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, 2001 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, 2001
was 10,080,784 shares.
Form 10-Q
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information PAGE NUMBER
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
February 28, 2001 and May 31, 2000 3
Consolidated Condensed Statements of Income -
Three Months and Nine Months Ended February 28,
2001 and 2000 4-5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended February 28, 2001 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
FEBRUARY 28, MAY 31,
2001 2000
(UNAUDITED) (AUDITED)
------------ -------------
ASSETS
Cash and cash equivalents $ 695 $ 1,278
Accounts receivable, net 3,632 4,670
Unbilled costs and fees 375 316
Inventory 25 54
Prepaid expenses and other assets 486 644
------- -------
Total current assets 5,213 6,962
------- -------
Property and equipment, net (Note B) 830 1,210
Capitalized software costs, net 11,380 12,577
Goodwill, net 4,020 4,718
Other assets 569 550
------- -------
TOTAL ASSETS $22,012 $26,017
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,008 $ 1,068
Accrued expenses 837 1,916
Deferred maintenance revenue 3,208 3,712
Current portion of capital lease obligations 63 127
Current portion of long term debt 445 328
------- -------
Total current liabilities 5,561 7,151
------- -------
Capital lease obligations, net of current portion 122 169
Long-term debt, net of current portion 11,001 9,894
------- -------
Total long-term debt 11,123 10,063
------- -------
Stockholders' equity (Note B) 5,328 8,803
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,012 $26,017
======= =======
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 28, FEBRUARY 29,
2001 2000
------------------- -------------------
Revenue
Products $ 949 $ 1,619
Services 1,738 2,341
-------- --------
Total revenue 2,687 3,960
Cost of products sold 56 327
Cost of services provided 241 576
-------- --------
Gross margin 2,390 3,057
Research and development expenses 1,306 1,118
Selling, general and administrative 2,474 3,368
-------- --------
Loss from operations (1,390) (1,429)
Interest expense, net 345 493
-------- --------
Loss from operations before income taxes (1,735) (1,922)
Provision for income taxes -- --
-------- --------
Net loss $ (1,735) $ (1,922)
======== ========
Basic net loss per common share $ (0.17) $ (0.23)
Weighted average common shares outstanding 10,081 8,191
Diluted net loss per common share $ (0.17) $ (0.23)
Weighted average dilutive common share equivalents outstanding 10,081 8,191
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 28, February 29,
2001 2000
------------------- -------------------
Revenue
Products $ 4,505 $ 8,531
Services 5,841 8,335
-------- --------
Total revenue 10,346 16,866
Cost of products sold 400 1,734
Cost of services provided 1,000 2,218
-------- --------
Gross margin 8,946 12,914
Research and development expenses 3,856 3,833
Selling, general and administrative 7,570 9,320
-------- --------
Loss from operations (2,480) (239)
Interest expense, net 981 1,222
-------- --------
Loss from operations before income taxes (3,461) (1,461)
Provision for income taxes -- 103
-------- --------
Net loss $ (3,461) $ (1,564)
======== ========
Basic net loss per common share $ (0.33) $ (0.19)
Weighted average common shares outstanding 10,463 8,192
Diluted net loss per common share $ (0.33) $ (0.19)
Weighted average dilutive common share equivalents outstanding 10,463 8,192
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 28, February 29,
2001 2000
---------------- -----------------
Cash flows from operating activities:
Net loss $(3,461) $(1,564)
------- -------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 2,350 2,556
Change in current assets and liabilities:
Accounts receivable 1,038 1,355
Unbilled costs and fees (59) (327)
Inventory 29 138
Prepaid expenses and other assets 139 (71)
Accounts payable and accrued expenses (1,139) (2,556)
Deferred maintenance revenue (504) (1,476)
------- -------
Total adjustments 1,854 (381)
------- -------
Net cash used by operating activities (1,607) (1,945)
------- -------
Cash flows used by investing activities:
Capital expenditures (89) (900)
Proceeds from sale of fixed assets -- 16
------- -------
Net cash used by investing activities (89) (884)
------- -------
Cash flows from financing activities:
Proceeds of capital lease obligations -- 97
Principal payments under capital lease obligations (111) (181)
Proceeds from senior debt financing, net of repayments 1,224 2,398
------- -------
Net cash provided by financing activities 1,113 2,314
------- -------
Decrease in cash and cash equivalents (583) (515)
Cash and cash equivalents, beginning of period 1,278 1,600
------- -------
Cash and cash equivalents, end of period $ 695 $ 1,085
======= =======
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 fiscal year 2000 Annual Report on Form 10-K.
(B) BALANCE SHEET
Details of certain balance sheet captions are as follows (in
thousands):
February 28, May 31,
2001 2000
--------------- ---------------
Property and equipment $ 3,559 $ 3,504
Accumulated depreciation
and amortization (2,729) (2,294)
-------- --------
Property and equipment, net $ 830 $ 1,210
-------- --------
Common stock, $.10 par value $ 1,128 $ 1,128
Capital in excess of par value 19,690 19,690
Other accumulated comprehensive loss (57) (43)
Accumulated deficit (13,872) (10,411)
Less treasury stock (1,561) (1,561)
-------- --------
Stockholders' equity $ 5,328 $ 8,803
-------- --------
(C) EARNINGS PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted-average number of common shares outstanding.
Diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted-average number of common and equivalent dilutive
common shares outstanding. Options to purchase shares of common stock
and common stock warrants have been excluded from the computation of
diluted earnings per share for all periods presented because their
inclusion would be antidilutive.
(D) COMPREHENSIVE LOSS (in thousands)
Other accumulated comprehensive loss represents accumulated foreign
currency translation adjustments at February 28, 2001 and May 31, 2000.
Comprehensive loss for the nine months ended February 28, 2001 and
February 29, 2000 was $(3,475) and $(1,614), respectively, and included
net income (loss) and translation loss for the respective periods.
Form 10Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(D) 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
(in thousands):
Three Months Ended Three Months Ended
February 28, February 29,
Revenue: 2001 2000
------- -------
North America $ 2,091 $ 2,945
Asia 314 403
Europe 603 893
Eliminations (321) (281)
------- --------
Consolidated Total $ 2,687 $ 3,960
======= ========
Nine months Ended Nine months Ended
February 28, February 29,
Revenue: 2001 2000
-------- --------
North America $ 7,641 $ 13,383
Asia 1,400 1,306
Europe 2,240 2,804
Eliminations (935) (627)
-------- --------
Consolidated Total $ 10,346 $ 16,866
======== ========
February 28, May 31,
Long-Lived Assets: 2001 2000
------- --------
North America $16,585 $ 18,806
Europe 214 249
------- --------
Consolidated Total $16,799 $ 19,055
======= ========
(F) NASDAQ COMPLIANCE
On February 12, 2001, the Company received the determination of the
Nasdaq Listing Qualifications Panel (the "Panel") regarding its failure
to meet several of the listing standards of the Nasdaq National Market
System. The determination was that the Company had until April 2, 2001
to regain compliance with the $1.00 minimum bid requirement and until
that time would be granted a contingent listing on the NASDAQ Small Cap
market. With the move to the SmallCap market, the Company was in
compliance with all listing standards other than the $1.00 minimum bid
using the November 30, 2000 Form 10-Q filing.
In early March 2001, the Company filed a preliminary proxy with the SEC
contemplating a 6 for 1 reverse stock split of its shares in order to
attempt to correct for the minimum bid deficiency. In late March 2001,
however, the Company became aware that its results for the quarter
ended February 28, 2001 would result in a failure to meet the minimum
tangible net worth standard. In addition, the planned sale of its AMT
division was delayed.
The Company submitted a request to the Panel seeking an additional 120
days of contingent listing on the SmallCap market to allow for
completion of the sale of its AMT Division and the reverse split of its
shares. On April 5, 2001, the Nasdaq informed the Company that its
request for additional time to regain compliance was rejected and that
its shares would be delisted immediately.
Form 10Q
Page 9
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
On April 6, 2001, the Company's shares began trading on the Over the
Counter Bulletin Board under the ticker symbol "SOFTC". On April 10,
2001, the ticker symbol changed to "SOFT".
(G) SUBSEQUENT EVENTS
On April 2, 2001, the Company signed a settlement agreement (the
"Agreement") with MatrixOne to resolve all disputes that had arisen
under the Asset Purchase Agreement entered into in May 1998 between the
two companies. Under the Agreement, the Company is prohibited from
disclosing the nature of the settlement.
Subsequent to the end of the current quarter, the Letter of Intent
("LOI") the Company had signed in mid-January to sell its Computer
Aided Manufacturing Division ("CAM") to an undisclosed third party
buyer (the "Buyer") was terminated. The termination was the result of
the Buyer being unable to complete its financing in the time period
contemplated by the LOI. The Company's decision to sell the Division in
order to generate cash to fund its other operating unit and the
introduction of new products has not changed.
Form 10-Q
Page 10
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT BUSINESS DEVELOPMENTS
The Company's Board of Directors has agreed upon a plan whereby the
Company will seek a buyer for its Computer Aided Manufacturing ("CAM")
business. The CAM Business is a stand-alone operating unit with
technology aimed at the Mold & Die industry. The products include
Prospector, ToolDesigner, ExpertCAD and ExpertCAM.
It is expected that the proceeds from the sale of the CAM Business will
have a positive impact on the Company's liquidity and will improve its
chances of realizing its two very large market opportunities in the CAD
business, namely Cadra as a replacement for the MICROCADAM users and
DesignGateway. These two opportunities were detailed in the Company's
Annual Report on Form 10-K, in Item 1 under the caption "Products and
Services". In addition, the resulting focus on the CAD and Product Data
Management ("PDM") marketplace is expected to improve our product
development efforts and the effectiveness of our sales and marketing
personnel.
RESULTS OF OPERATIONS
Total revenue for the three and nine-month periods ended February 28,
2001 was approximately $2.7 million and $10.3 million, respectively, as
compared to $4.0 million and $16.9 million, respectively, for the same
periods in the prior fiscal year. This represents a decrease from
fiscal 2000 to fiscal 2001 of $1.3 million or 32.2% and $6.6 million or
38.7% for the three and nine month periods, respectively. Product
revenue decreased by approximately $670,000 in the third quarter of
fiscal 2001 as compared to the same period in the prior year or about
41.4% and decreased by about $4.0 million or 47.2% for the nine month
period. Service revenue decreased by about $600,000 or 25.8% in the
third quarter of fiscal 2001 as compared to the third quarter of fiscal
2000 and by about $2.5 million or 29.9% for the nine month period.
The Company made a strategic decision at the end of fiscal 1999 to
focus its 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. The decision was based on the fact that the
margins on third party hardware and software and design service
projects to be performed by less experienced mechanical engineers were
under continued downward pressure in a very competitive marketplace and
it was anticipated that this trend would continue. The cost attendant
with marketing and supporting other companies' technologies and
performing under the above described design projects in this type of
environment precluded the Company from continuing these activities
profitably. Approximately half of the revenue decline from the first
nine months of fiscal 2000 compared to the same period in fiscal 2001
can be attributed to this decision to exit the reseller and low margin
service business.
Product revenue is composed of license revenue from the sale of the
Company's software technology and revenue from the sale of third party
hardware and software technology. Revenue from the licensing of the
Company's software technology during the three and nine months ended
February 28, 2001 was $0.9 million and $4.2 million, respectively, as
compared to $1.4 million and $6.7 million for the same periods in the
prior fiscal year. The product revenue declines experienced in the
first nine months of fiscal year 2001 as compared to the same period in
fiscal 2000 have been dramatic. North American Cadra sales are
responsible for approximately $1.2 million of the $2.2 million decline
in the year over year comparison. The revenue contributions expected
for fiscal 2001 from the sale of Cadra to MicroCadam users as described
in Item 1 of the fiscal 2000 Annual Report on Form 10K under the
caption "Products and Services" have not yet materialized. The market
opportunity we anticipated for our DesignGateway technology continues
to develop but at a much slower pace than expected. Revenue from the
sale of third party hardware and software during the three and nine
months ended February 28, 2001 was $30,000 and $270,000, respectively,
as compared to $250,000 and
Form 10-Q
Page 11
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$1.8 million in the same periods in fiscal 2000. The Company expects
that the revenue from hardware and third party software sales will be
insignificant in the future as the Company continues to focus on
marketing its technology.
Service revenue is composed of software maintenance on our proprietary
software, maintenance sold on 3rd party hardware and software and
revenue generated from services performed by our engineers. For the
three and nine month periods ended February 28, 2001 software
maintenance revenue on our proprietary technology was $1.6 million and
$5.1 million, respectively, as compared to $1.9 million and $6.0
million for the same periods in the prior fiscal year. Service revenue
generated from the engineering services group during the three and
nine-month periods ended February 28, 2001 was $180,000 and $700,000,
respectively, as compared to $400,000 and $1.9 million for the same
periods in the prior fiscal year.
Product gross margin for the three and nine month periods ended
February 28, 2001 was $0.9 million and $4.1 million, respectively, as
compared to $1.3 million and $6.8 million for the same periods in
fiscal 2000. Gross margin as a percent of revenue for the three and
nine-month periods ended February 28, 2001 was 94.1% and 91.1%,
respectively, as compared to 79.8% and 79.7% for the same periods in
fiscal 2000. The gross margin generated on service revenue for the
three and nine- month periods ended February 28, 2001 was 86.1% and
82.9%, respectively, as compared to about 75.4% and 73.4% for the same
periods in fiscal 2000. Overall gross margin as a percent of revenue
increased to 88.9% and 86.5%, respectively, for the three and nine
month periods ended February 28, 2001 as compared to 77.2% and 76.6%
for the same periods of fiscal 2000. The improvement in gross margin as
a percent of revenue in the current fiscal year as compared to fiscal
2000 is a direct result of a larger component of revenue coming from
the sale of the Company's technology rather than selling other
companies' hardware and software and focusing on high margin service
opportunities as detailed above.
Research and development expenditures for the three and nine month
periods ended February 28, 2001 were $1.3 million and $3.9 million,
respectively, as compared to $1.1 million and $3.8million for the same
periods in the prior fiscal year. It is expected that the quarterly
expenditures will be somewhat constant for the remainder of fiscal
2001.
Selling, general and administrative expenses for the three and nine
month periods ended February 28, 2001 were $2.5 million and $7.6
million, respectively, as compared to $3.4 million and $9.3 million for
the same periods in fiscal 2000. This represents a decrease of 26.5%
and 18.8% for the three and nine-month periods ended February 28, 2001
as compared to the same periods in the prior fiscal year. The reduced
spending in SG&A in the first nine months of fiscal 2001 as compared to
the same period in fiscal 2000 is due to headcount reductions related
to the refocusing detailed above.
Interest expense for the first nine months of fiscal year 2001 was
$981,000 as compared to approximately $1.2 million for the same period
in the prior fiscal year, a decrease of approximately 20%. The decrease
is the result of the debt to equity conversions that took place during
the second half of fiscal 2000 that reduced our average borrowing in
the first half of fiscal 2001 relative to the same period in fiscal
2000.
Net loss for the three and nine month periods ended February 28, 2001
was $(1,735,000) or $(0.17) per share and $(3,461,000) or $(0.33) per
share, respectively, as compared to a net loss of $(1,922,000) or
$(0.23) per share and $(1,564,000) or $(0.19) per share for the same
periods in the prior fiscal year.
Form 10-Q
Page 12
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
The Company ended the first nine months of fiscal 2001 with cash of
approximately $695,000, a decrease of $583,000 from year-end 2000.
Operating activities used approximately $1.6 million of cash during the
first nine months of fiscal 2001. The net reduction of billed and
unbilled accounts receivable generated cash of approximately $1.0
million, while reductions in liabilities used approximately $1.1
million and deferred maintenance revenue was reduced by approximately
$0.5 million. Financing activities provided approximately $1.1 million
during the first nine months of fiscal 2001 through additional net
borrowings from the senior debt facility.
In January, the Company announced that it had entered into a Letter of
Intent ("LOI") to sell its CAM Business for approximately $4.5 million.
The LOI had contemplated completion of the sale by the end of February
2001. The buyer of that Business experienced delays in completing its
financing and was unable to complete the purchase of the Business in
accordance with the LOI. As a result, the Company is moving forward
with its plan to divest this operation in order to generate needed
capital to fund its remaining CAD Business unit and to realize the
potential of new technologies it is bringing to market. It is not at
all certain that the Company will be able to sell this Division and
generate the necessary liquidity especially in this current economic
climate.
Subsequent to the end of the quarter, the Company's securities were
delisted from the Nasdaq SmallCap market due to failure to meet the
minimum bid requirement of $1.00. The Company's securities are now
listed under the Over the Counter Bulletin Board under the symbol
"SOFT". While this move has no direct impact on the Company's
operations it can negatively impact its ability to raise capital in the
public market through a secondary offering.
The Company believes that the cash on hand, the potential cash flow
from operations, the cash that could be generated from the sale of the
CAM Business and its available borrowings under its credit facility
will be sufficient for meeting its liquidity and capital resource needs
for the next year. At February 28, 2001, the Company had available
borrowings on its line of credit of approximately $2,940,000.
The statements made above with respect to SofTech's outlook for fiscal
2001 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, 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, maintaining existing
relationships with the Company's lenders, 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 13
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, 2001.
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 16, 2001 /s/ Joseph P. Mullaney
------------------- ---------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: April 16, 2001 /s/ Jan E. Yansak
------------------- ---------------------------------
Jan E. Yansak
Controller