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, 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 December 31,
1999 was 8,150,289 shares.
<PAGE>
Form 10-Q
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
November 30, 1999 and May 31, 1999 3
Consolidated Condensed Statements of Income -
Three and Six Months Ended November 30, 1999 and
November 30, 1998 4-5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended November 30, 1999 and
November 30, 1998 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
November 30, May 31,
1999 1999
(unaudited) (audited)
------------ ----------
ASSETS
Cash and cash equivalents $ 981 $ 1,600
Accounts receivable, net 7,137 8,237
Unbilled costs and fees 1,346 789
Inventory 128 335
Prepaid expenses and other assets 1,006 774
-------- --------
Total current assets 10,598 11,735
-------- --------
Property and equipment, net (Note B) 1,415 1,687
Capitalized software costs, net 12,465 12,714
Goodwill, net 5,290 5,987
Other assets 509 546
-------- --------
TOTAL ASSETS $ 30,277 $ 32,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,315 $ 2,924
Accrued expenses 1,155 2,167
Deferred maintenance revenue 2,193 4,725
Current portion of capital lease obligations 207 208
Current portion of long term debt 222 220
-------- --------
Total current liabilities 5,092 10,244
-------- --------
Capital lease obligations, net of current portion 206 215
Long-term debt, net of current portion 14,992 12,529
-------- --------
Total long-term debt 15,198 12,744
-------- --------
Stockholders' equity (Note B) 9,987 9,681
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,277 $ 32,669
======== ========
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,
1999 1998
-------------------- -------------------
<S> <C> <C>
Revenue
Products $ 3,043 $ 3,138
Services 2,481 4,368
------- -------
Total revenue 5,524 7,506
Cost of products sold 387 1,445
Cost of services provided 651 2,489
------- -------
Gross margin 4,486 3,572
Research and development expenses 1,177 1,380
Selling, general and administrative 2,705 4,635
------- -------
Income (loss) from operations 604 (2,443)
Interest expense, net 336 405
------- -------
Income (loss) from operations before income taxes 268 (2,848)
Provision for income taxes 58 --
------- -------
Net income (loss) $ 210 $(2,848)
======= =======
Basic net income (loss) per common share $ 0.03 $ (0.39)
Weighted average common shares outstanding 8,150 7,297
Diluted net income (loss) per common share $ 0.03 $ (0.39)
Weighted average dilutive common share equivalents outstanding 8,185 7,297
</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)
Three Months Ended
-----------------------------------------
November 30, November 30,
1999 1998
-------------------- -------------------
<S> <C> <C>
Revenue
Products $ 6,912 $ 7,527
Services 5,994 9,017
------- -------
Total revenue 12,906 16,544
Cost of products sold 1,407 2,762
Cost of services provided 1,642 4,721
------- -------
Gross margin 9,857 9,061
Research and development expenses 2,715 2,269
Selling, general and administrative 5,952 7,962
------- -------
Income (loss) from operations 1,190 (1,170)
Interest expense, net 729 818
------- -------
Income (loss) from operations before income taxes 461 (1,988)
Provision for income taxes 103 173
------- -------
Net income (loss) $ 358 $(2,161)
======= =======
Basic net income (loss) per common share $ 0.04 $ (0.31)
Weighted average common shares outstanding 8,150 6,956
Diluted net income (loss) per common share $ 0.04 $ (0.31)
Weighted average dilutive common share equivalents outstanding 8,213 6,956
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Form 10-Q
Page 6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Six Months Ended
--------------------------
November 30, November 30,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 358 $ (2,161)
-------- --------
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 1,874 1,732
Gain on sale of fixed assets (7) --
Change in current assets and liabilities:
Accounts receivable 1,100 93
Unbilled costs and fees (557) (117)
Inventory 136 (81)
Prepaid expenses and other assets (195) (124)
Accounts payable and accrued expenses (2,621) (161)
Deferred maintenance revenue (2,532) (1,458)
-------- --------
Total adjustments (2,802) (116)
-------- --------
Net cash used by operating activities (2,444) (2,277)
-------- --------
Cash flows used by investing activities:
Capital expenditures (586) (687)
Proceeds from sale of fixed assets 15 --
Purchase of ADRA, net of cash received -- (144)
-------- --------
Net cash used by investing activities (571) (831)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 1,089
Proceeds of capital lease obligations 97 205
Principal payments under capital lease obligations (107) (94)
Proceeds from Greenleaf financing 10,475 --
Principal payments under senior debt financing (194) --
Proceeds from (repayment of) Imperial debt (7,875) 8,625
Repayment of subordinated debt -- (6,900)
Equity financing proceeds -- 3,000
Net repayment of line of credit -- (2,609)
-------- --------
Net cash provided by financing activities 2,396 3,316
-------- --------
Increase (decrease) in cash and cash equivalents (619) 208
Cash and cash equivalents, beginning of period 1,600 429
-------- --------
Cash and cash equivalents, end of period $ 981 $ 637
======== ========
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,
1999 1999
------------ ----------
Property and equipment $ 4,184 $ 4,028
Accumulated depreciation
And amortization (2,769) (2,341)
-------- --------
Property and equipment, net $ 1,415 $ 1,687
-------- --------
Common stock, $.10 par value $ 859 $ 859
Capital in excess of par value 14,742 14,790
Other accumulated comprehensive loss (22) (18)
Retained deficit (4,110) (4,468)
Less treasury stock (1,482) (1,482)
-------- --------
Stockholders' equity $ 9,987 $ 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.
November 30, November 30,
1999 1998
---- ----
Basic weighted average shares outstanding
during the quarter 8,150,289 7,297,212
Effect of employee stock options 34,461 --
--------- ---------
Diluted 8,184,750 7,297,212
========= =========
(D) COMPREHENSIVE INCOME (LOSS)
Other accumulated comprehensive loss represents accumulated foreign
currency translation adjustments at November 30, 1999 and May 31, 1999.
Comprehensive income (loss) for the six months ended November 30, 1999 and
November 30, 1998 was $354 and $(2,153), respectively, and included net
income (loss) and translation gains (losses) for the respective periods.
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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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30, November 30, November 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
North America $ 4,800 $ 6,666 $ 11,341 $ 14,970
Europe 891 1,034 1,911 1,947
Eliminations (167) (194) (346) (373)
-------- -------- -------- --------
Consolidated Total $ 5,524 $ 7,506 $ 12,906 $ 16,544
======== ======== ======== ========
</TABLE>
November 30, May 31,
1999 1999
---- ----
Long-Lived Assets:
North America $ 19,375 $ 20,642
Europe 304 292
-------- --------
Consolidated Total $ 19,679 $ 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.
<PAGE>
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 six month periods ended November 30, 1999 was
$5.5 million and $12.9 million, respectively, as compared to $7.5 million and
$16.5 million, respectively, for the same periods in the prior fiscal year. This
represents a decrease from fiscal 1999 to fiscal 2000 of $2.0 million or 26.4%
and $3.6 million or 22.0% for the three and six month periods, respectively.
Product revenue decreased by approximately $95,000 in the second quarter of
fiscal 2000 as compared to the same period in the prior year or about 3% and
decreased by about $615,000 or 8.2% for the six month period. Service revenue
decreased by about $1.9 million or 43.2% in the second quarter of fiscal 2000 as
compared to the second quarter of fiscal 1999 and by about $3.0 million or 33.5%
for the six 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 six month periods ended November 30, 1999
was $2.6 million and $5.4 million, respectively, as compared to $1.7 million and
$4.3 million in the same periods in the prior fiscal year. Revenue from the sale
of third party hardware and software in the three and six month periods ended
November 30, 1999 was $0.4 million and $1.6 million, respectively, as compared
to $1.4 million and $3.3 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. In the current quarter the $95,000
net decrease in product revenue was composed of an increase of $0.9 million in
the sale of the Company's high margin technology that was offset by a decrease
of $1.0 million in the sale of lower margin third party hardware and software.
We expect this trend to continue in the comparative income statement with the
third and fourth quarters of fiscal 1999.
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 six month periods ended November 30, 1999 software maintenance revenue on
our proprietary technology was $1.9 million and $4.1 million, respectively, as
compared to $2.1 million and $4.7 million for the same periods in fiscal 1999.
Service revenue generated from the engineering services group for the three and
six month periods ended November 30, 1999 was $0.6 million and $1.5 million,
respectively, as compared to $2.1 million and $3.9 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 six month periods ended November 30, 1999
was $2.7 million and $5.5 million, respectively, as compared to $1.7 million and
$4.8 million for the same periods in fiscal 1999. Gross margin as a percent of
revenue for the three and six month periods ended November 30, 1999 was 87.3%
and 79.6%, respectively, as compared to 54.0% and 63.3% for the same periods in
fiscal 1999. The improvement in both gross margin dollars generated and 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 six month periods ended November 30, 1999
was $1.8 million and $4.4 million, respectively, as compared to $1.9 million and
$4.3 million in the same periods in fiscal 1999. Service gross margin as a
percent of revenue for the three and six month periods ended
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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
November 30, 1999 was 73.8% and 72.6%, respectively as compared to 43.0% and
47.6% for the same periods in fiscal 1999.
Research and development expenditures for the three and six month periods ended
November 30, 1999 were $1.2 million and $2.7 million, respectively, as compared
to $1.4 million and $2.3 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 six month level for the foreseeable future.
Selling, general and administrative expenditures ("SG&A") for the three and six
month periods ended November 30, 1999 were $2.7 million and $6.0 million,
respectively, as compared to $4.6 million and $8.0 million for the same periods
in fiscal 1999. This represents a decrease of 41.6% and 25.2% for the three and
six month periods ended November 30, 1999 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 income for the three and six month periods ended November 30, 1999 was
$210,000 or $.03 per share and $358,000 or $.04 per share, respectively, as
compared to a net loss of $(2.8) million or $(.39) per share and $(2.2) million
or $(.31) per share for the same periods in the prior fiscal year.
Capital Resources and Liquidity
Net cash used by operating activities for the six month period ended November
30, 1999 was $2.4 million. Net income adjusted for non-cash expenditures
generated cash of approximately $2.2 million and the net reduction of billed and
unbilled accounts receivable generated cash of about $543,000. Accounts payable
and accrued expenses were reduced by approximately $2.6 million and deferred
maintenance revenue was reduced by about $2.5 million, which accounted for the
majority of cash utilization during the period.
Net cash used by investing activities during the six month period ended November
30, 1999 was $571,000, which was primarily composed of capital expenditures.
Capital expenditures in the same period of the prior fiscal year were $687,000.
Net cash provided by financing activities for the six month period ended
November 30, 1999 was $2.4 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. During the current quarter the Company borrowed an additional $1.2
million under its line of credit to finance its operations.
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 obsolesce to 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.
<PAGE>
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 November 30, 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: January 14, 2000 /s/ Joseph P. Mullaney
------------------------- -------------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: January 14, 2000 /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-31-2000
<PERIOD-END> NOV-30-1999
<CASH> 981
<SECURITIES> 0
<RECEIVABLES> 7,557
<ALLOWANCES> (420)
<INVENTORY> 128
<CURRENT-ASSETS> 10,598
<PP&E> 4,184
<DEPRECIATION> 2,769
<TOTAL-ASSETS> 30,277
<CURRENT-LIABILITIES> 5,092
<BONDS> 0
0
0
<COMMON> 859
<OTHER-SE> 9,128
<TOTAL-LIABILITY-AND-EQUITY> 30,277
<SALES> 12,906
<TOTAL-REVENUES> 12,906
<CGS> 3,049
<TOTAL-COSTS> 11,716
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 729
<INCOME-PRETAX> 461
<INCOME-TAX> 103
<INCOME-CONTINUING> 358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
