Form 10-QSB
Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
For the Quarter Ended Commission File Number
August 31, 2002 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
2 Highwood Drive, Tewksbury, MA 01876
Telephone (978)640-6222
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of registrant's common stock at September 30,
2002 was 12,205,236 shares.
Form 10-QSB
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
August 31, 2002 (unaudited) and May 31, 2002 3
Consolidated Condensed Statements of Operations -
Three Months Ended August 31, 2002 (unaudited) and
2001 (unaudited) 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended August 31, 2002 (unaudited)
and 2001 (unaudited) 5
Notes to Consolidated Condensed Financial Statements 6-10
Item 2. Management's Discussion and Analysis or Plan of Operation 11-12
Item 3. Controls and Procedures 13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Form 10-QSB
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
August 31, May 31,
2002 2002
(unaudited) (audited)
--------- ---------
ASSETS
------
Cash and cash equivalents $ 379 $ 708
Accounts receivable, net 1,140 1,671
Prepaid expenses and other assets 129 170
--------- ---------
Total current assets 1,648 2,549
--------- ---------
Property and equipment, net (Note B) 297 330
Capitalized software costs, net 8,986 9,371
Goodwill, net 2,197 2,197
Marketable securities 157 106
Other assets 146 143
--------- ---------
TOTAL ASSETS $ 13,431 $ 14,696
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accounts payable $ 418 $ 372
Accrued expenses 435 694
Deferred maintenance revenue 2,261 2,642
Current portion of capital lease obligations 79 79
Current portion of long term debt 714 714
--------- ---------
Total current liabilities 3,907 4,501
--------- ---------
Capital lease obligations, net of current portion 9 23
Non-current deferred revenue 459 459
Long-term debt, net of current portion 10,419 10,589
--------- ---------
Total long-term debt 10,887 11,071
--------- ---------
Stockholders' deficit (Note B) (1,363) (876)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 13,431 $ 14,696
========= =========
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
-----------------------------------------
August 31, August 31,
2002 2001
------------- ------------
Revenue
Products $ 298 $ 692
Services 1,423 1,747
------------- ------------
Total revenue 1,721 2,439
Cost of products sold 9 20
Cost of services provided 67 141
------------- ------------
Gross margin 1,645 2,278
Research and development expenses 334 379
Selling, general and administrative 1,558 2,012
------------- ------------
Loss from operations before interest expense and income taxes (247) (113)
Interest expense 285 308
------------- ------------
Loss from operations before income taxes (532) (421)
Provision for income taxes - -
------------- ------------
Net loss $ (532) $ (421)
============= ============
Basic and diluted net loss per common share $ (0.04) $ (0.04)
Weighted average common shares outstanding 12,205 10,742
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Three Months Ended
-----------------------------------
August 31, August 31,
2002 2001
------------- ------------
Cash flows from operating activities:
Net loss $ (532) $ (421)
------------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 469 815
Change in current assets and liabilities:
Accounts receivable 531 531
Unbilled costs and fees - (464)
Prepaid expenses and other assets 41 103
Accounts payable and accrued expenses (213) (455)
Deferred maintenance revenue (381) (771)
------------- ------------
Total adjustments 447 (241)
------------- ------------
Net cash used by operating activities (85) (662)
------------- ------------
Cash flows used by investing activities:
Purchase of marketable securities (29) -
Capital expenditures (31) (38)
------------- ------------
Net cash used by investing activities (60) (38)
------------- ------------
Cash flows from financing activities:
Principal payments under capital lease obligations (14) (42)
Repayments (proceeds) from line of credit agreements, net (170) 421
------------- ------------
Net cash provided by financing activities (184) 379
------------- ------------
Decrease in cash and cash equivalents (329) (321)
Cash and cash equivalents, beginning of period 708 1,278
------------- ------------
Cash and cash equivalents, end of period $ 379 $ 957
============= ============
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 6
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 2002 Annual
Report on Form 10-K.
(B) Details of certain balance sheet captions are as follows (000's):
August 31, May 31,
2002 2002
(unaudited)
------------ ---------
Property and equipment $ 3,599 $ 3,568
Accumulated depreciation
and amortization (3,302) (3,238)
------------ ---------
Property and equipment, net $ 297 $ 330
------------ ---------
Common stock, $.10 par value $ 1,274 $ 1,274
Capital in excess of par value 19,544 19,544
Accumulated deficit (20,451) (19,919)
Cumulative translation adjustment (143) (166)
Unrealized loss on marketable securities (26) (48)
Less treasury stock (1,561) (1,561)
------------ ---------
Stockholders' deficit $ (1,363) $ (876)
------------ ---------
(C) LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss by the
weighted-average number of common shares outstanding. Diluted net loss per
share is computed by dividing net loss by the weighted-average number of
common and equivalent dilutive common shares outstanding. Options to
purchase 4,583 of common stock were excluded from the denominator for the
computation of diluted earnings per share in the first quarter of fiscal
2002 because their inclusion would be antidilutive. There were no dilutive
options outstanding for the first quarter of fiscal 2002.
August 31, August 31,
2002 2001
(unaudited) (unaudited)
---------- ----------
Basic weighted average shares outstanding
during the quarter 12,205,236 10,741,784
Effect of employee stock options outstanding -- --
---------- ----------
Diluted 12,205,236 10,741,784
========== ==========
Form 10-QSB
Page 7
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(D) COMPREHENSIVE LOSS
The Company's comprehensive loss includes accumulated foreign currency
translation adjustments and unrealized loss on marketable securities. For
the quarters ended at August 31, 2002 and 2001, the comprehensive loss was
as follows (000's):
Three Months Ended August 31,
2002 2001
------ ------
Net loss $ (532) $ (421)
Changes in:
Foreign currency translation adjustment 23 9
Unrealized gain on marketable securities 22 --
------ ------
Comprehensive loss $ (487) $ (412)
====== ======
(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 (000's):
Three Months Ended Three Months Ended
August 31, August 31,
Revenue: 2002 2001
(unaudited) (unaudited)
-----------------------------------------------
North America $1,014 $1,592
Asia 225 282
Europe 505 669
Eliminations (23) (104)
------ ------
Consolidated Total $1,721 $2,439
====== ======
August 31, May 31,
Long-Lived Assets: 2002 2002
(unaudited)
-----------------------------------------------
North America $11,616 $12,050
Europe 167 97
--- --
Consolidated Total $11,783 $12,147
======= =======
Form 10-QSB
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(F) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, FASB issued SFAS 141, "Business Combination", and SFAS No.
142, "Goodwill and Intangible Assets". SFAS 141 is effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of
SFAS 142. For the Company, SFAS No. 142 was adopted for the first quarter
of fiscal 2003 which began on June 1, 2002. Major provisions of these
Statements and their effective dates for the Company are as follows:
o All business combinations initiated after June 30, 2001 must
use the purchase method of accounting. The pooling of
interests method of accounting is prohibited;
o Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the
acquired entity and can be sold, transferred, licensed, rented
or exchanged, either individually or as part of a related
contract, asset or liability;
o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
June 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be
subject to amortization;
o Effective June 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator;
o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company adopted SFAS No. 142 prospectively on June 1, 2002.
Accordingly, the Company ceased recording amortization of goodwill
effective June 1, 2002. In addition, the Company is currently conducting
the impairment testing required under SFAS No. 142. The following table
presents the reported net loss and net loss per share data for the three
months ended August 31, 2002 and 2001, as well as pro forma adjustments
relating to the three months ended August 31, 2001, as if SFAS No. 142 had
been adopted on June 1, 2001.
Three Months Ended
August 31 (000's)
------------------------
2002 2001
------ ------
Reported net loss $(532) $(421)
Add back: Goodwill amortization -- 254
----- -----
Adjusted net earnings $(532) $(167)
====== ======
Basic and diluted earnings per
share, as reported $(.04) $(.04)
====== ======
Basic and diluted earnings per
share, pro forma $(.04) $(.02)
====== ======
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, an entity
capitalizes a cost by increasing the carrying amount of the long-lived
Form 10-QSB
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SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
asset. Over time, the liability is accreted to its present value each
period and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon
settlement. The standard is effective for fiscal years beginning after
June 15, 2002.
Management believes the adoption of SFAS No. 143 will not have a material
effect on the financial position or results of operations of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets. It replaces SFAS No. 121. The accounting model for
long-lived assets to be disposed of by sale applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or
in discontinued operations. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens
the reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The
adoption of SFAS No. 144 did not have a material effect on the financial
position or results of operations of the Company.
In April 2002, FASB issued Statement No. 145, "Rescission of FASB
Statements No 4, 44, and 64, Amendment of FASB 13, and Technical
Corrections", which is effective for fiscal years beginning after May 15,
2002. Upon adoption of SFAS 145, companies will be required to apply the
criteria in APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions" in determining the classification of gains/losses resulting
from the extinguishment of debt. Upon adoption, extinguishments of debt
shall be classified under the criteria in APB Opinion No. 30. The adoption
of SFAS No. 145 did not have a material effect on the financial position
or results of operations or retained earnings.
In July 2002, FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities", which becomes effective
January 2003. SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of commitment. Management believes the adoption of SFAS
No. 146 will not have a material effect on the financial position or
results of operations or retained earnings.
(G) RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the
current year presentation. Research and development expense for the prior
period included $479,000 of amortization and allocation of overhead cost
that have been reclassified to selling, general and administrative expense
to conform to the current year presentation. These reclassifications have
no effect on the previously reported results of operations or retained
earnings.
(H) LIQUIDITY
The Company has incurred significant net losses of $2.7 and $6.8 million
over the last two fiscal years and a net loss of $532,000 for the current
quarter. While more than half the net losses incurred in fiscal 2001 were
composed of non-cash expenses, the losses were significant and were far
below the business plan. Fiscal year 2002's results were dramatically
Form 10-QSB
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SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
improved with net losses of only $2.7 million but, more importantly,
positive cash results of approximately $548,000 from operations. This
represented the first cash positive result since fiscal 1997 and was in
line with the budget adopted by the Board of Directors at the beginning of
the year. During fiscal 2002 the Company was also successful in
negotiating financial settlements to several long term office leases in
Indiana, Michigan and the United Kingdom. These settlements have been
fully provided for in the results for fiscal 2001 and 2002. Despite these
recent events, the Company remains dependent on its debt facilities with
Greenleaf Capital to fund operations.
Although the Company believes its current cost structure together with
reasonable revenue run rates based on historical performance will generate
positive cash flow in fiscal 2003, the current economic environment
especially in the manufacturing sector makes forecasting revenue based on
historical models difficult and somewhat unreliable. The Company is
continuing to seek out market opportunities both through new products and
acquisitions to grow its revenue base and its product offerings to its
customers.
Form 10-QSB
Page 11
SOFTECH, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
RESULTS OF OPERATIONS
Total revenue for the three-month period ended August 31, 2002 was $1.7
million as compared to $2.4 million for the same period in the prior
fiscal year. This represents a decrease from the first quarter of fiscal
2002 to fiscal 2003 of $718,000 or 29%. Product revenue decreased by
approximately $394,000 in the first quarter of fiscal 2003 as compared to
the same period in the prior year or about 57%. Service revenue decreased
by about $324,000 or 19% in the first quarter of fiscal 2003 as compared
to the first quarter of fiscal 2002.
Product revenue is composed of licensing our technology to end users. This
decrease is the direct result of the ongoing extreme weakness in the
worldwide manufacturing sector and the resulting impact on technology
spending. This weakness in the current quarter was evident in all our
geographic regions when compared to the prior year's Q1 license revenue
with North America declining by 52%, Europe 69% and Asia 54%. Extreme
weather conditions in Germany added to this downward pressure.
Service revenue is composed of software maintenance on our proprietary
software and revenue generated from services performed by our engineers
such as installation, training and consulting. For the quarter ended
August 31, 2002 software maintenance revenue on our proprietary technology
was $1.4 million as compared to $1.6 million for the same period in the
prior fiscal year. Service revenue in the current quarter was about
$100,000 lower than in the same period in fiscal 2002 due to a significant
consulting project in the prior year that has not recurred.
Research and development expenditures for the first quarter of fiscal 2002
was approximately $334,000 as compared to $379,000 in fiscal 2002, a
decrease of approximately 12%. R&D as a percent of revenue was 19% in the
current fiscal quarter as compared to approximately 16% in the comparable
quarter in fiscal 2002.
Selling, general and administrative expenses totaled approximately $1.6
million in the first quarter of fiscal year 2002 as compared to $2.0
million in fiscal 2002, a decrease of approximately 23%. The reduced
spending in SG&A in the current quarter as compared to the same quarter in
fiscal 2002 was due to headcount reductions which accounted for about
$200,000 of savings and the cessation of goodwill amortization in the
current year related to the adoption of FAS 142 which reduced current
quarter expenses by $254,000.
Interest expense for the first quarter of fiscal year 2003 was $285,000 as
compared to $308,000 for the same period in the prior fiscal year. The
decrease in interest expense is due to lower average borrowings in the
current quarter of approximately $250,000 as compared to the same period
in the previous fiscal year and a lower average borrowing rate.
The net loss for the current fiscal year was $532,000 as compared to
$421,000 in the same period in fiscal 2002. The number of shares
outstanding increased to 12.2 million as compared to 10.7 million. The net
loss per share for both periods was $.04.
Form 10-QSB
Page 12
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Company ended the first quarter of fiscal 2003 with cash of
approximately $379,000, a decrease of $329,000 from year-end 2002.
Operating activities used approximately $85,000 of cash during the first
quarter. The net loss adjusted for non-cash expenditures related to
amortization and depreciation used cash of $63,000. A net decrease in
accounts receivable generated $531,000 and a slight reduction in other
assets generated $41,000. The paydown of accounts payable and accrued
expenses utilized $213,000 and the decrease in deferred revenue utilized
$381,000.
During the quarter, the Company purchased $31,000 of capital equipment and
an additional 33,952 shares of Workgroup Technology Corporation ("WTC")
shares in open market transactions for approximately $29,000. The Company
also utilized approximately $184,000 to paydown its debt obligations
during the quarter.
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. At August 31, 2002, the Company had available borrowings on its
debt facilities of approximately $2.2 million.
The statements made above with respect to SofTech's outlook for fiscal
2003 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, 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.
Form 10-QSB
Page 13
SOFTECH, INC. AND SUBSIDIARIES
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Operating Officer is responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such
officer has concluded (based upon their evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that
the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in this report is
accumulated and communicated to the Company's management, including its
principal executive officers as appropriate, to allow timely decisions
regarding required disclosure.
The Certifying Officer also has indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their
evaluation, and there were no corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month period
ended August 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: OCTOBER 15, 2002 /s/ Joseph P. Mullaney
------------------ -----------------------------
Joseph P. Mullaney
President
Chief Operating Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph P. Mullaney, President and Chief Operating Officer of SofTech, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of SofTech, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: October 15, 2002 /s/ Joseph P. Mullaney
----------------------
Joseph P. Mullaney
President and Chief Operating Officer