| Wed 30 May 2001, 0:00 | | Softline - Audited Results |
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Softline Limited
GROUP AUDITED RESULTS
FOR THE YEAR ENDED 31 MARCH 2001
HIGHLIGHTS (EXCLUDING SVI)
* total turnover from ordinary activities R412m
* operating profit from ordinary activities, before exceptional items, R114m
* operating margin 28%
* sustainable earnings per share 28,3 cents
* total net assets R462m
* cash generated from ordinary activities, as a percentage of reported
operating profit inclusive of start-up operations, 83%
COMMENTARY
The business
Softline is a focused developer of business and accounting software
applications. Operations provide accounting, payroll and e-commerce software
and related services to the small and mid-size business community. Softline
has a well established market position in South Africa (SA), Australia, the
USA and Canada and more than 335 000 businesses, encompassing approximately
5,2 million individual users, utilising its applications. Research and
development (R&D) centres located around the globe are responsible for the
continued development and enhancement of technology applications ensuring
Softline is able to further its position in an increasingly competitive
global software environment.
Review of group results
The detailed income statement has been presented in accordance with
international accounting standards with exceptional items reported in the
body of the income statement. Furthermore Softline's core operations, the
accounting, payroll and e-commerce software divisions, have been separated
from SVI Holdings Inc. (SVI) in order to provide a clear and accurate
representation of the performance of the core business.
The Union Bank of California is the principal bank to SVI, and due to SVI's
poor performance over the past 18 months and its cash flow issues, the bank
accordingly requires consent in respect of material transactions. As a
consequence of this, Softline is no longer able to exercise significant
influence in the affairs of the business. In addition, Softline's interest
was reduced to below 50% on a fully diluted basis after accounting for
outstanding share options granted and approved. Dilution below 50% occurred
with effect from 15 October 2000, with the result that Softline no longer
holds the majority of voting rights in SVI. Furthermore Softline has stated
its intention to dispose of SVI. In accordance with this, SVI has been
accounted for as an investment at fair value from the effective date of
dilution, thus providing an accurate representation of Softline's ongoing
operations. SVI's results from 1 April 2000 until 15 October 2000 have been
consolidated. The balance sheet at year end reflects SVI as an investment.
Softline's exposure is limited to its original investment in SVI, carried in
the balance sheet at 31 March 2001, at R112 million and the loan together
with accrued interest of R91 million. The market value of Softline's
investment in SVI as at 28 May 2001, is R204 million. There are no further
guarantees in place between Softline and SVI. Further to the cautionary
announcement of 22 May 2001, Softline is well advanced in negotiations for
the disposal of a major portion of its investment in SVI.
The review of results below focuses upon the year-on-year performance of
Softline's ongoing operations, excluding SVI.
Softline achieved revenue growth of 17% from R354 million in FY00 to R412
million in FY01, primarily as a result of the acquisitions completed in the
USA and Canada, namely AccountMate and BusinessVision. The geographic
breakdown of revenue is as follows: South Africa 64%, Australia 15%, North
America 19% and other 2%.
Selling, general and administration (SG&A) expenses as a proportion of
revenues increased from 39% to 49% in FY01. The increase is attributable to
a number of factors including flat organic revenue growth, the acquisition
of AccountMate and BusinessVision, costs incurred in implementing Softline's
state-of-the-art call centre infrastructure, and the relocation of a number
of operations to the Softline Technology Park in Johannesburg, South Africa.
Softline achieved an operating profit of R51 million net of the amortisation
of intangible assets, closure of start-up operations and the impairment of
the share trust loan, hereto referred to as exceptional items. No costs of
this kind were incurred in FY00 rendering it difficult to make a direct
comparison to the R111 million operating profit achieved in FY00.
Operating profit from the core operations, excluding exceptional items, was
R114 million compared to R110 million achieved in FY00. Relative to H1 of
FY01, Softline's performance during H2 of FY01 was less robust primarily as
a result of the seasonally weighted contribution from Handisoft in H1.
Excluding acquisitions, operating profit on an organic basis declined by R8
million in FY01. This was primarily attributable to the difficult trading
conditions experienced by the accounting software industry globally
following Y2K. As a result both Pastel Software and Sybiz Software performed
below expectations. The decline was not however fully representative of the
performance of all operations. Performances in other major operating
divisions, including Handisoft, VIP Payroll and Brilliant Business Systems,
exceeded expectations. Softline's offshore operations contributed 33% of
operating profits.
The operating margin, excluding exceptional items, for the core business
remained healthy although it decreased in line with expectations from 31,2%
reported in FY00 to 27,7% in FY01. Difficult trading conditions and the
resultant effect on Pastel Software and Sybiz Software (Australia), as well
as the inclusion of the profitable yet low margin AccountMate acquisition
were the primary contributors to the easing of the operating margin.
If costs of start-up operations closed amounting to R26 million are taken
into account, this further impacts on Softline's profitability and cash
flow, lowering the operating margin to 21,5%. These costs primarily relate
to the organic start-up and subsequent closure of Pastel USA and Pastel
Ireland and UK. Management's decision to effect closure of these operations
was based upon the following reasons: the operations were incurring losses
ahead of budgeted expectations; organic entry into mature first world
markets was more difficult than anticipated; Softline's acquisitive entry
into the North American market provided an existing, established market
position in both the USA and Canada from which to grow. Considering global
trading conditions and managements focus on improving the performance of the
core business, these acquisitions replaced the need for continued investment
in start-up operations in these regions. Costs of R26 million are inclusive
of all closure costs and the corresponding writedown of fixed assets.
In accordance with international accounting standards, the impairment of the
share trust loan is required in order to reflect the loan at market value of
shares issued to the trust. The writedown reflects the diminution in value
of shares purchased by the trust in respect of options that had not yet been
exercised. The writedown confers no benefit on management or option holders.
Integral to Softline's strategy is the continued investment in research and
development (R&D). This is essential in sustaining and enhancing the
competitive positioning of Softline's technology, and thus the longevity of
its business model. Softline invested R34 million in R&D, comprising 9% of
revenues, of which 5% was expensed relating to ongoing product enhancement
and development. The balance of 4% or R16 million was capitalised as result
of the investment in new or substantially improved product. R4 million
relating to capitalisation from FY00 was expensed, in relation to product
completed in FY01. This is in line with Softline's policy to amortise such
expenditure over the useful life of the product.
Softline's effective tax rate increased from 26% to 29% in FY01 due to the
higher effective tax rates applicable in the USA and Canada impacting on
Softline as a result of acquisitions in these markets.
Profit after tax, including the effect of exceptional items, was R37 million
in FY01. Sustainable earnings, excluding exceptional items, increased
marginally from R100 million in FY00 to R105 million in FY01. Sustainable
earnings per share for Softline's continuing operations is 28,3c as compared
to 28,1c for the Softline core operations in FY00. The number of shares in
issue increased by 15 million on a weighted average basis. Due to Softline's
low share price the purchase of AccountMate in the USA had a dilutionary
effect on sustainable earnings per share. However, the acquisition has
provided robust technology and is considered key to Softline's strategy in
entering the North American market.
A detailed reconciliation of the sustainable earnings per share calculation
has been presented in order to provide clarity on the actual profit derived
from Softline's ongoing trading operations, excluding the effect of
exceptional items. In this respect the table provides a detailed breakdown
of the effect of exceptional items on the earnings per share calculation.
Cash generated by operations constituted 83% of trading profit attesting to
the quality of earnings. Softline's cash position decreased from R206
million in FY00 to R39 million in FY01. Funds utilised for the purchase of
businesses, (R80 million), and the loan to SVI, (R79 million), are the
primary reasons for the decrease. Nonetheless, Softline's operations
continue to generate cash on a monthly basis and thus the cash position is
expected to increase going forward.
No dividends have been declared for the period. In line with the prior year,
the board continues to consider that it would be advantageous to
shareholders to retain funds within the group for future growth as Softline
continues to pursue opportunities in this rapidly evolving industry.
Accounting and payroll software and services
In line with the group's stated strategy and vision in becoming a
significant player in the global SME and midrange accounting software market
Softline enhanced its position in the North American market through the
strategic acquisitions of AccountMate and BusinessVision. These acquisitions
provided Softline with an immediate footprint in the USA and Canada
respectively, established channels to market, sizeable installed user bases,
substantial brand equity, and robust proprietary technology.
Following the acquisitions of AccountMate and BusinessVision and due to the
funding requirements and difficulties encountered in entering mature first
world markets organically, Softline effected the closure of Pastel's
operations in the USA, Ireland and the UK. In line with the strategy to grow
BusinessVision's position in the USA, the Philadelphia based Pastel USA
office was integrated into BusinessVision's operations, serving as an east
coast sales and marketing office. This operation is forecast to breakeven
during Q1 FY02.
Going forward Softline will retain the brands in the individual businesses,
introducing Softline as the corporate brand. The reputation, loyalty and
trust associated with these brands in each country are essential components
for the continued growth of the operations. Whilst brands will be retained,
the group will introduce common technology platforms in the medium term.
Management continue to focus on the effective utilisation of R&D resources
and realisation of synergies through collaborative projects.
The software industry around the globe experienced difficult trading
conditions following the tremendous growth rates achieved in the lead up to
Y2K. The trading reality of this environment highlighted the sustainability
of earnings in operations where contracted recurring revenue forms the
foundation of the sales model. Further to this and assisted by the vertical
markets in which they operate, Softline's payroll and taxation software
businesses in SA and Australia respectively achieved healthy year-on-year
organic growth in operating profits and cash generation.
In contrast, the slowing of the Australian economy as a result of the Y2K
slowdown, the changeover from VAT to GST and the Olympics contributed to the
weaker operating performance of Sybiz Software. Sybiz traded at breakeven in
H1 FY01 and incurred operating losses in H2 FY01. Subsequent to the year
end, coupled with other initiatives, overheads have been substantially
reduced and Sybiz is expected to breakeven during the first quarter of FY02.
Pastel Software recorded lower than expected revenues in FY01. The evolution
of the sales model to focus on increasing the base of contracted recurring
revenue and revenue derived per user through the sale of additional software
and services are key initiatives for FY02.
Globally the software industry has entered a new phase in its life cycle.
Software vendors are increasingly focusing on building greater customer
intimacy by selling additional software and services to the existing user
base. Softline's key focus in FY02 will be on converting users into
customers, growing the group's base of contracted recurring revenue thereby
providing the group with an increasingly sustainable and cash generative
income stream.
e-commerce software
The take-up of Softline's e-commerce software and PlanetPastel.com during
FY01 was disappointing, but also comparable with the low take-up rate of e-
commerce globally. In line with current trading conditions PlanetPastel.com
has been right-sized. Further to this, Softline's investment in FY01 in the
area of e-commerce and related technologies was conservative, falling in
line with budget and is not considered to be of a material nature. This will
be reviewed and adjusted as and when demand requires.
Going forward the provision of business software over the Internet remains
compelling technology as accounting software makes its natural migration to
web-based technologies. It is for this reason that Softline will continue to
focus R&D efforts on integrating Internet functionality as a standard
component of its technology offering. R&D will continue to be pragmatic
taking cognisance of the e-commerce landscape that lies ahead. Softline
continues to be strategically positioned as the natural provider of e-
commerce solutions to its extensive, growing user base due to the
transactional nature of back-office accounting applications. Softline has
the ability to leverage off its user base and core accounting applications
to provide e-commerce technology to existing as well as new users further
enhancing the group's recurring income stream.
For and on behalf of the board
Ivan M Epstein Steven M Cohen Rob P Wilkie
(Chief Executive Officer) (Chief Operating Officer) (Group Financial
Director)
30 May 2001
DIRECTORATE
I M Epstein - Chief Executive Officer, S M Cohen - Chief Operating Officer,
R P Wilkie - Group Financial Director, M J A Golding* - Chairman, J A
Copelyn*, C S dos Santos*, E Ellerine*, I B Ferrer*, S R Maharaj*, L M
Nestadt*, G B Rubenstein*
* Non-executive
POSTAL ADDRESS
Softline Limited
PO Box 76182, Wendywood, 2144
Tel: +27 11 292-8200, Fax: +27 11 292-8202
Reg No: 1977/002304/06
REGISTERED OFFICE
Softline Limited
PO Box 76182, Wendywood, 2144
INVESTOR RELATIONS
For further information, please e-mail:
investor-relations@softline.co.za
TRANSFER SECRETARIES
Mercantile Registrars Limited
First National House
11 Diagonal Street
Johannesburg, 2001
www.softline.co.za
GROUP INCOME STATEMENT
Definition:
SVI Holdings Inc. ("SVI")
Softline Group excluding SVI Holdings Inc. ("Softline")
SVI included in 2001 for 6 months only
2001 2000
R'000 R'000
Revenue 531 169 603 569
SVI 118 705 250 005
Softline 412 464 353 564
- Software sales 154 060 110 078
- Maintenance and services 258 404 243 486
Gross profit 406 129 452 589
SVI 72 551 187 581
Softline 333 578 265 008
Operating expenses 380 806 280 085
SVI 98 533 125 841
Softline 282 273 154 244
- Selling, general and administration 201 031 137 202
- Research and development 18 306 17 328
- Start-up operations closed 25 527 -
- Amortisation of intellectual property
and goodwill 15 346 -
- Impairment of share trust loan 22 063 -
- Profit on disposal of operations - (286)
Profit/(loss) before finance income 25 323 172 504
SVI (25 982) 61 740
Softline 51 305 110 764
Net finance income 11 369 15 495
SVI (4 580) (2 508
Softline 15 949 18 003
Profit/(loss) before taxation 36 692 187 999
SVI (30 562) 59 232
Softline 67 254 128 767
Income tax expense 25 201 43 911
SVI (4 974) 10 420
Softline 30 175 33 491
Profit/(loss) after taxation 11 491 144 088
SVI (25 588) 48 812
Softline 37 079 95 276
Attributable (from)/to minorities (11 105) 19 525
Profit attributable to ordinary shareholders 22 596 124 563
GROUP BALANCE SHEET
2001 2000
excl SVI excl SVI 2000
R'000 R'000 R'000
Assets
Non-current assets 488 240 281 063 593 905
Fixed assets 20 350 16 748 28 300
Intellectual property and goodwill 129 830 - 369 892
Capitalised development costs 24 781 12 984 22 194
Share incentive trust 36 798 47 173 47 173
Investment in SVI 111 504 127 675 -
Other investments 33 829 33 179 125 977
Deferred taxation 40 055 43 304 369
Loan receivable 91 093 - -
Current assets 107 699 244 338 356 776
Inventories 7 004 7 784 9 568
Trade and other receivables 61 886 60 320 140 903
Cash and cash equivalents 38 809 176 234 206 305
Total assets 595 939 525 401 950 681
Equity and liabilities
Capital and reserves 461 679 388 721 627 037
Ordinary shareholders' interests 461 679 388 721 497 146
Minority interests - - 156 298
Treasury shares - - (26 407
Non-current liabilities 243 354 13 690
Interest-bearing debt 243 354 13 690
Current liabilities 134 017 136 326 309 954
Trade and other payables 120 025 124 260 174 875
Vendor liabilities 13 542 11 779 11 779
Interest-bearing debt 450 287 123 300
Total equity and liabilities 595 939 525 401 950 681
Total number of ordinary shares
in issue (000's) 386 511 359 973 359 973
Net asset value per share (cents) 119,4 108,0 138,1
GROUP STATEMENT OF CHANGES IN EQUITY
Ordinary Ordinary
shareholders' shareholders'
interest interest
2001 2000
R'000 R'000
Balance at beginning of year 497 146 588 666
As previously reported 447 156 534 063
Change in accounting policy in
terms of AC102 - deferred taxation 49 990 54 603
Net profit for the year 22 596 124 563
Transfer (from)/to non-distributable
and translation reserves (106 796) 35 236
Issue of share capital 68 973 80 034
Intellectual property and goodwill
written off - (333 384)
(Decrease)/increase in vendor
liabilities (20 240) 2 031
Balance at end of year 461 679 497 146
OTHER GROUP INFORMATION
Depreciation 14 072 11 507
EARNINGS PER SHARE
2001 2000
Sustainable earnings per share (cents) 28,3 28,1
Reconciled to basic earnings per share
as follows:
- Start-up operations closed (6,9) -
- Notional deferred tax on trademarks (1,2) (1,3)
- SVI (losses)/profits net of amortisations (3,9) 8,2
- Profit on sale of operations - 0,1
- Impairment of share trust loan (6,0) -
- Amortisation of intellectual
property and goodwill (4,2) -
Basic earnings per share (cents) 6,1 35,1
Fully diluted basic earnings per
share (cents) 5,9 35,0
Weighted average number of ordinary
shares in issue (000s) 370 327 354 973
Fully diluted number of ordinary
shares in issue (000s) 380 215 356 053
GROUP CASH FLOW STATEMENT
2001 2000
R'000 R'000
Cash flows from operating activities 66 983 74 500
Cash flows from investing activities (119 976) (357 245)
Cash flows from financing activities (106 763) 194 364
Net movement in cash and cash equivalents (159 756) (88 381)
Cash and cash equivalents at
beginning of year 206 305 279 765
Net cash obtained from operations
acquired/disposed of (3 348) 14 921
Cash effect on deconsolidation of SVI (4 392) -
Cash and cash equivalents at end of year 38 809 206 305
BASIS OF ACCOUNTING/CHANGE IN ACCOUNTING POLICIES
This report has been prepared in compliance with South African Statements of
Generally Accepted Accounting Practice.
The accounting policies are consistent with those used in the annual
financial statements for the year ended 31 March 2000, except for the
treatment of goodwill and intellectual property, and deferred taxation,
which are accounted for in terms of new accounting standards.
Goodwill and intellectual property, all of which were acquired after 1 April
2000, are now accounted for as assets in the balance sheet and amortised
over a maximum period of ten years. Goodwill and intellectual property were
written off directly against share premium in previous years.
Deferred taxation now includes the effect of trademark allowances, and the
prior year results and opening accumulated profits have been restated
accordingly.
