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SoftBrands' Recovery Softens the AremisSoft Bankruptcy Blow

Written By: Predrag Jakovljevic
Published On: February 27 2006

Background

The dynamic enterprise applications market never ceases to amaze long-term observers. While many players have sunken into oblivion, a few have come back under new names, with familiar (albeit refined) value propositions. One such case is SoftBrands, Inc. (AMEX: SBN; http://www.softbrands.com/ ), a Minneapolis, Minnesota (US)-based provider of enterprise solutions for small- to medium-sized businesses (SMB) in the manufacturing and hospitality industries worldwide. The vendor has more than 550 employees in its US headquarters and branch offices in Europe, India, Asia, Australia, and Africa. With more than 4,000 customers in over 60 countries now actively using its products, it has established a decent global infrastructure for the distribution, development, and support of enterprise software.

In order to understand the significance of SoftBrand's recovery, it must be considered in relation to its recent history. While the SoftBrands name may not sound familiar, some may remember Fourth Shift Corporation, a formerly prominent, public, manufacturing mid-market, enterprise resources planning (ERP) provider. Fourth Shift Corporation was one of SoftBrands' previous incarnations (and is still its major pillar; for more information, see Fourth Shift Corporation: Working Overtime to Provide Complete Customer Care). Some may also recall AremisSoft, another of SoftBrands' former names, as a scandal-plagued company whose top executives are still hiding out in their native Cyprus, which (conspicuously) does yet have an extradition treaty with the US (though there is an unconfirmed rumor that one of the culprits was recently captured in the US).

Although SoftBrands was incorporated in October 2001, it was first formed as a subsidiary of AremisSoft, primarily to serve as a holding company for Fourth Shift Corporation and certain hospitality software assets. Fourth Shift, established in 1984, became SoftBrands' principal operating subsidiary. However, the Minneapolis, Minnesota (US)-based Fourth Shift, which had been a public corporation until it was acquired by AremisSoft in April 2001 (see The Mid-Market Is Consolidating, Lo And Behold), was never really integrated into the ill-fated AremisSoft organization.

AremisSoft purported to be an international developer and marketer of software for several vertical markets. It was headquartered primarily in the UK and Cyprus. Unlike Fourth Shift and many other players in the downshifting market at the time, AremisSoft alleged substantially increased revenue in 2000, in part due to several supposed acquisitions and large sales by its erstwhile Emerging Markets Group, which served Eastern Europe, the Middle East, and India. In late 2000 and early 2001, AremisSoft also acquired two US companies in the hospitality software business and completed a cash merger through which it acquired all of Fourth Shift's outstanding shares in April 2001. But, beginning in May 2001, a number of class action lawsuits, as well as a US Security and Exchange Commission (SEC) investigation, were commenced against AremisSoft. This led to the resignation of all of AremisSoft's executive officers by the fall of 2001, and eventually to an SEC enforcement action against AremisSoft and criminal complaints against certain of its former officers.

AremisSoft's new management, which is Softbrands' current management, was tapped to help investigate these issues and to operate the businesses AremisSoft had acquired. After substantial forensic accounting work, the new management was (not surprisingly) unable to fully substantiate AremisSoft's operations as reported in 2000. Consequently, the class action lawsuits and enforcement proceedings led AremisSoft to file for protection under Chapter 11 of the US Bankruptcy Code in March 2002. With full participation of the plaintiff class, a plan for the reorganization of AremisSoft was approved in July 2002, and became effective in August 2002. Under this plan, SoftBrands was spun-off as a separate entity. The non-SoftBrands assets of AremisSoft were sold or disposed of immediately prior to, or as a part of, the bankruptcy proceedings. Because virtually all of AremisSoft's continuing operations were already contained in SoftBrands, from an accounting and financial reporting standpoint Softbrands' spin-off was treated as a reverse spin-off, that is, as if it had spun off AremisSoft.

Because of the substantial disruption in business operations and damage to credibility caused by the events described above, neither SoftBrands' hospitality nor manufacturing enterprise applications businesses generated significant revenue from product licenses to new customers during the period from June 2001 to late 2002, though the vendor continued to generate recurring revenue from software maintenance of its principal manufacturing software product. During that difficult period, the company was nonetheless successful in expanding revenues in China, and in continuing development on DemandStream, a new generation of lean manufacturing software. SoftBrands management also worked during this period to integrate the company's hospitality operations, which had been aggregated from several recent acquisitions of disparate software products, and to stabilize the principal hospitality product's code.

During 2003, the vendor continued to work feverishly to reinvigorate sales of new licenses of its manufacturing software, to introduce DemandStream to the market, and to consolidate and integrate its hospitality operations. To that end, in November 2002, while waiting for the outcome of the AremisSoft bankruptcy proceedings, SoftBrands obtained financing of $20 million (USD), which has since largely supported its cash needs. The company's financial situation was also aided by the fact that income from its manufacturing operations exceeded expections in fiscal year (FY)2003 (though income levels were still reduced compared to Fourth Shift's mid-1990s levels) due to renewed interest in Softbrands' core manufacturing product. The hospitality operations in FY2003, on the other hand, despite the acquisition a new hospitality product, Medallion, in April 2003, continued to be plagued by systems and personnel that had never been fully integrated and by software code for new products that did not meet customer expectations.

Because of these business unit performance issues, SoftBrands substantially restructured its operations at the end of FY2003, combining several office locations, decreasing staff in the hospitality division, and combining management of its manufacturing and hospitality operations so that the entire organization would function with greater efficiency. Since then, SoftBrands has continued its efforts to put its entire unfortunate, nightmarish AremisSoft-related history behind it, so as to further reinvent itself and rebuild some credibility. Consequently, it has been making a strong comeback in the enterprise applications world, especially in its traditional stronghold of China (and also in India).

During 2004, Softbrands, capitalizing on steps taken during 2003, entered into an arrangement to provide software to the smaller manufacturing business market with SAP Business One (see SoftBrands to Institute Fourth Shift for SAP Business One Manufacturing Work-plan) and continued market development for the budding DemandStream lean manufacturing product. As for the hospitality operations, the vendor completed new versions of its software products that now are reportedly stable, are under consistent development control, and have obtained renewed support and confidence from major customers.

SoftBrands' Recovery

Currently, SoftBrands has revenues of about $70 million (USD), with around 65 percent coming from customer support as recurring revenue, and approximately 60 percent coming from North America. The vendor has also successfully worked on its Wall Street reinstatement (its stock had long traded on the pink sheet over-the-counter stock market, where value is much more difficult to gain than in national markets). As of December 28, 2005, the company has been trading on the American Stock Exchange (ASE).

The AremisSoft operations that were curtailed as part of the bankruptcy agreement are reflected in SoftBrands' 2004 financial statements as discontinued operations. Over the next five years, the company's goal is to grow revenues 10 percent to 15 percent and to have earnings before interest, taxes, depreciation and amortization (EBITDA) of 20 percent to 30 percent, thereby building its business to a greater size and scale. This optimism is based on several of SoftBrands' strategic initiatives, including the following ones.

  • The company's partnership with SAP, which gives Softbrands a major credibility boost. The recent appointment of Ralf Suerken as senior vice president (SVP) and general manager (GM) of SoftBrands' manufacturing division can be bundled in with this. Mr. Suerken has many years of SAP-related experience. He has intimate knowledge of SAP culture and mid-market products and services in Europe, where SAP is accepted as a viable mid-market candidate, and brought itelligence Group, a major SAP mid-market reseller, to the US in the 1990s.

  • The vendor's commitment to advancing, under its own steam, the lean, demand-driven manufacturing concepts with its DemandStream offering

  • Its long-term presence (i.e., since 1989) in the Chinese market, which makes it one of the leading ERP suppliers in China. SoftBrands now has Asian headquarters in Tianjin, China, as well as offices in Shanghai, Beijing, and Guangzhou, China. SoftBrands' current manufacturing customers in China are primarily western-based companies with major operations in China.

  • The company's ability to capitalize on right-shoring trends through its worldwide development and customer support infrastructure. Again, much of this infrastructure is in China, where it has more than 100 employees in 4 offices and several hundred customer installations. It also has a presence in India, where it has eighty staff members and thirty installations.

  • The fact that the company recently received $12.6 million (USD) as part of the $200 million (USD) settlement (one of the largest in the history of rogue, runaway executives) reached between federal regulators and the former chief executive officer (CEO) of AremisSoft. This money is coming in handy to bolster SoftBrands' cash position and expansion capital. SoftBrands also received $2.9 million (USD) in 2003, and could potentially receive more in the future.

  • The ongoing upgrading of SoftBrands' hospitality solution products

Nowadays, Softbrands' revenue comes mostly (about two thirds or more) from the SoftBrands Manufacturing division. It receives the remaining approximately 30 percent from sales and support of mid-market hotel, property, and leisure management systems (i.e., PORTfolio, POS, Medallion, RIO Grand, and other products) within the SoftBrands Hospitality division. With over 300 employees worldwide, the manufacturing business supports the enterprise information management needs of small- to mid-sized manufacturing companies worldwide by offering them ERP software, consulting, implementation, installation, and ongoing support. SoftBrands' four core products for manufacturing include the following.

  1. Classic Fourth Shift, aimed at manufacturing SMBs
  2. Fourth Shift Edition for SAP Business One. This product is the result of the 2004 agreement to a significant joint-initiative with the SAP Business One product to address the software applications needs of small and medium-sized manufacturing companies.
  3. evolution (formerly Aremis Enterprise). This is another extended ERP product that is primarily a configurable ERP and business-to-business (B2B) e-commerce solution. It is built on several database platforms (Oracle, IBM Informix, and Microsoft SQL2000) and server platforms (HP-UX, Sun Solaris, IBM AIX, and Microsoft 2000 Windows Server), and, therefore, might be more suitable for larger mid-size manufacturers.
  4. DemandStream. On the manufacturing side, DemandStream is a lean enterprise automation software system that addresses the emerging market for lean automation.

This concludes Part One of a five-part note. Parts Two and Three will address SoftBrands Manufacturing, Part Four will look at SoftBrands Hospitality, and Part Five will examine the company's market impact.

 
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