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SoftBrands 10-Q 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
Commission file number 0-51118
SoftBrands, Inc. (Exact name of registrant as specified in its charter)
Two
Meridian Crossings, Suite 800 (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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Indicate by checkmark whether the registrant is a shell company (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 March 31, 2006 was 40,160,199.
Index
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SoftBrands, Inc. in thousands, except share and per share data (unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
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SoftBrands, Inc. Consolidated Statements of Operations in
thousands, except per share data
The accompanying notes are an integral part of these consolidated financial statements.
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SoftBrands, Inc. Consolidated Statements of Cash Flows in
thousands
The accompanying notes are an integral part of these consolidated financial statements.
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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 six months ended March 31, 2006 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending September 30, 2006. 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 fiscal 2005 Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on December 20, 2005.
On December 13, 2001, the Company’s Board of Directors and shareholders approved the SoftBrands, Inc. 2001 Stock Incentive Plan, which has a total of 12,400,000 shares of the Company’s common stock reserved for issuance under options, including incentive stock options (“ISOs”) and other stock options, restricted stock awards, stock appreciation rights, dividend rights and other share-based awards thereunder. The plan provides that employees, directors and consultants are eligible to receive awards thereunder, that the Compensation Committee of the Board of Directors is authorized to establish the terms of such awards, as long as, in the case of ISOs, the term does not exceed ten years from the date of grant and the exercise price of the options is not less than fair value on the date of grant. Through March 31, 2006, 7,906,794 of the options granted had become exercisable. In the fiscal quarter ended December 31, 2005 the Company’s Compensation Committee for the first time approved equity awards to management which consisted of restricted stock units (“RSUs”) and stock appreciation rights (“SARs”). The Company promptly issues and delivers, out of the reservation created for the plan from its authorized but unissued common stock, shares upon exercise of options or stock appreciation rights, or upon vesting of restricted stock units, and has no current expectation of repurchasing shares to replace the shares so issued.
Effective October 1, 2005 the Company adopted the fair value method of accounting for share-based compensation arrangements in accordance with Financial Accounting Standards Board (“FASB”) Statement No123R, Share-Based Payment (“SFAS No. 123(R)”), using the modified prospective method of transition. Under the provisions of SFAS No. 123(R), the estimated fair value of share based awards granted under the 2001 Stock Incentive Plan is recognized as compensation expense over the vesting period. Using the modified prospective method, compensation expense is recognized beginning with the effective date of adoption of SFAS No. 123(R) for all share based payments (i) granted after the effective date of adoption and (ii) granted prior to the effective date of adoption and that remain unvested on the date of adoption.
Prior to October 1, 2005, the Company accounted for share-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and its related interpretations. Under the provisions of APB 25, no compensation expense was recognized when stock options were granted with exercise prices equal to or greater than market value on the date of grant.
The Company recorded $587,000, or $0.01 per share and $935,000, or $0.02 per share of total share-based compensation expense for the three and six months ended March 31, 2006, respectively, as required by the provisions of SFAS No. 123(R). The share-based compensation expense is calculated on a straight-line basis over the vesting periods of the related options, RSUs and SARs. This charge had no impact on the Company’s reported cash flows. For the three and six months ended March 31, 2005, the Company recorded no share-based compensation expense pursuant to APB 25. The allocation of the share-based compensation expense for the three and six months ended March 31, 2006 was as follows:
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Under the modified prospective method of transition under SFAS No. 123(R), the Company is not required to restate its prior period financial statements to reflect expensing of share-based compensation under SFAS No. 123(R). Therefore, the results as of March 31, 2006 are not directly comparable to the same period in the prior year.
As required by SFAS No. 123(R), the Company has presented pro forma disclosures of its net loss and net loss per share for the prior year period assuming the estimated fair value of the options outstanding during the period ended March 31, 2005 was amortized to expense over the option-vesting period as illustrated below.
The pro forma share-based compensation expense for the three and six month periods ending March 31, 2005 includes an additional $1.0 million to record the effect of the accelerated vesting. Prior to March 15, 2005 when the Company’s registration under Section 12(g) of the Securities Exchange Act of 1934 became effective, options had a seven year cliff vesting period. Under initial terms of the options, vesting was accelerated on March 15, 2005 and vesting now occurs over three-to-four-year terms.
The fair market value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions noted in the following table. The weighted average option life is a significant assumption as it determines the period for which the risk-free interest rate, volatility, and dividend yield must be applied. The expected life is the estimated average length of time over which the options will be exercised. In the fourth quarter of fiscal 2005, the Company changed the expected life of options granted from 10 years to 5 years based on a market study of comparable companies and to reflect anticipated increased marketability and trading volume of SoftBrands, Inc. common stock due to the approved listing and trading on the American Stock Exchange effective December 27, 2005. The risk-free interest rate is based on the five-year Treasury constant maturity interest rate whose term is consistent with the expected life of our stock options. An outside valuation advisor was used to assist the company in more accurately projecting expected stock price volatility considering both historical data and observable market prices of similar equity instruments.
The Black-Scholes option-pricing model requires the input of highly subjective assumptions. The Company’s employee stock
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options have characteristics significantly different from those of traded options. Because changes in the subjective input assumptions can materially affect the fair value estimate, management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, which could materially impact the Company’s fair value determination.
A summary of option activity under the 2001 Stock Incentive Plan as of March 31, 2006, and changes during the three-and six-month periods then ended are presented below.
The weighted-average, grant-date fair value of options granted during the six-month period ended March 31, 2006 and 2005 was $1.23 and $1.75, respectively.
Restricted Stock Units and Stock Appreciation Rights
On December 29, 2005, the Company’s Compensation Committee approved equity awards to management employees under the SoftBrands, Inc. 2001 Stock Incentive Program. To better optimize the cost of the Company’s equity incentives under SFAS 123(R), the awards consisted of restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) rather than stock options. In total, the Committee granted RSUs to acquire 362,000 shares of common stock, and SARs with respect to 237,500 shares of common stock. The SARs were assigned a fair value at $1.27 per share using the Black Scholes valuation model using the same assumptions used for share-based options.
In general, RSU grants vest and require SoftBrands to issue to the employee 25% of the shares subject to the grant on the first, second, third and fourth annual anniversaries of the date of grant, provided the employee remains an employee of the Company or a subsidiary on those dates. The estimated fair value of RSUs is based on the fair market value of the Company's common stock on the date of grant.
A summary of the status of the Company’s unvested shares as of March 31, 2006, and changes during the three-and six- month periods then ended are presented below.
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Each of the SAR grants also vest on the first, second, third and fourth anniversaries of the date of grant with respect to 25% of the shares, provided the employee remains employed with the Company or a subsidiary on that date, and expire on the fifth anniversary of the date of grant. The SARs entitle the employee, once vested and exercised, to receive shares of SoftBrands common stock having a value on the date of exercise equal to the excess of the fair market value of the shares on the date of exercise over the fair market value of the shares on the date of grant. During the quarter ending March 31, 2006, an additional 5,000 SARs were granted (valued at $1.05 per share) and 30,000 SARs were forfeited. The total outstanding at March 31, 2006 is 212,500.
As of March 31, 2006, there was $3,176,053, net of estimated forfeitures, of total unrecognized compensation expense related to stock–based arrangements granted under the 2001 Stock Incentive Plan. This expense is expected to be recognized over a weighted-average period of 2.0 years.
3. Net Income (Loss) Per Share
Net income (loss) per share is computed under the provisions of SFAS No. 128, Earning per Share. Basic earnings per share is computed using net income (loss) available to common shareholders and the weighted average number of shares outstanding. Income (loss) available to common shareholders includes the impact of dividends on the Company’s Series C Convertible Preferred Stock which was issued in August 2005. 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. 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 and Series C Preferred Stock is considered in both the basic and diluted earnings per share calculations, subject to the applicable antidilution provisions.
For the three and six months ended March 31, 2006, 4,331,540 shares of Series B Convertible Preferred Stock and 18,000 shares of Series C Convertible Preferred Stock were not considered in the calculation of basic or diluted earnings per share because the Company had net losses and based on the contractual terms, holders of neither the Series B Convertible Preferred Stock nor the Series C Convertible Preferred Stock have the obligation to share in the losses of the Company. In addition, for the periods ended March 31, 2006, SARs, RSUs, options and warrants to purchase 16,675,504 shares of the Company’s common stock were not considered in the calculation of diluted earnings per share because the impact would be antidilutive.
For the three and six months ended March 31, 2005, 4,331,540 shares of Series B Convertible Preferred Stock and options and warrants to purchase 14,594,000 shares of the Company’s common stock were not considered in the calculation of diluted earnings per share because the Company had net losses and to do so would have been antidilutive. There were no Series C Convertible Preferred Stock shares issued and outstanding at March 31, 2005.
4. Discontinued Operations
The Company records any recoveries from the liquidating trust of AremisSoft Corporation (the “Former Parent”) and any associated expenses as income or loss from discontinued operations. Upon separation from the Former Parent, the Company established an accrual related to lease expense for premises occupied by the Former Parent in the Europe, Middle East and Africa (“EMEA”). Upon re-assignment of the lease to a third party during the first quarter ended December 31, 2005, the Company reversed the remaining $655,000 balance of the accrual. The benefit is recorded as income from discontinued operations and is shown net of income taxes of $267,000.
The details of the Company’s relationship with the Former Parent are more fully described in the Company’s Report on
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Form 10-K filed with the SEC on December 20, 2005.
5. Restructuring Related Charges
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 lease costs that were to continue. Of this amount, $728,000 was taken during the first quarter 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 reversed in the second quarter of fiscal year 2005 with the closing of leased space in our EMEA region. There were no more restructuring-based lease commitments as of September 30, 2005.
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. As of September 30, 2005, the remaining balance of this plan was $33,000. During the six-month period ended March 31, 2006, the Company made cash severance payments of $18,000. At March 31, 2006, the remaining employee severance accrual for this program was $15,000, all of which is continued carryover from regions outside of the U.S.
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 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 was recorded. The most significant portion of this reversal relates to previously unused space at the Company’s headquarters in the U.S. 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 March 31, 2006, $166,000 of this restructuring liability was remaining and is required for special one-time retirement benefits that the Company is obligated to pay for three former employees.
The following table presents a summary of the Company’s restructuring activities during the six months ended March 31, 2006 and the year ended September 30, 2005:
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(1) The impact of foreign currency translation is included with cash payments.
6. Comprehensive Income (loss)
Total comprehensive loss was $1.3 million and $800,000 for the three months ended March 31, 2006 and 2005, respectively. Total comprehensive loss was $1.6 million and $2.1 million for the six months ended March 31, 2006 and 2005, respectively. Comprehensive loss differs from net loss due to foreign currency translation adjustments.
7. Acquisition
Effective October 1, 2005, the Company acquired all of the outstanding shares of Infra Business Solutions GmbH (“Infra”), a privately held German software company that is a reseller and development partner of SAP Business One, for approximately $2.3 million. The purchase price includes cash of approximately $1.9 million (net of cash acquired), warrants to purchase 200,000 shares of our common stock valued at $227,000 and closing costs. The acquisition gives the Company presence in Germany and the ability to use Infra’s established channel partners to introduce Fourth Shift Edition for SAP Business One to the German market. As a result of the acquisition of Infra, the Company acquired $1.4 million of identifiable intangible assets that have estimated useful lives of three to four years and are being amortized on accelerated and straight-line methods. The fair market value of the identifiable intangible assets purchased included Infra’s software product Infra:Net, a production planning system sold to small- to medium-sized manufacturers in the German, Swiss and Austrian markets at $676,000, non-contractual customer relationships valued at $282,000, a licensing and royalty agreement valued at $25,000 and employment contracts valued at $376,000. Goodwill of $585,000 was assigned to the manufacturing operating segment. The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed:
The results of operations of Infra have been included in the Company’s consolidated statements of operations since the date of the acquisition. The pro forma impact of the Infra acquisition was not significant to the results of the Company for the six months ended March 31, 2006 or the three or six months ended March 31, 2005.
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8. 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, 2005 annual assessment resulted in no impairments.
There was an increase of $585,000 to goodwill during the six months ended March 31, 2006, which was due entirely to the Infra acquisition in October 2005.
Net intangible assets at March 31, 2006 and September 30, 2005, were comprised of the following:
Total amortization of intangibles was $1.1 million and $1.2 million for the three months ended March 31, 2006 and 2005, respectively. Total amortization of intangibles was $2.2 million and $2.3 million for the six months ended March 31, 2006 and 2005, respectively. Based on the intangibles at March 31, 2006, estimated amortization expense for each of the next four years is as follows:
9. Segment Information
The Company discloses segments in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which established 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 through the resale of complementary third-party software licenses and hardware.
Financial information by segment is summarized in the following table. Total assets are not allocated to manufacturing and hospitality for internal reporting purposes.
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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
SoftBrands, Inc. provides enterprise software and support solutions to approximately 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 and medium-sized manufacturing concerns. Our principal products in this segment include Fourth Shift Edition for SAP Business One, our newest product that is sold with SAP’s Business One product suite to small and medium-sized manufacturers and to plants or divisions of multinational enterprises; 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; and Demand Stream, a lean enterprise automation software system that was introduced in 2003. 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 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. Because much of our administrative and support staff provides services to both segments, we also report in this Management’s Discussion unallocated corporate expenses as part of a “Corporate” segment.
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We derive revenue in both of our manufacturing and hospitality segments through sale of licenses to use our software products and through providing services required to maintain our products, to install and implement our products, and in some cases to customize or create extensions for our products. On occasion we also sell hardware products of third-party vendors on a distribution basis for the convenience of our customers and sell licenses to third-party software programs. 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 a 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.
Infra Acquisition
Effective October 1, 2005, we acquired all of the outstanding shares of Infra Business Solutions GmbH, a privately held German software company that is a reseller and development partner of SAP Business One, for approximately $2.3 million. The purchase price consisted of cash plus warrants to purchase 200,000 shares of our common stock. We assigned $343,000 of the purchase price to the value of net tangible assets acquired, $1.4 million to identifiable intangible assets, and $585,000 to goodwill. The fair market value of the identifiable intangible assets purchased included Infra’s software product Infra:Net, a production planning system sold to small- to medium-sized manufacturers in the German, Swiss and Austrian markets valued at $676,000, non-contractual customer relationships valued at $282,000, a licensing and royalty agreement valued at $25,000 and employment contracts valued at $376,000.
Critical Accounting Policies and Estimates
The preparation of the financial information contained in this Form 10-Q requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our management evaluates 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. Except with respect to changes in the manner in which we account for share based compensation, as discussed below, 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-K as filed with the SEC on December 20, 2005.
Share-based Compensation. During the first quarter of 2006, we adopted the fair value method of accounting for share-based compensation using the modified prospective method of transition as outlined in Financial Accounting Standards Board Statement No. 123R, Share-Based Payment (“SFAS No. 123R”). Under SFAS No. 123R, the estimated fair value of share-based compensation, including stock options granted under our 2001 Stock Incentive Plan, is recognized as compensation expense. The estimated fair value of stock options is expensed on a straight-line basis over the vesting period. Prior to October 1, 2005, we accounted for share-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and its related interpretations. Under the provisions of APB 25, no compensation expense was recognized when stock options were granted with exercise prices equal to or greater than market value on the date of grant. Under the modified prospective method of transition that we adopted, compensation expense is recognized beginning with the effective date of adoption for all share-based payments (i) granted after the effective date of adoption and (ii) granted prior to the effective date of adoption and that remain unvested on the date of adoption. Under the modified prospective method of transition, we are not required to restate our prior period financial statements to reflect expensing of share-based compensation under SFAS No. 123R. Therefore the three and six month results of March 31, 2006 are not directly comparable to the same period in the prior year. Under SFAS No. 123R, we use the Black-Scholes pricing model to estimate the fair value of the share-based compensation as of the grant date. The Black-Scholes model by its design is highly complex, and dependent upon key data inputs estimated by management. The primary data input with the greatest degree of subjective judgment are the estimated lives of the share-based awards and the estimated volatility of our stock price. The Black-Scholes model is highly sensitive to changes in these two data inputs. Beginning in the fourth quarter of fiscal 2005, we calculated the 5-year estimated life of stock options granted using the information and guidance from an analysis by an independent compensation consultant. We based our estimate of expected volatility for fiscal year 2006 on daily historical trading data of our common stock. For fiscal year 2005, we based our volatility estimate under the same method as fiscal year 2006. We selected the historical method primarily because we have not identified a more reliable or appropriate method to predict future volatility. See Note 2, Accounting for Share-based Compensation, to our financial statements for more information about the adoption of SFAS No. 123(R).
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Results of Operations
For the three months ended March 31, 2006, we reported total revenue of $17.4 million and a net loss of $1.4 million, or $0.04 per share, compared to total revenue of $17.4 million and a net loss of $895,000, or $0.02 per share, for the same period in 2005. The results for the quarter ended March 31, 2006, include $587,000 of share-based compensation resulting from the adoption of SFAS No. 123(R) on October 1, 2005, $395,000 in severance costs and an expense of $460,000 related to lease obligations in the United Kingdom, partially offset by a $1.0 million decrease in interest expense. The new lease terms in the U.K. will result in approximately a $480,000, or 49% decrease in annual rent expense for the Reading facility. The decrease in interest expense was from the Senior Notes that were repaid in August 2005.
For the six months ended March 31, 2006, we reported total revenue of $34.1 million and a net loss of $1.6 million, or $0.05 per share, compared to total revenue of $34.7 million and a net loss of $1.6 million, or $0.04 per share, for the same period in 2005. Loss from continuing operations was $2.0 million for the six months ended March 31, 2006 compared to $1.6 million for the six months ended March 31, 2005. The change in the loss from continuing operations includes $935,000 of SFAS No. 123(R) share-based compensation expense, $395,000 in severance costs and an expense of $460,000 related to lease obligations in the United Kingdom, partially offset by a $2.0 million decrease in interest expense.
The following table summarizes revenue and operating results by reportable segment for the three and six months ended March 31, 2006 and 2005:
*NM: Percentage not meaningful
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Total revenue was relatively unchanged in the three months ended March 31, 2006 compared to the three months ended March 31, 2005. This reflects an 8.5% increase for manufacturing offset by an 18.8% decrease for hospitality. See below for a more detailed discussion of changes in revenue by reportable segment, revenue type and geography. Operating income in the manufacturing group increased by 8.5% in the three months ended March 31, 2006 compared to the 2005 period, primarily because of increased revenue. Operating income in the hospitality group decreased 62.7% in the three months ended March 31, 2006, primarily because of declining maintenance revenue. The corporate group loss increased by 24.5% in the three months ended March 31, 2006, due in large part to share based compensation expenses, U.K. lease obligations, severance charges and increased marketing efforts.
Total revenue decreased 1.6% in the six months ended March 31, 2006 compared to the six months ended March 31, 2005. This reflects a 5.2% increase in manufacturing group revenue offset by a 17.6% decrease in hospitality group revenue. See below for a more detailed discussion of changes in revenue by reportable segment, revenue type and geography. Operating income in the six months ended March 31, 2006 in the manufacturing group increased by 5.0%, primarily through the revenue increase. Operating income in the hospitality group decreased 58.8% in the six months ended March 31, 2006 primarily because of declining maintenance revenue. The corporate group loss increased by 23.0%, due in large part to share based compensation expenses, severance charges and increased marketing efforts.
Revenue. The following table summarizes revenue by reportable segment, revenue type and geography for the three and six months ended March 31, 2006 and 2005:
*NM: Percentage not meaningful
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Manufacturing segment: Total manufacturing revenue increased by $1.0 million or 8.5% for the three months ended March 31, 2006 compared to the three months ended March 31, 2005, and increased $1.3 million or 5.2% in the six months ended March 31, 2006 compared to the same period in 2005. License revenue increased 19.2% in the three months ended and 7.7% in the six months ended March 31, 2006 in manufacturing as a result of a number of factors including strong performance from Fourth Shift sales in Americas and Evolution sales in Europe during the March quarter. Maintenance revenues in manufacturing increased 1.8 % in the quarter and 2.7% in the six months ended March 31, 2006 as we continue to experience high retention rates on maintenance renewals and the generation of support revenue from additional service offerings. These services include remote system administration, and business process management. Professional services revenue increased 22.5% during the quarter and 13.2% during the six months ended March 31, 2006, primarily due to strong performance in the business process management services and new revenue from our October 2005 acquisition in Germany.
Geographically, we generated organic license and maintenance growth and increased revenue from evolution sales in Europe, Middle East & Africa (EMEA) region and from the Infra acquisition. Our license and maintenance revenue from the Asia
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Pacific region increased as the strength of the Chinese economy continues and our customers demand increased product and services. The Americas region was aided during the second quarter by the strong sales of Fourth Shift.
Hospitality segment: Total hospitality segment revenue decreased by $1.0 million or 18.8% in the three months ended March 31, 2006, compared to the prior year and decreased $1.8 million or 17.6% in the six-month period. The revenue decrease was driven by reduced maintenance revenue and because the fiscal 2005 period includes $503,000 combined license and professional services revenue from a large custom development project that did not recur in the fiscal 2006 period. License revenue decreased $236,000 or 27.7% in the three months ended March 31, 2006 over March 31, 2005 and $127,000 or 9.5% in the six months ended March 31, 2006 over the same period in 2005. License revenue was higher in the prior three month period in part because of $257,000 recorded from the custom project mentioned above. Sales volume and license revenue from Medallion increased from the three months ended March 31, 2005 to the three months ended March 31, 2006. The average site license revenue is lower than historically realized due to a high mix of sales to smaller hotels. The 23.0% decrease in hospitality maintenance revenue was primarily due to continued attrition related to legacy systems that are being phased out by customers. Although we plan to partially offset this attrition with revenue from maintenance of newly sold Medallion and Portfolio products, our installed base of those products is not yet to the level necessary to compensate for the attrition. Provided we are successful in meeting our new account sales objectives, we expect relatively flat hospitality maintenance revenue for the remainder of the year.
Geographically, we provide maintenance services on legacy products primarily in the EMEA and Americas regions, and our operations in those regions have therefore experienced the largest decreases in hospitality maintenance revenue.
Gross Margin. The following table summarizes gross profit as a percentage of revenue, or gross margin percentages, by reportable segment and revenue type for the three and six months ended March 31, 2006 and 2005:
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