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
November 30, 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 December 31,
2003 was 12,205,236 shares.
SOFTECH, INC.
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INDEX
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PART I. Financial Information Page Number
------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
November 30, 2003 (unaudited) and May 31, 2003 (audited) 3
Consolidated Condensed Statements of Operations (unaudited) -
Three Months Ended November 30, 2003 and 2002 4
Consolidated Condensed Statements of Operations (unaudited) -
Six Months Ended November 30, 2003 and 2002 5
Consolidated Condensed Statements of Cash Flows (unaudited) -
Six Months Ended November 30, 2003 and 2002 6
Notes to Consolidated Condensed Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Operations 14-19
Item 3. Controls and Procedures 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTECH, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
November 30, May 31,
2003 2003
(unaudited) (audited)
------------------ -------------
ASSETS
-----------------------
Cash and cash equivalents $ 306 $ 654
Restricted cash - 65
Accounts receivable, net 1,731 2,052
Prepaid expenses and other assets 142 235
---------------- -------------
Total current assets 2,179 3,006
---------------- -------------
Property and equipment, net 242 306
Capitalized software costs, net 8,078 9,114
Identifiable intangible assets, net 733 917
Goodwill, net 4,598 4,598
Notes receivable 134 134
Other assets 159 160
--------------- -------------
TOTAL ASSETS $ 16,123 $ 18,235
=============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
---------------------------------------
Accounts payable $ 251 $ 474
Accrued expenses 1,591 2,048
Deferred maintenance revenue 3,433 4,074
Current portion of capital lease obligations 17 30
Current portion of long term debt 2,100 1,095
--------------- -------------
Total current liabilities 7,392 7,721
--------------- -------------
Non-current deferred revenue - 204
Long-term debt, net of current portion 12,282 13,058
--------------- -------------
Total long-term debt 12,282 13,262
--------------- -------------
Stockholders' deficit (3,551) (2,748)
--------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 16,123 $ 18,235
=============== =============
See accompanying notes to consolidated condensed financial statements.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
--------------------
November 30, November 30,
2003 2002
------------- --------------
Revenue
Products $ 868 $ 837
Services 2,442 1,389
------------- --------------
Total revenue 3,310 2,226
Cost of products sold 11 24
Cost of services provided 491 70
-------------- --------------
Gross margin 2,808 2,132
Research and development expenses 768 362
Selling, general and administrative 1,427 1,307
Amortization of capitalized software and other intangible assets 610 385
-------------- --------------
Income from operations before interest expense and income taxes 3 78
Interest expense 249 291
-------------- --------------
Loss from operations before income taxes (246) (213)
Provision for income taxes - -
-------------- --------------
Net loss $ (246) $ (213)
============== ==============
Basic and diluted net loss per common share $ (0.02) $ (0.02)
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 OPERATIONS
-----------------------------------------------
(in thousands, except for per share data)
(Unaudited)
Six Months Ended
-----------------------------
November 30, November 30,
2003 2002
--------------- --------------
Revenue
Products $ 1,451 $ 1,135
Services 4,802 2,812
---------------- --------------
Total revenue 6,253 3,947
Cost of products sold 19 33
Cost of services provided 984 137
---------------- --------------
Gross margin 5,250 3,777
Research and development expenses 1,541 696
Selling, general and administrative 2,706 2,480
Amortization of capitalized software and other intangible assets 1,225 770
---------------- --------------
Loss from operations before interest expense and income taxes (222) (169)
Interest expense 502 576
---------------- --------------
Loss from operations before income taxes (724) (745)
Provision for income taxes - -
---------------- --------------
Net loss $ (724) $ (745)
================ ==============
Basic and diluted net loss per common share $ (0.06) $ (0.06)
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)
(dollars in thousands)
Six Months Ended
------------------------------------
November 30, November 30,
2003 2002
------------------- --------------
Cash flows from operating activities:
Net loss $ (724) $ (745)
-------------------- --------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 1,311 977
Change in current assets and liabilities:
Accounts receivable 321 276
Prepaid expenses and other assets 77 (65)
Accounts payable and accrued expenses (680) (180)
Deferred maintenance revenue (845) (744)
-------------------- --------------
Total adjustments 184 264
-------------------- --------------
Net cash used by operating activities (540) (481)
-------------------- --------------
Cash flows used by investing activities:
Purchase of marketable securities - (29)
Capital expenditures (24) (33)
-------------------- --------------
Net cash used by investing activities (24) (62)
-------------------- --------------
Cash flows from financing activities:
Principal payments under capital lease obligations (13) (31)
Proceeds from line of credit agreements, net 229 3,345
-------------------- --------------
Net cash provided by financing activities 216 3,314
-------------------- --------------
Increase (decrease) in cash and cash equivalents (348) 2,771
Cash and cash equivalents, beginning of period 654 708
-------------------- --------------
Cash and cash equivalents, end of period $ 306 $ 3,479
==================== ==============
See accompanying notes to consolidated condensed financial statements.
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 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 and six month
periods ended November 30, 2003 or 2002.
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
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 three and six month periods
ended November 30, 2003 or 2002.
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 November 30,
(in thousands, except per share data) 2003 2002
--------------------------------------- ------ -------
Net income (loss) - as reported $(246) $(213)
Net income (loss) - pro forma (254) (218)
Loss per share - diluted - as reported (.02) (.02)
Loss per share - diluted - pro forma (.02) (.02)
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
------------------------------------------------------
Six Month Periods Ended November 30,
(in thousands, except per share data) 2003 2002
-------------------------------------- ------- --------
Net income (loss) - as reported $(724) $(745)
Net income (loss) - pro forma (740) (753)
Loss per share - diluted - as reported (.06) (.06)
Loss per share - diluted - pro forma (.06) (.06)
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 half of fiscal 2004 with cash of $306,000. Operating
activities utilized $540,000 of cash during the first six 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
assets generated cash of $985,000. The reduction in accounts payable and accrued
expenses used cash of $680,000 and the cyclical reduction in deferred revenue
utilized cash of $845,000 during the first half of the fiscal year.
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 November 30, 2003, the Company had available borrowings on its debt
facilities of approximately $3.3 million.
(D) Details of certain balance sheet captions are as follows (000's):
November 30, 2003 May 31, 2003
(unaudited) (audited)
----------- ---------------
Property and equipment $ 3,851 $ 3,827
Accumulated depreciation
and amortization (3,609) (3,521)
Property and equipment, net $ 242 $ 306
----------- ---------
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
Common stock, $.10 par value $ 1,274 $ 1,274
Capital in excess of par value 19,544 19,544
Accumulated deficit (22,495) (21,771)
Cumulative translation adjustment (313) (234)
Less treasury stock (1,561) (1,561)
Stockholders' deficit $ (3,551) $ (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 half net loss of
$724 and the first half foreign currency translation adjustment of $79.
(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 2004 and 2003
because their inclusion would be antidilutive. There were a total of 493,000 and
413,000 options outstanding at November 30, 2003 and 2002, respectively.
(F) COMPREHENSIVE LOSS
The Company's comprehensive loss includes accumulated foreign currency
translation adjustments and unrealized gain (loss) on marketable securities. For
the three and six month periods ended November 30, 2003 and 2002, the
comprehensive loss was as follows (000's):
Three Month Periods Ended November 30,
2003 2002
(unaudited) (unaudited)
-------------- -------------
Net loss $ (246) $ (213)
Changes in:
Foreign currency translation adjustment (45) (12)
Unrealized gain on marketable securities -- 97
-------- -------
Comprehensive loss $ (291) $ (128)
========= =======
Six Month Periods Ended November 30,
2003 2002
(unaudited) (unaudited)
-------------- -------------
Net loss $ (724) $ (745)
Changes in:
Foreign currency translation adjustment (79) 12
Unrealized gain on marketable securities -- 119
-------- ---------
Comprehensive loss $ (803) $ (614)
========== =========
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(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
November 30, 2003 November 30, 2002
Revenue: (unaudited) (unaudited)
-------------------- -------------------
North America $ 2,595 $ 1,251
Asia 260 279
Europe 698 904
Eliminations (243) (208)
-------------------- -------------------
Consolidated Total $ 3,310 $ 2,226
-------------------- -------------------
Six Months Ended Six Months Ended
November 30, November 30,
Revenue: 2003 2002
(unaudited) (unaudited))
------------------ -------------------
North America $ 4,906 $ 2,300
Asia 449 469
Europe 1,170 1,409
Eliminations (272) (231)
------------------ ---------------------
Consolidated Total $ 6,253 $ 3,947
------------------ ---------------------
November 30, May 31,
2003 2003
Long Lived Assets: (unaudited) (audited)
-------------- ----------
North America $ 13,752 $ 15,017
Europe 192 212
----------
Consolidated Total $ 13,944 $ 15,229
----------
(H) NEW ACCOUNTING PRONOUNCEMENTS:
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.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
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.
Subsequent to the 2003 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.
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
three and six month periods ended November 30, 2003 are the actual results
reported in this Form 10-QSB. The unaudited pro forma results of operations for
the three and six month periods ended November 30, 2002 assume that the WTC
acquisition had occurred as of the beginning of each of those periods.
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 three and six month periods ended November 30, 2002 (in thousands, except
per shared data). The results of WTC for the three and six month periods ended
December 31, 2002 were combined with the results of SofTech for the three and
six month periods ended November 30, 2002 in the preparation of this comparative
information:
Three Months Ended November 30,
(unaudited)
2003 2002
----------- -------
Revenue $ 3,310 $3,932
Net loss (246) (574)
Net loss per share:
Basic (.02) (.05)
Diluted (.02) (.05)
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
Six Months Ended November 30,
(unaudited)
2003 2002
------------- --------
Revenue $ 6,253 $ 7,209
Net loss (724) (1,817)
Net loss per share:
Basic (.06) (.15)
Diluted (.06) (.15)
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
ITEM 2 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 B 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
------------------------------
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
-----------------------
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 as more fully described above and in our previous SEC filings. The
operating results of WTC have been included in the Company's results since the
acquisition date. This acquisition had a material positive impact on the
Company's operating results and the acquisition is the primary reason for
the changes in revenue and cash flow for the three and six month periods ended
November 30, 2003 (which include WTC) as compared to the three and six month
periods ended November 30, 2002 (which exclude WTC).
Revenue for the three and six month periods ended November 30, 2003 was $3.3
million and $6.3 million, respectively, as compared to $2.2 million and $3.9
million for the same periods in the prior fiscal year. This represents an
increase of $1.1 million or 48.7% for fiscal 2004 Q2 as compared to the same
period in fiscal 2003 and an increase of $2.3 million or 58.4% for the first
half of fiscal 2004 compared to the same period in fiscal 2003. WTC generated
approximately $1.5 million and $2.8 million of revenue, respectively, for the
three and six month periods ended November 30, 2003 thereby offsetting a
decrease in the revenue of the Company's CAD and CAM products of about 17% and
22% for the three and six month periods ended November 30, 2003 as compared to
the same periods in the prior year. This decrease was due primarily to a
depressed capital spending environment especially for the manufacturing
marketplace that uses the Company's software products.
Product revenue for the three and six month periods ended November 30, 2003 was
approximately $868,000 and $1.5 million, respectively, as compared to $837,000
and $1.1 million for the same periods in the prior fiscal year. This represents
an increase of $31,000 or 3.7% for fiscal 2004 Q2 as compared to the same period
in fiscal 2003 and an increase of $.3 million or 27.8% for the first half of
fiscal 2004 compared to the same period in fiscal 2003. WTC generated
approximately $.4 million and $.7 million of product revenue, respectively, for
the three and six month periods ended November 30, 2003. The product revenue for
SofTech's non-WTC product offerings declined by approximately 46.8% and 33.8%
for the three and six month periods ended November 30, 2003 as compared to the
same periods in 2002 due to the aforementioned depressed capital spending
market. In this kind of environment, orders for new product are often delayed or
reduced significantly as companies adjust their capital expenditures.
Service revenue for the three and six month periods ended November 30, 2003 was
$2.4 million and $4.8 million, respectively, as compared to $1.4 million and
$2.8 million for the same period in fiscal 2003. This represents an increase of
$1.1 million or 75.8% for fiscal 2004 Q2 as compared to the same period in
fiscal 2003 and an increase of $2.0 million or 70.8% for the first half of
fiscal 2004 compared to the same period in fiscal 2003. WTC generated
approximately $1.1 million and $2.0 million of service revenue, respectively,
for the three and six month periods ended November 30, 2003 thereby accounting
for all of the increase in service revenue. Despite the difficult economic
situation noted above, generally our customers continue to purchase maintenance
support contracts. This is the reason
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
that SofTech's non-WTC service revenue remained flat despite the declines noted
above for product revenue.
Revenue generated in the U.S. accounted for 71% and 74% of total revenue for the
three and six month periods ended November 30, 2003, respectively, up from 47%
and 52% of total revenue for the same periods in the previous year. Revenue
generated in Europe for the three and six month periods ended November 30, 2003
was 21% and 19% of total revenue, respectively, as compared to 40% and 36% of
total revenue for the same period in fiscal 2003. Revenue generated in Asia for
the three and six month periods ended November 30, 2003 was 8% and 7% of total
revenue, respectively, as compared to 13% and 12% of total revenue for the same
period in fiscal 2003. Revenue generated in the U.S. increased by 107% and 113%
for the three and six month periods ended November 30, 2003 as compared to the
same periods in the prior fiscal year. Revenue generated in Europe decreased by
23% and 17% while revenue generated in Asia decreased 7% and 4% for 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 84.8% and 84.0 % for the three and
six month periods ended November 30, 2003, respectively, as compared to 95.8%
and 95.7% for the same periods in fiscal 2003. This decrease in gross margin as
a percent of revenue in fiscal 2004 as compared to the same period in fiscal
2003 is due to WTC's consulting services which make up approximately 6% 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 $768,000 and $1.5 million for the
three and six month periods ended November 30, 2003, respectively, as compared
to $362,000 and $696,000 for the same periods in the prior fiscal year. This
represents an increase of $406,000 or 112.2% for fiscal 2004 Q2 as compared to
the same period in fiscal 2003 and an increase of $845,000 or 121.4% for the
first half of fiscal 2004 compared to the same period in fiscal 2003. 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
fiscal 2003 to 28 in fiscal 2004.
Selling, general and administrative ("SG&A") expenses were $1.4 million and $2.7
million, respectively, for the three and six month periods ended November 30,
2003 as compared to $1.3 million and $2.5 million for the same period in fiscal
2003. This represents an increase of $.1 million or 9.2% for fiscal 2004 Q2 as
compared to the same period in fiscal 2003 and an increase of $.2 million or
9.1% for the first half of fiscal 2004 compared to the same period in fiscal
2003. 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 year to
reduce its infrastructure costs and gain synergies in combining these two
businesses. These actions have offset the increased headcount.
The non-cash expenses related to the amortization of capitalized software and
other intangible assets were $.6 million and $1.2 million for the three and six
month periods ended November 30, 2003 as compared to $.4 million and $.8 million
for the same periods in fiscal 2003. The increase of approximately $.2 million
per quarter in fiscal 2004 compared to fiscal 2003 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 and six month periods ended November 30, 2003
were approximately $249,000 and $502,000, respectively, as compared to $291,000
and $576,000 for the same periods in fiscal 2003. This represents a decrease of
$42,000 or 14.4% for the second quarter of fiscal 2004 compared to the same
period in the previous fiscal year and a decrease of $74,000 or 12.8% for the
six month period ended November 30, 2003 compared to the same period in the
prior fiscal year. The average borrowings increased to approximately $14.3
million during the current quarter as compared to $12.1 million for the same
period in fiscal 2003, however, the average interest rate on those borrowings
decreased to about 7.0% in the current quarter from 9.6% for the same period in
fiscal 2003. The average borrowings increased to approximately $14.3 million
during the first half of fiscal 2004 as compared to $11.7 million for the same
period in fiscal 2003, however, average the interest rate on those
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
borrowings decreased to about 7.0% during the first half of fiscal 2004 as
compared to 9.8% 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 and six month periods ended November 30, 2003 were
$(246,000) and $(724,000), respectively, as compared to a net loss of $(213,000)
and $(745,000) for the same period in the prior fiscal year. The loss per share
for each of the three month periods ended November 30, 2003 and 2002 was $(.02)
and for each of the six month periods ended November 30, 2003 and 2002 was
$(.06).
Capital Resources and Liquidity
----------------------------------
The Company ended the first half of fiscal 2004 with cash of $306,000. Operating
activities utilized $540,000 of cash during the first six 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
assets generated cash of $985,000. The reduction in accounts payable and accrued
expenses used cash of $680,000 and the cyclical reduction in deferred revenue
utilized cash of $845,000 during the first half of the fiscal year.
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 November 30, 2003, the Company had available borrowings on its debt
facilities of approximately $3.3 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.
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.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
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 three and six month periods
ended November 30, 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.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS 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
------------------------------
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
-----------------------------------------------
(b) Reports on Form 8-K
None.
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 14, 2004 /s/ Joseph P. Mullaney
---------------------- -------------------------
Joseph P. Mullaney
President
Chief Operating Officer