-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Arz9jRLLSWcbeQVi6FpCKqYPD+FhTNSaZ7MubeRLQWISuVkmcMRwaQurRVjMmwnv 9hIZioZYQcM9Ljahd+shGw== 0000891554-99-000736.txt : 19990415 0000891554-99-000736.hdr.sgml : 19990415 ACCESSION NUMBER: 0000891554-99-000736 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTECH INC CENTRAL INDEX KEY: 0000354260 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 042453033 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10665 FILM NUMBER: 99593401 BUSINESS ADDRESS: STREET 1: 4695 44TH STREET N E STREET 2: SUITE B 130 CITY: GRAND RAPIDS STATE: MI ZIP: 49512 BUSINESS PHONE: 6169572330 MAIL ADDRESS: STREET 1: 4695 44TH STREET N E STREET 2: SUITE B 130 CITY: GRAND RAPIDS STATE: MI ZIP: 49512 10-Q 1 QUARTERLY REPORT 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. 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 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. 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 28, 1999 1998 ------------ ------------ 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
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 28, 1999 1998 ------------ ------------ 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
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 28, 1999 1998 ------------ ------------ 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 ======= =======
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 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. 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. 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 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. 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. 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 EX-27 2 FDS --
5 1,000 9-MOS MAY-31-1999 FEB-28-1999 1,393 0 10,966 (1,054) 310 14,694 4,687 2,843 36,487 13,902 0 0 0 839 12,821 36,487 25,398 25,398 10,138 25,650 0 0 1,186 (1,438) 173 (1,611) 0 0 0 (1,611) (0.23) (0.23)
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