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
August 31, 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 September 30,
1999 was 8,150,289 shares.
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Form 10-Q
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SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
August 31, 1999 and May 31, 1999 3
Consolidated Condensed Statements of Income -
Three Months Ended August 31, 1999 and
August 31, 1998 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended August 31, 1999 and
August 31, 1998 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
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Form 10-Q
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PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
August 31, May 31,
1999 1999
(unaudited) (audited)
----------- -----------
ASSETS
Cash and cash equivalents $ 636 $ 1,600
Accounts receivable, net 7,820 8,237
Unbilled costs and fees 890 789
Inventory 440 335
Prepaid expenses and other assets 878 774
----------- -----------
Total current assets 10,664 11,735
----------- -----------
Property and equipment, net (Note B) 1,527 1,687
Capitalized software costs, net 12,536 12,714
Goodwill, net 5,644 5,987
Other assets 505 546
----------- -----------
TOTAL ASSETS $ 30,876 $ 32,669
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,059 $ 2,924
Accrued expenses 1,523 2,167
Deferred maintenance revenue 2,872 4,725
Current portion of capital lease obligations 222 208
Current portion of long term debt 228 220
----------- -----------
Total current liabilities 6,904 10,244
----------- -----------
Capital lease obligations, net of current portion 180 215
Long-term debt, net of current portion 13,944 12,529
----------- -----------
Total long-term debt 14,124 12,744
----------- -----------
Stockholders' equity (Note B) 9,848 9,681
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,876 $ 32,669
=========== ===========
See accompanying notes to consolidated condensed financial statements.
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Form 10-Q
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SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except for per share data)
Three Months Ended
-----------------------------------------
August 31, August 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenue
Products $ 3,869 $ 4,389
Services 3,513 4,649
----------- -----------
Total revenue 7,382 9,038
Cost of products sold 1,020 1,119
Cost of services provided 991 2,232
----------- -----------
Gross margin 5,371 5,687
Research and development expenses 1,538 956
Selling, general and administrative 3,247 3,458
----------- -----------
Income from operations 586 1,273
Interest expense 393 413
----------- -----------
Income from operations before income taxes 193 860
Provision for income taxes 45 173
----------- -----------
Net income $ 148 $ 687
=========== ===========
Basic net income per common share $ 0.02 $ 0.10
Weighted average common shares outstanding 8,150 6,618
Diluted net income per common share $ 0.02 $ 0.10
Weighted average dilutive common share equivalents outstanding 8,390 7,121
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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Form 10-Q
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(dollars in thousands)
Three Months Ended
------------------------
August 31, August 31,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 148 $ 687
---------- ----------
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 952 744
Gain on sale of fixed assets (7) --
Change in current assets and liabilities:
Accounts receivable 417 345
Unbilled costs and fees (101) (726)
Inventory (105) 115
Prepaid expenses and other assets (63) (537)
Accounts payable and accrued expenses (1,509) (1,350)
Deferred maintenance revenue (1,853) (963)
---------- ----------
Total adjustments (2,269) (2,372)
---------- ----------
Net cash used by operating activities (2,121) (1,685)
---------- ----------
Cash flows used by investing activities:
Capital expenditures (237) (216)
Proceeds from sale of fixed assets 15 --
---------- ----------
Net cash used by investing activities (222) (216)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 1,062
Principal payments under capital lease obligations (21) --
Proceeds from Greenleaf financing 9,275 --
Proceeds from (repayment of) Imperial debt (7,875) 9,000
Repayment of subordinated debt -- (5,400)
Net repayment of line of credit -- (2,609)
---------- ----------
Net cash provided by financing activities 1,379 2,053
---------- ----------
Increase (decrease) in cash and cash equivalents (964) 152
Cash and cash equivalents, beginning of period 1,600 429
---------- ----------
Cash and cash equivalents, end of period $ 636 $ 581
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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Form 10-Q
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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:
August 31, May 31,
1999 1999
---------- --------
Property and equipment $ 4,118 $ 4,028
Accumulated depreciation
And amortization (2,591) (2,341)
---------- --------
Property and equipment, net $ 1,527 $ 1,687
---------- --------
Common stock, $.10 par value $ 859 $ 859
Capital in excess of par value 14,742 14,790
Other accumulated comprehensive loss (16) (18)
Retained deficit (4,255) (4,468)
Less treasury stock (1,482) (1,482)
---------- --------
Stockholders' equity $ 9,848 $ 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.
August 31, August 31,
1999 1998
---------- ----------
Basic weighted average shares outstanding
during the quarter 8,150,289 6,617,845
Effect of employee stock options 239,400 502,839
---------- ----------
Diluted 8,389,689 7,120,684
========== ==========
(D) COMPREHENSIVE INCOME
Other accumulated comprehensive loss represents accumulated translation
adjustments at August 31, 1999 and May 31, 1999. First quarter
comprehensive income was $132 and $669 in fiscal 2000 and 1999,
respectively, and included net income and translation losses for the
respective quarters.
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Form 10-Q
Page 7
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 Three Months
Ended August 31, Ended August 31,
Revenue: 1999 1998
---- ----
North America $ 6,541 $ 8,304
Europe 1,020 913
Eliminations (179) (179)
----------- -----------
Consolidated Total $ 7,382 $ 9,038
=========== ===========
August 31, May 31,
Long-Lived Assets: 1999 1999
---- ----
North America $ 19,898 $ 20,642
Europe 313 292
----------- -----------
Consolidated Total $ 20,211 $ 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.
(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.
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Form 10-Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenue for the three months ended August 31, 1999 was approximately
$7.4 million, a decrease of about 18% from the $9.0 million in the first
quarter of fiscal year 1999. Product revenue was about $3.9 million for
the current quarter as compared to $4.4 million in the same period last
year, a decrease of about 12%. Service revenue was $3.5 million in the
current quarter as compared to about $4.6 million in fiscal 1999, a
decrease of about 24%.
Product revenue is composed of two distinct components: the Company's
technology and third party technology. Third party technology includes
hardware and software. The decrease in product revenue from fiscal year
1999 is due to less revenue generated in the current fiscal year from the
sale of third party products. For Q1FY 2000 revenue from hardware and
third party software was $1.0 million as compared to $1.8 million in the
prior fiscal year. The Company expects that the trend of decreased sales
of third party software and hardware will continue during the remainder of
the fiscal year.
Service revenue is composed of two distinct components: maintenance
revenue on software and engineering services. The decrease in service
revenue in Q1 FY 2000 as compared to fiscal 1999 is due to a significant
reduction in revenue generated from the Company's engineering services
group. For Q1 FY 2000 the engineering services group generated $800,000 as
compared to $1.74 million in fiscal 1999. The Company has experienced
significant turnover in the management of the engineering services group
during the later part of fiscal 1999 as more effort has been focused on
higher level consulting revenue rather than hourly projects, which are
sold at lower gross margins. As a result, gross margin as a percent of
revenue during the first quarter of fiscal 2000 has improved relative to
the same period in fiscal 1999.
Product gross margin as a percent of revenue was 73.6% for the first
quarter of fiscal 2000 as compared to 74.5% for the same period in fiscal
1999. The gross margin generated on service revenue for the first quarter
of fiscal 2000 was 71.8% as compared to about 52.0% for the same period in
fiscal 1999. Overall gross margin as a percent of revenue increased to
72.8% in the current quarter as compared to 62.9% in the same period of
fiscal 1999.
Research and development expense for the first quarter of fiscal 2000 was
approximately $1.5 million as compared to approximately $1.0 million in
fiscal 1999, an increase of approximately 61%. The increased expenditures
are the result of continued enhancements to the Cadra product line through
release of version 11.0 during the current quarter as well as enhancements
to the Prospector and ToolDesigner product lines. It is expected that the
current quarter expenditures will be somewhat constant for the remainder
of fiscal 2000.
Selling, general and administrative expenses totaled approximately $3.2
million in the first quarter of fiscal 2000, a decrease of approximately
6% from the fiscal 1999 first quarter SG&A expenditures. SG&A amounted to
44.0% of total revenue in Q1 2000 as compared to 38.3% in the same quarter
in fiscal 1999.
Interest expense for the first quarter of fiscal year 2000 was $393,000 as
compared to approximately $413,000 for the same period in the prior fiscal
year, a decrease of approximately 5%. The decrease is a combination of
lower net borrowings during the current quarter as compared to the same
period in the prior fiscal year and a slightly lower combined borrowing
rate.
The tax provision in the current quarter was $45,000 as compared to
$173,000 in the same period of the prior fiscal year. The effective tax
rate for the current quarter was 23.3% as compared to 20.1% in the
comparable quarter of the prior fiscal year. The current year tax
provision is composed primarily of
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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
a provision related to foreign tax. The tax provision in the first quarter
of the prior fiscal year was related primarily to state and local taxes.
The Company has recorded no provision for U.S. federal income taxes for
the first quarters of fiscal 2000 and 1999 as a result of expected
utilization of previously unrecognized net operating loss carryovers.
Capital Resources and Liquidity
The Company ended the first quarter of fiscal year 2000 with cash of
approximately $636,000, a decrease of $964,000 from year-end 1999.
Operating activities used approximately $2.1 million of cash during the
first quarter. Reductions in liabilities used nearly $3.4 million that was
partially offset by $1.1 million provided from net income adjusted for
non-cash expenses and approximately $300,000 provided from a reduction in
accounts receivables. Investing activities used approximately $222,000
during the first quarter primarily in capital expenditures. Financing
activities provided approximately $1.4 million during the quarter through
additional net borrowings from the Greenleaf line of credit following the
refinancing of the Imperial Bank senior debt.
The Company believes that the cash on hand together with cash flow from
operations and the available credit facility will be sufficient for
meeting its liquidity and capital resource needs for the next year. 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. At August 31, 1999, the Company had available borrowings on its line
of credit of $1,725,000.
The statements made above with respect to SofTech's outlook for fiscal
2000 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 relationships with lenders 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 10
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 August 31, 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: October 13, 1999 /s/ Joseph P. Mullaney
-------------------- -----------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: October 13, 1999 /s/ Jan E. Yansak
-------------------- -----------------------------------
Jan E. Yansak
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> AUG-31-1999
<CASH> 636
<SECURITIES> 0
<RECEIVABLES> 8,240
<ALLOWANCES> (420)
<INVENTORY> 440
<CURRENT-ASSETS> 10,664
<PP&E> 4,118
<DEPRECIATION> 2,591
<TOTAL-ASSETS> 30,876
<CURRENT-LIABILITIES> 6,904
<BONDS> 0
0
0
<COMMON> 859
<OTHER-SE> 8,989
<TOTAL-LIABILITY-AND-EQUITY> 30,876
<SALES> 7,382
<TOTAL-REVENUES> 7,382
<CGS> 2,011
<TOTAL-COSTS> 6,796
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 393
<INCOME-PRETAX> 193
<INCOME-TAX> 45
<INCOME-CONTINUING> 148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
