Scala Announces 2003 Results, Restates Historic US GAAP Financial Statements

Offenbach, (PresseBox) - Scala® Business Solutions (Euronext: A.SCALA) announced today its audited full-year 2003 results, and said it has restated its US GAAP consolidated financial statements for 2001 and 2002. The proposed exchange offer by Epicor® Software Corporation is expected to proceed on the terms previously announced.

For 2002 and 2003 the company reports full year and fourth quarter results as shown below, reflecting the impact of the restatement of the 2002 consolidated financial statements.


Financial Performance

The commentary in this announcement relates to US GAAP, supported by Attachments 1 and 3. Attachments 2 and 4 relate to the Dutch statutory accounts. The consolidated financial statements differ in their treatment of certain items, as described fully in the notes to the consolidated financial statements, recognizing the differences between the two legal and regulatory environments. There are restatements under US GAAP but none under Dutch GAAP.





Financial Restatement

As part of preparation for the planned exchange offer by Epicor, Scala has reviewed its historic US GAAP consolidated financial statements. Following this review, and in consultation with its auditors, Scala recognized the need to restate its US GAAP consolidated financial statements for periods prior to 2003. In total, the restatements affecting 2002 have resulted in a $0.3 million increase in net income to $5.0 million in 2002 from the previously reported $4.7 million.

The matters giving rise to the restatements are historic accounting transactions, which are not expected to have a material on-going impact on the business. The financial controls regime within the company had already been significantly strengthened during 2003.


These restatements are reflected in the 2002 Consolidated Statement of Operations as shown in the proforma table below (2003 impact shown for comparison):


The items giving rise to restatement in 2002 are summarized below, together with the impact on the 2003 results; full details are given in the Extract from the notes to the US GAAP consolidated financial statements (Attachment 1).


The company has reported a net loss for 2003 of $10.7 million (restated 2002: net income of $5.0 million) The 2003 full year result includes $0.9 million of revenue and $1.8 million of EBITA previously attributed to 2002. Excluding the impact of these restatements, the proforma financial performance for 2003 would have been reported as:


Significant Charges to Consolidated Statement of Operations

Within the overall 2003 result, the company has recorded a number of charges that, individually, have a significant impact on EBITA. Some have already been included in the second and third quarter results. The charges impacting 2003 are:

o Restructuring Charge

In the second quarter results, the company reported a charge of $2.6 million arising from the implementation of its restructuring programme. As at the end of December 2003, the programme had been substantially completed within the costs provided in the second quarter. The programme has been successful in reducing the company’s cost base in the second half-year and improving the commercial focus of the business.

o Employee Taxes

In keeping with the nature of Scala’s operations, directors, senior management and other staff have been required to work flexibly and to change their professional and personal locations in response to business changes. This has given rise to considerable complexity in employment and compensation arrangements, which in some cases have been compounded by the termination of individuals’ employment contracts. Actions were taken in 2001 and 2002 to regularize these complex historic employee compensation arrangements, and provisions for certain of these liabilities were made in the 2002 statutory accounts.

In the third quarter of 2003, the formalization of the associated settlements highlighted potential additional settlement costs amounting to $2.1 million, $0.9 million of which related to unrecorded liabilities for the year ended 31 December 2002. The company has restated the results and balances for the year ended 31 December 2002, resulting in an increase in operating expenses and accrued liabilities in that year by $0.9 million. The remaining $1.2 million was included in the 2003 third quarter results.

o Variable Accounting for Share Options

As a Euronext listed company, Scala issues share options in Euro at the market price prevailing at the time of issue. Scala has previously accounted for share options on a fixed plan basis and generally recognized no compensation expense with respect to the grant of share options as the exercise price of the share options awarded was equal to the fair market value of the underlying security on the grant date. Scala has reviewed its accounting treatment for share options and, as it is in the unusual position of issuing options in a currency (the Euro) which is not the functional currency of its operations (USD), Scala has determined that variable plan accounting should be applied.

This requires certain options outstanding to be revalued from the price of issue to the year end market value, the gain converted into USD at the year-end exchange rate and a cumulative valuation adjustment charged as an employee cost within operating expenses. For 2003, the cost of applying variable accounting is $0.7 million (2002: $0.6 million).

o Merger With Epicor

In December 2003, Scala announced that it was recommending an offer from Epicor. Progressing this transaction has required expenditure on various advisory costs. In the fourth quarter of 2003, the amount included in the consolidated statement of operations was $1.8 million.



Excluding the effect of the restatements and the significant charges, the proforma underlying financial performance for the 2003 financial year is:

EBITA improves from $1.7 million EBITA loss in the first six months of the year to $2.8 million EBITA profit in the second half year, reflecting the benefits of improved commercial focus and cost control. This is in line with management expectations for second half performance.

Cash and Debtors

The company reported net cash of $9.2 million as at December 2003 (2002: $12.6 million), well above the $6.5 - $7.0 million forecast included in the third quarter results announcement.

Days sales outstanding (DSO) on a like-for-like basis, reflecting the invoicing pattern of maintenance, were 63 days at December 2003 compared to 47 days at December 2002. However, adjusting for a substantial overdue receipt in early January, DSO at December 2003 would have been reduced to 55 days.

Amortization, Taxation and Net Profit/Loss

The company has recorded a $2.2 million charge in 2003 in relation to amortization (2002: $2.2 million). This arises from the continuing write-down of assets acquired in prior years. In addition, during 2003, Scala acquired licensing rights from its former partner in Australia and this has contributed $0.045 million to the 2003 amortization charge (2002: nil).

In 2002, the company has recorded a $4.4 million charge for taxation (2003: $2.0 million). Of this tax charge, $2.6 million relates to the write-down of the carrying value of the deferred tax asset and $1.1 million of this reduction was included within the second quarter results. The balance of $1.8 million is a corporation tax charge arising in jurisdictions which do not benefit from brought-forward tax losses.

The company reports a full year net loss of $10.7 million compared to a net income of $5.0 million in 2002.

2003 Commercial Overview

“2003 was a year of great contrasts for Scala, with disappointments in the first half year giving way to encouraging successes and increasing optimism as we moved through the second half year,” said Andreas Kemi, interim Chief Executive Officer. Kemi was delegated by the Supervisory Board in May as supervisory director responsible for the daily supervision of management and the business affairs of the company. “Much of our ultimate commercial success in 2003 has been driven by our customers and the value they gain from our offerings wherever they do business.”

The first half year was characterized by continuing general economic uncertainties which affected patterns in IT buying by many customers, and major changes in the company. The exceptional revenue and cost pressures Scala faced early in the year, and delays in releasing the new version of the iScala® Collaborative ERP system, led to organization restructuring in the second quarter, the outcome of which substantially helped reduce such pressures in the second half year.

“We began the second half year with a leaner and more nimble business structure, which has enabled us to sharpen our focus on meeting customers’ needs and resolutely drive sales in our long-established strength markets in Western Europe, Nordic Europe, Central and Eastern Europe, Russia and China,” Kemi said. “We further enhanced our already-strong relationship with Microsoft®, both at the strategic and local-market levels.” Significant accomplishments included the commercial release in September of the new version of iScala to an enthusiastic reception by customers worldwide; and in December, the commercial release of iScala CRM.

Kemi said 2003 concluded on a highly optimistic note with improving second half operating profitability and the announcement in December of a recommended stock and cash offer for Scala by Epicor. The transaction is expected to be completed in the second quarter 2004.

2003 Operating Highlights

New iScala Version Commercially Released

In September, Scala announced the highly-anticipated release of the new version of the iScala Collaborative ERP system.

Available for customers on a global basis, iScala delivers an integrated enterprise resource planning (ERP), customer relationship management (CRM) and supply chain management (SCM) solution on a web services platform tailored for local language, tax and legislative requirements. It is designed to meet the specific needs of companies in industry sectors such as industrial machinery, light engineering, automotive, electronics, pharmaceutical, consumer packaged goods, and not-for-profit organizations.

There was strong and growing customer demand for iScala during the fourth quarter. The company reached a major milestone in November with more than 225 customers worldwide using or planning to implement the iScala system. By the end of 2003, over 500 customers had signed new license or upgrade contracts for the new version.

Enhanced Relationship with Microsoft

During 2003, Scala significantly reinforced its commitment to the Microsoft technology platform and strengthened its overall relationship with the company.

In July, Scala and Microsoft announced plans to embed Microsoft Business Solutions CRM (Microsoft CRM) software into iScala to address growing customer demand for more business functionality in one integrated solution. The resulting new product – iScala CRM – was commercially-released in December.

In September, Scala became one of the first early adopters of the Microsoft Business Framework, the common software development framework under which the company can more rapidly build solutions that add value to its customers. In October, the company announced integration of iScala with the new Microsoft Office 2003 system, the first such integration by an ERP vendor.

During the second half of 2003, Scala began working in closer sales and marketing partnership with Microsoft locally (in particular, throughout Nordic Europe, Central and Eastern Europe and in Russia), with its go-to-market sales campaigns closely aligned with Microsoft’s to more effectively bring Scala’s Microsoft-based solutions to key markets.

Business Unit Operations

During the second half year, the company saw a strong performance in many markets compared to the first half. The worldwide indirect channel continued to perform well, especially in the fourth quarter.

2003 business highlights by Region include:

· The single European business unit formed in May 2003 continued as the strong driver for overall sales in the second half, especially in Western Europe. In particular, sales of maintenance and consulting services exceeded expectations in Western Europe. Central Europe delivered a strong and consistent result according to expectations. However, in the Nordic Europe part of the Region, direct sales were disappointing, although the indirect channel performed well. Top-selling markets in the Region included Germany, Poland, Russia, the Baltics and the Middle East. Overall, the Region performed below target for the year.

· Results for 2003 in the Americas Region were disappointing, illustrating pressure throughout the year on sales. However, the indirect channel in Latin America performed very strongly in license sales especially in the fourth quarter. Overall, the Region did not meet its revenue target for the year.

· The Asia Pacific Region showed a better than expected performance in 2003, especially in the fourth quarter compared to the same period in the previous year. There were good results in Japan and Singapore and in emerging markets such as China. Throughout the Region, the indirect channel performed well and, overall, the Region performed slightly above target for the year.

Restructuring

The restructuring programme announced in May was aimed at improving and enhancing the company’s commercial focus and reducing costs. This included:

· Creation of the new combined European business unit, merging the three previously-separate units in Europe.

· Rationalization of R&D facilities.

· Headcount reductions of about 10% of the workforce.

The restructuring produced significant cost savings in the second half year.

Global Sales Initiatives

The success shown by the strong uptake of the new iScala version by customers worldwide illustrates the effectiveness of Scala’s uncompromising go-to-market sales and marketing campaigns, with targeted offerings in specific markets and at specific industry groups.

All sales campaigns in the second half of 2003 were geared to maximizing immediate revenue opportunities. In the fourth quarter, iScala helped gain significant sales momentum which had gathered considerable strength by year end and provided a strong foundation for success with ongoing quarterly and other campaigns in 2004.

Continuing Customer Satisfaction

During 2003, Scala surveyed over 2,300 customers in more than 40 countries worldwide, representing nearly 40% of its total customer base. The 2003 customer satisfaction survey showed that 72% of all customers surveyed said they would recommend Scala’s software to another company. This continues the trend of increasing customer satisfaction year on year since 1999.

“We are proud that our customers continue to demonstrate their commitment and loyalty to our company and our products,” Kemi said. “The continuing improvement in customer satisfaction and loyalty demonstrates our long-term commitment to providing world class service that our customers value.” Scala has conducted customer satisfaction surveys every year since 1997.

2004: The Planned Combination of Epicor and Scala

As the 2003 financial year progressed, the company has been able increasingly to demonstrate the value of its three key assets: its employees, its technology and its international distribution platform. These have made the company an attractive potential partner to a number of other software organizations.

Recognizing the value of increasing scale to exploit its technology base and commercial position, throughout 2003 the company explored possible strategic partnerships. This process culminated in the announcement in December of a recommended offer by Epicor for Scala. Further details of the transaction and the benefits of the business combination will be provided to shareholders in the offer documentation.

“The Boards of Scala believe that the combination of Epicor and Scala will create a strong mid-market ERP competitor, with a strong presence in the key US and Europe markets in particular,” Kemi said. “The new company will be able to capitalize on the business strengths of both companies in building a successful and prosperous future for all stakeholders.”




Attachment 1

Extract from Notes to US GAAP Consolidated Financial Statements

Restatements of Consolidated Financial Results

Scala identified transactions for which accounting adjustments were necessary, which resulted in restatements of Scala's consolidated financial statements as set out below.

The following is a description of the restatement adjustment categories. The dollar effect of adjustments within each category for each fiscal period is described in the Consolidated Financial Statements.

Revenue Recognition

Application of contract accounting

AICPA Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), requires that an arrangement to deliver software that includes services that involve significant production, modification, or customization of software should be accounted for in accordance with ARB No. 45, “Long-Term Construction-Type Contracts”, and the relevant guidance provided by SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. The accounting in this guidance is often referred to as contract accounting.

Scala entered into a software license arrangement with a customer in the year ended December 31, 2001 and at the same time agreed to perform significant modification and customization of the software for that same customer. Scala originally had recognized the license fee revenue on delivery of the software separately from the revenue related to the modification and customization of the software that was performed during 2002 and 2003. Scala's consolidated financial statements [for 2002?] have been restated to recognize the revenue related to both the software license fee and the modification services and customization together on a percentage completion basis over the period during which the modification services and customization were performed. Progress to completion has been measured based on input measures.

Vendor Specific Objective Evidence (“VSOE”)

Scala allocates the total arrangement fee in multiple element arrangements to each of the separable elements based on vendor specific objective evidence of fair value. Where vendor specific objective evidence of the fair value of undelivered elements does not exist, revenue from the arrangement is deferred until all elements are delivered or where a service (including maintenance) is the only undelivered element, revenue is recognised as the service is performed. Scala's consolidated financial statements have been restated as follows to correctly apply this policy:

1) In respect of one development arrangement entered into at the same time as the sale of a software license Scala has determined that it does not have VSOE of the development services element due to the infrequency of the provision of development services of this size to specific customers and a lack of consistent pricing when taking into account the total development effort expended under the terms of these arrangements. Previously Scala recognized license fee revenue for this arrangement under the residual method and development/implementation services revenue were recognized as delivered. Scala's consolidated financial statements have been restated to recognize license and development/implementation services revenue over the performance period of the development/implementation services.

2) Scala has also restated the accounting for certain multiple element arrangements entered into during 2001 and 2002. The amounts deferred for maintenance and consulting services for these multiple elements arrangements was found to be lower than Scala’s VSOE analysis and, consequently, the amount of software license revenue recognized on delivery of the software has been reduced, allocated to maintenance and consulting services and deferred to later periods.

Employee Taxes

From the time of listing on the Amsterdam Stock Exchange in 1998, Scala has operated in a number of locations. In keeping with the nature of the Scala's operations, directors, senior management and other staff have been required to work flexibly and to change their professional and personal locations in response to business changes. This has given rise to considerable complexity in employment and compensation arrangements, which have in some cases been compounded by the termination of individual's employment contracts.

Actions were taken in 2001 and 2002 to regularize these complex historic employee compensation arrangements.

Provisions for certain of these liabilities were made in the 2002 statutory accounts. However, in the third quarter of 2003, the formalization of the associated settlements highlighted potential additional settlement costs amounting to $2.1 million, $0.9 million of which related to unrecorded liabilities of the year ended 31 December 2002. The Company has restated the results and balances for the year ended December 31, 2002 resulting in an increase in operating expenses and accrued liabilities in that year by $0.9 million.

Shares Issued to Employees

Scala previously accounted for shares issued to employees as fixed plans as required by APB Opinion 25: “Accounting for Stock Issued to Employees”. As a consequence of share options being issued at market price with no associated performance criteria, this resulted in no expense being recorded in the Statements of Operations. Scala has reviewed its accounting treatment for share options and determined that variable plan accounting is required to be applied for (1) certain options which were granted to employees who are remunerated in currencies other than the currency of the exercise price of the option, the Euro, and (2) certain option grants where the terms were modified after the date of grant. Scala’s consolidated financial statements have been restated to account for these share options on a variable plan basis. This has resulted in a compensation expense being recognized in 2001, 2002 and 2003 in respect of these options.





Transactions with Abisko Development Limited (“Abisko”)

Scala holds indirectly, through its subsidiary Scala ECE (Overseas) Limited (“ECE”), a 19.9% share in Abisko Development Ltd (“Abisko”), which was engaged in the research and development of software products, and is a subsidiary of Sonata Software Ltd, India. Based on an analysis of the control relationships between ECE and Abisko Scala considers Abisko to be an equity method investee for accounting purposes.

Scala recognized revenue in 1998 and 1999 associated with the sale and licensing of Scala owned intellectual property rights (“IPR”) to Abisko. Scala subsequently purchased completed IPR developed by Abisko in 1999 and 2001. The purchase price included an effective refund of the costs incurred by Abisko in 1998 and 1999 in the purchase and licensing of Scala owned IPR. The purchase costs have been capitalized as an intangible asset and amortized in Scala’s consolidated financial statements.

As realization of the proceeds of the 1998 and 1999 sales by Scala to Abisko could not be reasonably assured at that time, the revenue recognized has been reversed and the prior period results have been restated. Further, the purchase costs capitalized by Scala have also been restated to eliminate the effective refund of the costs incurred by Abisko in 1998 and 1999 in the purchase and licensing of Scala owned IPR. This restatement of the purchase price has also resulted in a restatement of the amortization charge of the capitalized IPR.





Attachment 2:

Extracts from Notes to Dutch GAAP Consolidated Financial Statements

As part of the acquisition process the Company has reviewed its prior year financial statements. From this review, an additional write-down in respect of intellectual property rights has resulted under Dutch GAAP.

Transactions with Abisko Development Limited

Prior to 2001 the Company recognized revenue associated with the sale and licensing of Company-owned intellectual property rights (“IPR”) to a Abisko Development Ltd (“Abisko”). The Company subsequently purchased the completed and enhanced IPR developed by Abisko in two tranches, the first prior to 2001 and the second in 2001. The purchase price also included an effective refund of the costs incurred by Abisko prior to 2001 in the purchase and licensing of Company owned IPR. The amortization charge in 2003 incorporates a specific charge of $714 thousand to reflect the write-down of the carrying value of the capitalized software costs associated with these transactions to eliminate the effective refund referred to above. As at December 31, 2003 the revised carrying value of the IPR capitalized under this arrangement is $1,067 thousand.

Other employee taxes

From the time of listing on the Amsterdam Stock Exchange in 1998, the Company has operated in a number of locations. In keeping with the nature of the Company’s operations, directors, senior management and other staff have been required to work flexibly and to change their professional and personal locations in response to business changes. This has given rise to considerable complexity in employment and compensation arrangements, which have in some cases been compounded by the termination of individual's employment contracts.

Actions were taken in 2001 and 2002 to regularize these complex historic employee compensation arrangements.

Provisions for certain of these liabilities were made in the 2002 statutory accounts. However, in the third quarter of 2003, the formalization of the associated settlements highlighted potential additional settlement costs amounting to $2.1 million. $0.9 million of this amount related to Financial Year 2002 and has been accrued in the current year. The balance reflects exchange rate movements and further increases in these liabilities relating to the current Financial Year

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