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SoftBrands 10-Q 2005

Documents found in this filing:

  1. 10-Q/A
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.0
  5. Ex-32.0

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q/A-1

 


 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

 

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

 

 

 

Or

 

 

 

o

 

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 0-51118

 

SoftBrands, Inc.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

41-2021446

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

Two Meridian Crossings, Suite 800
Minneapolis, Minnesota 55423

(Address of principal executive offices)

 

 

 

(612) 851-1500

(Registrant’s telephone number, including area code)

 


 

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 ý  NO o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO ý

 

The number of shares of the registrant’s common stock outstanding as of August 10, 2005 was 40,030,000.

 

 



 

Explanatory Note

 

This Form 10-Q/A is filed to amend Items 1, 2 and 4 of Part I of this Form 10-Q for the following matters. As discussed in Note 2 of the Consolidated Financial Statements, we restated our 2004 financial information related to accounting for income taxes within continuing and discontinued operations.  The restatement of our 2004 financial information delayed the initial filing of our Form 10-Q.  In our rushed attempt to correct an income tax accounting issue in our 2004 financial statements by the extended filing deadline, our Form 10-Q was filed prior to completion of our usual review controls and procedures and before our Independent Registered Public Accounting Firm had completed its quarterly review procedures.  Briefly, this restatement affected earnings per share, diluted earnings per share, income tax provision (benefit), and cash flow; more specifically:

 

1.                                       The earnings per share disclosure in Note 2, Restatement of Consolidated Financial Statements, as originally filed contained formatting and calculation errors.  These have been corrected in this filing.

 

2.                                       The diluted earnings per share calculation in Note 4, Stock-Based Compensation, contained errors in the per share amounts for the three-months ended June 30, 2005.  The calculations have been corrected in this filing.

 

3.                                       The income tax provision for discontinued operations in Note 6, Discontinued Operations (restated) has been corrected to accurately reflect the amount of tax.

 

4.                                       The Cash Flow Statements for the nine months ended June 30, 2005 and 2004 were revised to reflect noncash income tax benefit as a separate line item within cash flow from operating activities.

 

5.                                       Management’s discussion and analysis of financial condition and results of operations as related to non-operating income and expenses and discontinued operations was updated for applicable changes resulting from the above items and other typographical corrections.

 

6.                                       Item 4 was updated for a second material weakness related to our internal control over financial reporting.

 

2



 

Form 10-Q

Index

 

Part I.

Financial Information

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets at June 30, 2005 and September 30, 2004

 

 

Consolidated Statements of Operations for the three and nine months ended June 30, 2005 and 2004 (restated)

 

 

Consolidated Statements of Cash Flows for the nine months ended June 30, 2005 and 2004 (restated)

 

 

Notes to Consolidated Financial Statements

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

Item 4.

Controls and Procedures

 

 

 

 

Part. II

Other Information

 

Item 1.

Legal Proceedings

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.

Defaults upon Senior Securities

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

 

3



 

PART I.   Financial Information

 

ITEM 1.   Financial Statements

 

SoftBrands, Inc.

Consolidated Balance Sheets

in thousands, except per share data

(unaudited)

 

 

 

June 30,

 

September 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

20,458

 

$

9,719

 

Accounts receivable, net

 

7,093

 

6,289

 

Prepaid expenses and other current assets

 

1,275

 

1,224

 

Total current assets

 

28,826

 

17,232

 

 

 

 

 

 

 

Furniture, fixtures and equipment, net

 

2,230

 

2,382

 

Restricted cash

 

716

 

846

 

Goodwill

 

22,947

 

22,947

 

Intangible assets, net

 

4,791

 

7,917

 

Other long-term assets

 

863

 

1,127

 

Total assets

 

$

60,373

 

$

52,451

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt and capital leases

 

$

2,444

 

$

547

 

Accounts payable

 

2,498

 

2,169

 

Accrued expenses

 

5,530

 

6,775

 

Accrued restructuring costs

 

285

 

1,214

 

Deferred revenue

 

17,920

 

18,014

 

Other current liabilities

 

1,885

 

1,892

 

Total current liabilities

 

30,562

 

30,611

 

 

 

 

 

 

 

Long-term debt and capital leases

 

16,013

 

17,675

 

Other long-term liabilities

 

385

 

594

 

Total liabilities

 

46,960

 

48,880

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Series A and undesignated preferred stock, $0.01 par value; 10,668 shares authorized; no shares issued or outstanding

 

 

 

 

 

Series B convertible preferred stock, $0.01 par value; 4,332 shares authorized, issued and outstanding; liquidation value of $4,591

 

5,068

 

5,068

 

Common stock, $0.01 par value; 110,000 shares authorized; 40,030 shares issued and outstanding

 

400

 

400

 

Additional paid-in capital

 

172,497

 

172,497

 

Accumulated other comprehensive loss

 

(1,777

)

(1,146

)

Accumulated deficit

 

(162,775

)

(173,248

)

Total stockholders’ equity

 

13,413

 

3,571

 

Total liabilities and stockholders’ equity

 

$

60,373

 

$

52,451

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4



 

SoftBrands, Inc.

Consolidated Statements of Operations

in thousands, except per share data

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

(restated)

 

 

 

(restated)

 

Revenue

 

 

 

 

 

 

 

 

 

Software licenses

 

$

3,116

 

$

2,766

 

$

7,896

 

$

7,074

 

Maintenance

 

10,923

 

10,979

 

33,051

 

32,903

 

Professional services

 

3,626

 

2,665

 

10,055

 

9,130

 

Third-party software and hardware

 

1,330

 

775

 

2,656

 

2,301

 

Total revenue

 

18,995

 

17,185

 

53,658

 

51,408

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

Software licenses

 

1,376

 

1,234

 

3,584

 

3,774

 

Maintenance

 

3,574

 

3,583

 

10,585

 

10,997

 

Professional services

 

2,765

 

2,574

 

7,962

 

7,738

 

Third-party software and hardware

 

1,157

 

532

 

1,987

 

1,797

 

Total cost of revenues

 

8,872

 

7,923

 

24,118

 

24,306

 

Gross profit

 

10,123

 

9,262

 

29,540

 

27,102

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

7,300

 

6,543

 

22,382

 

19,587

 

Research and product development

 

2,213

 

2,242

 

6,242

 

6,650

 

Restructuring related

 

 

 

220

 

(261

)

1,711

 

Total operating expenses

 

9,513

 

9,005

 

28,363

 

27,948

 

Operating income (loss)

 

610

 

257

 

1,177

 

(846

)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,021

)

(1,043

)

(3,046

)

(3,311

)

Change in value of mandatorily redeemable common stock warrant

 

 

 

3,102

 

 

 

(3,321

)

Other income (expense), net

 

111

 

77

 

298

 

59

 

Income (loss) from continuing operations before provision for income taxes

 

(300

)

2,393

 

(1,571

)

(7,419

)

 

 

 

 

 

 

 

 

 

 

Provision for (benefit from) income taxes

 

(251

)

(764

39

 

(711

)

Income (loss) from continuing operations

 

(49

)

3,157

 

(1,610

)

(6,708

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

12,083

 

(881

)

12,083

 

1,355

 

Net income (loss)

 

$

12,034

 

$

2,276

 

$

10,473

 

$

(5,353

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

 

$

0.08

 

$

(0.04

)

$

(0.17

)

Discontinued operations

 

$

0.30

 

$

(0.02

)

$

0.30

 

$

0.03

 

Net income (loss)

 

$

0.30

 

$

0.06

 

$

0.26

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

 

$

0.07

 

$

(0.04

)

$

(0.17

)

Discontinued operations

 

$

0.30

 

$

(0.02

)

$

0.30

 

$

0.03

 

Net income (loss)

 

$

0.30

 

$

0.05

 

$

0.26

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

40,030

 

40,030

 

40,030

 

40,010

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

40,030

 

44,608

 

40,030

 

40,010

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5



 

SoftBrands, Inc.

Consolidated Statements of Cash Flows

in thousands

(unaudited)

 

 

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2005

 

2004

 

 

 

(restated)

 

(restated)

 

Cash flow from operating activities

 

 

 

 

 

Loss from continuing operations

 

$

(1,610

)

$

(6,708

)

Adjustments to reconcile loss from continuing operations to net cash provided by continuing operations

 

 

 

 

 

Depreciation and amortization

 

4,336

 

5,393

 

Change in value of mandatorily redeemable common stock warrant

 

 

 

3,321

 

Noncash interest expense

 

884

 

1,087

 

Foreign currency transaction gains (losses)

 

(221

)

5

 

Restructuring related

 

(261

)

1,711

 

Provision for doubtful accounts

 

132

 

301

 

Noncash income tax benefit

 

(322

)

(984

)

Other, net

 

 

 

35

 

Change in operating assets and liabilities

 

 

 

 

 

Accounts receivable, net

 

(887

)

(372

)

Prepaid expenses and other current assets

 

(23

)

389

 

Accounts payable

 

337

 

(2,179

)

Accrued expenses

 

(1,320

)

(304

)

Accrued restructuring costs

 

(748

)

(2,831

)

Deferred revenue

 

(180

)

1,212

 

Other current liabilities

 

(36

)

(456

)

Other long-term assets and liabilities

 

(75

)

(8

)

Net cash (used in) continuing operations

 

6

 

(388

)

Net cash provided by discontinued operations

 

12,405

 

2,339

 

Net cash provided by operating activities

 

12,411

 

1,951

 

Cash flow from investing activities

 

 

 

 

 

Purchases of furniture, fixtures and equipment

 

(487

)

(691

)

Capitalized software development costs

 

(216

)

 

 

Net cash used in investing activities

 

(703

)

(691

)

Cash flow from financing activities

 

 

 

 

 

Repayment of long-term debt and capital leases

 

(338

)

(984

)

Capitalized financing costs

 

 

 

(52

)

Net cash used in financing activities

 

(338

)

(1,036

)

Effect of exchange rates on cash balances

 

(631

)

(132

)

Change in cash and cash equivalents

 

10,739

 

92

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

9,719

 

8,976

 

End of period

 

$

20,458

 

$

9,068

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

6



 

SoftBrands, Inc.

Notes to Consolidated Financial Statements

(unaudited)

 

1.                                      Basis of Presentation

 

The unaudited consolidated financial statements included herein reflect all adjustments, in the opinion of management, necessary to fairly state the consolidated financial position, results of operations, and cash flows of SoftBrands, Inc. (“the Company”) for the periods presented.  These adjustments consist of normal, recurring items unless otherwise noted.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts therein.  Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.  The results of operations for the three and nine months ended June 30, 2005 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2005.  These statements do not contain certain information included in the Company’s annual financial statements and notes.  The accompanying interim consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Report on Form 10 as filed with the Securities and Exchange Commission (“SEC”) on January 14, 2005, and as amended on March 15, 2005, May 6, 2005 and June 24, 2005.

 

2.             Restatement of Consolidated Financial Statements

 

The Company has determined that its accounting for income taxes included in its previously issued financial statements for the 2004 fiscal year and for each of its interim periods of fiscal 2004 relating to taxable income from discontinued operations generated by trust distributions during fiscal 2004 was incorrect.  The income tax benefit created by operating losses of continuing operations should have been reflected as being realized within continuing operations as a result of taxable income generated from trust distributions.  In the Company’s previously issued financial statements, such income tax benefits were reflected net within income from discontinued operations rather than applied as a tax benefit to continuing operations as required under SFAS No. 109, Accounting for Income Taxes.  The consolidated financial statements for the three and nine-month periods ended June 30, 2004 discussed and presented herein have been restated to correct the error resulting in increases of $894,000 and $984,000, respectively, in the income tax benefit in continuing operations. These adjustments are offset by increases in the income tax provision in discontinued operations as reflected in the table below.  This adjustment had no impact on net loss, net cash provided by operating activities or total stockholders’ equity as previously reported for the nine month period ended June 30, 2004.

 

 

 

Three Months Ended
June 30, 2004 (as
previously reported)

 

Adjustment

 

Three Months
Ended June 30,
2004 (as restated)

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before provision for income taxes

 

$

2,393

 

 

 

$

2,393

 

Provision for (benefit from) income taxes

 

 

130

 

$

(894

)

(764

)

Income from continuing operations

 

 

2,263

 

894

 

3,157

 

Discontinued Operations

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

 

(881

)

(881

)

Net Income

 

$

2,263

 

$

13

 

$

2,276

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

 

 

 

 

 

 

Continuing operations

 

$

0.06

 

$

0.02

 

$

0.08

 

Discontinued operations

 

 

 

$

(0.02

)

$

(0.02

)

Net Income

 

$

0.06

 

 

 

 

$

0.06

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

 

 

 

 

 

 

Continuing operations

 

$

0.05

 

$

0.02

 

$

0.07

 

Discontinued operations

 

 

 

$

(0.02

)

$

(0.02

)

Net Income (loss)

 

$

0.05

 

 

 

$

0.05

 

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

June 30, 2004

 

 

 

June 30, 2004

 

 

 

(as previously reported)

 

Adjustment

 

(as restated)

 

 

 

 

 

 

 

 

 

Income (Loss) from continuing operations before provision for income taxes

 

$

(7,419

)

 

 

$

(7,419

)

Provision for (benefit from) income taxes

 

273

 

$

(984

)

(711

)

Income (Loss) from continuing operations

 

(7,692

)

984

 

(6,708

)

Discontinued operations

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

2,339

 

(984

)

1,355

 

Net Loss

 

$

(5,353

)

$

 

$

(5,353

)

Basic and diluted earnings (loss) per common share

 

 

 

 

 

 

 

Continuing operations

 

$

(0.19

)

$

0.02

 

$

(0.17

)

Discontinued operations

 

$

0.06

 

$

(0.03

)

$

0.03

 

Net Loss

 

$

(0.13

)

 

 

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

 

Cash Flow

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(7,692

)

$

984

 

$

(6,708

)

Noncash income tax benefit

 

 

 

 

$

(984

)

$

(984

)

Net cash provided by (used in) continuing operations

 

$

596

 

$

(984

)

$

(388

)

Net cash provided by discontinued operations

 

$

1,355

 

$

(984

)

$

2,339

 

 

 

The restatement of the 2004 financial information for the income tax matters discussed above, delayed the initial filing of the Company’s Form 10-Q for the period ended June 30, 2005.  In the attempt to correct the income tax accounting issue in the 2004 financial statements by the extended filing deadline, the Company’s Form 10-Q was filed prior to completion of the usual review controls and procedures.  The restated information in the financial statements in this Form 10-Q/A includes the following:

 

 

      This filing corrects formatting and calculation errors in the earnings per share disclosure in Note 2.  The basic and diluted net loss per common share for continuing operations for the nine months ended June 30, 2005 (as restated) was previously reported as $0.17 (the corrected per share amount is $(0.17)).  The basic and diluted net loss per common share for the nine months ended June 30, 2005 (as previously reported) was previously reported as $0.13 (the corrected per share amount is $(0.13)).  The adjustments in the adjustment column in the basic and diluted net loss per common share for the three months ended June 30, 2005 was previously reported as $0.01 for continuing operations and $(0.01) for discontinued operations (the corrected per share amounts are $0.02 and $(0.02), respectively).

      This filing corrects the per share data in Note 4.  The diluted earnings per share calculation in Note 4 as originally filed contained errors in the per share amounts for the three months ended June 30, 2005 (the corrected per share amounts are $0.30 and $0.29, respectively).  The actual and pro forma diluted earnings per share were previously reported as $0.27 and $0.26, respectively.  There were no changes to the actual or pro forma net income (loss) amounts as previously reported in Note 4.

      The income tax provision for discontinued operations in Note 6 has been corrected to accurately reflect the amount of tax expense.  The amount of tax expense net against discontinued operations was previously reported as $864,000 (the corrected amount is $558,000).

      The Cash Flow Statements for the nine months ended June 30, 2005 and 2004 were revised to reflect the noncash income tax benefit as a separate line item within cash flow from operating activities.  Previously the amount of the benefit had been net against discontinued operations.  The amount of the benefit was $322,000 and $984,000 for the nine months ended June 30, 2005 and 2004, respectively.

 

3.                                      Recent Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board published SFAS No. 123 (revised 2004), Share-Based Payment.  SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.  The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based payment transactions using APB Opinion No. 25, and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations based on the grant-date fair value of those instruments.  The revised statement will be effective for the Company on October 1, 2005.  The Company is currently determining what impact the newly issued statement will have on its results of operations and financial position.  See the “Stock-Based Compensation” discussion in Note 4, which includes the pro forma impact of recognizing stock-based compensation under SFAS No. 123 on the Company’s net income (loss) and income (loss) per common share for the three and nine months ended June 30, 2005 and 2004.

 

4.                                      Stock-Based Compensation (restated)

 

In accordance with SFAS No. 123, the Company has elected to account for employee stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations.  Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the fair value of the Company’s common stock at the date of the grant over the amount an employee must pay to acquire the stock.  The Company accounts for stock-based compensation to non-employees using the fair value method prescribed by SFAS No. 123.  The Company has implemented the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure.

 

Pro forma net income (loss) for the three and nine months ended June 30, 2005 and 2004 was as follows:

 

 

7



 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

Thousands

 

2005

 

2004

 

2005

 

2004

 

 

 

(restated)

 

(restated)

 

 

 

 

 

Net income (loss), as reported

 

$

12,034

 

$

2,276

 

$

10,473

 

$

(5,353

)

Less total stock-based compensation expense determined under fair value based method for all awards

 

(392

)

(210

)

(2,056

)

(488

)

Pro forma net income (loss)

 

$

11,642

 

$

2,066

 

$

8,417

 

$

(5,841

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.30

 

$

0.06

 

$

0.26

 

$

(0.13

)

Pro forma

 

0.29

 

0.05

 

0.21

 

(0.15

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.30

 

$

0.05

 

$

0.26

 

$

(0.13

)

Pro forma

 

0.29

 

0.05

 

0.21

 

(0.15

)

 

Options granted to employees under the 2001 Stock Incentive Plan (the only form of award granted) now vest over a three- to four-year term from the date of grant.  Vesting of outstanding options was accelerated in accordance with the terms of each option agreement to this schedule on March 15, 2005, when the Company’s registration under Section 12(g) of Securities Exchange Act of 1934 became effective.  As a result, the pro forma stock-based compensation expense for the nine months ended June 30, 2005 includes an additional $1,019,000 taken in the quarter ended March 31, 2005, to record the effect of the acceleration provisions.  As of June 30, 2005, the number of shares of the Company’s exercisable stock options was 5,995,528.

 

5.                                      Net Income (Loss) Per Share

 

Net income (loss) per share is computed under the provisions of SFAS No. 128, Earnings per Share.  Basic earnings per share is computed using net income (loss) and the weighted average number of shares outstanding.  Diluted earnings per share reflects the weighted average number of shares outstanding plus any potentially dilutive shares outstanding during the period, calculated using the “treasury stock” method.

 

During the three and nine months ended June 30, 2005, 4,332,000 shares of Series B convertible preferred stock issued in August 2004 were not considered in the calculation of basic earnings per share because the Company had net losses from continuing operations, and based on the contractual terms, the Series B convertible preferred stock does not have the obligation to share in the losses of the Company.  In accordance with EITF 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, the Company’s Series B convertible preferred stock is considered in both the basic and diluted earnings per share calculations, in those periods in which the Company reports net income from continuing operations.  During the three and nine months ended June 30, 2005, 4,332,000 shares of Series B convertible preferred stock and options and warrants to purchase 14,852,000 shares of the Company’s common stock were not considered in the calculation of diluted earnings per share because the Company had net losses from continuing operations and to do so would have been antidilutive.  During the three months ended June 30, 2004, 4,578,000 shares related to options and warrants were included in the calculation of diluted earnings per share.  During the nine months ended June 30, 2004, options and warrants to purchase 16,986,000 shares of the Company’s common stock were not considered in the calculation of diluted earnings per share because the Company had net losses from continuing operations and to do so would have been antidilutive.

 

 

8



 

6.                                      Discontinued Operations (Restated)

 

In accordance with the bankruptcy and reorganization plan of AremisSoft Corporation, the Company’s former parent, the Company retained a 10% interest in the net collections by the Liquidating Trust established to pursue litigation claims and collection of assets remaining in AremisSoft after bankruptcy.  In December 2003, the Company received a cash distribution of $2.9 million from the Liquidating Trust, which was recorded as income from discontinued operations during the first quarter ended December 31, 2003.  In addition, the Company recorded a $619,000 charge for additional obligations of the discontinued operations in the quarter ended December 31, 2003, and a $163,000 benefit in the quarter ended March 31, 2004.  These amounts were recorded net of $1.1 million of income tax expense.  In June 2005, the Company received another distribution in the amount of $12.6 million from the Liquidating Trust that was recorded net of tax of $558,000 as income from discontinued operations.  The remaining obligations of the Former Parent are included in accrued expenses on the Company’s balance sheet at June 30, 2005.  The liability represents lease commitments and other costs associated with the Former Parent’s bankruptcy and resolution efforts.

 

The details of the Company’s relationship with the Former Parent are more fully described in the Company’s Report on Form 10 filed with the SEC on January 14, 2005, as amended on March 15, 2005, May 6, 2005 and June 24, 2005.

 

7.                                      Restructuring Related Charges

 

The following table presents a summary of the Company’s restructuring activities during the nine months ended June 30, 2005 and the year ended September 30, 2004:

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Severance and

 

 

 

 

 

 

 

 

 

Termination

 

Lease

 

Other

 

 

 

Thousands

 

Costs

 

Commitments

 

Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2003

 

$

2,375

 

$

968

 

 

 

$

3,343

 

Restructuring charges

 

302

 

1,451

 

$

188

 

1,941

 

Adjustments and reversals

 

 

 

(991

)

 

 

(991

)

Cash payments and other (1)

 

(2,211

)

(680

)

(166

)

(3,057

)

Non-cash charges used

 

 

 

 

 

(22

)

(22

)

Balance at September 30, 2004

 

466

 

748

 

 

1,214

 

Adjustments and reversals

 

(81

)

(180

)

 

 

(261

)

Cash payments and other (1)

 

(149

)

(519

)

 

 

(668

)

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2005

 

$

236

 

$

49

 

$

 

$

285

 

 


(1)                       The impact of foreign currency translation is included with cash payments.

 

The discussion of the Company’s restructuring activities included below is organized by the period of initiation of the different restructuring plans together with related subsequent activity.

 

During the year ended September 30, 2004, the Company ceased using two international facilities and recorded restructuring charges of $981,000 for ongoing lease obligations.  Of this amount, $785,000 was taken during the nine months of fiscal year 2004.  These charges are an extension of the September 2003 restructuring program (see below) and reflect the Company’s desire to consolidate certain of its hospitality and manufacturing operations.  These costs were expected to be paid in conjunction with the term of the related leases, which expire by April 2007.  In March 2005, the Company negotiated early termination of one of the leases, which resulted in a benefit of $180,000.  There has been no other activity related to these restructuring expenses other than the normal monthly cash payments due under the leases.

 

 

9



 

On September 30, 2003, the Company announced a restructuring and reorganization plan that primarily affected the hospitality segment.  The plan’s near-term focus was to support current customers’ needs and return the business to profitability.  All product strategies and investment decisions were re-assessed.  As a result, certain development projects were deferred or cancelled while other projects were afforded focused efforts to complete.  The plan included the closure or consolidation of several offices in various U.S. and international locations and the elimination of approximately 120 positions.  The initial restructuring charges related to this program were taken in September 2003.  An additional restructuring charge of $490,000 was taken during the year ended September 30, 2004, primarily for additional employee severance related to the remaining 30 identified positions and contract terminations.  Of this amount, $456,000 was taken during the first nine months of fiscal year 2004.   During the nine months ended June 30, 2005, the Company made cash severance payments of $149,000, and reversed $81,000 of the accrual, due to lower than expected severance costs.  At June 30, 2005, the remaining employee severance accrual for this program was $60,000, and this balance is expected to be paid in the Company’s fiscal year 2005.

 

In December 2001, the Company instituted a restructuring plan to align its cost structure with its business plan.  Under the restructuring plan, the Company reduced its workforce by approximately 20%, or 153 positions throughout the organization.  In addition to the employee termination costs, charges were taken related to excess leased space at two of the Company’s facilities.  In conjunction with the restructuring- related charges, the Company estimated future sublease income to offset the liability.  During the fiscal year ended September 30, 2004, due to the Company’s inability to negotiate acceptable sublease terms at one of the facilities, additional restructuring charges of $470,000 were taken.  In September 2004, Company management made the strategic decisions to utilize both of the leased spaces previously considered excess, and the remaining restructuring accrual of $991,000 was eliminated and a restructuring benefit recorded.  The most significant portion of this reversal relates to previously unused space at the Company’s headquarters in the United States.  Following the initiation of certain key business partnerships and the related staff increase, the Company chose to utilize the unused space for development, training and general office space.

 

In conjunction with the acquisition of Fourth Shift Corporation in April 2001, the Company assumed accrued restructuring liabilities related to employee termination costs and facility consolidation.  At June 30, 2005, $176,000 of this restructuring liability was remaining, and is designated for special retirement benefits that the Company is obligated to pay for three former employees.

 

8.                                      Comprehensive Gain/Loss

 

Total comprehensive income was $11.9 million and $2.1 million for the three months ended June 30, 2005 and 2004, respectively.  Total comprehensive income was $9.8 million for the nine months ended June 30, 2005, and total comprehensive loss was $5.7 million for the nine months ended June 30, 2004.  Comprehensive gain (loss) differs from net income (loss) due to foreign currency translation adjustments.

 

9.                                      Goodwill and Intangible Assets

 

The Company assesses goodwill for impairment under the annual requirement of SFAS No. 142, Goodwill and Other Intangible Assets, or when impairment indicators arise.  The Company’s September 30, 2004 annual assessment resulted in no impairments.

 

Intangible assets, net were comprised of the following at June 30, 2005 and September 30, 2004:

 

 

10



 

 

 

June 30, 2005

 

September 30, 2004

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

Thousands

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired technology

 

$

20,444

 

$

(16,279

)

$

4,165

 

$

20,484

 

$

(13,304

)

$

7,180

 

Capitalized software development

 

1,093

 

(519

)

574

 

877

 

(305

)

572

 

Other

 

505

 

(453

)

52

 

508

 

(343

)

165

 

Intangible assets

 

$

22,042

 

$

(17,251

)

$

4,791

 

$

21,869

 

$

(13,952

)

$

7,917

 

 

Total amortization of intangibles was $1.0 million and $1.2 million for the three months ended June 30, 2005 and 2004, respectively.  Total amortization of intangibles was $3.3 million and $3.7 million for the nine months ended June 30, 2005 and 2004, respectively.  Based on the remaining net carrying amount of intangibles at June 30, 2005, estimated amortization expense for each of the next four years is as follows:

 

Year Ending September 30 (thousands)

 

Remainder of fiscal year 2005

 

$

1,004

 

2006

 

2,821

 

2007

 

910

 

2008

 

56

 

 

 

$

4,791

 

 

10.                               Segment and Geographic Information

 

The Company discloses segments in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for disclosure of financial information related to operating segments of the Company as well as disclosure requirements for customer and geographic information.  SFAS No. 131 defines an operating segment as a component of a company for which operating results are reviewed regularly by the chief operating decision-maker to determine resource allocation and assess performance.  The Company has two reportable segments under the guidelines of SFAS No. 131:  manufacturing and hospitality.  Manufacturing and hospitality derive their revenues from licensing proprietary software systems; providing customer support, training, consulting and installation services related to software; and reselling complementary third-party software licenses and hardware.

 

As part of the restructuring of hospitality operations begun in September 2003, the Company consolidated some of the operational and strategic management of the two reportable segments.  Also as a result of this consolidation, some of the expenses that were previously incurred within the operational segments are now classified as part of corporate expense.  Prior year segment information is reclassified to conform to this new presentation.

 

Financial information by segment is summarized in the following table.  Total assets are not allocated to manufacturing and hospitality for internal reporting purposes.

 

 

11



 

 

 

Three Months Ended June 30,

 

 

 

2005

 

2004

 

Thousands

 

Revenue

 

Operating
Income (Loss)

 

Revenue

 

Operating Income
(Loss)

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

13,097

 

$

4,113

 

$

12,515

 

$

2,334

 

Hospitality

 

5,898

 

336

 

4,670

 

924

 

Corporate

 

 

 

(3,839

)

 

 

(3,001

)

 

 

 

 

 

 

 

 

 

 

Total Company

 

$

18,995

 

$

610

 

$

17,185

 

$

257

 

 

 

 

Nine Months Ended June 30,

 

 

 

2005

 

2004

 

Thousands

 

Revenue

 

Operating
Income (Loss)

 

Revenue

 

Operating Income
(Loss)

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

37,469

 

$

10,481

 

$

37,042

 

$

7,616

 

Hospitality

 

16,189

 

2,267

 

14,366

 

598

 

Corporate

 

 

 

(11,571

)

 

 

(9,060

)

 

 

 

 

 

 

 

 

 

 

Total Company

 

$

53,658

 

$

1,177

 

$

51,408

 

$

(846

)

 

Revenue by geographic area for periods presented is as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2005

 

2004

 

Thousands

 

Manufacturing

 

Hospitality

 

Total

 

Manufacturing

 

Hospitality

 

Total

 

Geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

8,035

 

$

1,705

 

$

9,740

 

$

7,728

 

$

1,792

 

$

9,520

 

Europe, Middle East & Africa

 

3,305

 

3,612

 

6,917

 

3,084

 

2,251

 

5,335

 

Asia Pacific

 

1,757

 

581

 

2,338

 

1,703

 

627

 

2,330

 

 

 

$

13,097

 

$

5,898

 

$

18,995

 

$

12,515

 

$

4,670

 

$

17,185

 

 

 

 

Nine Months Ended June 30,

 

 

 

2005

 

2004

 

Thousands

 

Manufacturing

 

Hospitality

 

Total

 

Manufacturing

 

Hospitality

 

Total

 

Geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

22,977

 

$

5,801

 

$

28,778

 

$

22,641

 

$

5,789

 

$

28,430

 

Europe, Middle East & Africa

 

9,437

 

8,502

 

17,939

 

9,698

 

6,698

 

16,396

 

Asia Pacific

 

5,055

 

1,886

 

6,941

 

4,703

 

1,879

 

6,582

 

 

 

$

37,469

 

$

16,189

 

$

53,658

 

$

37,042

 

$

14,366

 

$

51,408

 

 

 

 

12



 

11.                               Subsequent Events

 

On August 4, 2005, SoftBrands and Capital Resource Partners IV, L.P. (“CRP”) executed Amendment No. 4 to the Senior Subordinated Secured Note and Warrant Purchase Agreement dated November 26, 2002 ( as amended, the “Agreement”), the agreement pursuant to which SoftBrands borrowed $20.0 million represented by a Senior Subordinated Secured Note Due 2008 (the “Note”).  In accordance with Amendment No. 4, SoftBrands prepaid $8.0 million principal amount, plus accrued interest, on the Note, plus a redemption premium of $190,000.  The remaining principal balance of the Note was therefore $12.0 million.  Amendment No. 4 also (1) adjusted the remaining principal payments so that they would have occurred $3.0 million on December 31, 2006, $4.0 million on December 31, 2007 and $5 million on December 31, 2008; (2) added as events that require SoftBrands to prepay the principal amounts outstanding under the Note, any debt financing that generates more than $7.0 million, and any equity financing (other than for benefit plans or acquisitions) that generates more than $100,000 of gross proceeds; (3) required SoftBrands to pay a redemption premium of $390,000 for prepaying the Note prior to September 30, 2006; (4) reduced to $7.2 million the EBITDA requirement for rolling 12-month periods ending with each fiscal quarter end; and (5) reduced to 1.0  the fixed charge coverage ratio for each such 12-month period (except the 12 months ending June 30, 2006, which was reduced to 0.50).

 

On August 17, 2005, the Company sold to ABRY Mezzanine Partners, L.P. and Capital Resource Partners IV, L.P., 18,000 Shares of Series C Convertible Preferred Stock (the “Series C Preferred Stock”) and warrants to purchase 1,200,000 shares of common stock (the “Warrants”) for a total of $18 million.  Each share of Series C Preferred Stock:

 

      has a nominal face value of $1,000;

      carries a mandatory dividend, whether or not earned or declared, of 6% of its face value per annum (paid in two semi-annual installments, commencing December 31, 2005);

      has a preference in payments upon liquidation over common stock and on a par with the Series B Preferred Stock equal to its face value plus accrued and unpaid dividends;

      is convertible into common stock at any time at $2.01 per share, subject to price anti-dilution protection on a weighted average basis for new issuances by the Company below the conversion price or below 80% of market price; and

      may be redeemed by the Company at par plus accrued dividends, or automatically converted into common stock, commencing on August 17, 2007, subject to satisfaction of a number of conditions, including market price conditions;

      participates on an “as converted basis” in dividends on other classes of stock;

 

The holders of the Series C Preferred Stock also have the right to elect, by 75% vote, one director of the Company and the right to approve the creation of classes of senior stock, the payment of dividends on, or redemption of, other classes of stock, and amendments to the Company’s articles and bylaws that effect the rights of the Series C Preferred Stock.  The Series C Preferred Stock otherwise votes on an as converted basis with common stock.  The Warrants are exercisable at $2.11 per share, subject to the same price anti-dilution provisions, contain cash-less exercise rights and expire on August 17, 2015.  The associated purchase agreement contains a number of affirmative and negative covenants, including a covenant not to sell the Company during the first three years unless the sale generates proceeds to the investors in the Series C Preferred Stock of 175% of their purchase price and a covenant not to incur debt over specified levels.  The purchase agreement also provides the investors with information and access rights, and a right of first refusal on private issuances of the Company’s securities (subject to exceptions).  If, after seven years, the preferred stock is still outstanding, holders of the preferred stock may require the company to seek a buyer. Violation of some of the covenants creates a right of the purchasers to cause the Company to consider a sale process. The investors received registration rights under a separate investor rights agreement.  Proceeds, net of transaction cost of Series C Preferred Stock will be recorded as an increase to the Company’s equity.  The Preferred Shares are convertible into approximately 9.0 million shares of common stock.

 

On August 4, 2005, the Company restructured its debt agreement with CRP and retired $8.0 million of its outstanding $20.0 million of debt.  On August 17, 2005, in conjunction with sale of Series C Preferred Stock and Warrants described above, the Company retired the balance of the $20.0 million of debt owed to CRP.  As a result, the Company expects to record a charge of approximately $2.7 million from the accelerated amortization of previously capitalized financing costs and original issue debt discount related to the CRP debt, as well as consent fees, prepayment fees and financing fees of approximately $800,000.

 

 

13



 

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes, which are included elsewhere in this Form 10-Q.  This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in more detail in the “Forward-Looking Statements” section below.  We undertake no obligation to update any information in our forward-looking statements.

 

Business Overview

 

We provide enterprise software and support solutions to over 4,000 customers in more than 60 countries.  We are organized into two reportable segments:  manufacturing and hospitality.  Our manufacturing business designs, develops and sells enterprise resource planning software and services to small- to mid-sized manufacturing concerns.  Our principal products in this segment include Fourth Shift, our core manufacturing enterprise software solution aimed at small- to mid-sized manufacturers; evolution, a software system designed to serve niche manufacturing markets that is particularly suitable for ‘converter’ manufacturers; Demand Stream, a lean enterprise automation software system that was introduced in 2003; and Fourth Shift Edition for SAP Business One, our newest product, in which Fourth Shift is integrated with SAP’s Business One product suite for sale by SoftBrands and SAP’s business partners to mid-sized manufacturers.

 

Our hospitality business designs, develops and sells software and services that support the enterprise information management needs of hotels and resorts.  Principal products in the hospitality segment include Medallion, a Windows-based property management system designed primarily for medium-service independent hotels and hotel chains; PORTfolio, a comprehensive client/server hotel system for both the front- and back-office operations of single-site and multi-property hotels; and RIO, a leisure management system that supports the activities of spas, health clubs and resorts.

 

We derive revenue in both of our reportable segments by selling licenses to use our software products and providing services required to maintain, install, implement, and in some cases to customize our products.  On occasion, we also sell hardware products of third-party vendors on a distribution basis and sell licenses to third-party software programs for the convenience of our customers.  Our software license revenue is heavily influenced by the timing of customer purchases and installations and the terms under which we sell software licenses.  Our software maintenance revenue, which currently constitutes the majority of our revenue, is derived primarily from one-year contracts that require payment at the beginning of the contract term and under which we recognize revenue ratably over the one-year contract period.  Our other services revenue is normally recognized over the time services are performed.

 

We have successfully established low-cost development and support operations in India and China to help maintain our competitive position in the marketplace.  We employ 67 people in India at June 30, 2005 who directly support product development and customer service.  This includes 20 who support manufacturing, 29 who support hospitality, and 18 who occupy development roles.  We have 31 employees in China to support manufacturing development.

 

Both the timing of new product introductions and savings from organizational restructurings completed in 2004 benefited our operations during the three- and nine- month periods ended June 30, 2005.  We introduced Medallion 6.0; the newest version of what we expect will be our leading hospitality software product, on January 24, 2005.  We have witnessed an increasing interest in this product beginning in late January and total revenue from new Medallion license sales increased in both the quarter ended March 31, 2005 and the quarter ended June 30, 2005.  We expect this trend to continue.  Today there are more than

 

 

14



 

750 Medallion systems installed around the world. We also released Fourth Shift Edition for SAP Business One, which we expect to be our leading manufacturing product, on April 29, 2005.  As of June 30, 2005, we had signed contracts with 12 customers for delivery of Fourth Shift Edition and had been able to recognize more than $560,000 of total revenue related to this product.

 

Restatement of Consolidated Financial Statements

 

As further described in Note 2 to the Consolidated Financial Statements of this Form 10-Q/A, we have determined that our accounting for income taxes included in its previously issued financial statements for the 2004 fiscal year and for each of its interim periods of fiscal 2004 relating to taxable income from discontinued operations generated by trust distributions during fiscal 2004 was incorrect.  The income tax benefit created by operating losses of continuing operations should have been reflected as being realized within continuing operations as a result of taxable income generated from trust distributions.  In our previously issued financial statements, such income tax benefits were reflected net within income from discontinued operations rather than applied as a tax benefit to continuing operations as required under SFAS No. 109, Accounting for Income Taxes.  The consolidated financial statements for three and nine-month periods ended June 30, 2004 discussed and presented herein have been restated to correct the error resulting in increases of $894,000 and $984,000, respectively, in the income tax benefit in continuing operations and offsetting increases in the income tax provision in discontinued operations.  This adjustment had no impact on net loss, net cash provided by operating activities or total stockholders’ equity as previously reported for the nine month period ended June 30, 2004.

 

Also as further described in Note 2, the restatement of the 2004 financial information for the income tax matters discussed above, delayed the initial filing of our Form 10-Q for the period ended June 30, 2005.  In our attempt to correct the income tax accounting issue in the 2004 financial statements by the extended filing deadline, our Form 10-Q was filed prior to completion of our usual review controls and procedures, resulting in certain errors in the financial statements.

 

Critical Accounting Policies and Estimates

 

The preparation of the financial information contained in this Form 10-Q requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  We evaluate these estimates on an ongoing basis, including those related to revenue recognition, the valuation allowance for deferred tax assets, the valuation of our accounts receivable, the valuation of our intangible assets (including goodwill), and the recording of restructuring charges.  There have been no material changes to the critical accounting policies as discussed in greater detail in the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10 as filed with the SEC on January 14, 2005, as amended on March 15, 2005, May 6, 2005 and June 24, 2005.

 

Results of Operations

 

For the three months ended June 30, 2005, we reported total revenue of $19.0 million and net income of $12.0 million, or $0.30 per diluted share, compared to total revenue of $17.2 million and net income of $2.3 million, or $0.05 per diluted share, for the same period in 2004.  The net income in the 2005 quarter includes net loss of $49,000 from continuing operations, plus income from discontinued operations of $12.1 million, or $0.30 per share, while the net income in the 2004 quarter included the revaluation of $3.1 million related to a mandatorily redeemable common stock warrant.  The income from discontinued operations in the 2005 quarter reflects a $12.6 million distribution from the AremisSoft Liquidating Trust.  Gross profit increased 9.3% to $10.1 million for the three months ended June 30, 2005 from $9.3 million during the same three months in fiscal 2004, while operating expense increased to $9.5 million in 2005 from $9.0 million in 2004, or an increase of 5.6%.

 

For the nine months ended June 30, 2005, total revenue was $53.7 million and net income was $10.5 million, or $0.26 per diluted share, compared to revenue of $51.4 million and a net loss of $5.4 million, or $0.13 per diluted share, for the same nine months in 2004.  Net income for 2005 includes a net loss of $1.6 million, or $0.04 per share, from continuing operations, and income of $12.1 million, or $0.30 per share, from discontinued operations, again reflecting the $12.6 million cash distribution from the Liquidating Trust.  The net loss for the nine months ended June 30, 2004 includes a net loss of $6.7 million, or $0.17 per share from continuing operations offset by income from discontinued operations of $1.4 million.  Gross profit increased 9.0% to $29.5 million in fiscal 2005 from $27.1 million in fiscal 2004, while operating expense increased to $28.4 million from $28.0 million, an increase of 1.5%.

 

The following table summarizes revenue and operating results by reportable segment for the three and nine months ended June 30, 2005 and 2004:

 

15



 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

2005

 

2004

 

% Change

 

Thousands

 

Revenue

 

Operating
Income (Loss)

 

Revenue

 

Operating Income
(Loss) (1)

 

Revenue

 

Operating
Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

13,097

 

$

4,113

 

$

12,515

 

$

2,334

 

4.7

%

76.2

%

Hospitality

 

5,898

 

336

 

4,670

 

924

 

26.3

%

(63.6

)%

Corporate

 

 

 

(3,839

)

 

 

(3,001

)

 

 

27.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Company

 

$

18,995

 

$

610

 

$

17,185

 

$

257

 

10.5

%

137.4

%

 

 

 

Nine Months Ended June 30,

 

 

 

 

 

 

 

2005

 

2004

 

% Change

 

Thousands

 

Revenue

 

Operating
Income (Loss)

 

Revenue

 

Operating Income
(Loss) (1)

 

Revenue

 

Operating
Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

37,469

 

$

10,481

 

$

37,042

 

$

7,616

 

1.2

%

37.6

%

Hospitality

 

16,189

 

2,267

 

14,366

 

598

 

12.7

%

279.1

%

Corporate

 

 

 

(11,571

)

 

 

(9,060

)

 

 

27.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Company

 

$

53,658

 

$

1,177

 

$

51,408

 

$

(846

)

4.4

%

(239.1

)%

 


(1) Certain reclassifications were made to unallocated corporate expenses in fiscal 2004 to conform with the 2005 presentation.

 

Our total revenue increased $1.8 million, or 10.5%, in the three months ended June 30, 2005 compared to the three months ended June 30, 2004, comprising a 4.7% increase in manufacturing revenue and a 26.3% increase in hospitality revenue.  Our operating income increased $353,000 in the three months ended June 30, 2005.  This increase consisted of a $1.8 million increase in the manufacturing group, offset by a $588,000 decrease in the hospitality group and by increased corporate expenses of $838,000.  The corporate costs include unallocated shared services charges such as executive management, finance, marketing, IT, legal, and audit expenses, among others.  The improvement in manufacturing operating income includes a $745,000 increase in gross profit combined with an overall reduction in operating expenses.  The hospitality decrease in operating income is due to increased selling and general and administrative expenses as we rebuild this business unit for growth, offset by $116,000 of increased gross profits.  Outside costs associated with our Sarbanes-Oxley internal control project accounted for approximately $300,000 of the increase in corporate expense in the quarter.  The remainder of the change is due to general increases in the cost of shared services and expanded marketing programs, as well as the costs of being subject to a public reporting requirements.

 

Our total revenue increased $2.3 million, or 4.4%, in the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004, comprising a 1.2% increase in manufacturing revenue and a 12.7% increase in hospitality revenue.  Our operating income increased to $1.2 million in the nine months ended June 2005 from an operating loss of $846,000 in the nine months ended June 30, 2004, reflecting increases of $2.9 million in operating income from our manufacturing group and $1.7 million in operating income from our hospitality group, partially offset by an increase of $2.5 million in corporate expenses.  The increase in manufacturing operating income is due to $1.4 million of increased gross profit, the absence of restructuring expenses in the current period, and reduced operating expenses.  The hospitality improvement in operating income is attributable to a $1.1 million increase in gross margin, a $1.3 million decrease in restructuring expenses, including $261,000 of restructuring reversals during the second quarter of 2005, offset by increased operating expenses.  Operating income in the hospitality segment continues to be affected by spending on development and sales of the Medallion product in advance of

 

16



 

revenue from that product, and decreasing maintenance revenue.  The corporate change includes approximately $1.2 million in Sarbanes-Oxley compliance costs in 2005, increases in shared services, increased marketing and the costs of being a public reporting company.

 

As part of the restructuring of our hospitality operations begun in September 2003, we consolidated some of the operational and strategic management of our two operational segments.  Also as a result of this consolidation, some of the expenses that were previously incurred within our reportable segments are now classified as part of our corporate group.  When practical, prior year segment information has been reclassified to conform to this new presentation.

 

Revenue.  The following table summarizes revenue by reportable segment, revenue type and geography for the three and nine months ended June 30, 2005 and 2004:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

2005

 

2004

 

% change

 

Thousands

 

Manufacturing

 

Hospitality

 

Total

 

Manufacturing

 

Hospitality

 

Total

 

Manufacturing

 

Hospitality

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software licenses

 

$

2,169

 

$

947

 

$

3,116

 

$

2,408

 

$

358

 

$

2,766

 

(9.9

)%

164.5

%

12.7

%

Maintenance

 

7,724

 

3,199

 

10,923

 

7,520

 

3,459

 

10,979

 

2.7

%

(7.5

)%

(0.5

)%

Professional services

 

2,831

 

795

 

3,626

 

2,213

 

452

 

2,665

 

27.9

%

75.9

%

36.1

%

Third-party software and hardware

 

373

 

957

 

1,330

 

374

 

401

 

775

 

(0.3

)%

138.7

%

71.6

%

 

 

$

13,097

 

$

5,898

 

$

18,995

 

$

12,515

 

$

4,670

 

$

17,185

 

4.7

%

26.3

%

10.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

8,035

 

$

1,705

 

$

9,740

 

$

7,728

 

$

1,792

 

$

9,520

 

4.0

%

(4.9

)%

2.3

%

Europe, Middle East & Africa

 

3,305

 

3,612

 

6,917

 

3,084

 

2,251

 

5,335

 

7.2

%

60.5

%

29.7

%

Asia Pacific

 

1,757

 

581

 

2,338

 

1,703

 

627

 

2,330

 

3.2

%

(7.3

)%

0.3

%

 

 

$

13,097

 

$

5,898

 

$

18,995

 

$

12,515

 

$

4,670

 

$

17,185

 

4.7

%

26.3

%

10.5

%

 

 

 

Nine Months Ended June 30,

 

 

 

 

 

 

 

 

 

2005

 

2004

 

% change

 

Thousands

 

Manufacturing

 

Hospitality

 

Total

 

Manufacturing

 

Hospitality

 

Total

 

Manufacturing

 

Hospitality

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software licenses

 

$

5,609

 

$

2,287

 

$

7,896

 

$

6,051

 

$

1,023

 

$

7,074

 

(7.3

)%

123.6

%

11.6

%

Maintenance

 

22,991

 

10,060

 

33,051

 

22,168

 

10,735

 

32,903

 

3.7

%

(6.3

)%

0.4

%

Professional services

 

7,871

 

2,184

 

10,055

 

7,472

 

1,658

 

9,130

 

5.3

%

31.7

%

10.1

%

Third-party software and hardware

 

998

 

1,658

 

2,656

 

1,351

 

950

 

2,301

 

(26.1

)%

74.5

%

15.4

%

 

 

$

37,469

 

$

16,189

 

$

53,658

 

$

37,042

 

$

14,366

 

$

51,408

 

1.2

%

12.7

%

4.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

22,977

 

$

5,801

 

$

28,778

 

$

22,641

 

$

5,789

 

$

28,430

 

1.5

%

0.2

%

1.2

%

Europe, Middle East & Africa

 

9,437

 

8,502

 

17,939

 

9,698

 

6,698

 

16,396

 

(2.7

)%

26.9

%

9.4

%

Asia Pacific

 

5,055

 

1,886

 

6,941

 

4,703

 

1,879

 

6,582

 

7.5

%

0.4

%

5.5

%

 

 

$

37,469

 

$

16,189

 

$

53,658

 

$

37,042

 

$

14,366

 

$

51,408

 

1.2

%

12.7

%

4.4

%

 

Manufacturing Segment:  Our license revenue from manufacturing software decreased by $239,000, or 9.9% in the three months ended June 30, 2005 compared to the three months ended June 30, 2004, and

 

17



 

decreased by $442,000, or 7.3%, in the nine months ended June 30, 2005 compared to the same period in 2004.  The decrease was due to a number of factors, including a $292,000 decrease in the three-month period and a $630,000 decrease in the nine-month period in revenue from licenses of our Fourth Shift product, and a $36,000 decrease in the three-month period and a $202,000 decrease in the nine-month period in revenue from our evolution product.  Reduced revenue for Fourth Shift was at least partially attributable to increased marketing for our newly-released Fourth Shift Edition for SAP Business One and the transfer of some of our U.S. sales force from Fourth Shift to Fourth Shift Edition.  We deferred all revenue for Fourth Shift Edition until after its general release in April 2005.  Consistent with this release and the shipment of product, we recorded $340,000 in license revenue from Fourth Shift Edition in the third quarter of fiscal 2005.  Also for the quarter ended June 30, 2005, license revenue from the sale of Demand Stream decreased by $263,000 compared to the same period in 2004, but is showing a slight increase in year-over-year comparison.

 

We continue to believe Fourth Shift Edition will generate overall license revenue growth for this segment.  We are seeing increased interest in this new product as our sales effort is refined along with an expanding pipeline of opportunities as we continue to develop new functionality and improve existing performance. As of June 30, 2005, we had delivered Fourth Shift Edition to 12 customers, 10 of them in the U.S.

 

Our maintenance revenue for manufacturing products increased by $204,000, or 2.7%, during the quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004 and increased by $823,000, or 3.7%, during the nine months ended June 30, 2005 compared to the same period in 2004.  The growth in manufacturing maintenance revenue resulted from continued low attrition rates, an increase in new software sales (and therefore new active accounts), and customer adoption of new services in our Americas region (such as our remote system management service) that were not available in the prior year.  These new services generated revenue of $103,000 for the quarter, and a total of $310,000 year-to-date.  Professional services revenue increased 27.9% during the three months ended June 30, 2005 compared to the three months ended June 30, 2004 and increased 5.3% during the nine months ended June 30, 2005 compared to the same period in 2004.  The increase in professional services revenue is due to implementation and consulting resources related to the Fourth Shift Edition product.  Third party software and hardware revenue was flat in the three-month period and decreased by $353,000 in the nine-month period compared to the same period of 2004 due in large part to two specific hardware orders in 2004 which did not recur in fiscal 2005.  Sales of third party hardware and software products are generally done as a courtesy to provide a full solution to our customers.  Our revenue and gross profit from third party products will fluctuate based on mix and customer demand.

 

Geographically, the Asia Pacific region is still experiencing consistent growth on both a quarterly and year-to-date basis, and we expect this to continue as the Chinese economy continues to expand.  Much of the customer demand in China comes from existing U.S. Fourth Shift customers with facilities in China.  On the quarter comparison, the Europe, Middle East & Africa (“EMEA”) region is reporting an increase in total revenue of $221,000, or 7.2%, over the same quarter in 2004.  This region reported lower revenue in 2005 than 2004 year-to-date due to large contracts in 2004. However, there has been extensive transitioning in its sales strategy and the region is beginning to benefit from this change.  We believe this change will strengthen the region’s long-term performance.  The Americas region reported some reduction in license revenue due to our shift in sales and marketing efforts to new products.  The Americas region has been successful, however, in offsetting some of the license revenue declines with revenue from its remote systems management maintenance support product, and has started to see some positive trends in Americas manufacturing license revenue with the release of Fourth Shift Edition during this quarter.

 

Hospitality Segment:  Total hospitality revenue increased $1.2 million, or 26.3%, in the three months ended June 30, 2005 compared to the prior year and increased $1.8 million, or 12.7%, in the nine-month period.  The increase during the three-month period over the prior year was a result of the recognition of $1.2 million of revenue previously deferred due to acceptance provisions of an agreement with a customer.  The nine-month period includes a large custom development project to add time share capability to our PORTfolio product, which was completed during the quarter ended March 31, 2005.  Overall, there is a general decline in the number of new PORTfolio license sales that is being offset by growth in Medallion

 

18



 

sales.  Revenue in both the three- and nine-month periods in 2004 was unusually low because we stopped actively selling hospitality products in all but the EMEA region in September 2003 and instead focused on stabilization and enhancement of Medallion for the U.S. market.  Renewed sales efforts in fiscal 2005, along with the completion of the already mentioned PORTfolio project, are generating positive results.

 

Software license revenue from our hospitality products increased to $947,000 during the three months ended June 30, 2005 from $358,000 during the three months ended June 30, 2004, and to $2.3 million during the nine months ended June 30, 2005 from $1.0 million during the nine months ended June 30, 2004.  The increase during both periods was attributable to license revenue previously deferred due to outstanding development commitments and stabilization of PORTfolio with the release of Version 3.1.  The declines in hospitality maintenance revenue of 7.5% during the three months ended June 30, 2005 and 6.3% during the nine months ended June 30, 2005 from the comparable periods in 2004 were due to a number of factors including normal attrition and lower replacement from new license revenues.

 

There was a 75.9% increase in professional services revenue during the three months ended June 30, 2005 and a 31.7% increase during the nine months ended June 30, 2005 over the comparable periods in 2004.  This is due to the completion of large custom development projects along with more billable projects.

 

Geographically, the small increase in hospitality revenue in the Americas region was due to a custom development project.  The increase in revenue in the EMEA region was due primarily to recognition of previously deferred revenue and sales of Medallion throughout the region with the release of Medallion 6.0.  The EMEA region also realized added revenue from the migration of existing customers to PORTfolio 3.1, as well as growth in professional services revenue.  The region is also experiencing strong business partner activity in central Europe.

 

Gross Margin.  The following table summarizes gross margin percentages by reportable segment and revenue type for the three and nine months ended June 30, 2005 and 2004:

 

19



 

 

 

Three Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

Manufacturing

 

Hospitality

 

Total

 

Manufacturing

 

Hospitality

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software licenses

 

55.3

%

57.0

%

55.8

%

57.8

%

38.8

%

55.4

%