Form 10-QSB
Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
For the Quarter Ended Commission File Number
November 30, 2002 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
2 Highwood Drive, Tewksbury, MA 01876
Telephone (978) 640-6222
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
The number of shares outstanding of registrant's common stock at December 31,
2002 was 12,205,236 shares.
Form 10-QSB
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets-
November 30, 2002 (unaudited) and May 31, 2002 3
Consolidated Condensed Statements of Operations (unaudited)-
Three Months Ended November 30, 2002 and
2001 4
Consolidated Condensed Statements of Operations (unaudited)-
Six Months Ended November 30, 2002 and
2001 5
Consolidated Condensed Statements of Cash Flows (unaudited)-
Six Months Ended November 30, 2002 and 2001 6
Notes to Consolidated Condensed Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-20
Item 3. Market Risk Quantitative and Qualitative Disclosures 20
PART II. Other Information
Item 5. Controls and Procedures 21
Item 6. Exhibits and Reports on Form 8-K 21
Form 10-QSB
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands)
November 30, May 31,
2002 2002
(unaudited) (audited)
------------- -----------
ASSETS
------
Cash and cash equivalents $ 3,479 $ 708
Accounts receivable, net 1,395 1,671
Prepaid expenses and other assets 235 170
------------- -----------
Total current assets 5,109 2,549
------------- -----------
Property and equipment, net (Note B) 240 330
Capitalized software costs, net 8,601 9,371
Goodwill, net 2,197 2,197
Marketable securities 183 106
Other assets 143 143
------------- -----------
TOTAL ASSETS $ 16,473 $ 14,696
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accounts payable $ 356 $ 372
Accrued expenses 530 694
Deferred maintenance revenue 1,898 2,642
Current portion of capital lease obligations 65 79
Current portion of long term debt 1,045 714
------------- -----------
Total current liabilities 3,894 4,501
------------- -----------
Capital lease obligations, net of current portion 7 23
Non-current deferred revenue 459 459
Long-term debt, net of current portion 13,603 10,589
------------- -----------
Total long-term debt 14,069 11,071
------------- -----------
Stockholders' deficit (1,490) (876)
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 16,473 $ 14,696
============= ===========
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
----------------------------------------
November 30, November 30,
2002 2001
-------------- -------------
Revenue
Products $ 837 $ 380
Services 1,389 1,609
-------------- -------------
Total revenue 2,226 1,989
Cost of products sold 24 28
Cost of services provided 70 45
-------------- -------------
Gross margin 2,132 1,916
Research and development expenses 362 413
Selling, general and administrative 1,692 1,838
-------------- -------------
Income (loss) from operations before interest expense and income taxes 78 (335)
Interest expense 291 288
-------------- -------------
Loss before income taxes (213) (623)
Provision for income taxes - -
-------------- -------------
Net loss $ (213) $ (623)
============== =============
Basic and diluted net loss per common share $ (0.02) $ (0.06)
Weighted average common shares outstanding 12,205 10,742
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Six Months Ended
-----------------------------------------
November 30, November 30,
2002 2001
------------ ------------
Revenue
Products $ 1,135 $ 1,072
Services 2,812 3,356
------------ ------------
Total revenue 3,947 4,428
Cost of products sold 33 48
Cost of services provided 137 186
------------ ------------
Gross margin 3,777 4,194
Research and development expenses 696 792
Selling, general and administrative 3,250 3,850
------------ ------------
Loss from operations before interest expense and income taxes (169) (448)
Interest expense 576 596
------------ ------------
Loss before income taxes (745) (1,044)
Provision for income taxes - -
------------ ------------
Net loss $ (745) $ (1,044)
============ ============
Basic and diluted net loss per common share $ (0.06) $ (0.10)
Weighted average common shares outstanding 12,205 10,742
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Six Months Ended
-----------------------------------
November 30, November 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (745) $ (1,044)
------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 977 1,539
Change in current assets and liabilities:
Accounts receivable 276 363
Prepaid expenses and other assets (65) (50)
Accounts payable and accrued expenses (180) (561)
Deferred maintenance revenue (744) (468)
------------ ------------
Total adjustments 264 823
------------ ------------
Net cash used by operating activities (481) (221)
------------ ------------
Cash flows used by investing activities:
Purchase of marketable securities (29) -
Capital expenditures (33) (5)
------------ ------------
Net cash used by investing activities (62) (5)
Cash flows from financing activities:
Principal payments under capital lease obligations (31) (24)
Proceeds from line of credit agreements, net 3,345 132
------------ ------------
Net cash provided by financing activities 3,314 108
------------ ------------
Increase (decrease) in cash and cash equivalents 2,771 (118)
Cash and cash equivalents, beginning of period 708 1,278
------------ ------------
Cash and cash equivalents, end of period $ 3,479 $ 1,160
============ ============
Supplemental Disclosures of Cash Flow Information:
Interest Paid 565 585
Income Taxes Paid 0 0
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 7
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(A) The consolidated condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission from
the accounts of SofTech, Inc. and its wholly owned subsidiaries (the
"Company") without audit; however, in the opinion of management, the
information presented reflects all adjustments which are of a normal
recurring nature and elimination of intercompany transactions which are
necessary to present fairly the Company's financial position and results of
operations. It is recommended that these consolidated condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's fiscal year 2002 Annual Report on
Form 10-K.
(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
eight to ten years.
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 and
intangible assets with indeterminable lives 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. The Company utilized a third party independent valuation
to determine the fair value of each of the reporting units based on a
discounted cash flow income approach. 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
Form 10-QSB
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
impairment test is not required to be completed. These valuations contain
certain assumptions concerning estimated future revenues and future
expenses for each of our two product lines, Cadra and AMT, using our fiscal
2003 budget as the baseline. For Cadra, we projected that annual revenue
would decrease at rates between 1.7% and 2.4% and expenses would increase
at annual rates of about 1.5%. For AMT, we projected annual revenue would
increase at annual rates between 2.5% and 3.3% and that expenses would
increase at annual rates of about 1.5%. No additional revenue was projected
for new product offerings for either product line. Should actual results
differ from these estimates, an impairment charge may be necessary in
subsequent periods. The Company will be required to continue to perform a
goodwill impairment test on an annual basis.
The Company did not record expense related to the amortization of goodwill
during the three and six months ended November 30, 2002. 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. The following table presents the reported net loss and
net loss per share data for the three and six month periods ended November
30, 2002 and 2001, as well as pro forma adjustments relating to the three
and six month periods ended November 30, 2002 and 2001, as if SFAS No. 142
had been adopted on June 1, 2001.
Three Months Ended
November 30 (000's)
(unaudited)
---------------------
2002 2001
---- ----
Reported net loss $(213) $(623)
Add back: Goodwill amortization -- 290
----- -----
Adjusted net loss $(213) $(333)
===== =====
Basic and diluted loss per
share, as reported $(.02) $(.06)
===== =====
Basic and diluted loss per
share, as adjusted $(.02) $(.03)
===== =====
Six Months Ended
November 30 (000's)
(unaudited)
---------------------
2002 2001
---- ----
Reported net loss $(745) $(1,044)
Add back: Goodwill amortization -- 514
----- ----
Adjusted net loss $(745) $(530)
===== =====
Basic and diluted loss per
share, as reported $(.06) $(.10)
===== =====
Basic and diluted loss per
share, as adjusted $(.06) $(.05)
===== =====
Form 10-QSB
Page 9
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.
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
allowance for doubtful accounts, valuation of long lived assets including
goodwill and intangibles (capitalized software costs) and deferred tax
assets. Actual results could differ from those estimates.
(C) LIQUIDITY
The Company ended the first half of fiscal 2003 with cash of approximately
$3.5 million. Operating activities used approximately $481,000 of cash
during the first six months of the fiscal year. The net loss adjusted for
non-cash expenditures related to amortization and depreciation provided
cash of $232,000. A net decrease in accounts receivable generated an
additional $276,000. The paydown of accounts payable and accrued expenses
utilized $180,000 and the decrease in deferred revenue resulted in an
additional reduction of $744,000.
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 2003, the current economic environment
especially in the manufacturing sector makes forecasting revenue based on
historical models difficult and somewhat unreliable.
During the first six months of fiscal 2003, the Company purchased $33,000
of capital equipment and an additional 33,952 shares of Workgroup
Technology Corporation ("WTC") shares in open market transactions for
approximately $29,000 prior to commencement of the Tender Offer in
mid-November. The Company drew down additional funds, net of repayments, of
$3.3 million under its Promissory Note with Greenleaf Capital in order to
provide sufficient capital to acquire WTC.
Form 10-QSB
Page 10
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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, 2002, the Company had available borrowings on
its debt facilities of approximately $3.4 million.
(D) Details of certain balance sheet captions are as follows (000's):
November 30, May 31,
2002 2002
(unaudited) (audited)
------------- -----------
Property and equipment $ 3,601 $ 3,568
Accumulated depreciation
and amortization (3,361) (3,238)
------------- -----------
Property and equipment, net $ 240 $ 330
------------- -----------
Common stock, $.10 par value $ 1,274 $ 1,274
Capital in excess of par value 19,544 19,544
Accumulated deficit (20,664) (19,919)
Cumulative translation adjustment (154) (166)
Unrealized gain(loss)on marketable securities 71 (48)
Less treasury stock (1,561) (1,561)
------------- -----------
Stockholders' deficit $ (1,490) $ (876)
------------- -----------
(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:
For the Three Month Periods Ended
November 30, November 30,
2002 2001
(unaudited) (unaudited)
-------------- ---------------
Basic weighted average shares outstanding 12,205,236 10,741,784
Effect of employee stock options outstanding -- --
---------- ----------
Diluted 12,205,236 10,741,784
========== ==========
For the Six Month Periods Ended
November 30, November 30,
2002 2001
(unaudited) (unaudited)
-------------- ---------------
Basic weighted average shares outstanding 12,205,236 10,741,784
Effect of employee stock options outstanding -- --
---------- ----------
Diluted 12,205,236 10,741,784
========== ==========
Form 10-QSB
Page 11
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(F) COMPREHENSIVE LOSS
The Company's comprehensive loss includes accumulated foreign currency
translation adjustments and unrealized gain on marketable securities. For
the three and six month periods ended at November 30, 2002 and 2001, the
comprehensive loss was as follows (000's):
Three Month Periods Ended November 30,
2002 2001
(unaudited) (unaudited)
----------- -----------
Net loss $ (213) $ (623)
Changes in:
Foreign currency translation adjustment (12) (4)
Unrealized gain on marketable securities 97 --
------- -------
Comprehensive loss $ (128) $ (627)
======= =======
Six Month Periods Ended November 30,
2002 2001
(unaudited) (unaudited)
----------- -----------
Net loss $ (745) $ (1,044)
Changes in:
Foreign currency translation adjustment 12 5
Unrealized gain on marketable securities 119 --
------ --------
Comprehensive loss $ (614) $ (1,039)
====== ========
(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):
Form 10-QSB
Page 12
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Three Months Ended Three Months Ended
November 30, November 30,
Revenue: 2002 2001
(unaudited) (unaudited)
-----------------------------------------------------
North America $1,251 $1,252
Asia 279 240
Europe 904 567
Eliminations (208) (70)
-------- --------
Consolidated Total $2,226 $1,989
======== ========
Six Months Ended Six Months Ended
November 30, November 30,
Revenue: 2002 2001
(unaudited) (unaudited)
-----------------------------------------------------
North America $2,300 $2,836
Asia 469 530
Europe 1,409 1,236
Eliminations (231) (174)
-------- --------
Consolidated Total $3,947 $4,428
======== ========
November 30, May 31,
Long-Lived Assets: 2002 2002
(unaudited) (audited)
-----------------------------------------------------
North America $11,212 $12,050
Europe 152 97
-------- --------
Consolidated Total $11,364 $12,147
======== ========
(H) NEW ACCOUNTING PRONOUNCEMENTS
On December 31, 2002, the 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. For entities that voluntarily change to the fair
value based method of accounting for stock-based employee compensation, the
transition provisions are effective for fiscal years ending after December
15, 2002. For all other companies, the disclosure provisions and the
amendment to APB No. 28 are effective for interim periods beginning after
December 15, 2002. We do not expect the transition provisions to have any
effect on our financial position, results of operations or cash flows.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies (SFAS 5), relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of
guarantees.
Form 10-QSB
Page 13
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under
that guarantee. FIN 45 covers guarantee contracts that have any of the
following four characteristics: (a) contracts that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, a liability, or an equity security
of the guaranteed party (e.g., financial and market value guarantees), (b)
contracts that contingently require the guarantor to make payments to the
guaranteed party based on another entity's failure to perform under an
obligating agreement (performance guarantees), (c) indemnification
agreements that contingently require the indemnifying party (guarantor) to
make payments to the indemnified party (guaranteed party) based on changes
in an underlying that is related to an asset, a liability, or an equity
security of the indemnified party, such as an adverse judgment in a lawsuit
or the imposition of additional taxes due to either a change in the tax law
or an adverse interpretation of the tax law, and (d) indirect guarantees of
the indebtedness of others.
FIN 45 specifically excludes certain guarantee contracts from its scope.
Additionally, certain guarantees are not subject to FIN 45's provisions for
initial recognition and measurement but are subject to its disclosure
requirements. The initial recognition and measurement provisions are
effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for our annual financial statements
the year ended May 31, 2003. We are currently evaluating the impact of FIN
45 on our financial statements and related disclosures.
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. Management believes the adoption of SFAS No. 143 will not have a
material effect on the financial position or results of operations of the
Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets. It replaces SFAS No. 121. The accounting model for
long-lived assets to be disposed of by sale applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. SFAS No. 144 also broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The adoption of SFAS No. 144 did
not have a material effect on the financial position or results of
operations of the Company.
In July 2002, FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities", which becomes effective
January 2003. SFAS No. 146 requires companies to recognize costs associated
with exit or disposal
Form 10-QSB
Page 14
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
activities when they are incurred rather than at the date of commitment.
Management believes the adoption of SFAS No. 146 will not have a material
effect on the financial position or results of operations or retained
earnings.
In April 2002, FASB issued Statement No. 145, "Rescission of FASB
Statements No 4, 44, and 64, Amendment of FASB 13, and Technical
Corrections", which is effective for fiscal years beginning after May 15,
2002. Upon adoption of SFAS 145, companies will be required to apply the
criteria in APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions"
in determining the classification of gains/losses resulting from the
extinguishment of debt. Upon adoption, extinguishments of debt shall be
classified under the criteria in APB Opinion No. 30. The adoption of SFAS
No. 145 did not have a material effect on the financial position or results
of operations or retained earnings.
(I) RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation. Research and development expense for the three and six
month periods ended November 30, 2001included $412,000 and $891,000,
respectively, of amortization and allocation of overhead cost that have
been reclassified to selling, general and administrative expense to conform
to the current year presentation. These reclassifications have no effect on
the previously reported results of operations or retained earnings.
(J) AMENDMENT TO PROMISSORY NOTE
On November 8, 2002, the Company amended its Promissory Note with Greenleaf
Capital, Inc. Under the amended agreement the Company increased its
borrowing from $11.0 million to $15.0 million. In addition, the interest
rate was reduced from 9.75% to Prime Rate plus 3.0% (currently 7.25%). This
amendment was entered into in order to provide the Company sufficient
capital to complete the acquisition of Workgroup Technology Corporation
(see Note K). The Promissory Note expires on June 12, 2007.
(K) SUBSEQUENT EVENT
On December 18, 2002, the Company successfully closed on a cash tender
offer ("Offer") to acquire the outstanding shares common stock of Workgroup
Technology Corporation (WTC) at a price of $2.00 per share. Approximately
1.5 million shares of WTC common stock were purchased by the Company under
the Offer, which, together with the shares owned by SofTech represents
approximately 89% of the outstanding shares of WTC. On January 2, 2003, the
Company filed a Form 8-K with the Securities and Exchange Commission which
provides additional information regarding this event.
Form 10-QSB
Page 15
SOFTECH, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The statements made below with respect to SofTech's outlook for fiscal 2003
and beyond represent "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934 and are subject to a number of risks and
uncertainties. These include, among other risks and uncertainties, general
business and economic conditions, generating sufficient cash flow from
operations to fund working capital needs, continued integration of acquired
entities, potential obsolescence of the Company's CAD and CAM technologies,
potential unfavorable outcome to existing litigation, maintaining existing
relationships with the Company's lenders, remaining in compliance with debt
covenants, successful introduction and market acceptance of planned new
products and the ability of the Company to attract and retain qualified
personnel both in our existing markets and in new territories in an
extremely competitive environment.
Critical Accounting Policies and Significant Judgements 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
the Company's consolidated financial statements, contained in its May 31,
2002 Annual Report on Form 10-K, as filed with the SEC. The Company
believes that the following accounting policies require the application of
management's most difficult, subjective or complex judgments:
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 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 product lines, Cadra and
AMT, using our fiscal 2003 budget as the baseline. For Cadra, we projected
that annual revenue would decrease at rates between 1.7% and 2.4% and
expenses would increase at annual rates of about 1.5%. For AMT, we
projected annual revenue would increase at annual rates between 2.5% and
3.3% and that expenses would increase at annual rates of about
Form 10-QSB
Page 16
SOFTECH, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
1.5%. No additional revenue was projected for new product offerings for
either product line.We have not determined that there has been an
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 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. The Company utilized a third party independent valuation
to determine the fair value of each of the reporting units based on a
discounted cash flow income approach. 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 is not required to be completed. The Company will be
required to continue to perform a goodwill impairment test on an annual
basis.
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 is currently fully reserved.
Results of Operations
---------------------
Total revenue for the three and six month periods ended November 30, 2002
were $2.2 million and $3.9 million, respectively, compared to $2.0 million
and $4.4 million for the same periods in the prior fiscal year. This
represents an increase in total revenue of about $237,000 or 12% for Q2
FY2003 compared to the same period in fiscal 2002 and a decrease in revenue
of about $481,000 or 11% for the first half of fiscal 2003 compared to the
same period in fiscal 2002. Product revenue increased by approximately
$457,000 in Q2 fiscal 2003 as compared to the same period in the prior year
or about 120% and increased about $63,000 or 6% for the first half of
fiscal 2003 as compared to the same period in fiscal 2002. Service revenue
decreased by about $220,000 or 14% in the second quarter of fiscal 2003 as
compared to the same period of fiscal 2002 and decreased by $544,000 or 11%
in the first half of fiscal 2003 compared to the same period in fiscal
2002.
Form 10-QSB
Page 17
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total revenue for Q2 2003 as compared to the same period in fiscal 2002 was
up 59% in Europe, 16% in Asia and flat in North America. For the first half
of fiscal 2003 as compared to the same period in fiscal 2002, total revenue
was up 14% in Europe, down 12% in Asia and down 19% in North America.
Product revenue is composed of licensing our technology to end users. The
manufacturing marketplace that is served by our technology offerings has
been in a prolonged slump that has resulted in greatly reduced capital
spending especially on technology. The second quarter 2003 results improved
greatly as compared to the same period of fiscal 2002 and did so in all
geographies. North America and Asia production doubled and Europe was up
185%. Year to date 2003 as compared to 2002, North America and Asia product
revenue production was down about 5% but Europe's production increased 39%.
Service revenue is composed of software maintenance on our proprietary
software and revenue generated from services performed by our engineers
such as installation, training and consulting. Service revenue decreased by
$220,000 and $544,000 for the three and six month periods ended November
30, 2002, respectively, as compared to the same periods in the prior fiscal
year. This represented a decrease of 14% and 16% for the three and six
month periods ended November 30, 2002, respectively, as compared to the
same periods in the prior year. The decrease for the both the quarter and
the first half of fiscal 2003 as compared to the same periods in the prior
year was due to a 16% reduction in North American maintenance revenue for
our Cadra product line and a 24% reduction in our CAM product line. In
addition, a large implementation project ended in Q1 of fiscal 2002 that
had contributed about $100,000 of additional service revenue in that
period. The decline in North American maintenance revenue was due partly to
the very difficult economic conditions in the manufacturing sector and the
loss a significant AMT product line customer in Q1 of fiscal 2002.
Research and development expenditures for the three and six month periods
ended November 30, 2002 were $362,000 and $696,000, respectively, as
compared to $413,000 and $792,000 in fiscal 2002. These small decreases in
spending reflect an overall reduction of approximately two full time
equivalents.
Selling, general and administrative expenses totaled approximately $1.7
million and $3.3 million for the three and six month periods ended November
30, 2002, respectively. The SG&A spending in the same periods in fiscal
2002 totaled $1.8 million and $3.9 million. The cessation of goodwill
amortization in the current year related to the adoption of FAS 142 reduced
SG&A expenses by $290,000 and $514,000 for the three and six month periods
ended November 30, 2002 and is the primary explanation for the change.
Interest expense for the three and six months ended November 30, 2002 were
not significantly different from the expenses incurred for the comparable
periods in fiscal 2002. The Company did draw additional funds totaling $3.5
million under its amended line of credit in November for the purpose of
completing the acquisition of WTC, however, the impact on interest expense
was negligible given the borrowings were outstanding for only the last
eight (8) days of the period.
The net loss for the three and six month periods ended November 30, 2002
was $213,000 and $745,000 as compared to $623,000 and $1,044,000 for the
same periods in fiscal 2002. The number of shares
Form 10-QSB
Page 18
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
outstanding for each of the periods in fiscal 2003 were 12.2 million as
compared to 10.7 million in each of the periods in fiscal 2002. The net
loss per share for the three and six month periods ended November 30, 2002
was $.02 and $.06, respectively, as compared to the net loss per share of
$.06 and $.10 for the same periods in fiscal 2002.
Capital Resources and Liquidity
-------------------------------
The Company ended the first half of fiscal 2003 with cash of approximately
$3.5 million. Operating activities used approximately $481,000 of cash
during the first six months of the fiscal year. The net loss adjusted for
non-cash expenditures related to amortization and depreciation provided
cash of $232,000. A net decrease in accounts receivable generated an
additional $276,000. The paydown of accounts payable and accrued expenses
utilized $180,000 and the decrease in deferred revenue resulted in an
additional reduction of $744,000.
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 2003, the current economic environment
especially in the manufacturing sector makes forecasting revenue based on
historical models difficult and somewhat unreliable.
During the first six months of fiscal 2003, the Company purchased $33,000
of capital equipment and an additional 33,952 shares of Workgroup
Technology Corporation ("WTC") shares in open market transactions for
approximately $29,000 prior to commencement of the Tender Offer in
mid-November. The Company drew down additional funds, net of repayments, of
$3.3 million under its Promissory Note with Greenleaf Capital in order to
provide sufficient capital to acquire WTC.
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, 2002, the Company had available borrowings on
its debt facilities of approximately $3.4 million.
NEW ACCOUNTING PRONOUNCEMENTS
On December 31, 2002, the 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. For entities that voluntarily change to the fair
value based method of accounting for stock-based employee compensation, the
transition provisions are effective for fiscal years ending after December
15, 2002. For all other companies, the disclosure provisions and the
amendment to APB No. 28 are effective for interim periods beginning after
December 15, 2002. We do not expect the transition provisions to have any
effect on our financial position, results of operations or cash flows.
Form 10-QSB
Page 19
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies (SFAS 5), relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of
guarantees.
FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under
that guarantee. FIN 45 covers guarantee contracts that have any of the
following four characteristics: (a) contracts that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, a liability, or an equity security
of the guaranteed party (e.g., financial and market value guarantees), (b)
contracts that contingently require the guarantor to make payments to the
guaranteed party based on another entity's failure to perform under an
obligating agreement (performance guarantees), (c) indemnification
agreements that contingently require the indemnifying party (guarantor) to
make payments to the indemnified party (guaranteed party) based on changes
in an underlying that is related to an asset, a liability, or an equity
security of the indemnified party, such as an adverse judgment in a lawsuit
or the imposition of additional taxes due to either a change in the tax law
or an adverse interpretation of the tax law, and (d) indirect guarantees of
the indebtedness of others.
FIN 45 specifically excludes certain guarantee contracts from its scope.
Additionally, certain guarantees are not subject to FIN 45's provisions for
initial recognition and measurement but are subject to its disclosure
requirements. The initial recognition and measurement provisions are
effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for our annual financial statements
the year ended May 31, 2003. We are currently evaluating the impact of FIN
45 on our financial statements and related disclosures.
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. Management believes the adoption of SFAS No. 143 will not have a
material effect on the financial position or results of operations of the
Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets. It replaces SFAS No. 121. The accounting model for
long-lived assets to be disposed of by sale applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. SFAS No. 144 also broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be
Form 10-QSB
Page 20
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The adoption of SFAS No. 144 did not have a
material effect on the financial position or results of operations of the
Company.
In July 2002, FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities", which becomes effective
January 2003. SFAS No. 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the
date of commitment. Management believes the adoption of SFAS No. 146 will
not have a material effect on the financial position or results of
operations or retained earnings.
In April 2002, FASB issued Statement No. 145, "Rescission of FASB
Statements No 4, 44, and 64, Amendment of FASB 13, and Technical
Corrections", which is effective for fiscal years beginning after May 15,
2002. Upon adoption of SFAS 145, companies will be required to apply the
criteria in APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions"
in determining the classification of gains/losses resulting from the
extinguishment of debt. Upon adoption, extinguishments of debt shall be
classified under the criteria in APB Opinion No. 30. The adoption of SFAS
No. 145 did not have a material effect on the financial position or results
of operations or retained earnings.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
------------------------------------------------------------------
We face exposure to financial market risks, including adverse movements and
changes in interest rates. We conduct operations in Europe (Germany, Italy
and France) where the local currency is the Euro and we are therefore
subject to risk with regard to currency rate changes. In addition, we have
a substantial long term debt obligation. Our borrowing rate is set at Prime
Rate plus 3. A change in the Prime Rate of 50 Basis points would change our
annual interest expense by approximately $73,000.
Form 10-QSB
Page 21
SOFTECH, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 5. Controls and Procedures
-------------------------------
The Company's Chief Operating Officer is responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such
officer has concluded (based upon their evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that
the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in this report is
accumulated and communicated to the Company's management, including its
principal executive officers as appropriate, to allow timely decisions
regarding required disclosure.
The Certifying Officer also has indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their
evaluation, and there were no corrective actions with regard to significant
deficiencies and material weaknesses.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
Certification Issued Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification Issued Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month period ended
November 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: January 14, 2003 /s/ Joseph P. Mullaney
------------------ ----------------------
Joseph P. Mullaney
President
Chief Operating Officer
SOFTECH, INC.
2 Highwood Drive
Tewksbury, MA 01876
Certification Issued 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 quarterly report on Form 10-Q of SofTech, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003 /s/ Joseph P. Mullaney
------------------ ----------------------
Joseph P. Mullaney
President
Chief Operating Officer
SofTech, Inc.
2 Highwood drive
Tewksbury, MA 01876
(Certification Issued Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
I, Joseph P. Mullaney, certify that:
1. I am the President and Chief Operating Officer of SofTech, Inc.
2. I have read the quarterly report of SofTech, Inc. filed on Form 10-Q for
the quarter ending November 30, 2002 (the "Report"), including the financial
statements contained in the Report.
3. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and the information contained in this
quarterly report fairly presents, in all material respects, the financial
condition and results of operations of SofTech, Inc. for and as of the period
described.
Date: January 14, 2003 /s/ Joseph P. Mullaney
------------------ ----------------------
Joseph P. Mullaney
President
Chief Operating Officer