBP53
represents the fair value of the 759,700 shares issued to the shareholders.
As of the year end, a substantial portion of the purchase price of the assets
and liabilities of Palm Teach limited is recorded as Goodwill, however, a formal
purchase price allocation has not been finalized. The Company expects to
finalize this in 2003 fiscal year.
9. INTANGIBLE ASSETS AND GOODWILL
Year ended April 30,
-----------------------
2002 2001 2000
---- ---- ----
Cost (GBP'000)
At May 1 264 1,523 1,508
Additions 53 - 15
Amounts written off - (1,259) -
------ -------- ------
At April 30 317 264 1,523
------ -------- ------
Amortization
At May 1 264 1,414 1,331
Charge for year - 109 83
Amounts written off - (1,259) -
------ -------- ------
At April 30 264 264 1,414
------ -------- ------
Net book amount at April 30 53 0 109
====== ======== ======
The addition in the current year is the goodwill resulting from the acquisition
described in Note 8. As the acquisition was completed after June 30, 2001, no
amortisation of goodwill was necessary in accordance with SFAS 142.
F19
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PROPERTY PLANT AND EQUIPMENT
April 30,
--------------------------------------------------
2002 2001
------------------------ ----------------------
Cost Depreciation Net Cost Depreciation Net
(GBP'000)
Property improvements . . . . . . . 59 59 - 59 59 -
Audio visual and computer equipment
Long-term . . . . . . . . . . . . . - - - - - -
Mid-term. . . . . . . . . . . . . . 78 69 9 78 53 25
Short-term. . . . . . . . . . . . . 336 237 99 202 116 86
Office equipment. . . . . . . . . . 71 21 50 71 15 56
----- ----- ----- ----- ------ -----
544 386 15 410 243 167
===== ===== ===== ===== ====== =====
The net book value includes no amounts in respect of assets held under capital
leases.
Freehold land and buildings at a carrying value of GBP908, ($1,328) are held for
sale at the lower of cost less depreciation and fair value less costs to sell at
April 30, 2002. In March 2001, the Company committed to a plan to sell it's
premises. From that time there have been several offers made and attempts to
finalize the contractual sale of the premises, but for various reasons, none of
these arrangements were finalized. The Company is still actively seeking a
purchaser.
11. INTEREST EXPENSE
Year ended April 30,
--------------------
2002 2001 2000
---- ---- ----
(GBP'000)
Loan interest 29 36 62
---- ---- ----
29 36 62
==== ==== ====
12. CHANGES IN SHAREHOLDER EQUITY
In July 2000, the Company completed an additional private placement under
Regulation S pursuant to which the Rennes Foundation purchased 1,944,444
Ordinary Shares and another non-US investor purchased 277,778 Ordinary shares at
a price of $1.80 per Share for an aggregate purchase price of approximately $4.0
million in cash
Also in July 2000, an option to purchase 10,000 ordinary shares at a price of
$0.50 per ordinary share under the Company's Unapproved Executive Share Option
Plan was exercised by an employee of the Company.
In March 2002, the Company contracted for the issue of and received the cash for
an aggregate of 4,702,410 Ordinary Shares at a price of $0.083 per Ordinary
Share representing an aggregate purchase price of approximately $390,000.
F20
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. CHANGES IN SHAREHOLDER EQUITY - (CONTINUED)
Also in March 2002, the Company contracted for the issue of an aggregate of
759,700 Ordinary Shares at a market price of $0.07 per Ordinary Share pursuant
to the stock transaction for the acquisition of the assets of Palm Teach
Limited, together with the issue of an aggregate 702,900 Ordinary shares at a
market price of $0.07 per Ordinary share to four key individuals on their
joining the Company.
Also in April 2002, the Company contracted for the issue of and received the
cash for 3,276,923 Ordinary shares at a price of $0.065 per Ordinary Share
representing an aggregate purchase price of approximately $213,000.
Also in April 2002, the Company contracted for the issue of 803,046 Ordinary
Shares at a price of $0.07 per Ordinary Share under a Salary sacrifice
arrangement, representing an aggregate purchase price of $56,000. At the same
time, a further 102,000 Ordinary Shares at a price of $0.07 per Ordinary Share
were agreed to be issued in settlement of outstanding invoiced charges for work
done for the Company.
At April 30, 2002 there were 854,240 warrants outstanding for the purchase of an
equivalent number of Ordinary shares, issued in August 1993,at the time of the
Company's initial float, which were due to expire in August 2002. The Company
decided to extend these warrants for a further twelve months until August 2003.
Persuant to the Loan Stock Agreement, 2002, as at April 30, 2002. there were
2,133,332 warrants outstanding for the purchase of an equivalent number of
Ordinary shares.
13. EMPLOYEE PROFIT-SHARING AND OPTION PLANS
In July 1993, the Company adopted three employee profits share or share option
schemes, as follows.
Under the Company's "Approved Executive Share Option Scheme", options to acquire
the Company's Ordinary Shares may be granted to all or selected employees. Any
full time employee, other than a director, of the Company who is not within two
years of his or her due date for retirement and who, within one year preceding
the grant, did not hold more than 10% of the share capital of the Company, is
eligible to participate. The exercise price of the options must be no less than
85% of the fair market value of the Company's ADSs on the date of grant. The
value of shares underlying the options granted to any employee may not exceed
the greater of 100,000 ($162,000) or four times earnings. An option
generally becomes exercisable three years after the date on which it was
granted, and may not be exercised more than ten years after the date of grant.
In certain circumstances, an option will be exercisable after the death or
termination of the employment of the option holder. No UK income tax will be
payable, even if the options are granted at a discount to market value, either
at the time of the grant or the exercise of the options, although there are
certain conditions that must be satisfied concerning the timing of any exercise.
UK capital gains tax may be payable at the time of the ultimate disposition of
the underlying shares.
The Company's "Employee Share Ownership Plan"(also known as the Approved Net
Profit Sharing Scheme) provided for the establishment of a trust, to be funded
by payments from the Company. The funds in the trust were required to be used
to subscribe for shares from the Company, which would then
F21
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE PROFIT-SHARING AND OPTION PLANS - (CONTINUED)
have been allocated to individual employees. The maximum amount that was
permitted be allocated to an individual employee per annum was the greater of
GBP3,000 or 10% of salary, up to a maximum of GBP8,000. As of September 2000,
this scheme was terminated and the Trust dissolved. No monies had been
allocated nor shares purchased.
Under the Company's "Unapproved Executive Share Option Scheme", options may be
granted to selected full-time employees, including directors, based on their
performance. The exercise price of the options granted must be at least the
fair market value of the Company's ADSs. The value of options to be granted is
not subject to any financial limit, although the number of shares over which the
options may be granted is subject to an overall restriction.
In addition to the foregoing, the Company maintains a net profit sharing plan
(the "Employee Profit Share Scheme" or the "Incentive Profit Sharing Scheme")
pursuant to which cash may be paid to employees out of the Company's annual
profits. No such distributions were made in the years ended April 30, 2001 or
2000. Pursuant to an agreement with the underwriter of the Company's initial
public offering, the aggregate value of the cash that may be issued annually
under the Employee Profit Share Scheme will not exceed 10% of the Company's
pre-tax profits, and, based on the Company's performance, may be limited to 10%
of the Company's post-tax profits.
Determinations as to the granting of options to employee-directors are made by
the Remuneration Committee.
Under the Approved Executive Share Option Scheme, 2,616 options are outstanding
at an exercise price of $4.25 and may be exercised until August 19, 2003, 3,907
options are outstanding at an exercise price of $2.55 and may be exercised until
August 19, 2003, 20,500 options are outstanding at an exercise price of $0.90625
and may be exercised until January 16, 2008 and 13,500 options are outstanding
at an exercise price of $1.5938 and may be exercised until July 25, 2010.
F22
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE PROFIT-SHARING AND OPTION PLANS - (CONTINUED)
A summary of the options outstanding under the Company's "Approved Share Option
Scheme" as at April 30, 2002 is as follows:
Number of Shares Weighted
Under Option Average Option
----------------- Price Per Share
-----------------
Outstanding April 30,1999 83,421 $1.3154
Options forfeited (36,459) $1.1708
---------------
Outstanding April 30,2000 46,962 $1.4277
Options granted 90,000 $1.5938
Options forfeited (58,574) $1.5741
---------------
Outstanding April 30,2001 78,388 $1.5090
Options forfeited (37,865) $1.4767
---------------
Outstanding April 30, 2002 40,523 $1.5096
===============
The following options have been issued under the Company's "Unapproved Executive
Share Option Scheme", and were outstanding as at April 30, 2002.
Exercisable when the
Date No. of Subscription Date Market Price at least
Granted Share Price Exercisable
- ------------ --------- ------------ -------- --------------------
Sep 07, 2000 5,000 0.19 Current No Restriction
Sep 07, 2000 5,000 0.59 Current No Restriction
Sep 07, 2000 100,000 $1.00 Current No Restriction
May 01, 2001 69,750 $0.35 05/01/03 No Restriction
May 01, 2001 69,750 $0.35 11/01/03 No Restriction
May 01, 2001 69,750 $0.35 05/01/04 No Restriction
May 01, 2001 69,750 $0.35 11/01/04 No Restriction
Oct 27, 1996 100,000 $0.25 Current $ 1.00
Jan 17, 1997 5,000 $0.19 Current No Restriction
Oct 30, 1997 5,000 $0.19 Current No Restriction
Feb 14, 2002 474,750 $0.15 07/01/02 No Restriction
Feb 14, 2002 1,441,359 $0.15 03/01/03 No Restriction
Feb 14, 2002 474,750 $0.10 07/01/02 No Restriction
Feb 14, 2002 1,568,892 $0.10 03/01/03 No Restriction
---------
4,458,751
=========
The Company accounts for options granted under these plans in accordance with
the provisions of APB No. 25.
F23
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE PROFIT-SHARING AND OPTION PLANS - (CONTINUED)
In February, 2002, 1,075,000 existing options to purchase ordinary shares under
the Unapproved Executive Share Option Scheme at prices varying from $0.59 to
$3.00 per Ordinary share were cancelled and replaced with options to purchase
556,417 Ordinary shares at $0.10 per Ordinary share and 518,083 Ordinary shares
at $0.15 per Ordinary share, vesting between July 2002 and March 2003, and are
now accounted for as variable options. There is an immaterial difference between
the exercise price of the variable options and the trading price of the
Company's stock at the year end, therefore no compensation expense was recorded
in the current fiscal year.
A summary of the options outstanding under the Company's "Unapproved Share
Option Scheme" as at April 30, 2001 is as follows:
Number of Weighted
Shares Average Option
Under Option Price Per Share
------------- ---------------
Outstanding at April 30, 1999 1,535,000 $0.81
Options granted 484,000 $0.87
Options lapsed (225,000) $0.79
Outstanding at April 30, 2000 1,794,000 $0.83
-------------
Option granted 1,010,001 $1.41
Options lapsed (280,667) $1.47
Options exercised (10,000) $0.50
-------------
Outstanding at April 30, 2001 2,513,334 $0.99
Options granted 4,742,251 $0.165
Options lapsed and cancelled (2,796,834) $0.9056
-------------
Outstanding at April 30, 2001 4,458,751 $0.1605
=============
No share options were granted at market price in the year to April 30, 2002.
313,338 share options were granted at market price in the year ended April 30,
2001.
No share options were granted at below market price in the year ended April 30,
2002. The weighted average fair value of options granted at below market price
in the year ended April 30, 2001 was GBP0.60 ($0.86). The weighted average fair
value of options granted above market price in the year ended April 30, 2002 was
GBP0.04 ($0.06), 2001 GBP0.28. The determination of the fair value of all stock
options granted in 2002, 2001 and 2000 was calculated using the Black Scholes
method based on (i) risk-free interest rates of 3.84% (2001: 5.25% and 2000:
5.25%), (ii) expected option lives of 3 to 5 years (weighted average 3.3 years),
(iii) dividend yield of 0% and iv) a volatility of 0.318 (2001: 1.276 and 2000:
0.919).
F24
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE PROFIT-SHARING AND OPTION PLANS - (CONTINUED)
The following table summarizes the pro-forma consolidated results of operations
of the company had the fair value based method of SFAS No. 123 been used in
accounting for stock options.
Year ended April 30
----------------------
2002 2002 2001 2000
---- ---- ---- ----
($'000) (GBP'000) (GBP'000) (GBP'000)
Net loss as reported (2,944) (2,012) (3,697) (2,645)
Pro-forma (3,009) (2,056) (3,892) (2,808)
$ GBP GBP GBP
Net loss per share as reported (0.10) (0.07) (0.13) (0.11)
Pro-forma (0.10) (0.07) (0.13) (0.12)
14. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB Statement
No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognized acquired intangible assets
apart from goodwill if they meet certain criteria. SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. Accordingly, the Company
accounted for the acquisition as described in Note 8 in accordance with SFAS
141.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. This Statement changes the accounting for goodwill
from an amortization method to an impairment-only method. The amortization of
goodwill, including goodwill recorded in past business combinations will cease
upon adoption of this Statement, which will begin with the Company's fiscal year
beginning May 1, 2002. However, goodwill and intangible assets acquired after
June 30, 2001 will be subject to immediate adoption of the Statement. The
adoption of this standard will not have a material effect on the consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", in that it removes goodwill from its impairment
F25
FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
scope and allows for different approaches in cash flow estimation. However, SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition
and measurement of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of. SFAS No. 144 also supersedes the business
segment concept in APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in
that it permits presentation of a component of an entity, whether classified as
held for sale or disposed of, as a discontinued operation. However, SFAS No.144
retains the requirement of APB Opinion No. 30 to report discontinued operations
separately from continuing operations. The Company is required to adopt the
provision of SFAS No. 144 beginning with its fiscal year that starts May 1,
2002. The Company is still evaluating the effect of the standard on its
consolidated financial statements.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement provides guidance on the classification of gains and
losses from the extinguishment of debt and on the accounting for certain
specified lease transactions. The adoption of this statement will not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring activities. SFAS No.
146 also addresses recognition of certain costs related to terminating a
contract that is not a capital lease, costs to consolidate facilities or
relocate employees, and termination benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Given that SFAS No. 146 was issued in June
2002 and is not yet effective, the impact on the Company's financial position or
results of operations from adopting SFAS No. 146 has not been determined.
15. COMMITMENTS
The Company has secured the provision of its Internet Service Provider (ISP)
service requirements with Siemens UK Ltd. for a period of three years commencing
September 2001. The terms of the contract allow termination on three months
notice after the completion of the first year. In April 2001, the Company
contracted with Consignia Plc (UK) for the provision of a learning management
system comprising a hosted service together with learning content for a period
of 22 months commencing June 1, 2001. The total value of the contract was
approximately GBP1,000,000 ($1,438,600).
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FUTUREMEDIA PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENTS
Subsequent to the year end, in May 2002, the Company completed the acquisition
of C2W limited, a small UK based consultancy company specializing in resource
management, in an all-paper transaction at a net value of GBP29,000 ($45,000),
though the three personnel associated with that company had been employed by
Futuremedia since the beginning of April 2002. It is anticipated that the
acquisition will greatly assist the growth of the Company's knowledge management
capabilities, leveraging the contacts C2W has in the resource, environmental and
property sectors.
In April 2002, the Company had contracted with another private UK investor for
the issue of a total of 7,646,154 Ordinary shares at a price of $0.065 per
Ordinary share for a total purchase price of GBP350,000 ($497,000), payable by
instalment by the end of September 2002. No provision has been made in the
financial reports in respect of this agreement. Subsequent to the year end,
this investor defaulted on a substantial part of this commitment. Alternative
investors were found to replace the defaulted amounts, and the full investment
was completed in November, 2002.
In October 2002, the Company completed a new investment round from existing
investors and affiliates, raising a further GBP150,000 ($230,000), represented
by the issuance of a further 2.7 million (approximately) shares at a price of
$0.085 per share, at market rate.
17. PREPAID EXPENSES
Prepaid expenses for the year ended April 30, 2002 of GBP393 includes the
forward purchase of learning materials in respect of existing customer contracts
of GBP276, together with prepaid expenses for hosting services, dues and
subscriptions, insurances and salary sacrifices aggregating GBP117.
Prepaid expenses for the year ended April 30, 2001 of GBP444 included the
forward purchase of learning materials of GBP386, together with prepaid expenses
for hosting services, office rent, insurances, dues and subscriptions and
leasing cost aggregating GBP58.
F27