##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended December 31, 2006
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from               to
 Commission file number 0-51118
 SoftBrands, Inc.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    41-2021446
(I.R.S. Employer Identification No.)Two Meridian Crossings, Suite 800
Minneapolis, Minnesota
(Address of principal executive offices)
    
    55423
(Zip Code)
 (612) 851-1500
 þ o
  o o þ
 o þ
 
 þ o
   Common Stock, par value $.01 per share
(Title of class)
    
    41,140,625
(Outstanding at January 31, 2007)




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##### 



SoftBrands, Inc.
 Quarterly Report on Form 10-Q
 Table of Contents
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24Section 302 CertificationSection 302 CertificationSection 906 Certification
  2




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##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PageConsolidated Balance Sheets as of December 31, 2006 and September 30, 2006
    
    
    4Consolidated Statements of Operations for the three months ended December 31, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows for the three months ended December 31, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7
 3




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##### Table of Contents



SoftBrands, Inc.
 
 Consolidated Balance Sheets
 December 31,
    
    
    September 30,2006
    
    
    2006(In thousands, except share and per share data)
    
    (Unaudited)
    
    
    (See Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,837
    
    
    $
    14,520Accounts receivable, net
    
    
    10,947
    
    
    
    7,555Prepaid expenses and other current assets
    
    
    3,968
    
    
    
    3,542Total current assets
    
    
    27,752
    
    
    
    25,617Furniture, fixtures and equipment, net
    
    
    2,739
    
    
    
    2,787Restricted cash
    
    
    76
    
    
    
    73Goodwill
    
    
    34,466
    
    
    
    35,021Intangible assets, net
    
    
    9,952
    
    
    
    10,844Other long-term assets
    
    
    780
    
    
    
    705Total assets
    
    $
    75,765
    
    
    $
    75,047LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations
    
    $
    3,378
    
    
    $
    2,618Accounts payable
    
    
    1,999
    
    
    
    2,110Accrued expenses
    
    
    7,219
    
    
    
    6,870Accrued restructuring costs
    
    
    271
    
    
    
    936Deferred revenue
    
    
    22,607
    
    
    
    22,560Other current liabilities
    
    
    1,870
    
    
    
    1,288Total current liabilities
    
    
    37,344
    
    
    
    36,382Long-term obligations
    
    
    18,424
    
    
    
    19,302Other long-term liabilities
    
    
    1,047
    
    
    
    835Total liabilities
    
    
    56,815
    
    
    
    56,519Commitments and contingenciesStockholders equity:Series A and undesignated preferred stock, $.01 par value; 10,647,973
shares authorized; no shares issued or
outstanding
    
    
    
    
    
    
    Series B convertible preferred stock, $.01 par value; 4,331,540 shares
authorized, issued and outstanding;
liquidation value of $4,591
    
    
    5,068
    
    
    
    5,068Series C-1 convertible preferred stock, $.01 par value; 18,000 shares
authorized, issued and outstanding; liquidation value of $18,000 plus
unpaid dividends
    
    
    18,000
    
    
    
    18,000Series D convertible preferred stock, $.01 par value; 6,673 shares
authorized, 6,000 shares issued and outstanding; liquidation value of
$6,000 plus unpaid dividends
    
    
    5,051
    
    
    
    5,051Common stock, $.01 par value; 110,000,000 shares authorized; 41,080,008 and
41,024,960 shares issued and outstanding, respectively
    
    
    411
    
    
    
    410Additional paid-in capital
    
    
    173,779
    
    
    
    173,791Accumulated other comprehensive loss
    
    
    (1,740
    )
    
    
    (1,670
    )Accumulated deficit
    
    
    (181,619
    )
    
    
    (182,122
    )Total stockholders equity
    
    
    18,950
    
    
    
    18,528Total liabilities and stockholders equity
    
    $
    75,765
    
    
    $
    75,047
  4




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##### Table of Contents



SoftBrands, Inc.
 
 Consolidated Statements of Operations
 Three Months Ended December 31,2006
    
    
    2005(In thousands, except per share data)
    
    (Unaudited)
    
    
    (Unaudited)Revenues:Software licenses
    
    $
    5,462
    
    
    $
    2,357Maintenance and support
    
    
    13,758
    
    
    
    10,505Professional services
    
    
    4,938
    
    
    
    3,355Third-party software and hardware
    
    
    837
    
    
    
    525Total revenues
    
    
    24,995
    
    
    
    16,742Cost of revenues:Software licenses
    
    
    1,007
    
    
    
    983Maintenance and support
    
    
    3,906
    
    
    
    3,248Professional services
    
    
    4,339
    
    
    
    3,040Third-party software and hardware
    
    
    578
    
    
    
    342Total cost of revenues
    
    
    9,830
    
    
    
    7,613Gross profit
    
    
    15,165
    
    
    
    9,129Operating expenses:Selling and marketing
    
    
    5,212
    
    
    
    2,788Research and product development
    
    
    3,322
    
    
    
    2,439General and administrative
    
    
    5,189
    
    
    
    4,723Total operating expenses
    
    
    13,723
    
    
    
    9,950Operating income (loss)
    
    
    1,442
    
    
    
    (821
    )Interest expense
    
    
    (472
    )
    
    
    (4
    )Other income, net
    
    
    49
    
    
    
    85Income (loss) from continuing operations before provision for
(benefit from) income taxes
    
    
    1,019
    
    
    
    (740
    )Provision for (benefit from) income taxes
    
    
    516
    
    
    
    (87
    )Income (loss) from continuing operations
    
    
    503
    
    
    
    (653
    )Discontinued operations:Income from discontinued operations, net of tax
    
    
    
    
    
    
    426Net income (loss)
    
    
    503
    
    
    
    (227
    )Preferred stock dividends
    
    
    (491
    )
    
    
    (273
    )Net income (loss) available to common shareholders
    
    $
    12
    
    
    $
    (500
    )Basic and diluted earnings (loss) per common share:Continuing operations
    
    $
    0.00
    
    
    $
    (0.02
    )Discontinued operations
    
    
    0.00
    
    
    
    0.01Net income (loss) available to common shareholders
    
    $
    0.00
    
    
    $
    (0.01
    )Weighted-average common shares outstanding:Basic
    
    
    45,382
    
    
    
    40,042Diluted
    
    
    47,499
    
    
    
    40,042
  5




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##### Table of Contents



SoftBrands, Inc.
 
 Consolidated Statements of Cash Flows
 Three Months Ended December 31,2006
    
    
    2005(In thousands)
    
    (Unaudited)
    
    
    (Unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    503
    
    
    $
    (653
    )Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Deferred income taxes
    
    
    354
    
    
    
    Depreciation and amortization
    
    
    1,242
    
    
    
    1,407Stock-based compensation
    
    
    363
    
    
    
    348Provision for doubtful accounts
    
    
    (239
    )
    
    
    3Other, net
    
    
    
    
    
    
    (52
    )Change in operating assets and liabilities, net of effect of acquisition:Accounts receivable
    
    
    (3,153
    )
    
    
    (570
    )Prepaid expenses and other current assets
    
    
    (157
    )
    
    
    (273
    )Accounts payable
    
    
    (111
    )
    
    
    (996
    )Accrued expenses and restructuring costs
    
    
    (316
    )
    
    
    (20
    )Deferred revenue
    
    
    47
    
    
    
    2,203Other current liabilities
    
    
    582
    
    
    
    (913
    )Other long-term assets and liabilities
    
    
    (45
    )
    
    
    (24
    )Net cash provided by (used in) operating activities
    
    
    (930
    )
    
    
    460Cash flows from investing activities:Acquisitions, net of cash acquired
    
    
    (4
    )
    
    
    (1,907
    )Purchases of furniture, fixtures and equipment
    
    
    (302
    )
    
    
    (215
    )Change in restricted cash
    
    
    (3
    )
    
    
    Net cash used in investing activities
    
    
    (309
    )
    
    
    (2,122
    )Cash flows from financing activities:Repayment of long-term obligations
    
    
    
    
    
    
    (105
    )Net proceeds from issuance of common stock
    
    
    116
    
    
    
    76Preferred stock dividends paid
    
    
    (491
    )
    
    
    (408
    )Net cash used in financing activities
    
    
    (375
    )
    
    
    (437
    )Effect of exchange rates on cash balances
    
    
    (69
    )
    
    
    (123
    )Change in cash and cash equivalents
    
    
    (1,683
    )
    
    
    (2,222
    )Cash and cash equivalents:Beginning of period
    
    
    14,520
    
    
    
    16,034End of period
    
    $
    12,837
    
    
    $
    13,812
  6




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SoftBrands, Inc.
 
 Notes to Consolidated Financial Statements
 Note 1. General
 Basis of Presentation
  Consolidation
  Use of Estimates
  Fiscal Periods
  New Accounting Pronouncements
 Accounting for Uncertainty in Income
Taxes
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
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Materiality
 Fair
Value Measurements
 Note 2. Acquisition
 MAI Systems Corporation
  Unaudited Pro Forma Data
  Three Months EndedDecember 31, 2005Revenues
    
    $
    23,787Loss from continuing operations available to common shareholders
    
    
    (919
    )Net loss available to common shareholders
    
    
    (493
    )Basic and diluted loss per share:Continuing operations
    
    
    (0.02
    )Net loss available to common shareholders
    
    
    (0.01
    )
  8




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Note 3. Goodwill and Intangible Assets
 Goodwill
  Manufacturing
    
    
    Hospitality
    
    
    TotalBalance at September 30, 2006
    
    $
    22,354
    
    
    $
    12,667
    
    
    $
    35,021Adjustments
    
    
    
    
    
    
    (555
    )
    
    
    (555
    )Foreign currency exchange
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2006
    
    $
    22,354
    
    
    $
    12,112
    
    
    $
    34,466
  Intangible Assets
  December 31, 2006
    
    
    September 30, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAcquired technology
    
    $
    21,157
    
    
    $
    (20,036
    )
    
    $
    1,121
    
    
    $
    21,157
    
    
    $
    (19,820
    )
    
    $
    1,337Capitalized software development
    
    
    3,707
    
    
    
    (1,272
    )
    
    
    2,435
    
    
    
    3,707
    
    
    
    (1,027
    )
    
    
    2,680Consulting and
non compete agreements
    
    
    2,952
    
    
    
    (428
    )
    
    
    2,524
    
    
    
    2,952
    
    
    
    (226
    )
    
    
    2,726Customer relationships
    
    
    2,700
    
    
    
    (203
    )
    
    
    2,497
    
    
    
    2,700
    
    
    
    (68
    )
    
    
    2,632Other
    
    
    1,946
    
    
    
    (571
    )
    
    
    1,375
    
    
    
    1,946
    
    
    
    (477
    )
    
    
    1,469$
    32,462
    
    
    $
    (22,510
    )
    
    $
    9,952
    
    
    $
    32,462
    
    
    $
    (21,618
    )
    
    $
    10,844
   Remainder of 2007
    
    $
    2,6392008
    
    
    3,1352009
    
    
    2,4382010
    
    
    6682011
    
    
    572Thereafter
    
    
    500$
    9,952
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Note 4. Stock-Based Compensation
 Share-Based Payment
  Three Months EndedDecember 31,2006
    
    
    2005Cost of revenues
    
    $
    51
    
    
    $
    23Operating expenses:Selling, general and administrative
    
    
    252
    
    
    
    303Research and product development
    
    
    60
    
    
    
    22$
    363
    
    
    $
    348
  Three Months EndedDecember 31,2006
    
    2005Risk-free interest rate
    
    
    4.7
    %
    
    
    4.4
    %Volatility
    
    
    46.0
    %
    
    
    80.0
    %Weighted average life (years)
    
    
    5.0
    
    
    
    5.0Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
   Weighted
    
    Weighted-Average
    
    AggregateNumber
    
    Average
    
    Remaining
    
    Intrinsicof Options
    
    Exercise
    
    Contractual
    
    Value(in 000s)
    
    Price
    
    Life (Years)
    
    (in 000s)Outstanding, September 30, 2006
    
    
    9,653
    
    
    $
    2.25
    
    
    
    6.3
    
    
    $
    611Granted
    
    
    
    
    
    
    Exercised
    
    
    (49
    )
    
    
    1.50
    
    
    
    
    
    
    
    17Cancelled
    
    
    (70
    )
    
    
    1.67Outstanding, December 31, 2006
    
    
    9,534
    
    
    
    2.26
    
    
    
    6.2
    
    
    
    655Exercisable, December 31, 2006
    
    
    8,158
    
    
    
    2.37
    
    
    
    5.8
    
    
    
    521
 10




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##### Table of Contents



Restricted Stock Units
    
    Stock Appreciation RightsWeighted
    
    
    
    
    
    WeightedNon-Vested
    
    Average
    
    Number
    
    AverageShares
    
    Grant Date
    
    of SARs
    
    Grant Date(in 000s)
    
    Fair Value
    
    (in 000s)
    
    Fair ValueOutstanding, September 30, 2006
    
    
    301
    
    
    $
    2.06
    
    
    
    1,414
    
    
    $
    1.26Granted
    
    
    300
    
    
    
    1.66
    
    
    
    182
    
    
    
    1.79Vested
    
    
    (65
    )
    
    
    2.08
    
    
    
    
    
    
    
    Cancelled
    
    
    (18
    )
    
    
    2.08
    
    
    
    (50
    )
    
    
    1.45Outstanding, December 31, 2006
    
    
    518
    
    
    
    1.82
    
    
    
    1,546
    
    
    
    1.32
  Note 5. Earnings (Loss) Per Share
 Earning per Share
 Participating Securities and the Two-Class Method under FASB
Statement No. 128 The Effect of Contingently Convertible Instruments on Diluted
Earnings per share
  11




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Three Months Ended December 31,2006
    
    
    2005Income
    
    
    Shares
    
    
    
    
    
    
    Income
    
    
    Shares(Numerator)
    
    
    (Denominator)
    
    
    Per Share
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    Per ShareBasic:Net income (loss) available to
common shareholders
    
    $
    12
    
    
    
    
    
    
    
    
    
    
    $
    (500
    )
    
    
    Common shares outstanding
    
    
    
    
    
    
    41,051
    
    
    
    
    
    
    
    
    
    
    
    40,042Series B preferred
    
    
    
    
    
    
    4,332
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    45,383
    
    
    $
    
    
    
    
    (500
    )
    
    
    40,042
    
    
    $
    (0.01
    )Effect of Dilutive Securities:Options
    
    
    
    
    
    
    417
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    1,686
    
    
    
    
    
    
    
    
    
    
    
    Restricted stock units
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    $
    12
    
    
    
    47,499
    
    
    $
    
    
    
    $
    (500
    )
    
    
    40,042
    
    
    $
    (0.01
    )
  Three Months EndedDecember 31,2006
    
    2005Options
    
    
    4,865
    
    
    
    10,138Warrants
    
    
    1,993
    
    
    
    5,410Restricted stock units
    
    
    
    
    
    
    362Stock appreciation rights
    
    
    208
    
    
    
    238Series B convertible preferred stock
    
    
    
    
    
    
    4,332Series C convertible preferred stock
    
    
    
    
    
    
    8,955Series C-1 convertible preferred stock
    
    
    8,955
    
    
    
    Series D convertible preferred stock
    
    
    3,593
    
    
    
    
 Note 6. Comprehensive Income
 Reporting Comprehensive Income
 Three Months EndedDecember 31,2006
    
    
    2005Net income (loss)
    
    $
    503
    
    
    $
    (227
    )Foreign currency translation adjustment
    
    
    (70
    )
    
    
    560Comprehensive income
    
    $
    433
    
    
    $
    333
  12




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Note 7. Segment Reporting
 Disclosures about
Segments of an Enterprise and Related Information
  Three Months Ended December 31,2006
    
    2005Manufacturing
    
    Hospitality
    
    Total
    
    Manufacturing
    
    Hospitality
    
    TotalRevenues
    
    $
    12,721
    
    
    $
    12,274
    
    
    $
    24,995
    
    
    $
    12,680
    
    
    $
    4,062
    
    
    $
    16,742Operating income (loss)
    
    
    1,221
    
    
    
    221
    
    
    
    1,442
    
    
    
    669
    
    
    
    (1,490
    )
    
    
    (821
    )
   Three Months EndedDecember 31,2006
    
    
    2005United States
    
    $
    15,184
    
    
    $
    8,729United Kingdom
    
    
    4,975
    
    
    
    4,321Other
    
    
    4,836
    
    
    
    3,692$
    24,995
    
    
    $
    16,742
  December 31,
    
    
    September 30,2006
    
    
    2006United States
    
    $
    1,460
    
    
    $
    1,459Other
    
    
    1,279
    
    
    
    1,328$
    2,739
    
    
    $
    2,787
 13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of our financial condition and results of operations should be read
together with the financial statements and related notes, which are included elsewhere in this
Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of various
factors, including those set forth in more detail in our 2006 Annual Report on Form 10-K. We
undertake no obligation to update any information in our forward-looking statements.
 Fiscal Year
  Critical Accounting Policies and Estimates
   
    
    revenue recognition;
    
    the valuation of deferred tax assets;
    
    the valuation of accounts receivable;
    
    the valuation of goodwill, intangibles and in-process research and development (IPR&D);
    
    restructuring charges; and
    
    stock-based compensation.
 Managements Discussion and Analysis of Financial Condition and Results of Operations Note 2 to Consolidated Financial Statements
 Introduction and Overview
  14




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Results of Operations
 Revenues.
 Three Months Ended December 31,2006
    
    
    2005Manufacturing
    
    
    Hospitality
    
    
    Total
    
    
    Manufacturing
    
    
    Hospitality
    
    
    TotalSoftware licenses
    
    $
    1,449
    
    
    $
    4,013
    
    
    $
    5,462
    
    
    $
    1,759
    
    
    $
    598
    
    
    $
    2,357Maintenance and support
    
    
    8,073
    
    
    
    5,685
    
    
    
    13,758
    
    
    
    7,862
    
    
    
    2,643
    
    
    
    10,505Professional services
    
    
    2,991
    
    
    
    1,947
    
    
    
    4,938
    
    
    
    2,790
    
    
    
    565
    
    
    
    3,355Third-party software
and hardware
    
    
    208
    
    
    
    629
    
    
    
    837
    
    
    
    269
    
    
    
    256
    
    
    
    525Total
    
    $
    12,721
    
    
    $
    12,274
    
    
    $
    24,995
    
    
    $
    12,680
    
    
    $
    4,062
    
    
    $
    16,742
 % ChangeManufacturing
    
    Hospitality
    
    TotalSoftware licenses
    
    
    -17.6
    %
    
    
    571.1
    %
    
    
    131.7
    %Maintenance and support
    
    
    2.7
    %
    
    
    115.1
    %
    
    
    31.0
    %Professional services
    
    
    7.2
    %
    
    
    244.6
    %
    
    
    47.2
    %Third-party software
and hardware
    
    
    -22.7
    %
    
    
    145.7
    %
    
    
    59.4
    %Total
    
    
    0.3
    %
    
    
    202.2
    %
    
    
    49.3
    %
  Three Months Ended December 31,2006
    
    
    2005Manufacturing
    
    
    Hospitality
    
    
    Total
    
    
    Manufacturing
    
    
    Hospitality
    
    
    TotalAmericas
    
    $
    7,192
    
    
    $
    8,310
    
    
    $
    15,502
    
    
    $
    7,283
    
    
    $
    1,414
    
    
    $
    8,697Europe, Middle East
and Africa
    
    
    3,694
    
    
    
    2,391
    
    
    
    6,085
    
    
    
    3,558
    
    
    
    1,923
    
    
    
    5,481Asia Pacific
    
    
    1,835
    
    
    
    1,573
    
    
    
    3,408
    
    
    
    1,839
    
    
    
    725
    
    
    
    2,564Total
    
    $
    12,721
    
    
    $
    12,274
    
    
    $
    24,995
    
    
    $
    12,680
    
    
    $
    4,062
    
    
    $
    16,742
 % ChangeManufacturing
    
    Hospitality
    
    TotalAmericas
    
    
    -1.2
    %
    
    
    487.7
    %
    
    
    78.2
    %Europe, Middle East
and Africa
    
    
    3.8
    %
    
    
    24.3
    %
    
    
    11.0
    %Asia Pacific
    
    
    -0.2
    %
    
    
    117.0
    %
    
    
    32.9
    %Total
    
    
    0.3
    %
    
    
    202.2
    %
    
    
    49.3
    %
 15




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##### Table of Contents



Manufacturing Segment
  Software License Revenue. Fourth Shift Fourth Shift Fourth Shift Edition for SAP Business One
 Maintenance and Support Revenue.
 Professional Services Revenue.
 Third-Party Software and Hardware Revenue.
 Revenue by Geography.
 Hospitality Segment
  Software License Revenue.
 Maintenance Revenue.
 Professional Services.
 Third-Party Software and Hardware Revenue.
 Revenue by Geography.
 16




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##### Table of Contents



Gross Margin.
 Three Months Ended December 31,2006
    
    2005Manufacturing
    
    Hospitality
    
    Total
    
    Manufacturing
    
    Hospitality
    
    TotalSoftware licenses
    
    
    80.1
    %
    
    
    82.1
    %
    
    
    81.6
    %
    
    
    47.9
    %
    
    
    88.8
    %
    
    
    58.3
    %Maintenance and support
    
    
    78.6
    %
    
    
    62.3
    %
    
    
    71.6
    %
    
    
    77.2
    %
    
    
    44.9
    %
    
    
    69.1
    %Professional services
    
    
    16.6
    %
    
    
    6.1
    %
    
    
    12.2
    %
    
    
    10.8
    %
    
    
    2.3
    %
    
    
    9.4
    %Third-party software
and hardware
    
    
    22.4
    %
    
    
    33.8
    %
    
    
    31.0
    %
    
    
    18.2
    %
    
    
    52.3
    %
    
    
    34.9
    %Total
    
    
    63.3
    %
    
    
    58.4
    %
    
    
    60.7
    %
    
    
    57.3
    %
    
    
    45.9
    %
    
    
    54.5
    %
 Manufacturing Segment
 Fourth Shift
Edition
  Hospitality Segment
   17




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##### Table of Contents



Operating Expenses and Operating Income (Loss).
 Three Months Ended December 31,2006
    
    
    2005Manufacturing
    
    
    Hospitality
    
    
    Total
    
    
    Manufacturing
    
    
    Hospitality
    
    
    TotalSelling and marketing
    
    $
    2,848
    
    
    $
    2,364
    
    
    $
    5,212
    
    
    $
    1,845
    
    
    $
    943
    
    
    $
    2,788Research and product development
    
    
    1,537
    
    
    
    1,785
    
    
    
    3,322
    
    
    
    1,708
    
    
    
    731
    
    
    
    2,439General and administrative
    
    
    2,419
    
    
    
    2,770
    
    
    
    5,189
    
    
    
    3,042
    
    
    
    1,681
    
    
    
    4,723Total
    
    $
    6,804
    
    
    $
    6,919
    
    
    $
    13,723
    
    
    $
    6,595
    
    
    $
    3,355
    
    
    $
    9,950Operating income (loss)
    
    $
    1,221
    
    
    $
    221
    
    
    $
    1,442
    
    
    $
    669
    
    
    $
    (1,490
    )
    
    $
    (821
    )
  Selling and Marketing.
 General and Administrative.
 Research and Product Development.
 18




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##### Table of Contents



Non-Operating Income and Expenses, Income Taxes, Discontinued Operations and Preferred Stock
Dividends.
 Three Months EndedDecember 31,2006
    
    2005Interest expense
    
    $
    (472
    )
    
    $
    (4
    )Other income, net
    
    
    49
    
    
    
    95Provision for (benefit from) income taxes
    
    
    516
    
    
    
    (87
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    426Preferred stock dividends
    
    
    (491
    )
    
    
    (273
    )
 Interest Expense.
 Other Income, Net.
 Provision for (Benefit from) Income Taxes. Accounting for Income Taxes
   Discontinued Operations.
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##### Table of Contents



Preferred Stock Dividends.
 Liquidity and Capital Resources
 Cash and Cash Equivalents.
 Working Capital Deficit.
 Cash Flows from Operating Activities.
 Cash Flows from Investing Activities.
 Cash Flows from Financing Activities.
 Commitments and Capital Adequacy
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##### Table of Contents



Off-Balance Sheet Arrangements
  New Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Material Weaknesses in Internal Control over Financial Reporting
  
    
    We did not maintain effective controls to ensure that the tax accounting
was accurately presented for unique transactions and situations or that the related tax
accounting was appropriately reviewed to ensure compliance with generally accepted
accounting principles. This control deficiency resulted in the restatement of our
interim and annual consolidated financial statements for the year ended
September 30, 2004, and our interim consolidated financial statements for the quarters
ended December 31, 2004 and March 31, 2005. This control deficiency could result in a
material misstatement to the tax provision and related tax accounts and disclosures in
our interim or annual consolidated financial statements that would not be prevented or
detected. Accordingly, our management determined that this control deficiency
represents a material weakness in internal control over financial reporting as of
December 31, 2006.
 21




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##### Table of Contents




    
    We did not maintain effective controls over the period-end financial
reporting process to ensure that our June 30, 2005 Quarterly Report on Form 10-Q was
originally filed accurately. In our rushed attempt to correct the income tax
accounting for 2004 by the filing deadline in the context of the aforementioned control
deficiency, we filed our June 30, 2005 Quarterly Report on Form 10-Q prior to
completion of our usual review controls and procedures. The report as originally filed
contained errors in the cash flow statement, the restatement footnote and managements
discussion and analysis sections regarding the restatement. This control deficiency
resulted in the need to amend our June 30, 2005 Quarterly Report on Form 10-Q. This
control deficiency could result in a material misstatement to the aforementioned
disclosures in our interim or annual consolidated financial statements that would not
be prevented or detected. Accordingly, our management determined that this control
deficiency represents a material weakness in internal control over financial reporting
as of December 31, 2006.
 Plans for Remediation
    Changes in Internal Control over Financial Reporting
  22




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##### Table of Contents



PART II.  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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
 31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  Randal B. Tofteland31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  Gregg A. Waldon32
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
 23




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##### Table of Contents



SIGNATURES
  SoftBrands, Inc.Date: February 14, 2007
    
    By:
    
    /s/ GREGG A. WALDONGregg A. WaldonSenior Vice President and Chief Financial Officer(principal financial and accounting officer)
 24