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, 2003 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,
2003 was 12,205,236 shares.
SOFTECH, INC.
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INDEX
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Page Number
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PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
August 31, 2003 (unaudited) and
May 31, 2003 (audited) 3
Consolidated Condensed Statements of Operations
(unaudited) - Three Months Ended August 31, 2003
and 2002 4
Consolidated Condensed Statements of Cash Flows
(unaudited) - Three Months Ended August 31, 2003
and 2002 5
Notes to Consolidated Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis
of Operations 12-16
Item 3. Controls and Procedures 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
August 31, May 31,
2003 2003
(unaudited) (audited)
----------- -----------
(dollars in thousands)
ASSETS
----------
Cash and cash equivalents $ 438 $ 654
Restricted cash - 65
Accounts receivable, net 1,455 2,052
Prepaid expenses and other assets 130 235
---------- ---------
Total current assets 2,023 3,006
---------- ---------
Property and equipment, net 265 306
Capitalized software costs, net 8,596 9,114
Identifiable intangible assets, net 825 917
Goodwill, net 4,598 4,598
Notes receivable 134 134
Other assets 161 160
---------- ---------
TOTAL ASSETS $ 16,602 $ 18,235
========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
------------------------------------------
Accounts payable $ 314 $ 474
Accrued expenses 1,680 2,048
Deferred maintenance revenue 3,561 4,074
Current portion of capital lease obligations 20 30
Current portion of long term debt 1,095 1,095
---------- ---------
Total current liabilities 6,670 7,721
---------- ---------
Non-current deferred revenue 117 204
Long-term debt, net of current portion 13,075 13,058
--------- ---------
Total long-term debt 13,192 13,262
--------- ---------
Stockholders' deficit (3,260) (2,748)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 16,602 $ 18,235
========== =========
See accompanying notes to consolidated condensed financial statements.
SOFTECH, INC. AND SUBSIDIARIES
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended
--------------------
August 31, August 31,
2003 2002
--------------- ------------
(in thousands, except for per share data)
Revenue
Products $ 583 $ 298
Services 2,360 1,423
--------------- ------------
Total revenue 2,943 1,721
Cost of products sold 8 9
Cost of services provided 493 67
--------------- ------------
Gross margin 2,442 1,645
Research and development expenses 773 334
Selling, general and administrative 1,279 1,173
Amortization of capitalized software and other intangible assets 615 385
--------------- ------------
Loss from operations before interest expense and income taxes (225) (247)
Interest expense 253 285
--------------- ------------
Loss from operations before income taxes (478) (532)
Provision for income taxes - -
--------------- ------------
Net loss $ (478) $ (532)
=============== ============
Basic and diluted net loss per common share $ (0.04) $ (0.04)
Weighted average common shares outstanding 12,205 12,205
See accompanying notes to consolidated condensed financial statements.
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-----------------------
August 31, August 31,
2003 2002
-------------- ------------
(dollars in thousands)
Cash flows from operating activities:
Net loss $ (478) $ (532)
-------------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 663 469
Change in current assets and liabilities:
Accounts receivable 597 531
Prepaid expenses and other assets 70 41
Accounts payable and accrued expenses (528) (213)
Deferred maintenance revenue (600) (381)
-------------- ------------
Total adjustments 202 447
-------------- ------------
Net cash used by operating activities (276) (85)
-------------- ------------
Cash flows used by investing activities:
Purchase of marketable securities 0 (29)
Capital expenditures (12) (31)
-------------- ------------
Net cash used by investing activities (12) (60)
-------------- ------------
Cash flows from financing activities:
Principal payments under capital lease obligations (10) (14)
Proceeds (repayments) from line of credit agreements, net 17 (170)
-------------- ------------
Net cash provided (used) by financing activities 7 (184)
-------------- ------------
Decrease in cash and cash equivalents (281) (329)
Cash and cash equivalents, beginning of period 719 708
--------------- ------------
Cash and cash equivalents, end of period $ 438 $ 379
============== ============
See accompanying notes to consolidated condensed financial statements.
SOFTECH, INC. AND SUBSIDIARIES
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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 2003 Annual Report on Form 10-KSB.
(B) SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION:
The Company has adopted the provisions of Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2) as amended by SOP No. 98-9, in
recognizing revenue from software transactions. Revenue from software license
sales are recognized when persuasive evidence of an arrangement exists, delivery
of the product has been made, and a fixed fee and collectibility has been
determined. To the extent that obligations exist for other services, the Company
allocates revenue between the license and the services based upon their relative
fair value. Revenue from customer maintenance support agreements is deferred and
recognized ratably over the term of the agreements. Revenue from engineering,
consulting and training services is recognized as those services are rendered.
CAPITALIZED SOFTWARE COSTS AND RESEARCH AND DEVELOPMENT:
The Company capitalizes certain costs incurred to internally develop and/or
purchase software that is licensed to customers. Capitalization of internally
developed software begins upon the establishment of technological feasibility.
Costs incurred prior to the establishment of technological feasibility are
expensed as incurred. The Company evaluates the realizability and the related
periods of amortization on a regular basis. Such costs are amortized over
estimated useful lives ranging from three to ten years. The Company did not
capitalize any internally developed software during the three month periods
ended August 31, 2002 or 2003.
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. This statement affects the Company's
treatment of goodwill and other intangible assets. This statement requires that
goodwill existing at the date of adoption be reviewed for possible impairment
and that impairment tests be periodically repeated, with impaired assets written
down to fair value. Additionally, existing goodwill and intangible assets must
be assessed and classified within the statement's criteria. Intangible assets
with finite useful lives will continue to be amortized over those periods.
Amortization of goodwill ceased as of May 31, 2002.
The Company completed the first step of the transitional goodwill impairment
test during the three months ended November 30, 2002 based on the amount of
goodwill as of the beginning of fiscal year 2003, as required by SFAS No. 142.
Based on the results of the first step of the transitional goodwill impairment
test, the Company has determined that the fair value of each of the reporting
units exceeded their carrying amounts and, therefore, no goodwill impairment
existed as of June 1, 2002.
The Company tested the goodwill for impairment as of May 31, 2003 and concluded,
based on actual results for fiscal 2003 and projected cash flows from each of
the reporting units, that no impairment existed as of May 31, 2003.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of all intangible assets
with a finite life (primarily capitalized software costs) and other long-lived
assets. If indicators of impairment exist, the Company compares the undiscounted
cash flows estimated to be generated by those assets over their estimated
economic life to the related carrying value of those assets to determine if the
assets are impaired. If the carrying value of the asset is greater than the
estimated undiscounted cash flows, the carrying value of the assets would be
decreased to their fair value through a charge to operations. The Company does
not have any long-lived assets it considers to be impaired. The Company has
determined that all of its intangible assets (other than goodwill) have finite
lives and, therefore, the Company has continued to amortize its intangible
assets.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option plans. Because the number of shares is known and the exercise price
of options granted has been equal to fair value at date of grant, no
compensation expense has been recognized in the statements of operations. The
Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date for
awards under these plans, consistent with the methodology prescribed under SFAS
123, the Company's net loss and loss per share would have approximated the pro
forma amounts indicated below:
Three Month Periods Ended August 31,
2003 2002
-------------------------------------- -------------- -------------
(in thousands, except per share data)
Net income (loss) - as reported $(478) $(532)
Net income (loss) - pro forma (482) (537)
Loss per share - diluted - as reported (.04) (.04)
Loss per share - diluted - pro forma (.04) (.04)
FOREIGN CURRENCY TRANSLATION:
The functional currency of the Company's foreign operations (France, Germany and
Italy) is the local currency. As a result, assets and liabilities are translated
at period-end exchange rates and revenues and expenses are translated at the
average exchange rates. Adjustments resulting from translation of such financial
statements are classified in accumulated other comprehensive income (loss).
Foreign currency gains and losses arising from transactions are included in the
statement of operations.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates included in the
financial statements are the valuation of long term assets including intangibles
(goodwill, capitalized software and other intangible assets), deferred tax
assets and the allowance for doubtful accounts. Actual results could differ from
those estimates.
(C) LIQUIDITY
The Company ended the first three months of fiscal 2004 with cash of
approximately $.4 million. Operating activities utilized approximately $276,000
of cash during the first three months of the fiscal year. The net loss adjusted
for non-cash expenditures related to amortization and depreciation together with
a decrease in accounts receivable and other
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
assets generated cash of $852,000. The reduction in accounts payable and accrued
expenses used cash of $528,000 and the cyclical reduction in deferred revenue
utilized an additional $600,000 during the first quarter.
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 2004, the current economic environment especially
in the manufacturing sector makes forecasting revenue based on historical models
difficult and somewhat unreliable.
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, 2003, the Company had available borrowings on its debt
facilities of approximately $3.5 million.
(D) Details of certain balance sheet captions are as follows (000's):
August 31, 2003 May 31, 2003
(unaudited) (audited)
---------------- -------------
Property and equipment . . . . . . $ 3,839 $ 3,827
Accumulated depreciation
and amortization . . . . . . . . (3,574) (3,521)
----------------- ------------
Property and equipment, net. . . . $ 265 $ 306
----------------- ------------
Common stock, $.10 par value . . . $ 1,274 $ 1,274
Capital in excess of par value . . 19,544 19,544
Accumulated deficit. . . . . . . . (22,249) (21,771)
Cumulative translation adjustment. (268) (234)
Less treasury stock. . . . . . . . (1,561) (1,561)
----------------- ------------
Stockholders' deficit. . . . . . . $ (3,260) $ (2,748)
----------------- ------------
The changes from May 31, 2003 in stockholders equity are due solely to the
changes in the accumulated deficit resulting from the first quarter net loss of
$478 and the first quarter foreign currency translation adjustment of $34.
(E) 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 shares of
common stock have been excluded from the denominator for the computation of
diluted earnings per share for all periods presented in fiscal 2003 and 2002
because their inclusion would be antidilutive. The weighted average shares
outstanding for each of the income statements included in this filing are
presented below (000's):
Three Month Periods Ended August 31,
2003 2002
(unaudited) (unaudited)
-------------- ----------
Basic weighted average shares outstanding 12,205 12,205
Effect of employee stock options outstanding --- ---
-------------- ----------
12,205 12,205
============== ==========
SOFTECH, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(F) COMPREHENSIVE LOSS
The Company's comprehensive loss includes accumulated foreign currency
translation adjustments and unrealized gain (loss) on marketable securities. For
the three month periods ended August 31, 2003 and 2002, the comprehensive loss
was as follows (000's):
Three Month Periods Ended August 31,
2003 2002
(unaudited) (unaudited)
-------------- -------------
Net loss $ (478) $ (532)
Changes in:
Foreign currency translation adjustment (34) 23
Unrealized loss on marketable securities -- 22
--------- ---------
Comprehensive loss $ (512) $ (487)
========= =========
(G) 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 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,
2003 2002
Revenue: (unaudited) (unaudited)
--------------- -------------
North America $ 2,311 $ 1,014
Asia 189 225
Europe 472 505
Eliminations (29) (23)
---------------- ------------
Consolidated Total $ 2,943 $ 1,721
---------------- ------------
August 31, May 31,
2003 2003
Long Lived Assets: (unaudited) (audited)
---------- ----------
North America $ 14,383 $ 15,017
Europe 196 212
---------- ----------
Consolidated Total $ 14,579 $ 15,229
---------- ----------
(H) NEW ACCOUNTING PRONOUNCEMENTS:
On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 148 (SFAS 148), Accounting for Stock-Based Compensation --
Transition and Disclosure, amending FASB Statement No. 123 (SFAS 123),
Accounting for Stock-Based Compensation. This Statement amends SFAS 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, SFAS 148 amends APB Opinion No. 28, Interim Financial
Reporting, to require
SOFTECH, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
disclosure about those effects in interim financial information. The Company has
complied with the disclosure provisions in these financial statements.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees" and provides the
required pro forma disclosures prescribed by SFAS 123 and SFAS 148.
The Company has adopted the disclosure-only provisions of SFAS 123. In
accordance with those provisions, the Company applies APB 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost if the exercise price is not less than market.
No compensation expense was recognized during the quarters ended August 31, 2003
or 2002.
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 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. The adoption of SFAS No. 143 effective June
1, 2003 did not have a material effect on the financial position or results of
operations of the Company.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which is effective for contracts
entered into or modified after June 30, 2003. This Statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities for the purpose of improving financial reporting by requiring
contracts with comparable characteristics to be accounted for similarly. The
adoption of SFAS No. 149 effective July 1, 2003 did not have a material impact
on the Company's financial position or results of operations.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of SFAS No. 150 did
not have a material impact on the Company's financial position or results of
operations.
(I) ACQUISITION
On December 18, 2002, the Company closed its all cash tender offer ("Offer") for
all of the outstanding shares of common stock of Workgroup Technology
Corporation, a Delaware corporation ("WTC"), at a price of $2.00 per share. WTC
was a publicly traded company listed on the Over the Counter Bulletin Board. WTC
develops, supports and markets a software product to mechanical CAD ("Computer
Aided Design") users that allows them to manage their design models. Its product
offerings are compatible with SofTech's.
A total of 1,505,958 shares of WTC's common stock were tendered in the Offer,
which, together with shares beneficially owned by SofTech prior to commencement
of the Offer, represented approximately 88.8% of WTC's outstanding common stock.
The operating results of WTC have been included in the Company's results since
the acquisition date. Therefore the results of operations shown below for the
quarter ended August 31, 2003 are the actual results reported in this Form 10-Q.
The unaudited pro forma results of operations for the three months ended August
31, 2002 assume that the WTC acquisition had occurred as of the beginning of
each of that period.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
The following unaudited pro forma comparative information is presented for
illustrative purposes only and is not necessarily indicative of the consolidated
results of operations for future periods or that actually would have been
realized had the Company and WTC been a consolidated entity as of the beginning
of the quarter ended August 31, 2002 (in thousands, except per shared data). The
results of WTC for the three month period ended September 30, 2002 were combined
with the results of SofTech for the three month period ended August 31, 2002 in
the preparation of this comparative information:
Three Months Ended August 31,
(unaudited)
2003 2002
--------------- ----------------
Revenue $2,943 $3,277
Net loss (478) (1,244)
Net loss per share:
Basic (.04) (.10)
Diluted (.04) (.10)
Subsequent to the fiscal year end, the Company exercised an option to purchase
an additional 220,000 shares of WTC thereby bringing its ownership of WTC to
90.02%. On June 18, 2003, the Company filed a short-form merger with the State
of Delaware thereby acquiring the 205,662 WTC shares that had not been tendered
in the Offering. This action provides the beneficial owners of those 205,662
shares the right to present them to the Company and to receive $2.00 per share
in cash.
SOFTECH, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
The statements made below with respect to SofTech's outlook for fiscal 2004 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 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.
Critical Accounting Policies and Significant Judgments and Estimates
The Securities and Exchange Commission ("SEC") issued disclosure guidance for
"critical accounting policies." The SEC defines "critical accounting policies"
as those that require the application of management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.
The Company's significant accounting policies are described in Note A to these
financial statements. The Company believes that the following accounting
policies require the application of management's most difficult, subjective or
complex judgments:
Valuation of Long-lived and Intangible Assets
We assess the recoverability of long-lived assets and intangible assets whenever
we determine that events or changes in circumstances indicate that their
carrying amount may not be recoverable. Our assessment is primarily based upon
our estimate of future cash flows associated with these assets. These valuations
contain certain assumptions concerning estimated future revenues and future
expenses for each of our two reporting units. We have determined that there is
no indication of impairment of any of our assets. However, should our operating
results deteriorate, we may determine that some portion of our long-lived assets
or intangible assets are impaired. Such determination could result in non-cash
charges to income that could materially affect our financial position or results
of operations for that period.
Valuation of Goodwill
Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. This statement affects the Company's
treatment of goodwill and other intangible assets. This statement requires that
goodwill existing at the date of adoption be reviewed for possible impairment
and that impairment tests be periodically repeated, with impaired assets written
down to fair value. Additionally, existing goodwill and intangible assets must
be assessed and classified within the statement's criteria. Intangible assets
with finite useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminable lives ceased
as of June 1, 2002.
The Company completed the first step of the transitional goodwill impairment
test during the three months ended November 30, 2002 based on the amount of
goodwill as of the beginning of fiscal year 2003, as required by SFAS No. 142.
Based on the results of the first step of the transitional goodwill impairment
test, the Company has determined that the fair value of each of the reporting
units exceeded their carrying amounts and, therefore, no goodwill impairment
existed as of June 1, 2002. As a result, the second step of the transitional
goodwill impairment test was not required to be completed. The Company tested
the goodwill for impairment at May 31, 2003 and concluded based on actual
results for fiscal 2003 and projected cash flows from each of the reporting
units that no impairment existed as of May 31, 2003. The Company will be
required to continue to perform a goodwill impairment test on an annual basis.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
------- --------------------------------------------------
Estimating Allowances for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. The Company's
deferred tax assets are currently fully reserved.
Results of Operations
Revenue for the three month period ended August 31, 2003 was $2.9 million as
compared to $1.7 million for the same period in the prior fiscal year, an
increase of $1.2 million or about 71%. Product revenue for the quarter ended
August 31, 2003 was $583,000 as compared to $298,000 for the same period in the
prior fiscal year, an increase of $285,000 or 96%. Service revenue for the
quarter ended August 31, 2003 was about $2.4 million as compared to $1.4 million
for the same period in fiscal 2003, an increase of $.9 million or 66%. The
acquisition of WTC in December 2002 was responsible for these increases. During
the first quarter of fiscal 2004, the WTC product line generated $276,000 of
product revenue and $1.0 million of services revenue.
Revenue generated in the U.S. accounted for 77% of total revenue for the quarter
ended August 31, 2003, up from 58% of total revenue for the same quarter in the
previous year. Revenue generated in Europe and Asia for the first quarter of the
current fiscal year was 16% and 6% of total revenue as compared to 29% and 13%
of total revenue for the same period in fiscal 2003. Revenue generated in the
U.S. increased by 128% in the first quarter of fiscal 2004 as compared to the
first quarter of fiscal 2003 and decreased in Europe and Asia by 7% and 16%,
respectively, during the same periods. WTC's products are sold primarily in the
U.S. The acquisition of WTC was responsible for the increases in the U.S.
revenue noted above.
Gross margin as a percentage of revenue was 83.0% for the quarter ended August
31, 2003 as compared to 95.6% for the quarter ended August 31, 2002. This
decrease in gross margin as a percent of revenue in the current year as compared
to the same period last year is due to WTC's consulting services which make up
approximately 7% of total revenue. The consulting revenue generated is a labor
intensive effort and therefore has a much lower margin as compared to the margin
on software maintenance revenue. It is the Company's expectation that consulting
revenue will be an important element of our business in the future and that the
gross margin experience of the current quarter will be the norm.
Research and development expenses ("R&D") were $773,000 for the three month
period ended August 31, 2003 as compared to $334,000 for the same period in the
prior fiscal year, an increase of 131%. The increase in R&D expenditures is due
primarily to the addition of WTC's development engineering group which has
increased our R&D staff from 14 in the first quarter of fiscal 2003 to 28 in the
first quarter of fiscal 2004.
Selling, general and administrative ("SG&A") expense was $1.3 million for the
three month period ended August 31, 2003 as compared to $1.2 million for the
same period in fiscal 2003, an increase of approximately 9%. While the
acquisition of WTC has increased the headcount in sales, sales support,
marketing and administration by approximately 30%, the Company has taken cost
cutting actions throughout fiscal 2003 and into the current quarter to reduce
its infrastructure costs and gain synergies in combining these two businesses.
These actions have offset the increased headcount.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
The non-cash expenses related to the amortization of capitalized software and
other intangible assets was $615,000 for the quarter ended August 31, 2003 as
compared to $385,000 for the same period in fiscal 2003. The increase of
$230,000 is related to the capitalized software and other identifiable
intangible assets of WTC totaling approximately $2.7 million that are being
written off on a straight line basis over 3 years.
Interest expense for the three month period ended August 31, 2003 was
approximately $253,000 as compared to $285,000 for the same period in fiscal
2003. The average borrowings increased to approximately $14.1 million during the
current quarter as compared to $10.5 million for the same period in fiscal 2003,
however, the interest rate on those borrowings decreased to about 7.5% in the
current quarter from 11.1% for the same period in fiscal 2003. The increase in
average borrowings is a direct result of the funds borrowed to complete the WTC
acquisition.
The net loss for the three month period ended August 31, 2003 was $478,000 as
compared to a net loss of $532,000 for the same period in the prior fiscal year.
The loss per share for the three month periods ended August 31, 2003 and 2002
was $(.04).
Capital Resources and Liquidity
The Company ended the first three months of fiscal 2004 with cash of
approximately $.4 million. Operating activities utilized approximately $276,000
of cash during the first three months of the fiscal year. The net loss adjusted
for non-cash expenditures related to amortization and depreciation provided cash
of $185,000. A decrease in accounts receivable and other assets generated
$667,000, a reduction in accounts payable and accrued expenses used $528,000 and
the cyclical reduction in deferred revenue utilized $600,000.
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 2004, the current economic environment especially
in the manufacturing sector makes forecasting revenue based on historical models
difficult and somewhat unreliable.
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, 2003, the Company had available borrowings on its debt
facilities of approximately $3.5 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business is subject to many uncertainties and risks. This Form
10-QSB also contains certain forward-looking statements within the meaning of
the Private Securities Reform Act of 1995. The Company's future results may
differ materially from its current results and actual results could differ
materially from those projected in the forward looking statements as a result of
certain risk factors, including but not limited to those set forth below, other
one-time events and other important factors disclosed previously and from time
to time in the Company's other filings with the SEC.
Our quarterly results may fluctuate. The Company's quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Our quarterly revenue may fluctuate significantly for
several reasons, including: the timing and success of introductions of our new
products or product enhancements or those of our competitors; uncertainty
created by changes in the market; difficulty in predicting the size and timing
of individual orders; competition and pricing; and customer order deferrals as a
result of general economic decline. Furthermore, the Company has often
recognized a substantial portion of its product revenues in the last month of a
quarter, with these revenues frequently concentrated in the last weeks or days
of a quarter. As a result, product revenues in any quarter are substantially
dependent on orders booked and shipped in the latter part of that quarter and
revenues from any future quarter are not predictable with any significant degree
of accuracy. We typically do not experience order backlog. For these reasons, we
believe that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
We may not generate positive cash flow in the future. During fiscal years 1998
through 2001 we generated significant cash losses from operations. The Company
took aggressive cost cutting steps and reorganized its operations at the
beginning of fiscal 2002. These actions have greatly reduced our fixed costs and
resulted in positive cash flow from operations for the last two fiscal years. It
is our expectation that we can continue to improve on our recent success,
however, there can be no assurances that the Company will continue to generate
positive cash in the future.
Continued decline in business conditions and Information Technology (IT)
spending could cause further decline in revenue. The level of future IT
spending remains very uncertain as does the prognosis for an economic recovery
in the manufacturing sector. If IT spending continues to decline and the
manufacturing sector continues to experience economic difficulty, the Company's
revenues could be adversely impacted.
The Company is dependent on its lender for continued support. We have a very
strong relationship with our sole lender, Greenleaf Capital. They currently
represent our sole source of financing and it is our belief that it would be
difficult to find alternative financing sources in the event whereby the
relationship with Greenleaf changed.
The continued integration of WTC may experience difficulty. Since acquiring WTC
in December 2002, much progress has been made in integrating our operations,
reducing redundant functions and consolidating our facilities. The strategy
includes more closely integrating our technologies and offering our combined
customer base these solutions. The strategy also includes translating
ProductCenter for users other than the U.S. English speaking market. There can
be no assurance that this continued integration of our technologies or offering
ProductCenter outside the U.S. will be successful.
NEW ACCOUNTING PRONOUNCEMENTS:
On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 148 (SFAS 148), Accounting for Stock-Based Compensation --
Transition and Disclosure, amending FASB Statement No. 123 (SFAS 123),
Accounting for Stock-Based Compensation. This Statement amends SFAS 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, SFAS 148 amends APB Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. The Company has complied with the disclosure provisions in these
financial statements.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees" and provides the
required pro forma disclosures prescribed by SFAS 123 and SFAS 148.
The Company has adopted the disclosure-only provisions of SFAS 123. In
accordance with those provisions, the Company applies APB 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost if the exercise price is not less than market.
No compensation expense was recognized during the quarters ended August 31, 2003
or 2002.
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 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. The adoption of SFAS No. 143 effective June
1, 2003 did not have a material effect on the financial position or results of
operations of the Company.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which is effective for contracts
entered into or modified after June 30, 2003. This Statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities for the purpose of improving financial reporting by requiring
contracts with comparable characteristics to be accounted for similarly. The
adoption of SFAS No. 149 effective July 1, 2003 did not have a material impact
on the Company's financial position or results of operations.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of SFAS No. 150 did
not have a material impact on the Company's financial position or results of
operations.
SOFTECH, INC. AND SUBSIDIARIES
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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 his 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
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(b) Reports on Form 8-K
The Company filed a Form 8-K dated June 18, 2003 regarding its merger of
SofTech Acquisition Corporation with Workgroup Technology Corporation.
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, 2003 /s/ Joseph P. Mullaney
---------------------- -------------------------
Joseph P. Mullaney
President
Chief Operating Officer
EXHIBIT 31
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 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 annual report on Form 10-QSB of SofTech, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under my supervision, to ensure the
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities, particularly
through the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluations, and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5) I have disclosed, based on my most recent evaluation of internal control
over financial reporting, to the registrant's auditors and to the Audit
Committee of the registrant's Board of Directors:
a) All significant deficiencies and material weaknesses in the design or
operations of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: October 15, 2003 /s/ Joseph P. Mullaney
-------------------------
Joseph P. Mullaney
President and Chief Operating Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SofTech, Inc. (the "Company") on
Form 10-QSB for the quarter ended August 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Joseph P.
Mullaney, President and Chief Operating Officer of the Company, certify pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: October 15, 2003 /s/ Joseph P. Mullaney
--------------------
Joseph P. Mullaney
President and Chief Operating Officer