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
November 30, 1998 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 November 30,
1998 was 7,998,623 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
November 30, 1998 and May 31, 1998 3
Consolidated Condensed Statements of Income -
Three and Six Months Ended November 30, 1998 and
November 30, 1997 4-5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended November 30, 1998 and
November 30, 1997 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
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Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
November 30, May 31,
1998 1998
(unaudited) (audited)
----------- -----------
ASSETS
Cash and cash equivalents $ 637 $ 429
Accounts receivable, net 9,197 9,290
Unbilled costs and fees 1,270 1,153
Inventory 419 338
Prepaid expenses and other assets 963 886
Deferred income taxes 125 125
-------- --------
Total current assets 12,611 12,221
-------- --------
Property and equipment, net (Note B) 2,470 2,280
Capitalized software costs, net 13,324 13,816
Goodwill, net 6,666 7,252
Other assets 506 491
-------- --------
TOTAL ASSETS $ 35,577 $ 36,060
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable, line of credit $ 3,000 $ 2,609
Accounts payable 3,726 2,386
Accrued expenses 2,382 3,805
Deferred maintenance revenue 2,064 3,522
Net liabilities of discontinued operations 260 338
Current portion of capital lease obligations 228 180
Current portion of long term debt 1,449 6,900
-------- --------
Total current liabilities 13,109 19,740
-------- --------
Capital lease obligations, net of current portion 301 238
Long-term debt, net of current portion 9,033 4,900
-------- --------
Total long-term debt 9,334 5,138
-------- --------
Stockholders' equity (Note B) 13,134 11,182
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,577 $ 36,060
======== ========
See accompanying notes to consolidated condensed financial statements.
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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
-----------------------------------------
November 30, November 30,
1998 1997
------------- ------------
<S> <C> <C>
Revenue
Products $ 3,138 $ 1,688
Services 4,368 3,012
------- -------
Total revenue 7,506 4,700
Cost of products sold 1,445 944
Cost of services provided 2,489 1,720
------- -------
Gross margin 3,572 2,036
Research and development expenses 784 --
Selling, general and administrative 5,231 1,693
------- -------
Income (loss) from operations (2,443) 343
Interest expense 405 --
------- -------
Income (loss) from operations before income taxes (2,848) 343
Provision for income taxes -- 20
------- -------
Net income (loss) $(2,848) $ 323
======= =======
Basic net income (loss) per common share $ (0.39) $ 0.06
Weighted average common shares outstanding 7,297 5,389
Dilutive net income (loss) per common share $ (0.39) $ 0.06
Weighted average diluted common share equivalents outstanding 7,297 5,598
</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 INCOME
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except for per share data)
Six Months Ended
----------------------------------------
November 30, November 30,
1998 1997
------------- ------------
<S> <C> <C>
Revenue
Products $ 7,527 $ 3,114
Services 9,017 5,980
-------- --------
Total revenue 16,544 9,094
Cost of products sold 2,762 1,785
Cost of services provided 4,721 3,447
-------- --------
Gross margin 9,061 3,862
Research and development expenses 1,332 --
Selling, general and administrative 8,899 3,314
-------- --------
Income (loss) from operations (1,170) 548
Interest expense 818 --
Gain on available-for-sale securities -- 253
-------- --------
Income (loss) from operations before income taxes (1,988) 801
Provision for income taxes 173 100
-------- --------
Net income (loss) $ (2,161) $ 701
======== ========
Basic net income per common share $ (0.31) $ 0.13
Weighted average common shares outstanding 6,956 5,312
Dilutive net income per common share $ (0.31) $ 0.13
Weighted average diluted common share equivalents outstanding 6,956 5,540
</TABLE>
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 CASH FLOWS
<TABLE>
<CAPTION>
(dollars in thousands)
Six Months Ended
--------------------------------
November 30, November 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,161) $ 701
------- -------
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 1,732 682
Gain on sale of available-for-sale securities -- (253)
Change in current assets and liabilities:
Accounts receivable 93 (1,291)
Unbilled costs and fees (117) (1,368)
Inventory (81) 326
Prepaid expenses and other assets (124) (233)
Accounts payable and accrued expenses (83) 637
Deferred maintenance revenue (1,458) (171)
Net liabilities of discontinued operations (78) (23)
------- -------
Total adjustments (116) (1,694)
------- -------
Net cash used by operating activities (2,277) (993)
------- -------
Cash flows from investing activities:
Capital expenditures (687) (270)
Purchase of AMT, net of cash received -- (1,850)
Purchase of Adra, net of cash received (144) --
Proceeds from sale of available-for-sale securities -- 810
Loans to officers -- (358)
------- -------
Net cash used by investing activities (831) (1,668)
------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,089 --
Proceeds of capital lease obligations 205
Principal payments under capital lease obligations (94) 156
Proceeds from senior debt financing 9,000 --
Repayment of senior debt (375) --
Repayment of subordinated debt (6,900) --
Equity financing proceeds 3,000 --
Repayment of line of credit (2,609) 1,925
------- -------
Net cash provided by financing activities 3,316 2,081
------- -------
Increase (decrease) in cash and cash equivalents 208 (580)
Cash and cash equivalents, beginning of period 429 580
------- -------
Cash and cash equivalents, end of period $ 637 $ --
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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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:
November 30, May 31,
1998 1998
----------- --------
Property and equipment $ 4,438 $ 3,737
Accumulated depreciation
And amortization (1,968) (1,457)
-------- --------
Property and equipment, net $ 2,470 $ 2,280
-------- --------
Common stock, $.10 par value $ 839 $ 679
Capital in excess of par value 14,647 10,703
Accumulated translation adjustment 8 --
Retained earnings (878) 1,282
Less treasury stock (1,482) (1,482)
-------- --------
Stockholders' equity $ 13,134 $ 11,182
-------- --------
(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 $(2,840) and $(2,153) for the
second quarter and year-to-date of 1999, respectively. Comprehensive income
was equal to net income for the second quarter and year-to-date of 1999. In
addition to net earnings, comprehensive income (loss) included foreign
currency translation gains of $8 for the second quarter and year-to-date of
1999.
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Form 10-Q
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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 November 30, 1998, 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 six months of 1999 as compared to the
first six 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 second quarter and year-to-date of 1999 was
approximately $7.5 million and $16.5 million, respectively, as compared to
$4.7 million and $9.1 million for the same periods in the prior fiscal
year. This represents an increase of 59.7% and 81.9% for the three and six
-month periods ended November 30, 1998 as compared to the same periods in
fiscal 1998. Product revenue was $3.1 million and $7.5 million for the
three and six-month periods ended November 30, 1998, respectively, as
compared to $1.7 million and $3.1 million for the same periods in fiscal
1998, an increase of 85.9% and 141.7%. Service revenue was $4.4 million and
$9.0 million for the three and six-month periods ended November 30, 1998,
respectively, as compared to $3.0 million and $6.0 million for the same
periods in fiscal 1998, an increase of 45.0% and 50.8%. 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 54.0% and 63.3 % for the second quarter and
year-to-date of 1999, respectively, as compared to 44.1% and 42.7% 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 43.0% and 47.6% for the
three and six-month periods ended November 30, 1998, respectively, as
compared to 42.9% and 42.4% for the same periods in fiscal 1998.
Research and development expenditures totaled approximately $784,000 and
$1.3 million for the second 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.
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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 $5.2
million and $8.9 million for the second quarter and year-to-date of 1999,
respectively, as compared to $1.7 million and $3.3 million for the same
periods in fiscal 1998. This represents an increase of approximately 209%
or the three month period ended November 30, 1998 as compared to the same
period in fiscal 1998 and 169% for the six month period ended November 30,
1998 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. The business model
anticipated revenue and gross margin increases to support this increased
SG&A spending. In December 1998 the Company reduced its headcount by
approximately 25% in North America in order to bring the SG&A expenditures
more in line with the revenue anticipated for the remainder of the fiscal
year.
Provision for income taxes were $0 and $173 for the three and six-month
periods ended November 30, 1998, respectively. No benefit was recognized
related to losses reported in the second quarter because the realization of
these tax benefits is dependent upon the Company's ability to generate
future taxable income. Provision for income taxes was $20 and $100 for the
three and six month periods ended November 30, 1997, respectively, which
include the benefit related to the utilization of previously unrecognized
net operating loss and other credit carryforwards.
The net loss for the second quarter and year-to-date of 1999 was
approximately $2.8 million and $2.2 million, respectively, or $.39 and $.31
per share. The net income for the same periods in fiscal 1998 was
approximately $323,000 and $701,000, respectively, or $.06 and $.13 per
share.
Capital Resources and Liquidity
The Company ended the second quarter with approximately $637,000 in cash,
an increase of approximately $208,000. This net increase in cash was the
result of $3.3 million in cash provided from financing activities, $2.3
million used by operating activities and $831,000 used by investing
activities during the six month period ended November 30, 1998.
The significant components of the cash utilized by operating activities for
the six month period ended November 30, 1998 was as follows: the net loss
adjusted for non-cash expenses (depreciation and amortization) totaled
$429,000, increases in current assets utilized $229,000 and decreases in
current liabilities utilized approximately $1.6 million.
The net cash utilized by investing activities was primarily related to
capital expenditures for equipment.
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 $9.5 million.
As of this filing, the Company is in compliance with its debt covenants and
is current on all principal and interest payments. The total outstanding
indebtedness under its senior and subordinated debt facilities and its
capital lease obligations is approximately $14.0 million as of November 30,
1998 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. For
the third quarter ended February 28, 1998 the Company must earn a minimum
of $1,250,000 before interest and taxes to remain in compliance with its
financial debt covenants under the senior debt facility. While it is the
Company's expectation that, based on end of quarter backlog, sales
forecasts and reduced expenditures resulting from the December staff
reduction
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Form 10-Q
Page 11
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
noted above, it will attain this profitability requirement, failure to do
so could result in default under the senior debt facility.
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, remaining in compliance with debt covenants 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
The Company filed a Form 8-K with the Securities and Exchange Commission
dated October 26, 1998 providing information regarding the issuance of
shares in a private placement to Greenleaf Asset Management.
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: January 14, 1999 /s/ Joseph P. Mullaney
------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: January 14, 1999 /s/ Jan E. Yansak
------------------------------
Jan E. Yansak
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> May-31-1999
<PERIOD-END> Nov-30-1998
<CASH> 637
<SECURITIES> 0
<RECEIVABLES> 11,891
<ALLOWANCES> (1,424)
<INVENTORY> 419
<CURRENT-ASSETS> 12,611
<PP&E> 4,438
<DEPRECIATION> 1,968
<TOTAL-ASSETS> 35,577
<CURRENT-LIABILITIES> 13,109
<BONDS> 0
839
0
<COMMON> 0
<OTHER-SE> 12,295
<TOTAL-LIABILITY-AND-EQUITY> 35,577
<SALES> 16,544
<TOTAL-REVENUES> 16,544
<CGS> 7,483
<TOTAL-COSTS> 17,714
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 818
<INCOME-PRETAX> (1,988)
<INCOME-TAX> 173
<INCOME-CONTINUING> (2,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,161)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
