Form 10-Q
Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
For the Quarter Ended Commission File Number
February 29, 2000 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
4695 44th Street SE, Suite B-130, Grand Rapids, MI 49512
Telephone (616) 957-2330
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of registrant's common stock at March 31, 2000
was 8,993,784 shares.
Form 10-Q
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
February 29, 2000 and May 31, 1999 3
Consolidated Condensed Statements of Income -
Three and Nine Months Ended February 29, 2000 and
February 28, 1999 4-5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended February 29, 2000 and
February 28, 1999 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
February 29, May 31,
2000 1999
(unaudited) (audited)
----------- ---------
ASSETS
Cash and cash equivalents $ 1,085 $ 1,600
Accounts receivable, net 6,882 8,237
Unbilled costs and fees 1,116 789
Inventory 197 335
Prepaid expenses and other assets 821 774
------- -------
Total current assets 10,101 11,735
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Property and equipment, net (Note B) 1,248 1,687
Capitalized software costs, net 12,455 12,714
Goodwill, net 5,124 5,987
Other assets 570 546
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TOTAL ASSETS $29,498 $32,669
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,146 $ 2,924
Accrued expenses 1,389 2,167
Deferred revenue 3,249 4,725
Current portion of capital lease obligations 159 208
Current portion of long term debt 278 220
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Total current liabilities 6,221 10,244
------- -------
Capital lease obligations, net of current portion 181 215
Long-term debt, net of current portion 13,433 12,529
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Total long-term debt 13,614 12,744
------- -------
Stockholders' equity (Note B) 9,663 9,681
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,498 $32,669
======= =======
See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
-----------------------------------------
February 29, February 28,
2000 1999
------------ ------------
Revenue
Products $ 1,619 $ 4,339
Services 2,341 4,515
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Total revenue 3,960 8,854
Cost of products sold 327 1,244
Cost of services provided 576 1,412
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Gross margin 3,057 6,198
Research and development expenses 1,118 1,414
Selling, general and administrative 3,368 3,866
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Income (loss) from operations (1,429) 918
Interest expense, net 493 368
------- -------
Income (loss) from operations before income taxes (1,922) 550
Provision for income taxes -- --
Net income (loss) $(1,922) $ 550
======= =======
Basic net income (loss) per common share $ (0.23) $ 0.07
Weighted average common shares outstanding 8,191 7,999
Diluted net income (loss) per common share $ (0.23) $ 0.07
Weighted average dilutive common share equivalents outstanding 8,191 8,220
See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except for per share data)
Nine Months Ended
-----------------------------------------
February 29, February 28,
2000 1999
------------ ------------
Revenue
Products $ 8,531 $ 11,866
Services 8,335 13,532
-------- --------
Total revenue 16,866 25,398
Cost of products sold 1,734 4,005
Cost of services provided 2,218 6,133
-------- --------
Gross margin 12,914 15,260
Research and development expenses 3,833 3,683
Selling, general and administrative 9,320 11,829
-------- --------
Loss from operations (239) (252)
Interest expense, net 1,222 1,186
-------- --------
Loss from operations before income taxes (1,461) (1,438)
Provision for income taxes 103 173
-------- --------
Net loss $ (1,564) $ (1,611)
======== ========
Basic net loss per common share $ (0.19) $ (0.23)
Weighted average common shares outstanding 8,192 6,956
Diluted net loss per common share $ (0.19) $ (0.23)
Weighted average dilutive common share equivalents outstanding 8,192 6,956
See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Nine Months Ended
---------------------------
February 29, February 28,
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $ (1,564) $ (1,611)
-------- --------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 2,563 2,689
Gain on sale of fixed assets (7) --
Change in current assets and liabilities:
Accounts receivable 1,355 (622)
Unbilled costs and fees (327) (681)
Inventory 138 28
Prepaid expenses and other assets (71) (315)
Accounts payable and accrued expenses (2,556) (544)
Deferred revenue (1,476) (275)
-------- --------
Total adjustments (381) 280
-------- --------
Net cash used by operating activities (1,945) (1,331)
-------- --------
Cash flows used by investing activities:
Capital expenditures (900) (925)
Proceeds from sale of fixed assets 16 --
Purchase of ADRA, net of cash received -- (112)
Proceeds from sale of building -- 438
-------- --------
Net cash used by investing activities (884) (599)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 1,097
Proceeds of capital lease obligations 97 205
Principal payments under capital lease obligations (181) (149)
Proceeds from Greenleaf financing 10,475 9,000
Principal payments under senior debt financing (202) (750)
Repayment of Imperial debt (7,875) --
Repayment of subordinated debt -- (5,400)
Equity financing proceeds -- 1,500
Net repayment of line of credit -- (2,609)
-------- --------
Net cash provided by financing activities 2,314 2,894
-------- --------
Increase (decrease) in cash and cash equivalents (515) 964
Cash and cash equivalents, beginning of period 1,600 429
-------- --------
Cash and cash equivalents, end of period $ 1,085 $ 1,393
======== ========
See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 7
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(A) The consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission from the accounts of SofTech, Inc. and its wholly owned
subsidiaries (the "Company") without audit; however, in the opinion of
management, the information presented reflects all adjustments which are
of a normal recurring nature and elimination of intercompany transactions
which are necessary to present fairly the Company's financial position and
results of operations. It is recommended that these consolidated condensed
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's 1999 Annual Report on Form
10-K.
(B) Details of certain balance sheet captions are as follows:
February 29, May 31,
2000 1999
-------- --------
Property and equipment $ 3,403 $ 4,028
Accumulated depreciation
And amortization (2,155) (2,341)
-------- --------
Property and equipment, net $ 1,248 $ 1,687
-------- --------
Common stock, $.10 par value $ 943 $ 859
Capital in excess of par value 16,302 14,790
Other accumulated comprehensive (68) (18)
loss (6,032) (4,468)
Accumulated deficit
Less treasury stock (1,482) (1,482)
-------- --------
Stockholders' equity $ 9,663 $ 9,681
-------- --------
(C) EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted net income
per share is computed by dividing net income by the weighted-average
number of common and equivalent dilutive common shares outstanding.
February 29, February 28,
2000 1999
--------- ---------
Basic weighted average shares
outstanding during the quarter 8,190,634 7,999,049
Effect of employee stock options
outstanding -- 221,670
--------- ---------
Diluted 8,190,634 8,220,719
========= =========
(D) COMPREHENSIVE INCOME (LOSS)
Other accumulated comprehensive loss represents accumulated foreign
currency translation adjustments at February 29, 2000 and May 31, 1999.
Comprehensive (loss) for the nine months ended February 29, 2000 and
February 28, 1999 was $(1,614) and $(1,629), respectively, and included
net (loss) and translation gains (losses) for the respective periods.
Form 10-Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(E) SEGMENT INFORMATION
The Company operates in one reportable segment and is engaged in the
development, marketing, distribution and support of CAD/CAM and Product
Data Management computer solutions. The Company's operations are organized
geographically with foreign offices in England, France, Germany and Italy.
Components of revenue and long-lived assets (consisting primarily of
intangible assets, capitalized software and property, plant and equipment)
by geographic location, are as follows:
Three Months Ended Three Months Ended
February 29, February 28,
Revenue: 2000 1999
---- ----
North America $ 3,348 $ 8,008
Europe 893 975
Eliminations (281) (129)
-------- --------
Consolidated Total $ 3,960 $ 8,854
======== ========
Nine Months Ended Nine Months
February 29, Ended February 28,
Revenue: 2000 1999
---- ----
North America $ 14,689 $ 22,978
Europe 2,804 2,922
Eliminations (627) (502)
-------- --------
Consolidated Total $ 16,866 $ 25,398
======== ========
February 29, May 31,
Long-Lived Assets: 2000 1999
---- ----
North America $ 18,968 $ 20,642
Europe 291 292
-------- --------
Consolidated Total $ 19,259 $ 20,934
======== ========
(F) DEBT OBLIGATIONS:
During the quarter ended August 31, 1999, the Company entered into a $11
million senior facility with Greenleaf Capital ("Greenleaf"). Principal
and interest is payable monthly at 10.75% and the note has a 15-year
amortization with the remaining principal due in a single payment in June
2004. The facility was used to pay off the prior senior lender and to
provide working capital. William D. Johnston, a director of SofTech since
September 1996, is the President of Greenleaf.
During the quarter ended February 29, 2000, $1.5 million of subordinated
debt was used by Greenleaf to purchase 807,972 shares of previously
unissued common stock of the Company.
(G) NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which provides a consistent standard
for recognition and measurement of derivatives and hedging activities. The
Company is required to adopt the standard in fiscal 2002 and is in the
process of evaluating SFAS 133 and its impact.
Form 10-Q
Page 9
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenue for the three and nine-month periods ended February 29, 2000 was
$4.0 million and $16.9 million, respectively, as compared to $8.9 million and
$25.4 million, respectively, for the same periods in the prior fiscal year. This
represents a decrease from fiscal 1999 to fiscal 2000 of $4.9 million or 55.3%
and $8.5 million or 33.6% for the three and nine month periods, respectively.
Product revenue decreased by approximately $2.7 million in the third quarter of
fiscal 2000 as compared to the same period in the prior year or about 62.7% and
decreased by about $3.3 million or 28.1% for the nine month period. Service
revenue decreased by about $2.2 million or 48.2% in the third quarter of fiscal
2000 as compared to the third quarter of fiscal 1999 and by about $5.2 million
or 38.4% for the nine month period.
The decrease in product and service revenue in the current fiscal year as
compared to the prior fiscal year is due to a strategic decision by the Company
at the end of fiscal 1999 to focus its limited resources on marketing its
technology first and foremost and to limit its service offerings as much as
possible to high margin consulting projects, training services on its
proprietary software and software maintenance.
Product revenue is composed of license revenue from the sale of the Company's
software technology to end users and revenue from the sale of third party
hardware and software technology. Revenue from the licensing of the Company's
software technology in the three and nine month periods ended February 29, 2000
was $1.4 million and $6.7 million, respectively, as compared to $2.7 million and
$6.9 million in the same periods in the prior fiscal year. Revenue from the sale
of third party hardware and software in the three and nine month periods ended
February 29, 2000 was $250,000 and $1.8 million, respectively, as compared to
$1.7 million and $5.0 million in the same periods in fiscal 1999. This change in
strategy was aimed at improving the Company's profitability and bringing our
customers the solutions they were seeking.
Service revenue is composed of software maintenance on our proprietary software
and revenue generated from services performed by our engineers. At the end of
fiscal 1999 we began shifting away from low margin, hourly engineering projects
that had previously been a significant portion of the revenue performed by the
engineering group. The decision to shift away from that type of work was made in
order to improve the profitability of the service organization. For the three
and nine month periods ended February 29, 2000 software maintenance revenue on
our proprietary technology was $1.9 million and $6.0 million, respectively, as
compared to $2.4 million and $7.1 million for the same periods in fiscal 1999.
Service revenue generated from the engineering services group for the three and
nine-month periods ended February 29, 2000 was $0.4 million and $1.9 million,
respectively, as compared to $1.7 million and $5.6 million for the same periods
in the prior fiscal year. The reduced service revenue from low margin
engineering projects was the primary reason for the decrease in service revenue
from fiscal 1999 to 2000.
Product gross margin for the three and nine month periods ended February 29,
2000 was $1.3 million and $6.8 million, respectively, as compared to $3.1
million and $7.9 million for the same periods in fiscal 1999. Gross margin as a
percent of revenue for the three and nine-month periods ended February 29, 2000
was 79.8% and 79.7%, respectively, as compared to 71.3% and 66.2% for the same
periods in fiscal 1999. The improvement in gross margin as a percent of revenue
in the current fiscal year as compared to fiscal 1999 is a direct result of a
larger component of product revenue coming from the sale of the Company's
technology rather than selling other companies' hardware and software as
detailed above.
Service gross margin for the three and nine-month periods ended February 29,
2000 was $1.8 million and $6.1 million, respectively, as compared to $3.1
million and $7.4 million in the same periods in fiscal 1999. Service gross
margin as a percent of revenue for the three and nine month periods ended
Form 10-Q
Page 10
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
February 29, 2000 was 75.4% and 73.4%, respectively as compared to 68.7% and
54.7% for the same periods in fiscal 1999.
Research and development expenditures for the three and nine month periods ended
February 29, 2000 were $1.1 million and $3.8 million, respectively, as compared
to $1.4 million and $3.7 million for the same periods in the prior fiscal year.
This spending represents continued enhancements to the Company's proprietary
software technology. The Company expects its level of R&D expenditures to
continue at the past nine-month level for the foreseeable future.
Selling, general and administrative expenditures ("SG&A") for the three and nine
month periods ended February 29, 2000 were $3.4 million and $9.3 million,
respectively, as compared to $3.9 million and $11.8 million for the same periods
in fiscal 1999. This represents a decrease of 12.9% and 21.2% for the three and
nine-month periods ended February 29, 2000 as compared to the same periods in
the prior fiscal year. The reduced expenditures are a direct result of cost
cutting measures enacted over the last twelve months as the Company has
strategically repositioned itself to focus on selling its technology primarily
and focusing on high margin service opportunities. This repositioning has
resulted in a significant reduction in headcount that was previously required to
deliver on that low margin business.
Net loss for the three and nine-month periods ended February 29, 2000 was $(1.9)
million or $(.23) per share and $(1.6) million or $(.19) per share,
respectively, as compared to a net income (loss) of $550,000 or $.07 per share
and $(1.6) million or $(.23) per share for the same periods in the prior fiscal
year.
Capital Resources and Liquidity
Net cash used by operating activities for the nine-month period ended February
29, 2000 was $1.9 million. Net loss adjusted for non-cash expenditures generated
cash of approximately $1.0 million and the net reduction of billed and unbilled
accounts receivable generated cash of about $1.0 million. Accounts payable and
accrued expenses were reduced by approximately $2.6 million and deferred
maintenance revenue was reduced by about $1.5 million, which accounted for the
majority of cash utilization during the period.
Net cash used by investing activities during the nine-month period ended
February 29, 2000 was $884,000, which was primarily composed of capital
expenditures. Capital expenditures in the same period of the prior fiscal year
were $925,000.
Net cash provided by financing activities for the nine-month period ended
February 29, 2000 was $2.3 million which was the net result of the debt
refinancing previously disclosed in the Company's Form 10-K for the year ended
May 31, 1999. There were no additional borrowings under the Company's line of
credit during the current quarter.
The Company believes that the cash on hand together with cash flow from
operations and its available borrowings under its credit facility will be
sufficient for meeting its liquidity and capital resource needs for the next
year.
The statements made above with respect to SofTech's outlook for fiscal 2000 and
beyond represent "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934 and are subject to a number of risks and uncertainties. These include,
among other risks and uncertainties, general business and economic conditions,
maintaining reseller agreements with 3-D and PDM technology providers,
generating sufficient cash flow from operations to fund working capital needs,
continued integration of acquired entities, potential obsolescence of the
Company's CAD and CAM technologies, potential unfavorable outcome to existing
litigation, maintaining existing relationships with the Company's lenders,
remaining in compliance with debt covenants, successful introduction and market
acceptance of planned new products and the ability of the Company to attract and
retain qualified personnel both in our existing markets and in new territories
in an extremely competitive environment.
Form 10-Q
Page 11
PART II. OTHER INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27(i) Financial Data Schedule as required by Article 5 of Regulation S-X.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month period
ended February 29, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: April 14, 2000 /s/ Joseph P. Mullaney
---------------- ----------------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: April 14, 2000 /s/ Jan E. Yansak
---------------- ----------------------------------------
Jan E. Yansak
Controller