On the surface, the news at Accpac International in its filing for an initial public offering, doesn't look terribly good. The company had tens of millions of losses in fiscal 2001 and 2002 and a drop in revenue between the two years. And the $379,000 in net income for the half ended September 30 is not large.

But there are good signs -- we’re not saying this is the hottest thing to come down the pike—just that there are signs of improving health. For Accpac, the profit is good news. Other good news is the rise in deferred revenue from $14.6 million on March 31, 2001 to $19.6 million last September, probably reflecting an increase in revenue from maintenance.

More importantly, the company had $1.8 million in operating income in the first half, compared to an operating loss of $9.6 million a year earlier. First half revenue hit $39.1 million, up from $36.1 million, not great but considering the economy, not too bad, either.

What does the offering do? It raises money for working capital, but in a way, it helps Accpac pay for buying SBT in 2000. CA loaned Accpac $26.7 million of the $31.7 million purchase price. The amount due this year is $5.3 million. CA helped the cause by trimming the rate on the debt from 7.5 percent to 5.5 percent in March.

Another major benefit is the purchase of eWare, which makes the product marketed as Accpac eCRM. More recently, Accpac bought AGS, which makes its POS package. As customers demand suites of products, not owning your own products means not controlling your destiny. It wouldn’t be surprising to see Accpac buy more key third parties in order to ensure product direction and quality.

It’s the eWare purchase that provides an idea of the company’s value. Accpac is registering 830,555 shares for buying eWare and another 113,889 shares for eWare employees. Accpac issued eWare a put, under which eWare could require Accpac to purchase those share at $5.82 per share. This seems to represent a minimum guaranteed price to the eWare folks, in case the offering tanks. On the other side, Accpac has a call on the shares at $10.85, giving a bargain basement valuation on the company of roughly $126 million based on 11.6 million shares outstanding after the offering. Existing shareholders (predominately CA) have an average cost basis of 65 cents per share.

I figure that any offering of this size ($40 million maximum), would go in at least the $13-$18 per share range. I also assume Accpac wouldn’t have the call if it didn’t think it could resell the shares at more than $10.85 a share. Annualize the first half revenue to $80 million a year, and a theoretical acquisition price of twice revenue, you’d have a market value of $160 million. With 11.6 million shares outstanding after the offering, that gives a value of around $13.79 a share. It’s at least a yardstick, if not completely reliable.

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