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, 2000 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,
2000 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 -
November 30, 2000 and May 31, 2000 3
Consolidated Condensed Statements of Income -
Three Months and Six Months Ended November 30,
2000 and 1999 4-5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended November 30, 2000 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)
November 30, May 31,
2000 2000
(unaudited) (audited)
------------ ---------
ASSETS
Cash and cash equivalents $ 565 $ 1,278
Accounts receivable, net 3,795 4,670
Unbilled costs and fees 506 316
Inventory 59 54
Prepaid expenses and other assets 640 644
------- -------
Total current assets 5,565 6,962
------- -------
Property and equipment, net (Note B) 967 1,210
Capitalized software costs, net 11,788 12,577
Goodwill, net 4,241 4,718
Other assets 562 550
------- -------
TOTAL ASSETS $23,123 $26,017
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,107 $ 1,068
Accrued expenses 842 1,916
Deferred maintenance revenue 2,572 3,712
Current portion of capital lease obligations 73 127
Current portion of long term debt 398 328
------- -------
Total current liabilities 4,992 7,151
------- -------
Capital lease obligations, net of current portion 138 169
Long-term debt, net of current portion 10,942 9,894
------- -------
Total long-term debt 11,080 10,063
------- -------
Stockholders' equity (Note B) 7,051 8,803
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,123 $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
-----------------------------------------
November 30, November 30,
2000 1999
------------ ------------
Revenue
Products $ 1,166 $ 3,043
Services 1,981 2,481
-------- --------
Total revenue 3,147 5,524
Cost of products sold 146 387
Cost of services provided 347 651
-------- --------
Gross margin 2,654 4,486
Research and development expenses 1,255 1,177
Selling, general and administrative 2,310 2,705
-------- --------
Income (loss) from operations (911) 604
Interest expense, net 350 336
-------- --------
Income (loss) from operations before income taxes (1,261) 268
Provision for income taxes -- 58
-------- --------
Net income (loss) $ (1,261) $ 210
======== ========
Basic net income (loss) per common share $ (0.12) $ 0.03
Weighted average common shares outstanding 10,567 8,150
Diluted net income (loss) per common share $ (0.12) $ 0.03
Weighted average dilutive common share equivalents outstanding 10,567 8,185
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)
Six Months Ended
-----------------------------------------
November 30, November 30,
2000 1999
------------ ------------
Revenue
Products $ 3,555 $ 6,912
Services 4,103 5,994
-------- --------
Total revenue 7,658 12,906
Cost of products sold 344 1,407
Cost of services provided 758 1,642
-------- --------
Gross margin 6,556 9,857
Research and development expenses 2,550 2,715
Selling, general and administrative 5,094 5,952
-------- --------
Income (loss) from operations (1,088) 1,190
Interest expense, net 637 729
-------- --------
Income (loss) from operations before income taxes (1,725) 461
Provision for income taxes -- 103
-------- --------
Net income (loss) $ (1,725) $ 358
======== ========
Basic net income (loss) per common share $ (0.16) $ 0.04
Weighted average common shares outstanding 10,655 8,150
Diluted net income (loss) per common share $ (0.16) $ 0.04
Weighted average dilutive common share equivalents outstanding 10,655 8,213
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)
Six Months Ended
--------------------------
November 30, November 30,
2000 1999
------------ ------------
Cash flows from operating activities:
Net income (loss) $(1,725) $ 358
------- -------
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization 1,544 1,867
Change in current assets and liabilities:
Accounts receivable 875 1,100
Unbilled costs and fees (190) (557)
Inventory (5) 136
Prepaid expenses and other assets (8) (195)
Accounts payable and accrued expenses (1,035) (2,621)
Deferred maintenance revenue (1,140) (2,532)
------- -------
Total adjustments 41 (2,802)
------- -------
Net cash used by operating activities (1,684) (2,444)
------- -------
Cash flows used by investing activities:
Capital expenditures (62) (586)
Proceeds from sale of fixed assets -- 15
------- -------
Net cash used by investing activities (62) (571)
------- -------
Cash flows from financing activities:
Proceeds of capital lease obligations -- 97
Principal payments under capital lease obligations (85) (107)
Proceeds from senior debt financing, net of repayments 1,118 2,406
------- -------
Net cash provided by financing activities 1,033 2,396
------- -------
Decrease in cash and cash equivalents (713) (619)
Cash and cash equivalents, beginning of period 1,278 1,600
------- -------
Cash and cash equivalents, end of period $ 565 $ 981
======= =======
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):
November 30, May 31,
2000 2000
------------ --------
Property and equipment $ 3,566 $ 3,504
Accumulated depreciation
and amortization (2,599) (2,294)
-------- --------
Property and equipment, net $ 967 $ 1,210
-------- --------
Common stock, $.10 par value $ 1,062 $ 1,128
Capital in excess of par value 19,756 19,690
Other accumulated comprehensive loss (70) (43)
Accumulated deficit (12,136) (10,411)
Less treasury stock (1,561) (1,561)
-------- --------
Stockholders' equity $ 7,051 $ 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.
Three Months Ended
November 30, November 30,
2000 1999
-----------------------------
Basic weighted average shares outstanding
during the quarter 10,567,454 8,150,289
Effect of employee stock options outstanding -- 34,461
---------- ---------
Diluted 10,567,454 8,184,750
========== =========
Six Months Ended
November 30, November 30,
2000 1999
-----------------------------
Basic weighted average shares outstanding
during the six months 10,654,619 8,150,289
Effect of employee stock options outstanding -- 62,230
---------- ---------
Diluted 10,654,619 8,212,519
========== =========
Form 10-Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(D) COMPREHENSIVE INCOME (LOSS) (in thousands)
Other accumulated comprehensive loss represents accumulated foreign
currency translation adjustments at November 30, 2000 and May 31, 2000.
Comprehensive income (loss) for the six months ended November 30, 2000 and
1999 was $(1,752) and $354, respectively, and included net income (loss)
and translation loss for the respective periods.
(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 (in thousands):
Three Months Ended Three Months Ended
November 30, November 30,
2000 1999
Revenue: ---------------------------------------
North America $ 2,334 $ 4,269
Asia 418 531
Europe 858 891
Eliminations (463) (167)
-------- --------
Consolidated Total $ 3,147 $ 5,524
======== ========
Six Months Ended Six Months Ended
November 30, November 30,
2000 1999
---------------------------------------
Revenue:
North America $ 5,549 $ 10,439
Asia 1,086 902
Europe 1,637 1,911
Eliminations (614) (346)
-------- --------
Consolidated Total $ 7,658 $ 12,906
======== ========
November 30, May 30,
2000 2000
---------------------------------------
Long-Lived Assets:
North America $ 17,307 $ 18,806
Europe 251 249
-------- --------
Consolidated Total $ 17,558 $ 19,055
======== ========
(F) NASDAQ COMPLIANCE
The Company has been notified by the NASDAQ that it fails to meet several
listing requirements for continued listing on the National Market System
including failure to maintain a minimum closing bid price of at least
$1.00 and failure to maintain the market value of the public float at a
minimum of $5.0 million. In addition, the NASDAQ Staff has determined,
that in its opinion, the debt conversion and the resulting share issuance
in May 2000 as described in Note F to the Annual Report filed on Form 10-K
for fiscal year 2000 and the appointments of two new Board members
resulted in a change of control which requires shareholder approval. In
that shareholder approval was not received prior to the debt conversion
the NASDAQ Staff believes the Company has also violated that Marketplace
Rule. These Staff determinations have previously been reported by the
Company via press releases issued on December 19, 2000 and January 9,
2001.
Form 10-Q
Page 9
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
In addition to the listing violations identified by the NASDAQ Staff, with
the filing of this Form 10-Q, the Company has fallen below the $4.0
million net tangible asset level that is required for continued listing on
the National Market System.
The Company requested a Hearing before the NASDAQ Qualifications Hearing
Panel. This Hearing was held on January 11, 2001 and the Company had its
opportunity to share with the Panel its plans to correct for each of its
listing violations. The presentation included a specific course of action
that had already begun and could be completed within the next two months
aimed at correcting each of the violations identified above. The Company
requested a stay of the delisting action from the National Market System
for 75 days as these actions were completed. As an alternative, in the
event whereby the Panel was unwilling to grant that short stay of
delisting action, the company requested a contingent listing on the NASDAQ
SmallCap market for a period of up to 90 days while actions were completed
to correct for the $1.00 minimum bid deficiency.
As of the date of this filing, the Company has not had any further
communication with the NASDAQ Exchange. There can be no assurance that the
NASDAQ will grant either of the Company's requests. In the event whereby
the Exchange does take this delisting action the Company will seek to have
its shares listed on an alternative exchange.
(G) SUBSEQUENT EVENTS
On January 16, 2001, the Company signed a settlement agreement with Data
Systems Network Corporation ("DSN") to resolve all disputes and to end the
previously postponed Arbitration Hearing. This dispute which arose out of
the sale of the Company's Network Systems Group to DSN in 1996, was more
fully described in Note I to the Annual Report on Form 10-K for fiscal
2000. The settlement had no material impact on operating results for the
three and six month periods ended November 30, 2000.
Subsequent to quarter end, the Company entered into a Letter of Intent
("LOI") to sell all of the net assets of its Computer Aided Manufacturing
("CAM") business to a technology company based outside of the United
States. Included in the net assets of the CAM business are the Prospector,
ToolDesigner, ExpertCad and ExpertCam technologies. The CAM business
generated revenue of about $4.5 million in fiscal 2000 and $2.3 for the
first six months of fiscal 2001. The purchase price was established at
$4.5 million in cash and marketable securities and is anticipated to close
within the next few months. Under the terms of the LOI, no significant
gain or loss is expected to result from the disposition of net assets.
There can be no assurance, however, that the transaction as contemplated
in the LOI will be completed in this timeframe or at all. In the event
whereby this transaction is not completed it is the Company's intent to
sell this operating unit in order to generate liquidity and reduce debt
load consistent with the decision of the Company's Board of Directors as
described in MD&A.
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. This Business generated revenue
from the licensing of the above technologies and services of approximately
$4.5 million in fiscal 2000 and $2.3 million for the first half of fiscal
2001.
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 six-month periods ended November 30, 2000
was approximately $3.1 million and $7.7 million, respectively, as compared
to $5.5 million and $12.9 million, respectively, for the same periods in
the prior fiscal year. This represents a decrease from fiscal 2000 to
fiscal 2001 of $2.4 million or 43.0% and $5.2 million or 40.7% for the
three and six month periods, respectively. Product revenue decreased by
approximately $1.9 million in the second quarter of fiscal 2001 as
compared to the same period in the prior year or about 61.7% and decreased
by about $3.4 million or 48.6% for the six month period. Service revenue
decreased by about $500,000 or 20.2% in the second quarter of fiscal 2001
as compared to the second quarter of fiscal 2000 and by about $1.9 million
or 31.5% for the six 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 half 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 six months ended
November 30, 2000 was $1.1 million and $3.3 million, respectively, as
compared to $2.6 million and $5.4 million for the same periods in the
prior fiscal year. The product revenue declines experienced in the first
half of fiscal year 2001 as compared to the same period in fiscal 2000
have been dramatic. North American Cadra sales are responsible for
approximately $1.5 million of the $2.1 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 six months ended November 30, 2000 was $40,000 and
$240,000, respectively, as compared to $0.4 million and
Form 10-Q
Page 11
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
$1.6 million in the same periods in fiscal 2000. The Company expects that
the revenue from hardware and third party software sales will continue to
shrink 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 six
month periods ended November 30, 2000 software maintenance revenue on our
proprietary technology was $1.8 million and $3.6 million, respectively, as
compared to $1.9 million and $4.1 million for the same periods in the
prior fiscal year. Service revenue generated from the engineering services
group during the three and six-month periods ended November 30, 2000 was
$170,000 and $300,000, respectively, as compared to $600,000 and $1.5
million for the same periods in the prior fiscal year.
Product gross margin for the three and six month periods ended November
30, 2000 was $1.0 million and $3.2 million, respectively, as compared to
$2.7 million and $5.5 million for the same periods in fiscal 2000. Gross
margin as a percent of revenue for the three and six-month periods ended
November 30, 2000 was 87.5% and 90.3%, respectively, as compared to 87.3%
and 79.6% for the same periods in fiscal 2000. The gross margin generated
on service revenue for the three and six- month periods ended November 30,
2000 was 82.5% and 81.5%, respectively, as compared to about 73.8% and
72.6% for the same periods in fiscal 2000. Overall gross margin as a
percent of revenue increased to 84.3% and 85.6%, respectively, for the
three and six month periods ended November 30, 2000 as compared to 81.2%
and 76.4% for the same periods of fiscal 2000. The improvement in gross
margin as a percent of revenue in the first half of the current fiscal
year as compared to the first half of 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 six month periods
ended November 30, 2000 were $1.3 million and $2.6 million, respectively,
as compared to $1.2 million and $2.7 million 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 six month
periods ended November 30, 2000 were $2.3 million and $5.1 million,
respectively, as compared to $2.7 million and $6.0 million for the same
periods in fiscal 2000. This represents a decrease of 14.6% and 14.4% for
the three and six-month periods ended November 30, 2000 as compared to the
same periods in the prior fiscal year. The reduced spending in SG&A in the
first half 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 half of fiscal year 2001 was $637,000 as
compared to approximately $729,000 for the same period in the prior fiscal
year, a decrease of approximately 13%. 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 six month periods ended November 30, 2000 was
$(1,261,000) or $(0.12) per share and $(1,725,000) or $(0.16) per share,
respectively, as compared to net income of $210,000 or $0.03 per share and
$358,000 or $0.04 per share for the same periods in the prior fiscal year.
Capital Resources and Liquidity
The Company ended the first half of fiscal 2001 with cash of approximately
$565,000, a decrease of $713,000 from year-end 2000. Operating activities
used approximately $1.7 million of cash during the first six months of
fiscal 2001. The net reduction of billed and unbilled accounts receivable
generated cash of approximately $0.7 million, while reductions in
liabilities used approximately $1.0 million and deferred maintenance
revenue was reduced by approximately $1.1 million. Financing activities
Form 10-Q
Page 12
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
provided approximately $1.0 million during the first half of fiscal 2001
through additional net borrowings from the senior debt facility.
Subsequent to quarter end, the Company entered into a Letter of Intent
("LOI") to sell all of the net assets of its Computer Aided Manufacturing
("CAM") business to a technology company based outside of the United
States. Included in the net assets of the CAM business are the Prospector,
ToolDesigner, ExpertCad and ExpertCam technologies. The CAM business
generated revenue of about $4.5 million in fiscal 2000 and $2.3 million
for the first six months of fiscal 2001. The purchase price was
established at $4.5 million in cash and marketable securities and is
anticipated to close within the next few months. In the event whereby this
transaction is not completed it is the Company's intent to sell this
operating unit in order to generate liquidity and reduce debt load
consistent with the decision of the Company's Board of Directors as
described above.
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 November 30, 2000, the Company had available borrowings on
its line of credit of approximately $3,060,000.
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, 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-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 November 30, 2000.
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 16, 2001 /s/ Joseph P. Mullaney
---------------------- ----------------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: January 16, 2001 /s/ Jan E. Yansak
---------------------- ----------------------------------------
Jan E. Yansak
Controller