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 28, 1999 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, 1999
was 8,000,289 shares.
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Form 10-Q
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
February 28, 1999 and May 31, 1998 3
Consolidated Condensed Statements of Income -
Three and Nine Months Ended February 28, 1999 and
February 28, 1998 4-5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended February 28, 1999 and
February 28, 1998 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
February 28, May 31,
1999 1998
(unaudited) (audited)
----------- ---------
ASSETS
Cash and cash equivalents $ 1,393 $ 429
Accounts receivable, net 9,912 9,290
Unbilled costs and fees 1,834 1,153
Inventory 310 338
Prepaid expenses and other assets 1,120 886
Deferred income taxes 125 125
------- -------
Total current assets 14,694 12,221
------- -------
Property and equipment, net (Note B) 1,844 2,280
Capitalized software costs, net 13,043 13,816
Goodwill, net 6,392 7,252
Other assets 514 491
------- -------
TOTAL ASSETS $36,487 $36,060
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable, line of credit $ 3,000 $ 2,609
Accounts payable 4,050 2,386
Accrued expenses 1,701 3,805
Deferred maintenance revenue 3,247 3,522
Net liabilities of discontinued operations 234 338
Current portion of capital lease obligations 220 180
Current portion of long term debt 1,451 6,900
------- -------
Total current liabilities 13,903 19,740
------- -------
Capital lease obligations, net of current portion 254 238
Long-term debt, net of current portion 8,670 4,900
------- -------
Total long-term debt 8,924 5,138
------- -------
Stockholders' equity (Note B) 13,660 11,182
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,487 $36,060
======= =======
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Form 10-Q
Page 4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except for per share data)
Three Months Ended
----------------------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Products $4,339 $2,760
Services 4,515 2,437
------ ------
Total revenue 8,854 5,197
Cost of products sold 1,244 1,059
Cost of services provided 1,412 1,309
------ ------
Gross margin 6,198 2,829
Research and development expenses 1,414 --
Selling, general and administrative 3,866 2,445
------ ------
Income from operations 918 384
Interest expense 368 --
------ ------
Income from operations before income taxes 550 384
Provision for income taxes -- 11
------ ------
Net income $ 550 $ 373
====== ======
Basic net income per common share $ 0.07 $ 0.06
Weighted average common shares outstanding 7,999 5,935
Diluted net income per common share $ 0.07 $ 0.06
Weighted average diluted common share equivalents outstanding 8,220 6,403
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Form 10-Q
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except for per share data)
Nine Months Ended
----------------------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Products $ 11,866 $ 5,874
Services 13,532 8,417
-------- --------
Total revenue 25,398 14,291
Cost of products sold 4,005 2,844
Cost of services provided 6,133 4,757
-------- --------
Gross margin 15,260 6,690
Research and development expenses 2,628 --
Selling, general and administrative 12,884 5,759
-------- --------
Income (loss) from operations (252) 931
Interest expense 1,186 --
Gain on available-for-sale securities -- 253
-------- --------
Income (loss) from operations before income taxes (1,438) 1,184
Provision for income taxes 173 111
-------- --------
Net income (loss) $ (1,611) $ 1,073
======== ========
Basic net income (loss) per common share $ (0.23) $ 0.19
Weighted average common shares outstanding 6,956 5,515
Diluted net income (loss) per common share $ (0.23) $ 0.18
Weighted average diluted common share equivalents outstanding 6,956 5,807
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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Form 10-Q
Page 6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(dollars in thousands)
Nine Months Ended
--------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,611) $ 1,073
------- -------
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 2,689 1,066
Gain on sale of available-for-sale securities -- (253)
Change in current assets and liabilities:
Accounts receivable (622) (1,610)
Unbilled costs and fees (681) (2,066)
Inventory 28 389
Prepaid expenses and other assets (315) (1)
Accounts payable and accrued expenses (544) 536
Deferred maintenance revenue (275) (275)
Net liabilities of discontinued operations -- 206
------- -------
Total adjustments 280 (2,008)
------- -------
Net cash used by operating activities (1,331) (935)
------- -------
Cash flows from investing activities:
Capital expenditures (925) (652)
Purchase of AMT, net of cash received -- (1,915)
Purchase of Adra, net of cash received (112) --
Proceeds from sale of available-for-sale securities -- 810
Proceeds from sale of building 438 --
Loans to officers -- (368)
------- -------
Net cash used by investing activities (599) (2,125)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,097 10
Proceeds of capital lease obligations 205 --
Principal payments under capital lease obligations (149) 112
Proceeds from senior debt financing 9,000 --
Repayment of senior debt (750) --
Repayment of subordinated debt (6,900) --
Equity financing proceeds 3,000 --
Net borrowings (repayment) of line of credit (2,609) 2,464
------- -------
Net cash provided by financing activities 2,894 2,586
------- -------
Increase (decrease) in cash and cash equivalents 964 (474)
Cash and cash equivalents, beginning of period 429 580
------- -------
Cash and cash equivalents, end of period $ 1,393 $ 106
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Form 10-Q
Page 7
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(A) The consolidated condensed financial statements have been prepared 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.
(B) Details of certain balance sheet captions are as follows:
February 28, May 31,
1999 1998
-------- --------
Property and equipment $ 4,687 $ 3,737
Accumulated depreciation
And amortization (2,843) (1,457)
-------- --------
Property and equipment, net $ 1,844 $ 2,280
-------- --------
Common stock, $.10 par value $ 839 $ 679
Capital in excess of par value 14,650 10,703
Accumulated translation adjustment (18) --
Retained earnings (329) 1,282
Less treasury stock (1,482) (1,482)
-------- --------
Stockholders' equity $ 13,660 $ 11,182
-------- --------
At the Company's Annual Meeting on December 11, 1998, the Company's
Articles of Incorporation were amended to increase the authorized common
shares from 10 million to 20 million.
(C) EARNINGS PER SHARE
Basic income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Dilutive income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common and equivalent common shares outstanding. Employee
stock options and stock warrants are the Company's only common stock
equivalents and are included in the calculation only if dilutive.
(D) COMPREHENSIVE INCOME
At the beginning of fiscal 1999, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "REPORTING COMPREHENSIVE INCOME."
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS No.
130 had no impact on the Company's net earnings or stockholders' equity.
SFAS No. 130 requires any revenue, expenses, gains or losses that, prior to
adoption, were reported separately in stockholders' equity and excluded
from net earnings, to be included in other comprehensive income.
Total comprehensive income (loss) totaled $576 and $(1,593) for the third
quarter and year-to-date of 1999, respectively. Comprehensive income was
equal to net income for the third quarter and year-to-date of 1998. In
addition to net earnings, comprehensive income (loss) included foreign
currency translation gains of $(26) and $(18) for the third quarter and
year-to-date of 1999, respectively.
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Form 10-Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(E) NEW ACCOUNTING STANDARDS
Effective June 1, 1998, the Company adopted American Institute of Certified
Public Accountants Statement of Position 97-2, "Software Revenue
Recognition". The Statement requires each element of a software sale
arrangement to be separately identified and accounted for based on the
relative fair value of each element. Revenue cannot be recognized on any
element of the sale arrangement if undelivered elements are essential to
functionality of the delivered elements. The Statement replaces the
previous method of software revenue recognition, under which a distinction
was made between significant and insignificant post-shipment obligations
for revenue recognition purposes. Adoption of this new accounting standard
did not significantly affect the Company's results of operations for the
six months ended February 28, 1999, nor is it expected to have a
significant impact on results for the remainder of the year since the
Company's revenue recognition policies have historically been in
substantial compliance with the practices required by the new
pronouncement.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", defining which computer
software costs are to be capitalized and expensed. This statement is
effective fiscal year 2000 for the Company and will be implemented
effective June 1, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", requiring companies to recognize all
derivatives as either assets or liabilities on the balance sheet and to
measure the instruments at fair value. This statement is effective fiscal
year 2001 for the Company. The Company does not anticipate implementation
of either of these newly issued accounting pronouncements to have a
material impact on its consolidated operating results or financial
position.
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Form 10-Q
Page 9
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Description of the Business
As detailed in Management's Discussion and Analysis under the section
"Description of the Business" in the 1998 Annual Report on Form 10-K, the
Company completed two acquisitions of technology companies during the second
half of fiscal 1998 that significantly changed its business model. These two
technology company acquisitions were the Advanced Manufacturing Technology group
("AMT") in November 1997 and Adra Systems, Inc. ("ADRA") in May 1998. Note I to
the 1998 Annual Report on Form 10-K describes these acquisitions in detail.
During the first quarter of fiscal 1998, the Company's revenue was generated
primarily through the sale of Parametric Technology Corporation's ("PTC")
products. The Company had disclosed in its 1997 Annual Report on Form 10-K that
the loss of the PTC distribution agreement could have a material adverse impact
on the business. The distribution agreement expired on September 30, 1997 and
was not renewed. The acquisitions noted above provided the Company with
technology of its own to market in conjunction with its services offerings and
provided it with insulation from the risk noted in the 1997 Form 10-K.
The comparisons below of the first nine months of 1999 as compared to the first
nine months of 1998 reflect the significant transformation of the business from
the reseller business of Q1 1998 to the technology and service provider business
in 1999.
Results of Operations
Total revenue for the third quarter and year-to-date of 1999 was approximately
$8.9 million and $25.4 million, respectively, as compared to $5.2 million and
$14.3 million for the same periods in the prior fiscal year. This represents an
increase of 70.4% and 77.7% for the three and nine-month periods ended February
28, 1999 as compared to the same periods in fiscal 1998. Product revenue was
$4.3 million and $11.9 million for the three and nine-month periods ended
February 28, 1999, respectively, as compared to $2.8 million and $5.9 million
for the same periods in fiscal 1998, an increase of 57.2% and 102.0%. Service
revenue was $4.5 million and $13.5 million for the three and nine-month periods
ended February 28, 1999, respectively, as compared to $2.4 million and $8.4
million for the same periods in fiscal 1998, an increase of 85.3% and 60.8%. The
increases in product and service revenue in fiscal 1999 as compared to fiscal
1998 are due primarily to the acquisitions in November 1997 and May 1998 of AMT
and ADRA as described in the Company's Form 10-K filing (Item 1 "Product and
Services) for the year ended May 31, 1998. As detailed in that filing, these
acquisitions contributed greatly to the evolution of the business from that of a
reseller to an independent technology and service provider.
Product gross margin was 71.3% and 66.2 % for the third quarter and year-to-date
of 1999, respectively, as compared to 61.6% and 51.6% for the same periods in
fiscal 1998. The improved gross margins in fiscal 1999 as compared to fiscal
1998 are due to the increase in product revenue generated from the sale of the
Company's technology as a result of the acquisitions noted above. Service gross
margin was 68.7% and 54.7% for the three and nine-month periods ended February
28, 1999, respectively, as compared to 46.3% and 43.5% for the same periods in
fiscal 1998. The improved service gross margins are due primarily to the
amortization of software maintenance revenue in fiscal 1999 related to the two
technology acquisitions completed in the second half of fiscal 1998 as noted
previously.
Research and development expenditures totaled approximately $1.4 million and
$2.6 million for the third quarter and year-to-date of 1999. There were no
material research and development expenditures in the comparable periods of the
prior fiscal year in that the acquisitions of the technology companies occurred
in November 1997 and May 1998. Form 10-Q Page 10
<PAGE>
Form 10-Q
Page 10
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expense ("SG&A) was approximately $3.9
million and $12.9 million for the third quarter and year-to-date of 1999,
respectively, as compared to $2.4 million and $5.8 million for the same periods
in fiscal 1998. This represents an increase of approximately 58.1% for the three
month period ended February 28, 1999 as compared to the same period in fiscal
1998 and 123.7% for the nine-month period ended February 28, 1999 as compared to
the same period in fiscal 1998. The increased SG&A expenditures in fiscal 1999
relative to fiscal 1998 were due primarily to the increased costs associated
with the acquisitions of the two technology companies in the second half of
fiscal 1998 noted above. SG&A as a percent of revenue was 43.7% and 50.7% for
the three and nine-month periods ended February 28, 1999, respectively, as
compared to 47.0% and 40.3% for the three and nine-month periods ended February
28, 1998, respectively. As previously announced the Company reduced headcount in
North America in December 1998 to bring SG&A expense more in line with actual
revenue.
Interest expense was $368,000 and $1.2 million for the three and nine-month
periods ended February 28, 1999. The interest expense relates primarily to
monies borrowed to complete the acquisition of Adra Systems in May 1998 as noted
above. There was no interest expense incurred in fiscal 1998 related to the
continuing operations.
Provision for income taxes were $0 and $173,000 for the three and nine-month
periods ended February 28, 1999, respectively. No benefit was recognized related
to the current year loss because the realization of these tax benefits is
dependent upon the Company's ability to generate future taxable income.
Provision for income taxes was $11,000 and $111,000 for the three and nine-month
periods ended February 28, 1998, respectively, which include the benefit related
to the utilization of previously unrecognized net operating loss and other
credit carryforwards.
The net income (loss) for the third quarter and year-to-date of 1999 was
approximately $550,000 and $(1.6) million, respectively, or $.07 and $(.23) per
share. The net income for the same periods in fiscal 1998 was approximately
$373,000 and $1.1 million, respectively, or $.06 and $.18 per share.
Capital Resources and Liquidity
The Company ended the third quarter of fiscal 1999 with approximately $1.4
million in cash, an increase of approximately $1.0 million from year-end 1998.
This net increase in cash was the result of $2.9 million in cash provided by
financing activities, $1.3 million used by operating activities and $599,000
used by investing activities during the nine-month period ended February 28,
1999.
The significant components of the cash utilized by operating activities for the
nine month period ended February 28, 1999 were as follows: the net loss adjusted
for non-cash expenses (depreciation and amortization) totaled $1,079,000,
increases in current assets utilized $1,590,000 and decreases in current
liabilities utilized approximately $820,000.
The net cash utilized by investing activities was primarily related to capital
expenditures for equipment that were partially offset by the proceeds from the
sale of a building that was no longer in use by the Company.
The net cash provided by financing activities was composed primarily of stock
option exercises by employees totaling approximately $1.1 million, senior debt
financing of $9.0 million in July 1998 as detailed in Note F to the Form 10-K
for fiscal 1998, and $3.0 million in equity financing as detailed in the Form
8-K filed on November 4, 1998 with the Securities and Exchange Commission. These
sources of funds were offset by repayments of existing debt totaling
approximately $10.3 million.
<PAGE>
Form 10-Q
Page 11
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The total outstanding indebtedness under its senior and subordinated debt
facilities and its capital lease obligations is approximately $13.6 million as
of February 28, 1999 as compared to $14.8 million as of May 31, 1998. The
Company has fully utilized its borrowing capacity under its $3.0 million line of
credit. As of this filing the Company is current on all principal and interest
payments due under its senior and subordinated credit agreements including the
$375,000 principal payment made subsequent to the quarter ended February 28,
1999.
As previously disclosed in the 1998 Annual Report filed on Form 10-K and in the
Form 10-Q filed for the quarter ended November 30, 1998, the Company's Senior
Debt Facility required a minimum EBIT (earnings before interest and taxes) for
the third quarter of $1,250,000. The Company reported EBIT of $918,000 for the
third quarter of FY99 and is therefore in default of the Senior Debt Facility.
The Company is in discussions with the Senior Lender to enter into a forbearance
agreement to allow sufficient time to refinance the debt with an alternative
lender. In that regard the Company entered into a preliminary agreement with an
alternative lender and is reasonably optimistic that it can refinance the Senior
Lender's Debt on or before May 31, 1999.
The statements made above with respect to SofTech's outlook for fiscal 1999
represent "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities 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 to the
Company's CAD and CAM technologies, potential unfavorable outcome to existing
litigation, maintaining existing relationship with lenders while completing the
refinancing of the senior lender and the ability of the Company to attract and
retain qualified personnel both in our existing markets and in new office
locations.
<PAGE>
Form 10-Q
Page 12
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 28, 1999.
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, 1999 /s/ Joseph P. Mullaney
------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: April 14, 1999 /s/ Jan E. Yansak
------------------------------
Jan E. Yansak
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 1,393
<SECURITIES> 0
<RECEIVABLES> 10,966
<ALLOWANCES> (1,054)
<INVENTORY> 310
<CURRENT-ASSETS> 14,694
<PP&E> 4,687
<DEPRECIATION> 2,843
<TOTAL-ASSETS> 36,487
<CURRENT-LIABILITIES> 13,902
<BONDS> 0
0
0
<COMMON> 839
<OTHER-SE> 12,821
<TOTAL-LIABILITY-AND-EQUITY> 36,487
<SALES> 25,398
<TOTAL-REVENUES> 25,398
<CGS> 10,138
<TOTAL-COSTS> 25,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,186
<INCOME-PRETAX> (1,438)
<INCOME-TAX> 173
<INCOME-CONTINUING> (1,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,611)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
