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From the Wires
20-20 Technologies Inc. Reports Record Fourth Quarter and Full-Year Results for Fiscal 2006
20-20 Technologies Inc. Reports Record Fourth Quarter and Full-Year Results for Fiscal 2006
By: Marketwire .
Jan. 26, 2007 11:00 AM
LAVAL, QUEBEC -- (MARKET WIRE) -- 01/26/07 -- 20-20 Technologies Inc. (TSX: TWT), the world leader in 3D interior design and furniture manufacturing software, today announced quarterly and fiscal year-end results for the period ending October 31, 2006. All amounts are in U.S. dollars unless otherwise indicated. Fiscal 2006 Highlights - Revenues increased 49.4% to $60.5 million - Operating income advanced 6.0% to $6.3 million - Net earnings gained 37.7% to $5.9 million - EPS rose to $0.31 from $0.24 in 2005 - Net cash position $34.7 million at fiscal year end In 2006, 20-20 undertook to accomplish well defined objectives of consolidating its North American market and further expanding its business in Europe and emerging markets. Jean Mignault, CEO of 20-20, noted that "beyond our growth by acquisition, we continued to deliver organic growth, 13.0% in 2006, during which we extended and reinforced our position worldwide as the software provider of choice to every link in the chain of the interior design industry." Jean-Francois Grou, President and COO of 20-20 added that "We continue to integrate the companies and technologies we acquired over the last 18 months and are harmonizing our product portfolio to enhance the seamless application of our unique end-to-end solution." 20-20 now commands a unique selling proposition that should ensure our continued dominance in the North American marketplace, cement our position as the largest international provider of interior design software accelerating global acceptance of our technology as the clear industry standard. 20-20's potential on the manufacturing side of the interior design industry has hardly been tapped. Following the acquisition of three companies, MBI, VSI and PSI, all leading providers of manufacturing solutions, there is significant potential for the Company on the factory floor in the context of its end-to-end solution. 20-20 can now leverage its entrenched market position to connect the manufacturers to compatible 20-20 point of sales software. Revenues Revenues for the 12 months ended October 31, 2006 totalled $60.5 million, a 49.4% increase from fiscal 2005. On an organic basis, excluding revenues from acquisitions, revenues grew by 13.0% during fiscal 2006. License revenue for fiscal 2006 increased 32.6% to $24.3 million. Maintenance and other recurring revenues grew by 53.6% to $24.2 million, while professional services increased 87.1% to $11.9 million. For the fourth quarter of fiscal 2006, revenues advanced 60.6% over the same period in fiscal 2005 to $17.4 million. On an organic basis, excluding revenues from acquisitions, revenues grew by 26.7% during the quarter. License revenue for the fourth quarter gained 52.8% to $7.3 million, while maintenance and other recurring revenues grew by 56.2% to $6.5 million and revenue from professional services increased by 90.0% to $3.6 million for the three months ended October 31, 2006. Operating Income Operating income for fiscal 2006 increased 6.0% to $6.3 million. The total represented 10.4% of revenues, versus 14.7% in fiscal 2005. For the fourth quarter, operating income increased 195.1% to $3.1 million. The quarterly total represented 17.9% of revenues, compared to 9.7% in the same period last year. Net earnings Net earnings for fiscal 2006 totalled $5.9 million, an increase of 37.7% over last year. On a per-share basis, net earnings were $0.31 per share, up from $0.24 per share in fiscal 2005, on a fully diluted basis for both periods. For the fourth quarter, the total increased 159.4% to $2.7 million. That equated to $0.14 per share in the fourth quarter of fiscal 2006, versus $0.05 per share in the same period last year, also on a fully diluted basis for both periods. Conference Call Information 20-20 will host a conference call to discuss results today, January 26, 2007 at 10 a.m. (ET). The call will be available by telephone at 514-940-2795 and 1-866-250-4910. An audio recording will be archived until midnight on Monday, March 26, 2007, and can be accessed by dialing 416-640-1917 or 1-877-289-0825 and entering pass code 21216942#. About 20-20 Technologies Inc. 20-20 Technologies is the world's leading provider of computer-aided design, sales software and manufacturing solutions tailored for the interior design and furniture industry. 20-20 offers a proprietary end-to-end solution, integrating the entire sales, supply chain and manufacturing processes. The Company offers dealers and retailers state-of-the-art design, specification, photo-realistic 3D rendering and management software for configurable and standalone products in the residential and commercial interior design markets. 20-20's manufacturing solutions include enterprise resource planning systems, as well as computer-aided engineering, manufacturing and shop floor automation software. 20-20's software is available in more than 20 languages and is sold in more than 100 countries worldwide. 20-20 is a publicly traded company (TWT) on the Toronto Stock Exchange (TSX). For more information, visit www.2020technologies.com. Forward-Looking Statements Certain statements contained in this news release constitute forward-looking information within the meaning of securities laws. Implicit in this information, particularly in respect of future operating results and economic performance of the Company are assumptions regarding projected revenue and expenses. These assumptions, although considered reasonable by the Company at the time of preparation, may prove to be incorrect. Readers are cautioned that actual future operating results and economic performance of the Company are subject to a number of risks and uncertainties, including general economic, market and business conditions and could differ materially from what is currently expected. For more exhaustive information on these risks and uncertainties you should refer to our most recently filed annual information form which is available at www.sedar.com. Forward-looking information contained in this report is based on management's current estimates, expectations and projections, which management believes are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation and do not undertake to update this information at any particular time unless required by applicable securities law. The selected consolidated financial information set out below for the years ended October 31, 2006 and 2005 has been derived from our audited consolidated financial statements. The following information should be read in conjunction with our audited financial statements and notes related thereto available on www.sedar.com.
Consolidated Statement of Earnings Data:
(In thousands of U.S. dollars, except share and per-share data)
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Three months ended Year ended
October 31, October 31,
---------------------------------------------------------------------------
2006 2005(1) 2006 2005
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(Unaudited) (Unaudited)
$ $ $ $
Revenues
License sales 7,335 4,799 24,310 18,334
Maintenance and other
recurring revenues 6,522 4,175 24,224 15,767
Professional services 3,564 1,876 11,927 6,374
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17,421 10,850 60,461 40,475
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Cost of revenues
License sales 903 373 2,365 1,183
Maintenance and services 3,571 1,869 12,330 6,809
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4,474 2,242 14,695 7,992
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Gross margin 12,947 8,608 45,766 32,483
Gross margin % 74.3% 79.3% 75.7% 80.3%
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Operating expenses
Sales and marketing 4,379 3,662 18,686 13,480
Research and development 2,270 1,218 7,378 4,796
General and administrative 3,058 2,566 12,991 7,936
Stock-based compensation
expense 125 107 416 334
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9,832 7,553 39,471 26,546
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Operating income 3,115 1,055 6,295 5,937
Operating margin % 17.9% 9.7% 10.4% 14.7%
Financial income 368 115 1,160 140
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Earnings before income taxes 3,483 1,170 7,455 6,077
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Income taxes
Current 411 (126) 579 943
Future 400 266 1,007 872
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811 140 1,586 1,815
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Net earnings 2,672 1,030 5,869 4,262
Earnings per share
Basic 0.14 0.05 0.31 0.24
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Diluted 0.14 0.05 0.31 0.24
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(1) During the fourth quarter of the year ended October 31, 2005, an amount
of new product development was capitalized relating to work performed
over the twelve months then ended that met Canadian GAAP capitalization
criteria, but for which no capitalization had been recorded in the
first nine months of fiscal 2005 amounting to approximately $590,000,
net of amortization expense of $81,000 respectively. The figures for
the fourth quarter ended October 31, 2005 have been adjusted for this
amount resulting in a decrease in net earnings of $385,000 to
$1,030,000, including the related adjustment to income taxes of
$204,000.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
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October 31, October 31,
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2006 2005
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$ $
ASSETS
Current assets
Cash and cash equivalents 5,337 5,534
Short term investments 29,937 35,967
Accounts receivable 13,908 8,134
Contracts in progress 556 350
Prepaid expenses 1,229 773
Future income taxes 873 1,640
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51,840 52,398
Property and equipment 3,731 2,924
Intangibles 3,384 878
Development costs 11,599 6,217
Other 1,454 1,237
Goodwill 24,157 15,256
Future income taxes 414 54
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96,579 78,964
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LIABILITIES
Current liabilities
Accounts payable 8,625 6,731
Income taxes payable 1,853 1,014
Deferred revenue 12,672 8,945
Deferred credit 1,037 1,902
Long-term debt 53 238
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24,240 18,830
Long-term debt 568 1,166
Leasehold inducements 308 239
Future income taxes 3,375 -
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28,491 20,235
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SHAREHOLDERS' EQUITY
Capital stock 57,886 57,608
Common stock options 1,847 1,763
Contributed surplus 966 920
Retained earnings (deficit) 896 (4,973)
Cumulative translation adjustment 6,493 3,411
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68,088 58,729
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96,579 78,964
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CONSOLIDATED CASH FLOWS
(Amounts in thousands of U.S. dollars)
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Three months ended Year ended
---------------------------------------------------------------------------
October 31 October 31
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Unaudited) (Unaudited)
$ $ $ $
OPERATING ACTIVITIES
Net earnings 2,672 1,030 5,869 4,262
Non-cash items
Amortization 1,623 1,066 5,537 3,437
Capitalized interest on
convertible debentures - - - 125
Leasehold inducements 8 66 57 95
Stock-based compensation 125 107 416 334
Gain on long-term debt
forgiveness - (102) - (314)
Future income taxes 400 266 1,007 872
Changes in working
capital items (2,452) 924 (2,697) (396)
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Cash flows from
operating activities 2,376 3,357 10,189 8,415
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INVESTING ACTIVITIES
Business acquisitions - (501) (9,294) (663)
Short term investments (20,242) (14,735) 7,821 (31,179)
Property and equipment (301) (253) (1,639) (1,390)
Development costs - acquired (34) (898) (473) (1,473)
Development costs - internal (1,233) (745) (5,875) (3,176)
Other assets (52) (396) (402) (528)
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Cash flows from investing
activities (21,862) (17,528) (9,862) (38,409)
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FINANCING ACTIVITIES
Bank indebtedness - - (59) -
Long-term debt - - 10 32
Repayment of long-term debt (68) (679) (603) (859)
Share issue costs - 62 - (2,681)
Options exercised 2 12 72 199
Share issue - - - 35,503
Redemption of Class "D"
preferred shares - - - (904)
Dividends of Class "D"
preferred shares - - - (17)
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Cash flows from financing
activities (66) (605) (580) 31,273
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Effect of changes in
exchange rate on cash held
in foreign currencies (140) 411 56 386
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Net increase ( decrease)
in cash and cash
equivalents (19,692) (14,365) (197) 1,665
Cash and cash equivalents,
beginning of period 25,029 19,899 5,534 3,869
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Cash and cash equivalents,
end of period 5,337 5,534 5,337 5,534
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MANAGEMENT'S DISCUSSION AND ANALYSIS (For the year ended October 31, 2006) The following report, dated January 16, 2007, is a discussion relating to the financial results and condition of 20-20 Technologies Inc. ("20-20" or the "Company") for the years ended October 31, 2006 and 2005. The discussion should be read in conjunction with the selected consolidated financial information shown in this report and with our audited consolidated financial statements and the accompanying notes thereto. These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) and are presented in U.S. dollars as a significant proportion of the Company's revenues are recorded in U.S. dollars. The Company's financial statements result from having been translated from the currency of measurement, the Canadian dollar, to the U.S. dollar using the current rate method. Additional information relating to 20-20, including the Company's Annual Information Form, Annual Report and, interim financial statements and related management reports for the year ended October 31, 2006, can be obtained on SEDAR at www.sedar.com as well as on the Company's web site at www.2020technologies.com in the Investor Relations section. Information contained in this report is qualified by reference to the discussion concerning forward-looking statements detailed below. Unless otherwise noted or the context otherwise indicates, "20-20", the "Company", "we", "us" and "our" refers to 20-20 Technologies Inc. and its direct and indirect subsidiaries. Unless otherwise indicated, all dollar amounts in this report are expressed in U.S. dollars. References to "$" or "U.S." are to U.S. dollars and references to "C$" are to Canadian dollars. Disclosure of information in this report has been limited to that which management has determined to be "material", on the basis that omitting or misstating such information would influence or change a reasonable investor's decision to purchase, hold or dispose of securities in the Company. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The Consolidated Financial Statements and Management discussion and analysis ("MD&A") of 20-20 Technologies Inc. (the "Company") and all other information in this Annual Report are the responsibility of Management and have been reviewed and approved by its Board of Directors. The Consolidated Financial Statements have been prepared by Management in accordance with Canadian generally accepted accounting principles. The MD&A has been prepared in accordance with the requirements of securities regulators. The financial statements and MD&A include items that are based on best estimates and judgments of the expected effects of current events and transactions. Management has determined such items on a reasonable basis in order to ensure that the financial statements and MD&A are presented fairly in all material respects. Financial information presented elsewhere in the Annual Report is consistent with that in the Consolidated Financial Statements. The Company's Chief Executive Officer and Chief Financial Officer have designed disclosure controls and procedures, or have caused them to be designed under their supervision, to provide reasonable assurance that material information related to the Corporation has been made known to them and has been properly disclosed in the Consolidated Financial Statements and MD&A. The Company's Chief Executive Officer and Chief Financial Officer have also evaluated the effectiveness of such disclosure controls and procedures as of the end of fiscal year 2006. As at year end, Management believes that the disclosure controls and procedures effectively provide reasonable assurance that material information related to the Corporation has been disclosed in the Consolidated Financial Statements and MD&A. In compliance with Multilateral Instrument 52-109, the Company's Chief Executive Officer and Chief Financial Officer have provided to the Canadian Securities Administrators a certification related to the Company's annual disclosure documents, including the Consolidated Financial Statements and MD&A. The Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the Consolidated Financial Statements and MD&A. The Board of Directors carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board of Directors and is comprised entirely of independent and financially literate directors. The Audit Committee meets periodically with Management, as well as with the external auditors, to review the Consolidated Financial Statements, the MD&A, auditing matters and financial reporting issues, to discuss internal controls over the financial reporting process, and to satisfy it that each party is properly discharging its responsibilities. In addition, the Audit Committee has the duty to review the appropriateness of the accounting policies and significant estimates and judgments underlying the Consolidated Financial Statements as presented by Management, and to review and make recommendations to the Board of Directors with respect to the fees of the external auditors. The Audit Committee reports its findings to the Board of Directors for its consideration when it approves the Consolidated Financial Statements and MD&A for issuance to shareholders. Raymond Chabot Grant Thornton LLP, external auditors designated by the shareholders, meets regularly with the Audit Committee to discuss audit activities, financial reporting matters and other related subjects. This report and our audited consolidated financial statements were reviewed by the Company's Audit Committee on January 16, 2007 and approved by 20-20's Board of Directors on January 25, 2007. Forward-looking Statements Certain statements contained in this report constitute forward-looking information within the meaning of securities laws. Implicit in this information, particularly in respect of future operating results and economic performance of the Company are assumptions regarding projected revenues and expenses. These assumptions, although considered reasonable by the Company at the time of preparation, may prove to be incorrect. Readers are cautioned that actual future operating results and economic performance of the Company are subject to a number of risks and uncertainties, including general economic, market and business conditions and could differ materially from what is currently expected. For more exhaustive information on these risks and uncertainties you should refer to our most recently filed Annual Information Form which is available at www.sedar.com. Forward-looking information contained in this report is based on management's current estimates, expectations and projections, which Management believes are reasonable as of the current date. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While the Company may elect to, it is under no obligation and does not undertake to update this information at any particular time, unless required by applicable securities law. In addition to presenting an analysis of results for the fiscal years ended October 31, 2006 and 2005, this report also discusses certain important elements that occurred between such date and January 16, 2007. 1. Business Summary Founded in 1987, 20-20 is the world's leading provider of computer-aided design, sales and manufacturing software tailored for the interior design industry, offering dealers and retailers state-of-the-art design, specification, photo-realistic 3-D rendering and management software for configurable and standalone products in the residential, commercial and recreational interior design markets. The Company's proprietary end-to-end solution integrates the entire design, sales, supply chain and manufacturing processes of the industry, including an integration platform between sales and manufacturing, and computer-aided engineering and shop floor automation software tailored to the kitchen, bath and furniture industry's manufacturers. Moreover, we create, maintain, publish and update electronic catalogs with detailed 3-D graphics, product specifications and finishes, pricing information and product reference numbers for configurable products on behalf of our manufacturing customers. 20-20 has over 1,500 electronic catalogs in its catalog library. 20-20 solutions are available across both desktop and web environments. Its products and services are marketed and sold worldwide through a corporate sales and marketing team complemented by a network of consultants in North America and distributors located in the rest of the world. 20-20 is the largest international provider of software focused exclusively on the interior design industry with a direct presence in the fast-growing Asia-Pacific and Latin American markets. The Company's position in the interior design markets is built on a stable worldwide customer base with licenses sold in more than 100 countries. 20-20 derives revenue and growth from three sources. Revenues from License sales are predominantly derived from licensing of the Company's desktop and client-server enterprise software as described above. Each software license, for which users pay a one-time fee, is typically perpetual in nature. Each license is typically intended for use by a single user and is non-transferable. In fiscal 2006, revenues of this type amounted to $24.3 million, or 40.2% of total revenues. Our revenues from maintenance and other recurring revenues are derived from providing customer support, software and electronic catalog updates, web services, and from annual software usage fees. Typical maintenance and other recurring service agreements have a twelve-month term and are renewable at the option of the customer. In fiscal 2006, revenues of recurring nature amounted to $24.2 million, or 40.1% of total revenues. Finally, our revenues from professional services include revenues derived from training, electronic catalog creation and maintenance, and integration services, such as consulting and application customization, as well as a small portion related to hardware resale. These revenues amounted to $11.9 million, or 19.7% of total revenues during the past fiscal year. The Company's operating income is derived after considering both cost of revenues and operating expenses, explained as follows: Cost of revenues from license sales primarily consists of: (i) the costs of the actual software product media including duplication, manuals and inserts, and packaging; (ii) the cost of resale of third-party software; and (iii) royalties payable on certain license sales to third parties whose technology is embedded into 20-20 software. Cost of revenues from maintenance and professional services primarily consists of costs relating to personnel and other related costs incurred in providing customer support, software updates (other than research and development expenses), electronic catalog creation, updates and maintenance, web services, training, integration and hardware. Operating expenses include: (i) Sales and marketing expenses, which primarily consist of costs relating to personnel and to sales and marketing activities, including the salaries and commissions paid to our sales force and fees paid to our industry consultants, shipping, advertising, telemarketing, trade shows and other promotional activities and materials; (ii) Research and development expenses (including the amortization of capitalized research and development expenses) primarily consist of costs relating to personnel for the development of new products, the enhancement of existing products, quality assurance activities and software development tools and equipment. Research and development expenses are shown net of applicable tax credits; (iii) General and administrative expenses primarily consist of costs relating to administrative, information technology and finance functions, legal and professional fees, insurance and other corporate and overhead expenses, and; (iv) Stock-based compensation expense consists of the cost of stock-based awards to employees expensed on a straight-line basis over the options' vesting period and the cost associated with the deferred share units issued quarterly to the Company's Directors. 2. Year in Review Management is focused on deriving synergies at all levels of the organization, following the integration of the businesses acquired over the last twelve months. Fiscal 2006 has proven to be a pivotal year in the alignment of the Company in terms of its market positioning, product and services offering and, its resulting growth potential. Celebrating its first anniversary as a public company in December 2005, 20-20 has over the course of this past fiscal year, continued to deliver on a number of key strategic initiatives and objectives set out in the intended use of proceeds from its IPO. Fiscal 2006 saw the Company's revenues grow by 49.4% through a combination of both solid organic growth and acquisition, reaching $60.5 million for the twelve-month period ended October 31, 2006 and net earnings that amounted to $5.9 million, or 9.7% of total revenues for the period. This compares to $40.5 million in revenues and $4.3 million in net earnings, or 10.5% of total revenues for the comparable twelve month period in 2005. The performance recorded in fiscal 2006 is principally attributable to revenues contributed by our acquisitions totaling $14.7 million in fiscal 2006 compared to $0.5 million in 2005. The increase was also fueled by the continued strength in sales volumes to customers in both the residential and commercial markets of the industry. Sales of the Company's 20-20 Design software to dealers and retailers in the residential market continued to grow during fiscal 2006 on the back of continued strength of the retail renovation market in North America. License sales to customers in the commercial (office) market also showed growth over 2005. We continue to deploy business development and marketing efforts to demonstrate the value and merits of our systems to office furniture dealers and are investing in integrating all our software solutions and catalog tools for the commercial market to further leverage our catalog library, which was recently enhanced by the acquisition of Data One and its catalog creation tool. The number of housing-starts has little effect on 20-20's business. The largest part of our sales volume relates to bath, kitchen and other in-home renovation projects, transacted by individual home owners through retail centers and other dealers. We have found that when housing starts go down, the number of home renovation projects actually goes up. The improvement in overall license sales activity during fiscal 2006, reaching $24.3 million, contributed in turn to an increase in professional services revenue and, together with the $18.3 million of revenues from license sales recorded in fiscal 2005, contributed to maintenance and other recurring revenues climbing to $24.2 million for the twelve months ended October 31, 2006. The Company has and continues to complete strategic acquisitions of both highly complementary businesses and technologies. During the twelve months ended October 31, 2006, the Company completed key acquisitions representing a total of approximately $9.5 million in acquisition considerations. Transaction rationales for these key acquisitions and considerations in relation to such (including net debt assumed and capitalized transaction costs but excluding conditional future considerations and royalties) can be summarized as follows: Data One, Inc.: ($1,249,000 - before acquisition costs) Based in Indianapolis, Data One is a software developer of layout, specification, and catalog creation software for office furniture and case goods dealers and manufacturers (1,500 active customers) with minimal overlap to the Company's existing business. The acquisition consolidates the Company's market position within design centers and office manufacturers and will be instrumental in allowing 20-20 to further sales automation for the office furniture market - effective December 1, 2005. MBI Software Company GmbH: ($3,167,000 - before acquisition costs) Acquisition of all the assets, business and software solutions of the leading Germany-based software company involved in the development, sale and implementation of large-scale ERP solutions, supplemented by workflow management and business intelligence applications, specifically tailored for manufacturers of case goods and kitchen cabinets as well as office and other residential furniture. MBI has a large installed base of top-tier manufacturers in Europe and North America and has offices in Osnabrueck (Germany), Toronto (Canada) and Vienna (Austria). Complementing 20-20's own solution offering to manufacturers, the MBI transaction allows the Company to gain access to product data for the furniture industry in Germany and complements 20-20's offering of an end-to-end solution for the various manufacturing segments in relation to the residential and commercial interior design market worldwide, while gaining a significant presence in Germany and Eastern Europe - completed December 1, 2005. Virtual Systems International, Inc.: ($5,125,000 - before acquisition costs) Virtual Systems is a North Carolina-based software company involved in the development, sale and integration of manufacturing solutions for medium to large North American woodworking manufacturing operations which can be seamlessly integrated with various horizontal ERP platforms. Virtual Systems offers further potential for operational synergies once combined with that of MBI and 20-20. This transaction represents a further step in establishing the Company as the world leading vertically -integrated ERP, engineering and manufacturing solutions provider in its addressable markets --completed on February 9, 2006. Shanghai Rena and DesignTec Co. Ltd. The Company entered into an agreement to purchase all of the assets of Shanghai Rena (China) and DesignTec Co. Ltd. (Taiwan), in December 2005. The transactions have yet to close as the Company is currently in the process of completing the legal requirements in order to comply with Chinese legislation, thereby permitting a wholly foreign-owned Chinese entity ("WOFE") to conduct business in China. During the process, the Company amended its approach to move toward creating a WOFE that would permit the Company to conduct "manufacturing" activities such as catalog creation and integration services. This amendment resulted in additional delays in the process. Since October 31, 2006, the Company has also completed the following acquisition: Pattern Systems International, Inc. ($ 775,000 - before acquisition costs) On January 8, 2007, the Company acquired the assets and business of Pattern Systems International, Inc. of Mount Arlington, New Jersey ("PSI") for a total consideration of $775,000 (before acquisition fees), paid in cash. PSI has also been mandated to develop additional software components for the Company which, if completed and accepted by the Company, will result in additional consideration paid in cash to PSI, not to exceed $225,000. PSI develops computer software products for distribution through dealers and sales representatives, with some direct sales, mainly for the cabinetmaker, architectural millwork and woodworking industry. The Company also offers customer support, maintenance on its products and provides training and catalog development. These acquisitions are further explained in section 5 of this report and in Notes 8 and 23 to the audited consolidated financial statements. Amortization of Acquired Intangibles The Company's recent acquisitions have resulted in the addition of intangible assets to the Consolidated Balance Sheet that is being amortized over periods ranging from 3 to 15 years. These intangible assets consist of acquired development costs (software), client lists, trade names and a non-compete agreement. The amortization related to these intangible assets amounted to $1,214,000 for fiscal 2006 compared to $185,000 for fiscal 2005. Recent acquisitions mentioned in section 2 above have contributed 24.3% of revenues for the 2006 fiscal year. The revenue mix for these acquisitions, largely due to MBI and to a lesser extent, VSI, is different from that of 20-20 excluding acquisitions. This difference has had a significant impact on the consolidated gross margin of the group from 80.3% in 2005 to 75.7% in 2006. For year ended October 31, 2006, revenues were as follows:
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Excluding
Acquisitions Acquisitions Total
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% % %
Revenues
License sales 23.5 45.6 40.2
Maintenance and other recurring
revenues 39.2 40.3 40.1
Professional services 37.3 14.1 19.7
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100.0 100.0 100.0
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Gross margin (%) 61.6 80.2 75.7
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If we exclude the effect of the recent acquisitions, gross margins remained essentially unchanged at 80.2% in fiscal 2006 from 80.3% in fiscal 2005. However, as a percentage of revenues, operating expenses incurred by acquisitions, including the related amortization of intangible assets and development costs resulting from the purchase accounting of these acquisitions, are lower than those of 20-20 excluding acquisitions. For fiscal 2006, acquisition operating expenses amounted to 62.1% of revenue while expenses excluding acquisitions totalled 66.3%. MBI revenues recorded during fiscal 2006 were significantly weighted to maintenance and integration services revenue, with a smaller contribution from higher-margin license sales revenues. This situation was anticipated following the acquisition, as 20-20 repositioned the business of MBI following its financial difficulties in mid-2005, by first securing follow-on services revenues from existing MBI customers which had temporarily postponed their investments, waiting for a definitive resolution to MBI's financial difficulties. Since the acquisition date, license sales have begun to increase as clients gain confidence in the future prospects of MBI. As these higher margin license sales increase, we should begin to see the related improvement in gross margin from this acquisition. Following the launch of new products this year and our software integration and localization efforts accomplished to date, our focus in product management and marketing is on introducing these products in other geographical markets where we are already active and also expand our activities into adjacent markets in order to increase our licenses sales. This will not only contribute to our organic growth but also progressively improve our gross margins over the coming quarters. Research and Development We continue to focus in the coming quarters on integrating solutions acquired over the past fifteen months in order to deliver an industry-specific and fully-integrated solutions offering for all participants in the interior design market - from sales, design, and product configuration software, to ERP and manufacturing execution systems. In essence, 20-20 will continue to reinforce its position as the world leading provider of an end-to-end solution that effectively integrates all of the interior design industry's critical business processes. This will namely be done by maintaining and leveraging a unique comprehensive foundation of industry data that will be used seamlessly across all of 20-20's tools and solutions. Management believes this strategy will allow the Company to increasingly offer its customers the ability to produce and deliver customized products on an industrial scale, which is rapidly becoming vital for those participants wishing to remain competitive and profitable in today's operating environment. As a result of these efforts, the Company continues to maintain additional resources on research and development work, advancing the integration of Company-wide products and data. It is expected that the first half of fiscal 2006 represented the peak in terms of percentage of revenue for gross R&D expenditure for the Company. As projects approach completion, the amount invested in capitalized development costs will decline as a proportion of the total expenditure while the amortization of development costs will be increasing in the near term.
R&D Expenses and Development Costs
(Amounts in thousands of U.S. dollars)
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Years ended October 31,
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2006 2005
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$ $
Research and Development
Gross Expenditure 11,144 6,852
Less: tax credits (1) (253) (512)
--------------
10,891 6,340
--------------
--------------
Capitalized cost 7,145 4,072
Development costs acquired 473 1,473
Tax credits (1,270) (896)
--------------
Per cash flow statement 6,348 4,649
--------------
--------------
Gross Expenditure 11,144 6,852
Less: Expenses capitalized 7,145 4,072
--------------
As per note 4 to the Financial Statements 3,999 2,780
Less: Tax Credits (253) (512)
Amortization - Development costs internal 2,757 2,308
Amortization - Development costs acquired 875 220
--------------
Per earnings statement 7,378 4,796
--------------
--------------
Investment tax credits
Credited to Earnings (1) 253 512
Reducing Capitalization 1270 896
--------------
1,523 1,408
-----------------------------------------------------------------
-----------------------------------------------------------------
(1) The Company's investment tax credit claims previously submitted
for the fiscal years ended October 31, 2001 and 2002 were reviewed
by the tax authorities resulting in the Company recording an amount
of $388,000 in credits, previously unclaimed for such years, in its
statement of earnings for the year ended October 31, 2005 and $110,000
for the year ended October 31, 2006.
Currency Exchange Risk The Company's currency of measure is the Canadian dollar. However, financial statements are presented in U.S. dollars. With the recent decline in value of the U.S. dollar versus most major currencies, the company's operating results have been affected, particularly in cases where the expenditure is in a currency other than the U.S. dollar. The most significant impact is due to expenses incurred in Canadian dollars, given that most North American sales are in U.S. dollars. With respect to other currencies such as the Euro and the British Pound, however, we have a natural hedge since revenues and expenses are incurred in the same currency. The Company incurred cost in Canadian dollars of approximately C$23.5 million for the year. In fiscal 2006, the average Canadian dollar exchange rate was $0.8853 compared to $0.8212 in fiscal 2005. This 7.8% increase in value resulted in an increase of $1.3 million in expenses and a corresponding decrease in operating income simply due to the exchange rate variation. The Company enters into forward exchange contracts as described in Note 20 to our 2006 Consolidated Audited Annual Financial Statements in order to improve predictability in the short term with respect to the impact of the variations in exchange rates between the Canadian and U.S. dollars. Losses resulting from these contracts amounting to $304,000 for the year ended October 31, 2006 compared to $279,000 in 2005, are recorded in the "Financial Income" line of our Consolidated Earnings Statement. 3. Performance Overview Revenues for fiscal 2006 amounted to $60.5 million, representing a $20 million, or 49.4% increase over what had been recorded in the same period in the preceding fiscal year. The increase in revenues is attributable to revenues amounting to $14.7 million generated by businesses recently acquired including that of CMS (effective September 1, 2005), MBI (effective December 1, 2005), Data One (effective December 1, 2005) and VSI (effective February 1, 2006). On an organic basis, excluding revenues from acquisitions over the last 12 months, revenues grew by 13.0% for the year ended October 31, 2006 over the comparable period in 2005, largely due to continued license sales growth in North America. The Company's gross margin improved by $13.3 million, or 40.9% to $45.8 million for the year ended October 31, 2006 compared with $32.5 million for the comparable period in 2005, representing 75.7% and 80.3% of total revenues, respectively. As mentioned earlier, the decline in the overall gross margin (as a percentage of revenues) is namely attributable to MBI revenues recorded during the interim period which were heavily weighted to maintenance and professional services revenue, with negligible contribution from higher-margin license sales revenues as well as VSI revenues whose mix includes a greater proportion of integration services. With respect to MBI, this was anticipated following the acquisition as 20-20 repositions the business of MBI following its financial difficulties in mid-2005, namely by first securing follow-on services revenues from existing MBI customers which had temporarily postponed their investments in waiting for a definitive resolution of MBI's financial difficulties. The operating income for the year ended October 31, 2006, increased by 6.0% to $6.3 million in fiscal 2006 compared to fiscal 2005, representing 10.4% and 14.7% of total revenues for each respective period. The decline in operating income as a percentage of revenues is namely attributable to: (i) onetime benefits recorded as a reduction of expenses amounting to $713,000 in fiscal 2005; (ii) additional investments in sales and marketing; (iii) the addition of resources to sustain the Company's growth and compliance requirements (iv) the negative effect on operating expenses of the appreciation of the Canadian dollar against the U.S. dollar amounting to approximately $1.3 million and, (v) the incremental amortization of intangible assets created upon accounting for the business acquisitions completed subsequently to the end of the third quarter of fiscal 2005 amounting to $1.0 million, including acquired development costs (accounted for in the research and development operating expense line), client lists and trade names and a non-compete agreement (all accounted for in the general and administrative operating expense line). Net earnings for the period increased to $5.9 million for fiscal 2006 compared with $4.3 million for the comparable period in 2005. The consolidated income tax expense for 2006 stood at $1.6 million or 21.3% of pre-tax earnings compared to $1.82 million or 29.9% for 2005. The decrease in effective tax rate from 2005 is largely attributable to the reduction in the deferred credit account amounting to $865,000 (2005 -$ nil) which arose with the acquisition of MindAvenue Inc., with respect to unused tax losses carried forward. 4. Selected Consolidated Financial Information The selected consolidated financial information set out below for the three years ended October 31, 2006, 2005 and 2004 has been derived from our audited consolidated financial statements. The following information should be read in conjunction with our audited financial statements and notes related thereto.
Consolidated Statement of Earnings Data:
(In thousands of U.S. dollars, except share and per-share data)
------------------------------------------------------------------------
------------------------------------------------------------------------
Years ended October 31, 2006 2005 2004(i)
------------------------------------------------------------------------
Revenues
License sales $ 24,310 $ 18,334 $ 16,903
Maintenance and other recurring
revenues 24,224 15,767 13,973
Professional services 11,927 6,374 5,778
-----------------------------------------------------------------------
60,461 40,475 36,654
Cost of revenues
License sales 2,365 1,183 1,609
Maintenance and services 12,330 6,809 5,889
------------------------------------------------------------------------
14,695 7,992 7,498
------------------------------------------------------------------------
Gross margin 45,766 32,483 29,156
Gross margin (%) 75.7% 80.3% 79.5%
------------------------------------------------------------------------
Operating expenses
Sales and marketing 18,686 13,480 10,377
Research and development 7,378 4,796 5,131
General and administrative 12,991 7,936 8,117
Stock-based compensation
expense (1) 416 334 -
-----------------------------------------------------------------------
39,471 26,546 23,625
------------------------------------------------------------------------
Operating income 6,295 5,937 5,531
Operating margin (%) 10.4% 14.7% 15.1%
Financial expenses (income) (1,160) (140) 2,811
------------------------------------------------------------------------
Earnings before income taxes
and non-controlling interest 7,455 6,077 2,720
Income taxes
Current 579 943 545
Future 1,007 872 569
-----------------------------------------------------------------------
1,586 1,815 1,114
------------------------------------------------------------------------
Earnings before non-controlling
interest 5,869 4,262 1,606
Non-controlling interest - - (66)
------------------------------------------------------------------------
Net earnings $ 5,869 $ 4,262 $ 1,672
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per share (2)
Net earnings available to
common shareholders $ 5,869 $ 4,245 $ 1,536
Basic weighted average number
of common shares outstanding 18,785,855 17,580,899 8,535,140
Basic earnings per share $ 0.31 $ 0.24 $ 0.18
Diluted weighted average number
of common shares outstanding 19,068,537 17,996,569 9,054,640
Diluted earnings per share $ 0.31 $ 0.24 $ 0.17
------------------------------------------------------------------------
------------------------------------------------------------------------
(i) Restated: the 2004 consolidated financial statements have been restated to reflect the retroactive adoption effective November 1, 2004 of the Canadian Institute of Chartered Accountants' ("CICA") Handbook Section -- 3860, "Financial Instruments, Disclosure and Presentation" which requires that the principal equity component and associated cumulative translation adjustment of the convertible debentures be reclassified from the shareholders' equity to liabilities and as a result also reclassify for applicable periods, the increase of the equity component of convertible debentures to the consolidated earnings as a financial expense (refer to Note 2 to the audited consolidated financial statements for further details relating to the change in accounting policy). The change in standard has no impact on earnings per share for these periods as the adjustments on the consolidated earnings were already considered in each period's earnings per share calculations. On December 8, 2004, all outstanding convertible debentures were converted into common shares. (1) Effective January 1, 2004, CICA Handbook Section - 3870, "Stock-based Compensation and Other Stock-based Payments", was amended to require expense treatment for all stock-based compensation, eliminating the alternative of disclosing pro forma information instead of a charge to earnings, as was done for the 2005 fiscal year. On November 1, 2004, the Company adopted the amended standard retroactively without restatement of prior periods. Furthermore, since the Company became public on December 8, 2004; the minimum value method (e.g. using no volatility) can no longer be used to establish the stock-based compensation expense. The impact of adopting the new recommendation was an increase to deficit and to common stock options of $296,000 on November 1, 2004, representing the expense for the 2004 fiscal year. (2) Please refer to Note 6 to the audited consolidated financial statements for further details relating to the calculation of basic and diluted earnings per share. 5. Comparison of Twelve Months Ended October 31, 2006 and 2005 and Fiscal 2007 Outlook Acquisitions The following information in regard to major acquisitions completed during the twelve months ended October 31, 2006 and 2005 should be read in conjunction with Notes 8, 15 and 23 to the audited consolidated financial statements for further details relating to basic considerations paid, future performance-based additional considerations, values attributed to the assets acquired (including intangible assets and goodwill) and assumed liabilities as of the date of the transactions, if applicable. Virtual Systems International, Inc. On December 12, 2005, the Company entered into an agreement to acquire 100% of the shares of Virtual Systems International, Inc. ("VSI"), based in Raleigh, North Carolina for a total consideration of $5,233,690 paid in cash, with net cash acquired of $388,000. The transaction was completed on February 9, 2006. VSI develops, sells and integrates advanced manufacturing software solutions for the cabinet, furniture and woodworking industries. The purchase method of accounting for the transaction resulted in the creation of $2,242,000 in intangible assets (i.e. acquired development costs, a non-compete agreement and client lists) and goodwill of $3,611,000. Data One, Inc. Effective December 1, 2005, the Company acquired 100% of the shares of Data One for a total consideration of $1,303,000 paid in cash, with $62,000 in net cash assumed as at the effective date of acquisition. Data One develops services and sells layout, specification and catalog creation software for dealers, manufacturers and facilities managers of office furniture and case goods. The acquisition of Data One consolidates the Company's market position within design centers and allows for further enhancement of office furniture manufacturer data. The purchase method of accounting for the transaction resulted in the creation of $775,000 in intangible assets (i.e. acquired development costs and client lists) and goodwill of $1,017,000. MBI Software Company GmbH Effective on December 1, 2005, the Company acquired all of the assets of Germany-based MBI, for a total consideration of 2,804,764 Euros ($3,332,000) paid in cash with $125,000 in net cash assumed as of the effective date of the acquisition. MBI develops markets and implements software solutions for the furniture manufacturing industry. The purchase method of accounting for the transaction resulted in the creation of $2,293,000 in intangible assets (i.e. acquired development costs and client lists) and goodwill of $3,405,000. CMS Informatique SA Effective September 1, 2005, we concluded the acquisition of CMS Informatique SA, a software company based in Cannes, France that also has customers in Belgium and Spain. Our 20-20 Design, 20-20 CAD and 20-20 ProdManager will namely be used to complete CMS's product offering, thereby addressing a broader spectrum of size of woodworking shops. The cash consideration paid for 100% of the shares in CMS amounted to 619,000 Euros, or $775,000 (including $77,000 in transaction costs), with 288,000 Euros, or $360,000 in net debt assumed as at the effective date of acquisition. Under the terms of the agreement, an additional cash amount of 90,000 Euros is payable to the selling shareholder, and was paid subsequent to year end, since certain performance thresholds for the 2006 fiscal year were met. The purchase method of accounting for the transaction resulted in the creation of $588,000 in intangible assets (i.e. acquired development costs and client lists) and goodwill of $613,000. Build-Rite On September 1, 2005, the Company completed the acquisition of the Build-Rite software for a total cash consideration of $1,300,000, of which $500,000 remains due as a balance of purchase price, without interest, payable in installments of $500 per copy of Build-Rite software sold by the Company. Any remaining unpaid balance is due on July 27, 2010. In addition, the Company has agreed to pay a royalty on license sales commencing, at the earlier of when the $500,000 above is paid in full or July 27, 2010, up to a maximum of $250,000, also payable in cash. There were no direct revenues recorded in relation to the Build-Rite software as work continues to integrate the application to 20-20 Design for Manufacturing Professional (DFM-PRO) to automate manufacturing directly from 20-20 Design files. SmartFusion On July 5, 2005, the Company completed the purchase of certain computer software, SmartFusion, and related business activities. The cash purchase price was entirely attributed to development costs for an amount of $350,000. MindAvenue Inc. On June 30, 2005, we completed the acquisition of MindAvenue. The tool's capabilities have generated vivid interest from interior design retailers and manufacturers who have seen its applications. The cash consideration paid for 100% of the shares in MindAvenue amounted to $73,000 (including $24,000 in transaction costs), with $10,000 in net cash assumed as at the effective date of acquisition. MindAvenu
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