** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM10-Q/A-3**

 

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| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | **FOR  THE QUARTERLY PERIOD ENDED December 31, 2004**                                                                                                                                                                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | **Or**                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                       |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | **FOR THE TRANSITION PERIOD FROM                          TO                      ** |

** **

**Commissionfile number 0-51118**

 

**SoftBrands, Inc.**

(Exact name of registrantas 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)           |

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen 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 ofFebruary 10, 2005 was 40,030,000.

 

 

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**ExplanatoryStatement**

 

This Form 10-Q/A is filed to amend Items 1, 2 and 4 of Part I of thisForm 10-Q for the following reasons.  TheCompany has determined that its accounting for income taxes included in itspreviously issued financial statements for the 2004 fiscal year and for each ofits interim periods of fiscal 2004 relating to taxable income from discontinuedoperations generated by trust distributions during fiscal 2004 wasincorrect.  The income tax benefitcreated by operating losses of continuing operations should have been reflectedas being realized within continuing operations as a result of taxable incomegenerated from trust distributions.  Inthe Company’s previously issued financial statements, such income tax benefitswere reflected net within income from discontinued operations rather thanapplied as a tax benefit to continuing operations as required under SFAS No.109, *Accounting for Income Taxes.*

 

The restated amounts related to this matter are included in thisQuarterly Report on Form 10-Q/A for the quarter ended December 31,2004, and will be included in our amended Form 10 and our amendedQuarterly Reports on Form 10-Q for the quarters ended June 30, 2005and March 31, 2005.

 

For a discussion of the restatementadjustments, see Note 2 to the unaudited consolidated financial statementspresented herein.

2

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**Form10-Q**

**Index**

 
| Part I.  |   | Financial Information                                                                                    |   |
|----------|--------|----------------------------------------------------------------------------------------------------------|--------|
| Item 1.  |   | Financial Statements                                                                                     |   |
|     |   | Consolidated Balance Sheets  at December 31, 2004 and September 30, 2004                                 |   |
|     |   | Consolidated  Statements of Operations for the three months ended December 31, 2004 and  2003 (restated) |   |
|     |   | Consolidated  Statements of Cash Flows for the three months ended December 31, 2004 and  2003 (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                                                                                      |   |
| Exhibits |   |                                                                                                     |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

3

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**PARTI.  FINANCIAL INFORMATION**

 

**ITEM1.  Financial Statements**

 

**SoftBrands, Inc.**

**Consolidated Balance Sheet****s**

**in thousands, except per sharedata**

**(unaudited)**

 
| ** **                                                                                                                            | ** ** | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                            | ** ** | ** **             | ** ** | ** **              | ** ** |
| **Assets**                                                                                                                            |       |                   |       |                    |       |
| Current assets                                                                                                                        |       |                   |       |                    |       |
| Cash and cash  equivalents                                                                                                            |       | $                      | 9,700      |                    | $          | 9,719 |   |
| Accounts  receivable, net                                                                                                             |       | 6,347                  |       | 6,289                   |       |
| Prepaid expenses  and other current assets                                                                                            |       | 1,555                  |       | 1,224                   |       |
| Total current  assets                                                                                                                 |       | 17,602                 |       | 17,232                  |       |
|                                                                                                                                  |       |                   |       |                    |       |
| Furniture,  fixtures and equipment, net                                                                                               |       | 2,276                  |       | 2,382                   |       |
| Restricted cash                                                                                                                       |       | 899                    |       | 846                     |       |
| Goodwill                                                                                                                              |       | 22,947                 |       | 22,947                  |       |
| Intangible  assets, net                                                                                                               |       | 6,884                  |       | 7,917                   |       |
| Other long-term  assets                                                                                                               |       | 1,058                  |       | 1,127                   |       |
| Total assets                                                                                                                          |       | $                      | 51,666     |                    | $          | 52,451 |   |
|                                                                                                                                  |       |                   |       |                    |       |
| **Liabilities  and Stockholders’ Equity**                                                                                        |       |                   |       |                    |       |
| Current  liabilities                                                                                                                  |       |                   |       |                    |       |
| Current portion  of long-term debt and capital leases                                                                                 |       | $                      | 2,534      |                    | $          | 547 |   |
| Accounts payable                                                                                                                      |       | 1,956                  |       | 2,169                   |       |
| Accrued expenses                                                                                                                      |       | 5,934                  |       | 6,775                   |       |
| Accrued  restructuring costs                                                                                                          |       | 1,104                  |       | 1,214                   |       |
| Deferred revenue                                                                                                                      |       | 19,900                 |       | 18,014                  |       |
| Other current  liabilities                                                                                                            |       | 1,781                  |       | 1,892                   |       |
| Total current  liabilities                                                                                                            |       | 33,209                 |       | 30,611                  |       |
|                                                                                                                                  |       |                   |       |                    |       |
| Long-term debt  and capital leases                                                                                                    |       | 15,740                 |       | 17,675                  |       |
| Other long-term  liabilities                                                                                                          |       | 434                    |       | 594                     |       |
| Total  liabilities                                                                                                                    |       | 49,383                 |       | 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                                                                                                 |       | (1,768                 | )          | (1,146                  | )          |
| Accumulated  deficit                                                                                                                  |       | (173,914               | )          | (173,248                | )          |
| Total  stockholders’ equity                                                                                                      |       | 2,283                  |       | 3,571                   |       |
|                                                                                                                                  |       |                   |       |                    |       |
| Total liabilities  and stockholders’ equity                                                                                      |       | $                      | 51,666     |                    | $          | 52,451 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

4

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**SoftBrands,Inc.**

**ConsolidatedStatements of Operations**

**inthousands, except per share data(unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended**   | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                         | ** ** | **December 31,****2004** | ** ** | **December 31,****2003** | ** ** |
| ** **                                                         | ** ** | ** **               | ** ** | **(restated)** | ** ** |
| **Revenue**                                                        |       |                     |       |   |   |
| Software  licenses                                                 |       | $                        | 2,297      |   | $ | 2,152 |   |
| Maintenance                                                        |       | 11,133                   |       | 11,153 |   |
| Professional  services                                             |       | 3,179                    |       | 3,407 |   |
| Third-party  software and hardware                                 |       | 668                      |       | 703 |   |
| Total revenue                                                      |       | 17,277                   |       | 17,415 |   |
| **Cost of  revenues**                                              |       |                     |       |   |   |
| Software  licenses                                                 |       | 1,120                    |       | 1,127 |   |
| Maintenance                                                        |       | 3,533                    |       | 3,753 |   |
| Professional  services                                             |       | 2,586                    |       | 2,787 |   |
| Third-party  software and hardware                                 |       | 445                      |       | 558 |   |
| Total cost of  revenues                                            |       | 7,684                    |       | 8,225 |   |
| Gross profit                                                       |       | 9,593                    |       | 9,190 |   |
| **Operating  expenses**                                            |       |                     |       |   |   |
| Selling, general  and administrative                               |       | 7,427                    |       | 7,042 |   |
| Research and  product development                                  |       | 2,002                    |       | 2,148 |   |
| Restructuring  related charges                                     |       |                     |       | 1,126 |   |
| Total operating  expenses                                          |       | 9,429                    |       | 10,316 |   |
| Operating income  (loss)                                           |       | 164                      |       | (1,126 | ) |
| Interest expense                                                   |       | (1,003                   | )          | (1,038 | ) |
| Change in value  of mandatorily redeemable common stock warrant    |       |                     |       | (383 | ) |
| Other income,  net                                                 |       | 273                      |       | 26 |   |
| Loss from  continuing operations before provision for income taxes |       | (566                     | )          | (2,521 | ) |
| Provision for (benefit  from) income taxes                         |       | 100                      |       | (3 | ) |
| Loss from  continuing operations                                   |       | (666                     | )          | (2,518 | ) |
| **Discontinued  operations**                                       |       |                     |       |   |   |
| Income from  discontinued operations, net of tax                   |       |                     |       | 2,103 |   |
| Net loss                                                           |       | $                        | (666       | ) | $ | (415 | ) |
| **Basic  and diluted (loss) earnings per common share**            |       |                     |       |   |   |
| Continuing  operations                                             |       | $                        | (0.02      | ) | $ | (0.06 | ) |
| Discontinued  operations                                           |       |                     |       | $ | 0.05 |   |
| Net loss                                                           |       | $                        | (0.02      | ) | $ | (0.01 | ) |
|                                                               |       |                     |       |   |   |
| **Weighted  average basic and diluted shares outstanding**         |       | 40,030                   |       | 40,000 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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**SoftBrands,Inc.**

**ConsolidatedStatements of Cash Flows**

**inthousands(unaudited)**

 
| ** **                                                                                                         | ** ** | **Three Months Ended**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                         | ** ** | **December 31,****2004** | ** ** | **December 31,****2003** | ** ** |
| ** **                                                                                                         |       |                     |       | **(restated)** |   |
| **Cash  flow from operating activities**                                                                           |       |                     |       |   |   |
| Loss from  continuing operations                                                                                   |       | $                        | (666       | ) | $ | (2,518 | ) |
| Adjustments to  reconcile loss from continuing operations to net cash provided by (used in)  continuing operations |       |                     |       |   |   |
| Depreciation and  amortization                                                                                     |       | 1,464                    |       | 1,727 |   |
| Change in value  of mandatorily redeemable common stock warrant                                                    |       |                     |       | 383 |   |
| Noncash interest  expense                                                                                          |       | 271                      |       | 299 |   |
| Foreign currency  transaction gains                                                                                |       | (271                     | )          | (32 | ) |
| Restructuring  related charges                                                                                     |       |                     |       | 1,126 |   |
| Provision for  doubtful accounts                                                                                   |       | 69                       |       | 46 |   |
| Noncash income  tax benefit                                                                                        |       |                     |       | (13 | ) |
| Change in  operating assets and liabilities                                                                        |       |                     |       |   |   |
| Accounts  receivable, net                                                                                          |       | 300                      |       | (1,977 | ) |
| Prepaid expenses  and other current assets                                                                         |       | (259                     | )          | (239 | ) |
| Accounts payable                                                                                                   |       | (194                     | )          | (999 | ) |
| Accrued expenses                                                                                                   |       | (863                     | )          | (125 | ) |
| Accrued  restructuring costs                                                                                       |       | (179                     | )          | (1,531 | ) |
| Deferred revenue                                                                                                   |       | 1,353                    |       | 3,492 |   |
| Other current  liabilities                                                                                         |       | (196                     | )          | (201 | ) |
| Other long-term  assets and liabilities                                                                            |       | (161                     | )          | 498 |   |
| Net cash provided  by (used in) continuing operations                                                              |       | 668                      |       | (64 | ) |
| Net cash  provided by discontinued operations                                                                      |       |                     |       | 2,206 |   |
| Net cash  provided by operating activities                                                                         |       | 668                      |       | 2,142 |   |
| **Cash  flow from investing activities**                                                                           |       |                     |       |   |   |
| Purchases of  furniture, fixtures and equipment                                                                    |       | (111                     | )          | (80 | ) |
| Capitalized  software development costs                                                                            |       | (60                      | )          |   |   |
| Net cash used in  investing activities                                                                             |       | (171                     | )          | (80 | ) |
| **Cash  flow from financing activities**                                                                           |       |                     |       |   |   |
| Repayment of  long-term debt and capital leases                                                                    |       | (131                     | )          | (161 | ) |
| Capitalized  financing costs                                                                                       |       |                     |       | (52 | ) |
| Net cash used in  financing activities                                                                             |       | (131                     | )          | (213 | ) |
| Effect of  exchange rates on cash balances                                                                         |       | (385                     | )          | 13 |   |
| Change in cash  and cash equivalents                                                                               |       | (19                      | )          | 1,862 |   |
| **Cash  and cash equivalents**                                                                                     |       |                     |       |   |   |
| Beginning of  period                                                                                               |       | 9,719                    |       | 8,976 |   |
| End of period                                                                                                      |       | $                        | 9,700      |   | $ | 10,838 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

6

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**SoftBrands,Inc.**

**Notes toConsolidated Financial Statements**

**(unaudited)**

 

**1.             Basisof Presentation**

 

The unaudited consolidated financial statements included herein reflectall adjustments, in the opinion of management, necessary to fairly stateSoftBrands, Inc.’s (the Company’s) consolidated financial position,results of operations and cash flows for the periods presented. Theseadjustments consist of normal, recurring items unless otherwise noted. Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts therein. Due to theinherent uncertainty involved in making estimates, actual results in futureperiods may differ from those estimates. The results of operations for thequarter ended December 31, 2004 are not necessarily indicative of theresults to be expected for any subsequent quarter or for the entire fiscal yearending September 30, 2005. These statements do not contain certaininformation included in the Company’s annual financial statements and notes.The accompanying interim consolidated financial statements should be read inconjunction with the financial statements and related notes included in theCompany’s Report on Form 10 as filed with the Securities and ExchangeCommission (“SEC”) on January 14, 2005, and as amended on March 15, 2005, May6, 2005 and June 24, 2005.

 

**2.             Restatementof Consolidated Financial Statements**

 

The Company has determined that its accounting for income taxesincluded in its previously issued financial statements for the 2004 fiscal yearand for each of its interim periods of fiscal 2004 relating to taxable incomefrom discontinued operations generated by trust distributions during fiscal2004 was incorrect.  The income taxbenefit created by operating losses of continuing operations should have beenreflected as being realized within continuing operations as a result of taxableincome generated from trust distributions. In the Company’s previously issued financial statements, such income taxbenefits were reflected net within income from discontinued operations ratherthan applied as a tax benefit to continuing operations as required under SFASNo. 109, *Accounting for Income Taxes.*  As reflected below, the consolidatedfinancial statements for the three month period ended December 31, 2003discussed and presented herein have been restated to correct the errorresulting in a decrease of $13,000 in the income tax provision in continuingoperations.  The income tax provision indiscontinued operations for the three months ended December 31, 2003 wasincreased by $103,000.  These adjustmentshad no impact on net loss, net cash provided by operating activities or totalstockholders’ equity as previously reported for the year ended September 30,2004.

 
| ** **                                                         | ** ** | **Three Months  Ended December  31, 2003 (as  previously  reported)** | ** ** | **Adjustment** | ** ** | **Three Months  Ended December  31, 2003 (as  restated)** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------------------------------------------------------------|------------|
|                                                               |       |                                                                                      |       |           |       |                                                                          |       |
| Loss from  continuing operations before provision for income taxes |       | $                                                                                         | (2,521     | )              |       |                                                                          | $          | (2,521 | ) |
| Provision for (benefit  from) income taxes                         |       | 10                                                                                        |       | $              | (13        | )                                                                             | (3         | ) |
| Loss from  continuing operations                                   |       | (2,531                                                                                    | )          | 13             |       | (2,518                                                                        | )          |
| **Discontinued  Operations**                                       |       |                                                                                      |       |           |       |                                                                          |       |
| Income from  discontinued operations, net of tax                   |       | 2,206                                                                                     |       | (103           | )          | 2,103                                                                         |       |
| Net loss                                                           |       | $                                                                                         | (325       | )              | $          | (90                                                                           | )          | $ | (415 | ) |
| **Basic  and diluted earnings (loss) per common share**            |       |                                                                                      |       |           |       |                                                                          |       |
| Continuing  operations                                             |       | $                                                                                         | (0.06      | )              |       |                                                                          | $          | (0.06 | ) |
| Discontinued  operations                                           |       | $                                                                                         | 0.06       |           | $          | (0.01                                                                         | )          | $ | 0.05 |   |
| Net loss                                                           |       | $                                                                                         | (0.01      | )              |       |                                                                          | $          | (0.01 | ) |
| **Cash Flow**                                                      | ** ** | ** **                                                                                | ** ** | ** **     | ** ** | ** **                                                                    | ** ** |
| Loss from  continuing operations                                   |       | $                                                                                         | (2,531     | )              | $          | 13                                                                            |       | $ | (2,518 | ) |
| Noncash income  tax benefit                                        |       |                                                                                      |       |           | $          | (13                                                                           | )          | $ | (13 | ) |
| Net cash  provided by (used in) continuing operations              |       | $                                                                                         | (773       | )              | $          | 709                                                                           |       | $ | (64 | ) |
| Net cash  provided by discontinued operations                      |       | $                                                                                         | 2,915      |           | $          | (709                                                                          | )          | $ | 2,206 |   |

 

**3.             RecentAccounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Boardpublished SFAS No. 123 (revised 2004), *Share-BasedPaymen**t*.  SFAS No. 123(R) revises SFAS No. 123, *Accounting for Stock-Based Compensation*,and supersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees*. The revised statement addresses the accounting for share-based paymenttransactions with employees and other third parties, eliminates the ability toaccount for share-based payment transactions using APB Opinion No. 25 andrequires that the compensation costs relating to such transactions berecognized in the consolidated statement of operations based on the grant-datefair value of those instruments. The revised statement is effective as of thefirst interim period beginning after June 15, 2005.  The Company is currently determining whatimpact the newly issued statement will have on its results of operations andfinancial position.  See the “Stock-BasedCompensation” discussion in Note 3, which includes the pro forma impact ofrecognizing stock-based compensation under SFAS No. 123, on the Company’snet loss and loss per common share for the quarters ended December 31, 2004 and2003.

 

**4.**             **Stock-Based Compensation(restated)**

 

In accordance with SFAS No. 123, the Company has elected toaccount for stock-based compensation using the intrinsic value methodprescribed in APB Opinion No. 25, and related interpretations.  Accordingly, compensation cost for stockoptions granted to employees is measured as the excess, if any, of the fairvalue of the Company’s common stock at the date of the grant over the amount anemployee must pay to acquire the stock. The Company accounts for stock-based compensation to nonemployees usingthe fair value method prescribed by SFAS No. 123.  The Company has implemented the disclosureprovisions of SFAS No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure*.

 

Pro forma net loss for the quarters ended December 31, 2004 and2003 was as follows:

 

7

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| ** **                                                                                             | ** ** | **Three Months Ended**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| **Thousands**                                                                                          | ** ** | **December 31,****2004** | ** ** | **December 31****2003** | ** ** |
|                                                                                                   |       |                     |       | **(restated)** |   |
| Net loss, as  reported                                                                                 |       | $                        | (666       | ) | $ | (415 | ) |
| Less total  stock-based compensation expense determined under fair value based method for  all rewards |       | (277                     | )          | (123 | ) |
| Pro forma net  loss                                                                                    |       | $                        | (943       | ) | $ | (538 | ) |
|                                                                                                   |       |                     |       |   |   |
| Basic and  diluted loss per common share                                                               |       |                     |       |   |   |
| As reported                                                                                            |       | $                        | (0.02      | ) | $ | (0.01 | ) |
| Pro forma                                                                                              |       | (0.02                    | )          | (0.01 | ) |

 

Substantially all options granted to employees under the 2001 StockIncentive Plan (the only form of award granted) become exercisable in a lumpsum seven years from the date of grant, subject to certain accelerationprovisions, including the effectiveness of a Form 10 filing with the SEC.  Upon acceleration, the options would revertto a three- to four-year vesting term, retroactively from the date ofgrant.  Through December 31, 2004, noneof the options granted had become exercisable.  Assuming the Company’s Form 10 was effective as of December 31, 2004,the number of shares of the Company’s stock available through the exercise ofoptions at this date would be approximately 4,391,000, which representsapproximately 44% of the Company’s outstanding options.

 

**5.             NetIncome (Loss) Per Share**

 

Net income (loss) per share is computed under the provisions of SFASNo. 128, *Earning per Share*.  Basic earnings per share is computed usingnet income (loss) and the weighted average number of shares outstanding.  Diluted earnings per share reflects theweighted average number of shares outstanding plus any potentially dilutiveshares outstanding during the period, calculated using the “treasury stock”method.  In accordance withEITF 03-6, *Participating Securities and the Two-ClassMethod under FASB Statement No. 128*, the Company’sSeries B convertible preferred stock is considered in both the basic anddiluted earnings per share calculations, subject to the applicable antidilutionprovisions.

 

At December 31, 2004 and September 30, 2004, 4,332,000 shares of SeriesB convertible preferred stock were not considered in the calculation of basicearnings per share because the Company had net losses, and based on thecontractual terms, the Series B convertible preferred stock does not have theobligation to share in the losses of the Company.  At December 31, 2004 and September 30, 2004,4,332,000 shares of Series B convertible preferred stock and options andwarrants to purchase 14,512,000 and 14,233,000 shares of the Company’s commonstock, respectively, were not considered in the calculation of diluted earningsper share because the Company had net losses and to do so would have beenantidilutive.

 

**6.             DiscontinuedOperations (restated)**

 

In December 2003, the Company received a cash distribution of $2.9million from the liquidating trust of AremisSoft Corporation (the “FormerParent”), which was recorded as income from discontinued operations.  In addition, the Company recorded a $619,000charge for additional obligations of the discontinued operations.  These amounts were recorded net of $193,000of income tax expense.  The remainingobligations of the Former Parent are included in accrued expenses on theCompany’s balance sheet at December 31, 2004. The liability represents lease commitments and other costs associatedwith the

 

8

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Former Parent’s bankruptcy and clean-up efforts.

 

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

 

 

**7.             RestructuringRelated Charges**

 

The following table presents a summary of the Company’s restructuringactivities during the quarter ended December 31, 2004 and the year endedSeptember 30, 2004:

 
| **Thousands**                  | ** ** | **Employee  Severance and  Termination  Costs** | ** ** | **Lease  Commitments** | ** ** | **Other  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     |       |
| Cash payments  and other (1)   |       | (72                                             | )          | (38                    | )          |             |       | (110      | )          |
| Balance at  December 31, 2004  |       | $                                               | 394        |                   | $          | 710              |       | $         | —     |   | $ | 1,104 |   |

 

----

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

 

The discussion of the Company’s restructuring activities included belowis organized by the period of initiation of the different restructuring planstogether with related subsequent activity.

 

During the year ended September 30, 2004, the Company ceased usingtwo international facilities and recorded restructuring charges of $981,000 forlease costs that will continue to be incurred. Of this amount, $728,000 was taken during the first quarter of fiscalyear 2004.  These charges are anextension of the September 2003 restructuring program (see below) andreflect the Company’s desire to consolidate certain of its Hospitality andManufacturing operations.  These costsare expected to be paid in conjunction with the related lease terms, whichexpire by April 2007.  During thequarter ended December 31, 2004, the Company made cash payments on these leaseobligations of $96,000.

 

On September 30, 2003, the Company announced a restructuring andreorganization plan that primarily affected the Hospitality segment.  The plan’s near-term focus was to supportcurrent customers’ needs and return the business to profitability.  All product strategies and investmentdecisions were re-assessed.  As a result,certain development projects were deferred or cancelled while other projectswere afforded focused efforts to complete. The plan included the closure or consolidation of several offices invarious U.S. and international locations and the elimination of approximately120 positions.  The initial restructuringcharges 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 foradditional employee severance related to the remaining 30 identifiedpositions and contract terminations.  Ofthis amount, $398,000 was taken during the first quarter of fiscal year2004.   During the quarter ended December31, 2004, the Company made cash severance payments of $83,000, and at December31, 2004, the remaining employee severance accrual for this program was$214,000, all of which is expected to be paid in the Company’s fiscal year 2005.

 

9

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In December 2001, the Company instituted a restructuring plan toalign its cost structure with its business plan.  Under the restructuring plan, the Companyreduced its workforce by approximately 20%, or 153 positions throughout theorganization.  In addition to theemployee termination costs, charges were taken related to excess leased spaceat two of the Company’s facilities.  Inconjunction with the restructuring related charges, the Company estimatedfuture sublease income to offset the liability. During the year ended September 30, 2004, due to the Company’sinability to negotiate acceptable sublease terms at one of the facilities,additional restructuring charges of $470,000 were taken.  In September 2004, Company managementmade the strategic decisions to utilize both of the leased spaces previouslyconsidered excess, and the remaining restructuring accrual of $991,000 waseliminated and a restructuring benefit was recorded.  The most significant portion of this reversalrelates to previously unused space at the Company’s headquarters in theU.S.  Following the initiation of certainkey business partnerships and the related staff increase, the Company chose toutilize the unused space for development, training and general office space.

 

In conjunction with the acquisition of Fourth Shift Corporation inApril 2001, the Company assumed accrued restructuring liabilities relatedto employee termination costs and facility consolidation.  At December 31, 2004, $180,000 of thisrestructuring liability was remaining, and is required for special one-timeretirement benefits that the Company is obligated to pay for three formeremployees.

 

**8.             ComprehensiveLoss****(restated)**

 

Total comprehensive loss was $1,288,000 and $642,000 for the quartersended December 31, 2004 and 2003, respectively. Comprehensive loss differs from net loss due to foreign currencytranslation adjustments.

 

**9.**             **Goodwill andIntangible Assets**

 

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

 

Intangible assets, net were comprised by the following at December 31,2004 and September 30, 2004:

 
| ** **                        | ** ** | **December  31, 2004**      | ** ** | **September  30, 2004**       | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **Thousands**                     | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|                              |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Acquired  technology              |       | $                           | 20,575     |                          | $          | (14,405 | ) | $ | 6,170 |   | $ | 20,484 |   | $ | (13,304 | ) | $ | 7,180 |   |
| Capitalized  software development |       | 937                         |       | (365                          | )          | 572 |   | 877 |   | (305 | ) | 572 |   |
| Other                             |       | 537                         |       | (395                          | )          | 142 |   | 508 |   | (343 | ) | 165 |   |
| Intangible  assets                |       | $                           | 22,049     |                          | $          | (15,165 | ) | $ | 6,884 |   | $ | 21,869 |   | $ | (13,952 | ) | $ | 7,917 |   |

 

Total amortization of intangibles was $1.1 million and $1.0 million forthe quarters ended December 31, 2004 and 2003, respectively.  Based on the intangibles at December 31,2004, estimated amortization expense for each of the next five years is asfollows:

 

10

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| **Year Ending September 30 (thousands)** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| Remainder of  fiscal year 2005           |       | $          | 3,181      |   |
| 2006                                     |       | 2,720      |       |
| 2007                                     |       | 483        |       |
| 2008                                     |       | 279        |       |
| 2009                                     |       | 221        |       |
|                                     |       | $          | 6,884      |   |

 

**10.          SegmentInformation**

 

The Company discloses segments in accordance with SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*, which established standards for disclosure offinancial information related to operating segments of the Company, as well asdisclosure requirements for customer and geographic information.  SFAS No. 131 defines an operatingsegment as a component of a company for which operating results are reviewedregularly by the chief operating decision-maker to determine resourceallocation and assess performance.  TheCompany has two reportable segments under the guidelines of SFASNo. 131:  Manufacturing andHospitality.  Manufacturing andHospitality derive their revenues from licensing proprietary software systems;providing customer support, training, consulting and installation servicesrelated to software; and through the resale of complementary third-partysoftware licenses and hardware.

 

As part of the restructuring of our hospitality operations begun inSeptember 2003, we consolidated some of the operational and strategicmanagement of our two reportable segments. Also as a result of this consolidation, some of the expenses that werepreviously incurred within our reportable segments are now classified as partof our corporate group.  Prior yearsegment information is reclassified to conform to this new presentation.

 

Financial information by segment is summarized in the followingtable.  Total assets are not allocated toManufacturing and Hospitality for internal reporting purposes.

 
| **Thousands**                        | ** ** | **Manufacturing** | ** ** | **Hospitality** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------|------------|---------------|------------|------------------|------------|
|                                 |       |              |       |            |       |          |       |             |       |
| **Quarter  Ended December 31, 2004** |       |              |       |            |       |          |       |             |       |
| Revenue                              |       | $                 | 12,421     |            | $          | 4,856         |       |             |       | $ | 17,277 |   |
| Operating income  (loss)             |       | 3,343             |       | 459             |       | $             | (3,638     | )                | 164        |   |
|                                 |       |              |       |            |       |          |       |             |       |
| **Quarter  Ended December 31, 2003** |       |              |       |            |       |          |       |             |       |
| Revenue                              |       | $                 | 12,228     |            | $          | 5,187         |       |             |       | $ | 17,415 |   |
| Operating income  (loss)             |       | 3,331             |       | (505            | )          | $             | (3,952     | )                | (1,126     | ) |

 

11

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**11.****                               SubsequentEvents**

 

In June 2005, the Companyreceived a distribution in the amount of $12.6 million from the LiquidatingTrust that was recorded net of tax of $558,000 as income from discontinuedoperations.

 

OnAugust 4, 2005, SoftBrands and Capital Resource Partners IV, L.P. (“CRP”)executed Amendment No. 4 to the Senior Subordinated Secured Note andWarrant Purchase Agreement dated November 26, 2002 ( as amended, the“Agreement”), the agreement pursuant to which SoftBrands borrowed $20.0 millionrepresented 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 theNote, plus a redemption premium of $190,000. The remaining principal balance of the Note was therefore $12.0million.  Amendment No. 4 also (1) adjustedthe remaining principal payments so that they would have occurred $3.0 millionon December 31, 2006, $4.0 million on December 31, 2007 and $5million on December 31, 2008; (2) added as events that requireSoftBrands to prepay the principal amounts outstanding under the Note, any debtfinancing 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 redemptionpremium of $390,000 for prepaying the Note prior to September 30, 2006; (4) reducedto $7.2 million the EBITDA requirement for rolling 12-month periods ending witheach fiscal quarter end; and (5) reduced to 1.0  the fixed charge coverage ratio for each such12-month period (except the 12 months ending June 30, 2006, which wasreduced to 0.50).

 

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

 

•      hasa nominal face value of $1,000;

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

•      hasa preference in payments upon liquidation over common stock and on a par withthe Series B Preferred Stock equal to its face value plus accrued andunpaid dividends;

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

•      maybe redeemed by the Company at par plus accrued dividends, or automaticallyconverted into common stock, commencing on August 17, 2007, subject tosatisfaction of a number of conditions, including market price conditions;

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

 

The holders of the Series CPreferred Stock also have the right to elect, by 75% vote, one director of theCompany and the right to approve the creation of classes of senior stock, thepayment of dividends on, or redemption of, other classes of stock, andamendments to the Company’s articles and bylaws that effect the rights of the Series CPreferred Stock.  The Series C Preferred Stock otherwise votes on anas converted basis with common stock.  TheWarrants are exercisable at $2.11 per share, subject to the same priceanti-dilution provisions, contain cash-less exercise rights and expire on August 17,2015.  The associated purchase agreement contains a number of affirmativeand negative covenants, including a covenant not to sell the Company during thefirst three years unless the sale generates proceeds to the investors in the Series CPreferred Stock of 175% of their purchase price and a covenant not to incurdebt over specified levels.  The purchase agreement also provides theinvestors with information and access rights, and a right of first refusal onprivate issuances of the Company’s securities (subject to exceptions).  If, after seven years, the preferred stock isstill outstanding, holders of the Preferred Stock may require the Company toseek a buyer. Violation of some of the covenants creates a right of thepurchasers to cause the Company to consider a sale process. The investorsreceived registration rights under a separate investor rights agreement. Proceeds, net of transaction cost of Series C Preferred Stock will berecorded as an increase to the Company’s equity. The Preferred Shares areconvertible 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 millionof its outstanding $20.0 million of debt.  On August 17, 2005, inconjunction with sale of Series C Preferred Stock and Warrants describedabove, the Company retired the balance of the $20.0 million of debt owed toCRP.  As a result, the Company expects to record a charge of approximately$2.7 million from the accelerated amortization of previously capitalizedfinancing costs and original issue debt discount related to the CRP debt, aswell as consent fees, prepayment fees and financing fees of approximately$800,000.

 

12

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**ITEM 2.**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion of ourfinancial condition and results of operations should be read together with thefinancial statements and related notes, which are included elsewhere in thisForm 10-Q.  This discussion containsforward-looking statements based upon current expectations that involve risksand uncertainties.  Our actual resultsmay differ materially from those anticipated in these forward-lookingstatements as a result of various factors, including those set forth in moredetail in the “Forward-Looking Statements” section below.  We undertake no obligation to update anyinformation in our forward-looking statements.*

 

**Business Overview**

** **

SoftBrands, Inc. provides enterprisesoftware and support solutions to more than 4,500 customers in more than 60countries.  We are organized into two reportable segments:  Manufacturingand Hospitality.  Our manufacturingbusiness designs, develops and sells enterprise resource planning software andservices to mid-sized manufacturing concerns.  Our principal products inthis segment include***Fourth Shift*,** our core manufacturing enterprise softwaresolution aimed at small- to mid-sized manufacturers;***evolution***, asoftware system designed to serve niche manufacturing markets that isparticularly suitable for ‘converter’ manufacturers;***Demand Stream***, alean enterprise automation software system that was introduced in 2003; and***Fourth Shift Edition for SAPBusiness One***, our newest product that is being integrated withSAP’s Business One product suite for sale by SoftBrands, and through SAP’ssubstantial sales channels, to medium-sized manufacturers.  Ourhospitality business designs, develops and sells software and services thatsupport the enterprise information management needs of hotels andresorts.  Principal products in the hospitality segment include***Medallion***, awindows-based property management system designed primarily for medium-serviceindependent hotels and hotel chains;***PORTfolio***, a comprehensive client/serverhotel system for both the front- and back-office operations of single-site andmulti-property hotels; and***RIO***, a leisure management system that supports the activities ofspas, health clubs and resorts.

 

We derive revenue in both of our reportablesegments through sale of licenses to use our software products, and through providingservices required to maintain our products, to install and implement ourproducts, and in some cases to customize or create extensions for ourproducts.  On occasion we also sell hardware products of third-partyvendors on a distribution basis for the convenience of our customers and selllicenses to third-party software programs.  Our software license revenueis heavily influenced by the timing of customer purchases and installations,and the terms under which we sell software licenses.  Our softwaremaintenance revenue, which currently constitutes a majority of our revenue, isderived primarily from one-year contracts that require payment at the beginningof the contract term and under which we recognize revenue ratably over the one-yearcontract period.  Our other services revenue is normally recognized overthe time services are performed.

 

Our financial position at December 31, 2004has been significantly affected by events specific to SoftBrands that occurredin 2002 when our Former Parent incurred significant financial and legal issuesthat resulted in disruptions to the operations and large financial losses.   On August 2, 2002 we were spun off from ourFormer Parent.  From the time of the spinoff to September 30, 2003, management focused on reorganizing SoftBrands,regaining customer confidence, obtaining acceptable financing and emerging as afinancially sound business.  At the endof the September 30, 2003 fiscal year we decided to substantially restructureour operations, particularly in our hospitality business, in order to return topositive cash flow.  We reducedpersonnel, office locations and commitments in September 2003, which resultedin significant restructuring charges.

 

In fiscal year 2004, we capitalized on various strategic steps takenduring 2003 to renew growth in new license sales of the Fourth Shift and othermanufacturing products; agreed to a significant joint initiative to developsoftware for medium-sized manufacturing concerns as part of the SAP BusinessOne product suite; and continued development of the market for our new DemandStream lean manufacturing product.  Inour

 

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hospitality operations, following the restructuring of September 30,2003, we completed new versions of our leading software products and obtained renewedsupport.  An additional restructuringcharge of $1,126,000 was recorded in the first quarter of 2004 for ongoingcosts associated with the September 2003 restructuring plan and furtherfacilities consolidation.

 

There was much time invested in fiscal year 2004 planning andfinalizing our operational structure, and the quarter ended December 31, 2004was the first quarter that we fully operated under this new structure.  Although we expect this new structure andseveral of our other initiatives to benefit future operations, we believe ourgrowth in the remainder of fiscal year 2005 and beyond will substantiallydepend on the timely completion and integration of the Fourth Shift Edition forSAP Business One product and our success in generating increased interest inour Demand Stream and Medallion products.

 

**Restatement of Consolidated Financial Statements**

 

As further described in Note 2 to the Consolidated Financial Statementsof this Form 10-Q/A, we have determined that our accounting for income taxesincluded in its previously issued financial statements for the 2004 fiscal yearand for each of its interim periods of fiscal 2004 relating to taxable incomefrom discontinued operations generated by trust distributions during fiscal2004 was incorrect.  The income taxbenefit created by operating losses of continuing operations should have beenreflected as being realized within continuing operations as a result of taxableincome generated from trust distributions. In our previously issued financial statements, such income tax benefitswere reflected net within income from discontinued operations rather thanapplied as a tax benefit to continuing operations as required under SFAS No.109, *Accounting for Income Taxes*.  The consolidated financial statements for thethree months ended December 31, 2003 discussed and presented herein have beenrestated to correct the error resulting in a $13,000 decrease in the income taxprovision in continuing operations and an increase of $103,000 in the incometax provision in discontinued operations. This resulted in a $90,000 increase to net loss for the three monthsended December 31, 2003.  Net loss, netcash provided by operating activities and stockholders’ equity for the fiscalyear ended September 30, 2004 were unaffected by this change.

 

**CriticalAccounting Policies and Estimates**

 

The preparation of the financial information contained in this Form10-Q requires our management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. Our management evaluates theseestimates on an ongoing basis, including those related to revenue recognition,the valuation allowance for deferred tax assets, the valuation of our accountsreceivable, the valuation of our intangible assets, including goodwill and therecording of restructuring charges. There have been no material changes to thecritical accounting policies as discussed in greater detail in the Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in our Form 10 as filed with the SEC on January 14, 2005, and asamended on March 15, 2005, May 6, 2005 and June 24, 2005.

 

 

**Results of Operations**

 

For the quarter ended December 31, 2004, wereported total revenue of $17.3 million and a net loss of $666,000, or $0.02per share, compared to total revenue of $17.4 million and a net loss of $415,000,or $0.01 per share, for the same period in 2003.    The improvement in loss from continuingoperations is due to the $1.1 million of restructuring-related charges and the$383,000 charge related to our mandatorily redeemable common stock warrantwhich were recorded in 2003, and $271,000 of foreign currency transaction gainsin the December 2004 quarter.

 

The following table summarizes revenue andoperating results by reportable segment for the quarters ended December 31,2004 and 2003:

 
| ** **    | ** ** | **Three Months Ended December 31,** | ** ** | ** **                   | ** ** | ** **   | ** ** |
|---------------|------------|-------------------------------------|------------|------------------------------|------------|--------------|------------|
| ** **    | ** ** | **2004**                            | ** ** | **2003**                     | ** ** | **% Change** | ** ** |
| **Thousands** | ** ** | **Revenue**                         | ** ** | **Operating  Income (Loss)** | ** ** | **Revenue**  | ** ** | **Operating  Income  (Loss) (1)** | ** ** | **Revenue** | ** ** | **Operating  Income (Loss)** | ** ** |
| ** **    | ** ** | ** **                          | ** ** | ** **                   | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Manufacturing |       | $                                   | 12,421     |                         | $          | 3,343        |       | $ | 12,228 |   | $ | 3,331 |   | 1.6 | % | 0.4 | % |
| Hospitality   |       | 4,856                               |       | 459                          |       | 5,187        |       | (505 | ) | (6.4 | )% | NM | *  |
| Corporate     |       |                                |       | (3,638                       | )          |         |       | (3,952 | ) |   |   | (7.9 | )% |
|          |       |                                |       |                         |       |         |       |   |   |   |   |   |   |
| Total Company |       | $                                   | 17,277     |                         | $          | 164          |       | $ | 17,415 |   | $ | (1,126 | ) | (0.8 | )% | NM | *  |

 

----

*NM: Percentage not meaningful.

 

(1)Certain reclassifications were made to unallocated corporate expenses in fiscal2004 to conform with the 2005 presentation.

 

Total revenue decreased 0.8% in the 2005 quarter and reflects a slightincrease for manufacturing offset by a slight decrease for hospitality.  See below for a detailed discussion ofchanges in revenue by reportable

 

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segment, revenue type and geography. Operating income in the manufacturing group increased slightly, in linewith revenue, while both the hospitality and corporate groups returned improvedresults at the operating income line, due to the success of variouscost-control measures that had just begun in the first quarter of fiscal year2004, following the restructuring announced in September 2003, and have nowbeen more fully implemented into the day-to-day operations of the hospitalitybusiness.

 

As part of the restructuring of our hospitality operations begun inSeptember 2003, we consolidated some of the operational and strategicmanagement of our two operational segments. Also as a result of this consolidation, some of the expenses that werepreviously incurred within our reportable segments are now classified as partof our corporate group.  Prior yearsegment information is reclassified to conform to this new presentation.

 

**Revenue. **The following table summarizes revenue by reportable segment, revenuetype and geography for thequarters ended December 31, 2004 and 2003:

 
| ** **                         | ** ** | **Three  Months Ended December 31,** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-----------------|------------|--------------|------------|-------------------|------------|
| ** **                         | ** ** | **2004**                             | ** ** | **2003**        | ** ** | **% change** | ** ** |
| **Thousands**                      | ** ** | **Manufacturing**                    | ** ** | **Hospitality** | ** ** | **Total**    | ** ** | **Manufacturing** | ** ** | **Hospitality** | ** ** | **Total** | ** ** | **Manufacturing** | ** ** | **Hospitality** | ** ** | **Total** | ** ** |
|                               |       |                                 |       |            |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |
| **Revenue  Type:**                 |       |                                 |       |            |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Software licenses                  |       | $                                    | 1,808      |            | $          | 489          |       | $                 | 2,297      |   | $ | 1,780 |   | $ | 372 |   | $ | 2,152 |   | 1.6 | % | 31.5 | % | 6.7 | % |
| Maintenance                        |       | 7,587                                |       | 3,546           |       | 11,133       |       | 7,222             |       | 3,931 |   | 11,153 |   | 5.1 | % | (9.8 | )% | (0.2 | )% |
| Professional  services             |       | 2,659                                |       | 520             |       | 3,179        |       | 2,800             |       | 607 |   | 3,407 |   | (5.0 | )% | (14.3 | )% | (6.7 | )% |
| Third-party  software and hardware |       | 367                                  |       | 301             |       | 668          |       | 426               |       | 277 |   | 703 |   | (13.8 | )% | 8.7 | % | (5.0 | )% |
|                               |       | $                                    | 12,421     |            | $          | 4,856        |       | $                 | 17,277     |   | $ | 12,228 |   | $ | 5,187 |   | $ | 17,415 |   | 1.6 | % | (6.4 | )% | (0.8 | )% |
|                               |       |                                 |       |            |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |
| **Geography:**                     |       |                                 |       |            |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Americas                           |       | $                                    | 7,655      |            | $          | 1,822        |       | $                 | 9,477      |   | $ | 7,492 |   | $ | 2,377 |   | $ | 9,869 |   | 2.2 | % | (23.3 | )% | (4.0 | )% |
| Europe, Middle  East & Africa  |       | 3,103                                |       | 2,374           |       | 5,477        |       | 3,160             |       | 2,277 |   | 5,437 |   | (1.8 | )% | 4.3 | % | 0.7 | % |
| Asia Pacific                       |       | 1,663                                |       | 660             |       | 2,323        |       | 1,576             |       | 533 |   | 2,109 |   | 5.5 | % | 23.8 | % | 10.1 | % |
|                               |       | $                                    | 12,421     |            | $          | 4,856        |       | $                 | 17,277     |   | $ | 12,228 |   | $ | 5,187 |   | $ | 17,415 |   | 1.6 | % | (6.4 | )% | (0.8 | )% |
|                                    |            |                                      |            |                 |            |              |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

While we reported a 6.7% increase in total company software licenserevenue, our overall revenues decreased by $138,000 or 0.8% in the quarter,driven primarily by professional services revenue which decreased $228,000.  License revenue increased in hospitality withthe release PORTfolio 3.1, which generated approximately $150,000 of licenserevenue in the quarter ended December 31, 2004. Maintenance revenue was stable overall with manufacturing’s growthoffsetting the decline within hospitality. The growth in manufacturing maintenance revenue was derived fromcontinued low attrition rates, an increase in license revenue for the yearended September 30, 2004 over the comparable year ended September 30, 2003, andcustomer adoption of new offerings in our Americas region, such as Remote SystemAdministration, which were not available in the prior year.  The decline in hospitality maintenancerevenue was due to a number of factors including: normal attrition, lower thantypical replacement from new license revenues and discounted renewal maintenancerates offered for multi-year commitments. The decline in professional services revenue is primarily due to directingsome of the Americas implementation and consulting resources to the FourthShift Edition of SAP Business One product for which all revenue is deferreduntil general release.

 

The decrease in hospitality revenue in the Americas region was due tothe aforementioned maintenance revenue attrition and comparatively strongprofessional services revenue in the first quarter of fiscal year 2004 relatedto implementation of new customer contracts closed prior to the Septemberrestructuring.  The increase in revenuein the hospitality EMEA region was due to the successful launch of PORTfolio3.1.  The 10.1% growth we experienced inthe Asia Pacific region was fueled largely by unusually low hospitality revenuein the first quarter of fiscal year 2004, while first quarter 2005 results weremore in line with existing trends.

 

**GrossMargin. **The following table summarizes gross marginpercentages by reportable segment and revenue type for the quarters ended December 31, 2004 and2003:

 

15

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| ** **                              | ** ** | **Three Months Ended December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **Manufacturing**                   | ** ** | **Hospitality** | ** ** | **Total** | ** ** | **Manufacturing** | ** ** | **Hospitality** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Software  licenses                      |       | 51.5                                | %          | 50.1 | % | 51.2 | % | 46.9 | % | 51.1 | % | 47.6 | % |
|                                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Maintenance                             |       | 77.6                                | %          | 48.4 | % | 68.3 | % | 73.5 | % | 53.1 | % | 66.3 | % |
|                                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Professional  services services revenue |       | 21.9                                |       | 1.9 |   | 18.7 | % | 26.4 | % | (19.8 | )% | 18.2 | % |
|                                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Third-party software  and hardware      |       | 25.1                                | %          | 43.5 | % | 33.4 | % | 33.1 | % | 1.4 | % | 20.6 | % |
|                                    |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **Total**                               | ** ** | **60.3**                            | **%**      | **43.3** | **%** | **55.5** | **%** | **57.5** | **%** | **41.7** | **%** | **52.8** | **%** |

 

Overall gross margin percentage increased 2.7% from the first quarterof 2004 to the first quarter of 2005. The 4.6 point improvement in themanufacturing segment’s software license gross margin percentage is due to mixof products sold.  Overall manufacturinglicense revenue increased by $28,000, while costs decreased by $70,000.  Cost of license revenue consists ofamortization of acquired software, the amortization of capitalized costs forinternally developed software, and the cost of third-party software embedded insome of our products.  Amortization isrelatively fixed while royalty costs to third parties can fluctuate dependingon product mix.  The manufacturingsegment’s improvement in maintenance gross profit percentage is due both to anincrease in related revenue and to cost savings, as the incremental revenuegenerated by the new offerings in the Americas region did not result insignificant additional costs.  Inaddition, we achieved cost savings resulting from our support center inBangalore, India, which, having grown from five people in December 2003 to fourteenpeople in December 2004, became fully operational in late 2004.  The current focus of manufacturingnew-customer acquisition has been on the Fourth Shift Edition for SAP BusinessOne product.  The 4.5 point drop in themanufacturing segment’s professional services gross profit percentage was dueto the focus of this department on the anticipated release of this product

 

The decline in hospitality maintenance gross margin percentage is dueto the decline in related revenue as costs remained fairly constant.  Improvements in hospitality maintenance grossmargin percentage are expected as we move closer to bringing our Bangalorehospitality support center into operation. This project, started late in fiscal 2004, is expected to contribute toour efforts to control costs in fiscal 2005, although we believe full benefitsfrom this investment will be realized in fiscal 2006.   In the first quarter of fiscal 2004, thehospitality segment’s professional services organization had not yet realizedthe benefits of the reorganization announced in September 2003.  The improvement year-over-year is due largelyto the steps taken during the first quarter of 2004 that did not have asignificant impact until subsequent quarters. However, delayed delivery ofhospitality product upgrades limited our ability to provide expected upgradeservices to customers, and resulted in a low professional services gross profitpercentage of 1.9% for the first quarter of 2005.  In our European operations, the professionalservices gross profit percentage was also adversely affected by the requirementto utilize consulting resource in nonbillable product upgrade testingactivities.  We expect an improved grossprofit percentage in the hospitality sector as the recent releases of the PORTfolio3.1 and Medallion 6.0 products contribute more to revenue.  The unusually low gross margin percentagereported by hospitality in 2003 is the result of decisions made during theimplementation of the September 2003 restructuring plan.  During execution of this plan, we found itnecessary to take some very low margin business and provide further discountsin efforts to regain customer confidence. The year-over year change is further affected by a focused redirectionof programs in the U.S. to service our customer needs through outsourcedresources at improved margins.

 

16

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**Operating Expenses. **The following table summarizes operating expenses for the quarters endedDecember 31, 2004 and 2003:

 
| ** **                        | ** ** | **Three  Months Ended December 31,** | ** ** | ** **               | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **2004**                             | ** ** | **2003**                 | ** ** | ** ** | ** ** |
| **Thousands**                     | ** ** | ** **                           | ** ** | **% of  Total  Revenue** | ** ** | ** ** | ** ** | **% of  Total  Revenue** | ** ** | **% Change** | ** ** |
| ** **                        | ** ** | ** **                           | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative       |       | $                                    | 4,837      |                     | 28.0       | % | $ | 4,791 |   | 27.5 | % | 1.0 | % |
| Selling and  marketing            |       | 2,590                                |       | 15.0                     | %          | 2,251 |   | 12.9 | % | 15.1 | % |
| Research and  product development |       | 2,002                                |       | 11.6                     | %          | 2,148 |   | 12.3 | % | (6.8 | )% |
| Restructuring  related charges    |       |                                 |       |                     |       | 1,126 |   | 6.5 | % | (100.0 | )% |
| Total operating  expenses         |       | $                                    | 9,429      |                     | 54.6       | % | $ | 10,316 |   | 59.2 | % | (8.6 | )% |

 

Operating expenses before restructuring costs increased slightlyquarter over quarter in dollars and as a percentage of revenue.  The slight increase in general andadministrative expense was due to approximately $300,000 of externalprofessional fees associated with our Sarbanes-Oxley compliance project, whichbegan in the first quarter of 2005.  Thiscost was partially offset by benefits from our September 2003restructuring.  In addition, we expandedseveral of our selling and marketing efforts, principally associated with themanufacturing segment’s Fourth Shift Edition for SAP Business One and DemandStream product lines, and our recently completed corporate re-branding.  Research and product development expense washigher in the first quarter of 2004 due to intensive efforts to improve certainhospitality products.  Research anddevelopment expenses for hospitality were 16.0% of hospitality revenue duringthe quarter ended December 31, 2003 compared with 12.5% for the first quarterof 2005.  Research and developmentexpenses for manufacturing were 10.8% of revenue in the quarter ended December31, 2003 and 11.3% of manufacturing revenue in first quarter of 2005.  We expect that Sarbanes-Oxley compliance willcontinue to negatively affect general and administrative expense through theend of this year, particularly in the second and third quarters.  We expect that selling and marketing expense,and research and product development expense will continue at levels similar tothose in the first quarter, with a possible increase in selling expensesconcurrent with the release of Fourth Shift Edition for SAP Business One.

 

The restructuring charges in the quarter ended December 31, 2003reflect $398,000 of employee severance expenses and other costs for the ongoingimplementation of the September 2003 hospitality reorganization plan, whichresulted in the elimination of 120 positions. Charges were taken in September 2003 covering severance forapproximately 90 of the employees, and in the first quarter of fiscal 2004,additional charges related to majority of the remaining 30 employees wereincurred, along with other costs.  Inaddition, a charge of $728,000 was taken related to a portion of a leasedinternational facility that we ceased using during the first quarter of fiscalyear 2004.

 

Cash payments of $83,000 were made during the quarter ended December31, 2004 related to employee severance and $96,000 related to leasecommitments.  A balance of $1,104,000 ofaccrued restructuring charges remained at December 31, 2004.  Those costs will not affect our fiscal year2005 operating results but will require the expenditure of cash over time forseverance and lease termination costs based on the terms of thoseobligations.  Severance payments willcontinue through fiscal 2005, and the lease payments are expected to continuethrough the end of lease terms, which expire by April 2007.

 

**Non-Operating Income and Expenses. **The following table summarizes non-operating income and expenses for thequarters ended December 31, 2004 and 2003:

 
| ** **                                                                   | ** ** | **Three  Months Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **Thousands**                                                                | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                                         |       |                                 |       | **(restated)** |   |
| Interest expense                                                             |       | $                                    | 1,003      |   | $ | 1,038 |   |
| Expense from  change in value of mandatorily redeemable common stock warrant |       |                                 |       | 383 |   |
| Other income,  net                                                           |       | 273                                  |       | 26 |   |
| Provision for (benefit  from) income taxes                                   |       | 100                                  |       | (3 | ) |
| Income from  discontinued operations, net of tax                             |       |                                 |       | 2,103 |   |
|                                                                              |            |                                      |            |  |  |  |  |

 

17

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Interest expense is related to our long-term institutional debtincurred in November 2002.  It includescash interest expense, amortization of capitalized financing costs and debtaccretion of an original issue discount.

 

Our statement of operations for the quarter ended December 31, 2003,includes a charge for the change in value of the mandatorily redeemable commonstock warrant we issued as part of the long-term institutional debt financingin November 2002.  During the quarterended December 31, 2003, the put warrant fair value appreciated by $383,000,resulting in non-operating expense during the period.  In August 2004, this put warrant wasexchanged for Series B convertible preferred stock and a new common stockwarrant.  As a result, revaluation ofthis put warrant is no longer required.

 

Other income, net, primarily consists of the effect of changes inforeign exchange rates on intercompany payables denominated in U.S.dollars.  Of the $273,000 of otherincome, net reflected on our consolidated statement of operations for the threemonths ended December 31, 2004, $271,000 was due to the favorable impact of thestrengthening of foreign currencies against the U.S. dollar.  We do not currently utilize any derivativesecurity instruments or engage in any hedging activities.

 

Our tax provision for the quarter ended December 31, 2004 consists ofamounts for our estimated domestic state and international taxliabilities.  Our tax provisionfluctuates due to the mix of forecasted results between domestic operations andour international subsidiaries.  Inaddition, for the quarter ended December 31, 2003, $193,000 of income taxexpense was recorded as part of discontinued operations.  Finally, we have not recorded certain incometax benefits in either of the periods presented due to continued uncertaintyregarding our ability to realize our deferred tax assets.

 

In accordance with our Former Parent’s bankruptcy and reorganizationplan, SoftBrands retained a 10% interest in net collections by the liquidatingtrust.  In December 2003, we received acash distribution of $2.9 million from the liquidating trust, which wasrecorded as income from discontinued operations.  In addition, we recorded a $619,000 chargefor additional obligations of the discontinued operations and an income tax expenseof $193,000 in connection with discontinued operations.  Beyond our right to 10% of the netcollections, neither the Company nor any of our executives have any affiliationwith the trust.  As such, we cannotpredict when or in what amount future distributions, if any, might beforthcoming.

 

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# **Liquidity and Capital Resources**

# ** **

# **As of December 31, 2004, we had $9.7 millionof cash and cash equivalents and $899,000 of restricted cash.  Our working capital deficit (current assetsless current liabilities), increased from $13.4 million at September 30, 2004to $15.6 million at December 31, 2004. This increase in working capital deficit is due to the reclassificationfrom long-term to current of the $2.0 million principal payment of debt that isdue on December 31, 2005.  The workingcapital deficit at December 31, 2004 includes deferred revenue of $19.9million.  These deferred revenueobligations are typically satisfied for substantially less than the carryingvalue.  Deferred maintenance revenuescomprise the majority of our deferred revenues and our cost to perform these revenueshas recently been between 30% and 35% of total maintenance revenue.  Our most significant source of operating cashflows is derived from license, maintenance and service fees.  Our primary uses of cash from operatingactivities are for employee costs, third-party costs for services and the costof our facilities.**

# ** **

# **Cash Flowsfrom Operating Activities. **We generated $668,000 of cash from continuingoperations in the quarter ended December 31, 2004, an increase of $732,000 fromthe comparable period a year ago.  Thisincrease is comprised by a $1.9 million reduction in the loss from continuingoperations and $883,000 positive improvement in changes in our operating assetsand liabilities, offset by $2.0 million less of non-cash expenses.

# ** **

# **Our results from continuing operationsimproved due to the absence of any restructuring charges and the added benefitsfrom the previous restructurings.  Weannounced the hospitality restructuring in September 2003, a plan intended toeliminate certain discretionary costs and expenses and to reduce future lossesfrom operations.**

# ** **

# **We had $1.5 million of non-cash expenses inthe quarter ended December 31, 2004, including $1.5 million of depreciation andamortization, $271,000 for non-cash interest charges and $271,000 of foreigncurrency transaction gains.  Thiscompares to non-cash expenses of $3.5 million in the prior year, including $1.7million of depreciation and amortization, $1.1 million of restructuringcharges, $299,000 for non-cash interest, $383,000 for the increase in fairvalue of our put warrant as discussed above, and a benefit of $13,000 fromincome taxes.**

#  

19

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# **Changes in operating assets and liabilitiesproduced a use of $199,000 in the quarter ended December 31, 2004 as comparedto a $1.1 million use in the prior year. The most significant cash flow changesin the current year’s quarter relate to accounts receivable, accrued expensesand deferred revenue.  In the quarterended December 2003 we had improved collections, primarily in hospitality.   Much of the accrued expense decrease is dueto payments of year-end management and profit sharing incentive payments whichwere much higher this year than in the prior year.  We generated $1.4 million in cash in the quarterended December 31, 2004 from the reduction in deferred revenue.  This was primarily due to the collection ofannual maintenance billings.  Thiscompares with $3.5 million in cash generated from deferred revenue in thequarter ended December 31, 2003.  Toimprove short-term cash flow, a special promotion was offered to ourhospitality maintenance customers in 2003 that provided incentive to pay byDecember 31, 2003.  This accounts formuch of the significant change between periods. Strong collection of annual maintenance contracts is common in December,and generally continues into the early months of the calendar year.  The decrease in accounts receivable generated$300,000 in the first quarter of fiscal 2005 as compared to an increase, whichconsumed $2.0 million, in the first quarter of the previous year.  It is typical for accounts receivable toincrease in the first quarter due to an increase in sales at the calendaryear-end.    In the quarter endedDecember 31, 2003, we made restructuring related cash payments of $1.5 million,primarily related to the hospitality restructuring plan announced in September2003.**

# ** **

# **In December 2003 we received a cashdistribution of $2.9 million from the liquidating trust of our Former Parent,which is reflected as cash from discontinued operations, net of certain otherexpenses and taxes.**

# ** **

# **We believe that increased profitability andeffective working capital management will yield continued cash generation fromoperating activities in fiscal 2005.**

# ** **

# **Cash Flowsfrom Investing Activities.****We used $171,000 of cash in investing activities during the quarter endedDecember 31, 2004 and $80,000 for the quarter ended December 31, 2003.  We had limited expenditures for acquiredtechnology or other intangible assets, reflecting the strategy following theSeptember 2003 restructuring plan to focus hospitality development efforts onexisting products and existing customers. We did have expenditures to upgrade and replace some of our internal computerhardware and other equipment.  We expectinvesting activities in the remainder of fiscal 2005 to consist primarily ofinternal technology and system upgrades.

# ** **

# **Cash Flowsfrom Financing Activities. **We used $131,000 of cash in financingactivities in the quarter ended December 31, 2004 and $213,000 in the quarterended December 31, 2003 primarily related to payments for debt incurred inconnection with acquisitions.

# ** **

# **Effective November 26, 2002, we borrowed$20.0 million from Capital Resource Partners IV, L.P. (“CRP”) pursuant to aSenior Subordinated Note and Warrant Purchase Agreement and a SeniorSubordinated Note that carried an interest rate of 12.5% per annum.  An amendment in November 2003 resulted in anincrease in this interest rate to 14%. The note is collateralized by substantially all of our assets, includingthe stock of our subsidiaries.  Aspartial consideration for such borrowings, we issued warrants to thelender.  These warrants were subsequentlyexchanged for convertible preferred stock and warrants with a higher exerciseprice.**

# ** **

# **Commitments and Capital Adequacy.**  As of December 31, 2004, ourprimary commitments are for leased office space in Minneapolis, Minnesota;Wichita, Kansas; Golden, Colorado; Reading, England; Woking, England; Tianjin,China; and Sydney, Australia and payments on the long-term debt and leaseobligations.

# ** **

# **We believe that cash flows from operations,expected to improve with 2005 results, together with our cash and cashequivalents, will be sufficient to meet our commitments and our cashrequirements for at least the next twelve months.  Further, we believe the restructuringprograms implemented in September 2003 should improve our cash flows fromoperations over time.**

# ** **

# **Nevertheless, our debt agreement with CRPrequires us to satisfy covenants relating to our EBITDA, our fixed chargecoverage ratio, our leasehold expense and other items.  If we violate these covenants, the debt agreementprovides that CRP may accelerate and require us to immediately repay theindebtedness.   Although we are currentlyin compliance with all of the covenants in that agreement and expect that wewill continue to comply with the covenants during the coming twelve months, wewere required to renegotiate the debt agreement in the past when we expectedthat our operations would not satisfy the covenants.  We cannot be certain that, if we were toviolate the debt agreement, CRP would be agreeable to renegotiation in thefuture, and it if it were not, we would be required to find alternativefinancing to repay the debt, or risk that CRP would seek to dispose of some orall of our assets to repay the debt.  Wecurrently do not have arrangements for alternative financing, and if we wereforced to obtain financing in a short period of time to avoid default, theterms of that financing might be very disadvantageous to us and to ourstockholders.  We believe it is probablewe will meet our covenants with CRP for the next twelve months and thereforethe portion of our CRP debt with scheduled payments beyond December 31, 2005 isclassified as long-term.**

 

20

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If we were to choose to raise additional capital through the sale ofdebt, unless we simultaneously repaid our indebtedness to CRP, we would berequired to obtain their consent to incur amounts which in the aggregate exceedapproximately $6 million of additional indebtedness.  If we were to choose to raise additionalcapital through the sale of preferred stock, unless we simultaneously redeemedour Series B convertible preferred stock, we would be required to obtain CRP'sconsent to issue preferred stock having a dividend or liquidation preferencesenior to our Series B convertible preferred stock.

 

**Recent Accounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Boardpublished SFAS No. 123 (revised 2004), *Share-BasedPaymen**t*.  SFAS No. 123(R) revises SFAS No. 123, *Accounting for Stock-Based Compensation*,and supersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees*. The revised statement addresses the accounting for share-based paymenttransactions with employees and other third parties, eliminates the ability toaccount for share-based payment transactions using APB Opinion No. 25 andrequires that the compensation costs relating to such transactions berecognized in the consolidated statement of operations based on the grant-datefair value of those instruments. The revised statement is effective as of thefirst interim period beginning after June 15, 2005.  We are currently determining what impact the newlyissued statement will have on our results of operations and financialposition.  See the “Stock-BasedCompensation” discussion in Note 3 to the Consolidated Financial Statements,which includes the pro forma impact of recognizing stock-based compensationunder SFAS No. 123, on our net loss and loss per common share for thequarters ended December 31, 2004 and 2003.

 

**Forward-Looking Statements**

 

Our Form 10-Q contains a number of statementsabout our future operations.  We makestatements regarding anticipated product introductions, changes in markets,customers and customer order rates, expenditures in research and development,growth in revenue, taxation levels, the effects of pricing, and the growth inour foreign operations, all of which represent our expectations and beliefsabout future events.  In somecases, you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “could,” “expect,” “intend,” “plan,” “anticipate,” “believe,”“estimate,” “predict,” “potential,” “continue” or similar words andexpressions.  These statements are onlypredictions and involve known and unknown risks, uncertainties and otherfactors that may cause our or our industry’s actual results, level of activity,performance or achievements to be materially different from those expressed orimplied by these forward-looking statements. The factors that may cause our operations to vary materially from thosecontemplated by our forward-looking statements are described in detail in ourForm 10 dated January 14, 2005, and as amended on March 15, 2005, May 6, 2005and June 24, 2005, and include:

 

•                  Economic andmarket conditions.

 

•                  Downturns in thehospitality or manufacturing markets.

 

•                  The difficultyencountered in generating significant new software license sales in maturemarkets.

 

•                  Increasingdependence on products that are not currently widely accepted and that wecannot be certain will be widely accepted.

 

•                  The risksrelated to our substantial international operations and sales.

 

•                  The unpredictabilityof our operating results because of the sales cycle of our products.

 

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•                  The need tocontinue to develop new products and enhance our current products in responseto technological changes and competing products.

 

•                  The dependenceof our revenue on renewal of maintenance agreements by our customers.

 

•                  The possibilitythat we may not be able to recognize revenue when we deliver products.

 

•                  The effect ofour anti-takeover defenses on possible acquisition proposals.

 

•                  The greater sizeand brand recognition of a number of our competitors.

 

•                  The effect of achange, effective for periods beginning after June 15, 2005, in accounting forstock options and other stock based benefits on our reported operating results.

 

•                  Our dependenceon third-party vendors for some of the software technology used in ourproducts.

 

•                  Our potentialexposure to intellectual property disputes.

 

•                  Our dependenceon current management.

 

•                  Our previousstatus and association as a subsidiary of AremisSoft Corporation.

 

•                  Our ability tomaintain an effective system of internal controls.

 

•                  Oursusceptibility to declarations of default under, and renegotiation of, our debtagreement with our principal lender.

 

•                  Our ability toraise capital with acceptable pricing and terms should we choose to do so.

 

 

 

 

 

**ITEM 3.QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There were no material changes in market risk for the Company in theperiod covered by this report. See the Company’s Form 10 as filed with the SECon January 14, 2005, and as amended on March 15, 2005, May 6, 2005 and June 24,2005, for a discussion of market risk for the Company.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*Evaluationof Disclosure Controls and Procedures.* As required by Rule 13a-15(b) underthe Securities Exchange Act of 1934, as amended, we conducted an evaluationunder the supervision and with the participation of our management, includingthe Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report.  Based onthat evaluation and because of the material weakness in internal control overfinancial reporting discussed below, the Chief Executive Officer and the ChiefFinancial Officer concluded that our disclosure controls and procedures werenot effective in ensuring that all information required to be disclosed inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,in a manner that allows timely decisions regarding required disclosure.  Not withstanding the material weaknessdiscussed below, the Company’s management has concluded that the financialstatements included in this Form 10-Q/A fairly present in all materialrespects the Company’s financial position, results of operations, and cashflows for the periods presented in conformity with generally acceptedaccounting principles.

 

*Changesin Internal Control over Financial Reporting. *Except asnoted below, there were no changes in our internal control overfinancial reporting that occurred during the quarter ended December 31, 2004that materially affected, or that are reasonably likely to materially affect,our internal control over financial reporting.

 

Although we have not yet been required to assess andreport on the effectiveness of our internal control over financial reporting,we have concluded that we did not maintain effective controls over accountingfor income taxes required under SFAS No. 109.  Specifically, we did not maintain effectivecontrols to ensure that the tax accounting was accurately presented for uniquetransactions and situations or that the related tax accounting wasappropriately reviewed to ensure compliance with generally accepted accountingprinciples.  This control deficiencyresulted in the restatement of our interim and annual consolidated financialstatements for the year ended September 30, 2004, and the interimconsolidated financial statements during fiscal year 2005 (the quarters ended December 31,2004 and March 31, 2005).  Therestatement had no impact on net loss, net cash provided by operatingactivities and total stockholders’ equity as previously reported for the fiscalyear ended September 30, 2004. Additionally, this control deficiency could result in a misstatement tothe tax provision and related tax accounts and disclosures that would result ina material misstatement in the annual or interim financial statements thatwould not be prevented or detected. Accordingly, management determined thatthis control deficiency represents a material weakness in internal control overfinancial reporting as of September 30, 2004 and through June 30, 2005.

 

*Plans for Remediation*.  Management intends to remediate this materialweakness in internal control over financial reporting during 2005 and willreport on its status when it files its Form 10-K for the year endingSeptember 30, 2005.  In particular,we intend to

 

•      Strengthen our internal knowledge base with expandedtraining and education.

•      Expand our review procedures related to unique andspecialized transactions.

•      Review unique and specialized transactions on acontemporaneous basis.

•      Increase consultations with external experts in thefield of accounting, to augment our internal knowledge and experience base.

 

By implementing these internal control improvements,we expect to remediate this material weakness in internal control overfinancial reporting before September 30, 2006, which is the date withrespect to which our management, and our independent registered publicaccounting firm, must first report on the effectiveness of our internal controlover financial reporting under the Section 404 provisions of theSarbanes-Oxley Act.

 

Internal control over financial reporting, no matterhow well designed, has inherent limitations. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance with respectto financial statement preparation and presentation. We will continue toimprove the design and effectiveness of our disclosure controls and procedures andinternal control over financial reporting to the extent necessary in the futureto provide our senior management with timely access to such materialinformation, and to correct any deficiencies that we may discover in thefuture.

 

22

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**PART II. OTHER INFORMATION**

 

**Item 1—Legal Proceedings**

 

We are periodically engaged in litigation in the ordinary course ofbusiness, including litigation seeking return of software licensing andservicing fees.  We do not believe thatany of such litigation is material to our ongoing operations.

 

**Item2—Unregistered Sales of Equity Securities and Use of Proceeds**.

 

Not applicable.

 

**Item3—Default on Senior Securities**

 

Not applicable.

 

**Item4—Submission of Matters to a Vote of Security Holders**

 

Not applicable.

 

**Item 5—Other Information**

 

Not applicable.

 

**Item 6—Exhibits**

 

10.1+       Formof SoftBrands, Inc. Director Non Qualified Stock Option Agreement

 

31.1                           Certification Pursuant to Section 302 of theSarbanes-Oxley Act – George H. Ellis.

 

31.2                           Certification Pursuant to Section 302 of theSarbanes-Oxley Act – David G. Latzke.

 

32                                    CertificationPursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

----

+  Previously filed 

 

23

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date: October 5, 2005 |             |                                                                                                            |
|-----------------------|------------------|-----------------------------------------------------------------------------------------------------------------|
|                  |             |                                                                                                            |
|                  | SoftBrands, Inc. |
|                  |             |                                                                                                            |
|                  | By:              | /s/ DAVID G. LATZKE                                                                                             |   |
|                  |             | David G. Latzke*Senior Vice President  and Chief Financial Officer*(principal financial and accounting officer) |

 

24

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**EXHIBIT INDEX**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION  OF DOCUMENTS**                                                            |
|---------------------|------------|------------------------------------------------------------------------------------------|
|                |       |                                                                                     |
| 10.1+               |       | Form of SoftBrands, Inc.  Director Non Qualified Stock Option Agreement                  |
|                |       |                                                                                     |
| 31.1                |       | Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act – George H. Ellis. |
|                |       |                                                                                     |
| 31.2                |       | Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act – David G. Latzke. |
|                |       |                                                                                     |
| 32                  |       | Certification Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                 |

 

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+      Previously filed

 

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