Form 10-QSB
Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
For the Quarter Ended Commission File Number
August 31, 2004 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
2 Highwood Drive, Tewksbury, MA 01876
Telephone (978) 640-6222
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of registrant's common stock at September 30,
2004 was 12,205,236 shares.
Form 10-QSB
Page 2
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 -
August 31, 2004 and May 31, 2004 3
Consolidated Condensed Statements of Operations -
Three Months Ended August 31, 2004 and 2003 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended August 31, 2004 and 2003 5
Notes to Consolidated Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Operations 10-13
Item 3. Controls and Procedures 14
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Form 10-QSB
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(dollars in thousands)
August 31, May 31,
2004 2004
------------ ------------
ASSETS
------
Cash and cash equivalents $ 363 $ 275
Accounts receivable, net 1,615 2,175
Prepaid and other assets 177 194
------------ ------------
Total current assets 2,155 2,644
------------ ------------
Property and equipment, net 185 199
Capitalized software costs, net 6,524 7,043
Other intangible assets, net 458 550
Goodwill, net 4,598 4,598
Notes receivable 134 134
Other assets 160 165
------------ ------------
TOTAL ASSETS $ 14,214 $ 15,333
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Accounts payable $ 211 $ 205
Accrued expenses 1,392 1,575
Deferred maintenance revenue 3,509 3,941
Current portion of long term debt 1,293 1,293
------------ ------------
Total current liabilities 6,405 7,014
------------ ------------
Long-term debt, net of current portion 12,876 12,917
------------ ------------
Stockholders' deficit (5,067) (4,598)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 14,214 $ 15,333
============ ============
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 4
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except for per share data)
Three Months Ended
-----------------------------------------
August 31, August 31,
2004 2003
---------------- ----------------
Revenue
Products $ 418 $ 583
Services 2,359 2,360
---------------- ----------------
Total revenue 2,777 2,943
Cost of products sold 9 8
Cost of services provided 389 422
---------------- ----------------
Gross margin 2,379 2,513
Research and development expenses 677 672
Selling, general and administrative 1,300 1,451
Amortization of capitalized software and other intangible assets 611 615
---------------- ----------------
Loss from operations before interest expense (209) (225)
Interest expense 250 253
---------------- ----------------
Net loss $ (459) $ (478)
================ ================
Basic and diluted net loss per common share $ (0.04) $ (0.04)
Weighted average common shares outstanding 12,205 12,205
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended
-----------------------------------------
August 31, August 31,
2004 2003
---------------- ----------------
Cash flows from operating activities:
Net loss $ (459) $ (478)
---------------- ----------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 632 663
Change in current assets and liabilities:
Accounts receivable 560 597
Prepaid expenses and other assets 17 70
Accounts payable and accrued expenses (177) (528)
Deferred maintenance revenue (432) (600)
Other (5) -
---------------- ----------------
Total adjustments 595 202
---------------- ----------------
Net cash provided (used) by operating activities 136 (276)
---------------- ----------------
Cash flows used by investing activities:
Capital expenditures (7) (12)
---------------- ----------------
Net cash used by investing activities (7) (12)
---------------- ----------------
Cash flows from financing activities:
Principal payments under capital lease obligations - (10)
(Repayments) proceeds from line of credit agreements, net (41) 17
---------------- ----------------
Net cash (used) provided by financing activities (41) 7
---------------- ----------------
Increase (decrease) in cash and cash equivalents 88 (281)
Cash and cash equivalents, beginning of period 275 719
---------------- ----------------
Cash and cash equivalents, end of period $ 363 $ 438
================ ================
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB
Page 6
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(A) BASIS OF PRESENTATION
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 2004 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, "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions" (SOP 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. The Company does not provide for a right of return. For
multiple element arrangements, total fees are allocated to each of the
elements using the residual method set forth in SOP 98-9. 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. Purchased software
is recorded at cost. The Company evaluates the realizability and the
related periods of amortization on a regular basis. Such costs are
amortized over estimated useful lives ranging from three to ten years.
The Company did not capitalize any internally developed software during
the three month periods ended August 31, 2003 or 2004. Amortization
expense related to capitalized software costs for the three month
periods ended August 31, 2003 and 2004 were $518,000 and $519,000,
respectively.
ACCOUNTING FOR 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 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 exceeded the carrying amount and, therefore, no goodwill
impairment existed as of June 1, 2002.
The Company tested the goodwill for impairment as of May 31, 2004 and
concluded, based on actual results for fiscal 2004 and projected cash
flows, that no impairment existed as of May 31, 2004.
Form 10-QSB
Page 7
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of all intangible
assets with a finite life (primarily capitalized software costs) and
other long-lived assets. If indicators of impairment exist, the Company
compares the undiscounted cash flows estimated to be generated by those
assets over their estimated economic life to the related carrying value
of those assets to determine if the assets are impaired. If the carrying
value of the asset is greater than the estimated undiscounted cash
flows, the carrying value of the assets would be decreased to their fair
value through a charge to operations. The Company does not have any
long-lived assets it considers to be impaired. The Company has
determined that all of its intangible assets (other than goodwill) have
finite lives and, therefore, the Company has continued to amortize its
intangible assets.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its stock option plans. Because the number of shares
is known and the exercise price of options granted has been equal to
fair value at date of grant, no compensation expense has been recognized
in the statements of operations. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation
- An Amendment of SFAS No. 123." Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant
date for awards under these plans, consistent with the methodology
prescribed under SFAS 123, the Company's net loss and loss per share
would have approximated the pro forma amounts indicated below:
Three Month Periods Ended August 31,
(in thousands, except per share data) 2004 2003
---------------------------------------------------------------------------------
Net loss - as reported $ (459) $ (478)
Stock-based compensation expense determined
under fair value based method (3) (4)
------- -------
Net loss - pro forma (462) (482)
======= =======
Loss per share - diluted - as reported (.04) (.04)
Loss per share - diluted - pro forma (.04) (.04)
FOREIGN CURRENCY TRANSLATION:
The functional currency of the Company's foreign operations (France,
Germany and Italy) is the local currency. As a result, assets and
liabilities are translated at period-end exchange rates and revenues and
expenses are translated at the average exchange rates. Adjustments
resulting from translation of such financial statements are classified
in accumulated other comprehensive income (loss). Foreign currency gains
and losses arising from transactions are included in the statement of
operations.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The most
significant estimates included in the financial statements are the
valuation of long term assets including intangibles (goodwill,
capitalized software and other intangible assets), deferred tax assets
and the allowance for doubtful accounts. Actual results could differ
from those estimates.
Form 10-QSB
Page 8
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
RECLASSIFACATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications have no effect on
previously reported results of operations or retained earnings.
(C) LIQUIDITY
The Company ended the first three months of fiscal 2005 with cash of
approximately $363,000. Operating activities provided approximately
$136,000 of cash during the first three months of the fiscal year. The
net loss adjusted for non-cash expenditures related to amortization and
depreciation together with a decrease in accounts receivable and other
assets generated cash of $745,000. The reduction in accounts payable and
accrued expenses used cash of $177,000 and the cyclical reduction in
deferred revenue utilized an additional $432,000 during the first
quarter.
Although the Company believes its current cost structure together with
reasonable revenue run rates based on historical performance will
generate positive cash flow in fiscal 2005, the current economic
environment especially in the manufacturing sector makes forecasting
revenue based on historical models difficult and somewhat unreliable.
The Company believes that the cash on hand together with cash flow from
operations and its available borrowings under its credit facility will
be sufficient for meeting its liquidity and capital resource needs for
the next year. At August 31, 2004, the Company had available borrowings
on its debt facilities of approximately $3.5 million.
(D) BALANCE SHEET COMPONENTS
Details of certain balance sheet captions are as follows (000's):
August 31, May 31,
2004 2004
--------------- -----------
Property and equipment $ 3,874 $ 3,867
Accumulated depreciation
and amortization (3,689) (3,668)
--------------- -----------
Property and equipment, net $ 185 $ 199
--------------- -----------
Common stock, $.10 par value $ 1,274 $ 1,274
Capital in excess of par value 19,544 19,544
Accumulated deficit (24,083) (23,624)
Cumulative translation adjustment (241) (231)
Less treasury stock (1,561) (1,561)
--------------- -----------
Stockholders' deficit $ (5,067) $ (4,598)
--------------- -----------
(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. The weighted average
Form 10-QSB
Page 9
SOFTECH, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
shares outstanding for each of the income statements included in this
filing are presented below (000's):
Three Month Periods Ended August 31,
2004 2003
-------------- --------------
Basic weighted average shares outstanding 12,205 12,205
Effect of employee stock options outstanding --- ---
-------------- --------------
12,205 12,205
============== ==============
(F) COMPREHENSIVE LOSS
The Company's comprehensive loss includes accumulated foreign currency
translation adjustments and unrealized gain (loss) on marketable
securities. For the three month periods ended August 31, 2004 and 2003,
the comprehensive loss was as follows (000's):
Three Month Periods Ended August 31,
2004 2003
-------------- --------------
Net loss $ (459) $ (478)
Changes in:
Foreign currency translation adjustment (10) (34)
-------------- --------------
Comprehensive loss $ (469) $ (512)
============== ==============
(G) SEGMENT INFORMATION
The Company operates in one reportable segment and is engaged in the
development, marketing, distribution and support of CAD/CAM and Product
Data Management computer solutions. The Company's operations are
organized geographically with foreign offices in France, Germany and
Italy. Components of revenue and long-lived assets (consisting primarily
of intangible assets, capitalized software and property, plant and
equipment) by geographic location, are as follows (000's):
Three Months Ended Three Months Ended
August 31, August 31,
Revenue: 2004 2003
-------------------------------------------------
North America $ 2,095 $ 2,311
Asia 218 189
Europe 483 472
Eliminations (19) (29)
-------- --------
Consolidated Total $ 2,777 $ 2,943
-------- --------
August 31, May 31,
2004 2004
Long Lived Assets:
-------------------------------------------------
North America $11,881 $12,495
Europe 178 194
-------- --------
Consolidated Total $12,059 $12,689
-------- --------
Form 10-QSB
Page 10
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
The statements made below with respect to SofTech's outlook for fiscal 2005 and
beyond represent "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934 and are subject to a number of risks and uncertainties. These include,
among other risks and uncertainties, general business and economic conditions,
generating sufficient cash flow from operations to fund working capital needs,
continued integration of acquired entities, potential obsolescence of the
Company's technologies, maintaining existing relationships with the Company's
lenders, successful introduction and market acceptance of planned new products
and the ability of the Company to attract and retain qualified personnel both in
our existing markets and in new territories in an extremely competitive
environment.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
The Securities and Exchange Commission ("SEC") issued disclosure guidance for
"critical accounting policies." The SEC defines "critical accounting policies"
as those that require the application of management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.
The Company's significant accounting policies are described in Note A to these
financial statements. The Company believes that the following accounting
policies require the application of management's most difficult, subjective or
complex judgments:
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,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions" (SOP 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. The Company does not provide for a right
of return. For multiple element arrangements, total fees are allocated to each
of the elements using the residual method set forth in SOP 98-9. 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.
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. 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.
Form 10-QSB
Page 11
SOFTECH, INC. AND SUBSIDIARIES
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
----------------------------------------------------------
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 exceeded the carrying
amount 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, 2004 and concluded based on actual results for fiscal 2004 and projected
cash flows, that no impairment existed as of May 31, 2004. The Company will be
required to continue to perform a goodwill impairment test on an annual basis.
This valuation contains certain assumptions concerning estimated future revenues
and expenses. Should our operating results deteriorate, we may determine that
some portion of our goodwill or all of our goodwill is impaired. Such
determination could result in non-cash charges to income that could materially
affect our results of operations for that period.
ESTIMATING ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
VALUATION OF DEFERRED TAX ASSETS
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. The Company's
deferred tax assets are currently fully reserved.
RESULTS OF OPERATIONS
Revenue for the three month period ended August 31, 2004 was $2.78 million as
compared to $2.94 million for the same period in the prior fiscal year, a
decrease of $166,000 or about 6%. Product revenue for the quarter ended August
31, 2004 was $418,000 as compared to $583,000 for the same period in the prior
fiscal year, a decrease of $165,000 or 28%. Service revenue for the quarter
ended August 31, 2004 was about $2.4 million, essentially unchanged from the
same period in fiscal 2004. The decrease in revenue in the current quarter
relative to the same period in fiscal 2004 was related to lower software
licensing revenue from our ProductCenter offering. It is our view that this
decrease is related to an uneven flow of software licensing orders as the
pipeline of identified business from this product line has increased over the
last eighteen months.
Gross margin as a percentage of revenue was 85.7% for the quarter ended August
31, 2004 as compared to 85.4% for the quarter ended August 31, 2003. Maintenance
revenue for the current quarter was approximately $2.04 million and the
consulting revenue was approximately $323,000. Maintenance revenue for the same
period in fiscal 2004 was $2.14 million and consulting revenue was $219,000. It
is our expectation that our gross margin as a percent of revenue will continue
at these levels in the future.
Research and development expenses ("R&D") were $677,000 for the three month
period ended August 31, 2004 as compared to $672,000 for the same period in the
prior fiscal year. R&D as a percentage of revenue was 24.4% in the current
quarter as compared to 22.8% for the same period in the prior fiscal year. It is
our expectation that this level of expenditure related to R&D activities will
remain stable for the foreseeable future.
Selling, general and administrative ("SG&A") expense was $1.3 million for the
three month period ended August 31, 2004 as compared to $1.45 million for the
same period in fiscal 2004, a decrease of approximately 10%. The decrease is due
primarily to reduced payroll and payroll related expenses as a result of
continued reduction in general and administrative headcount over the last twelve
months.
Form 10-QSB
Page 12
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
The non-cash expenses related to the amortization of capitalized software and
other intangible assets was $611,000 for the quarter ended August 31, 2004 as
compared to $615,000 for the same period in fiscal 2004.
Interest expense for the three month period ended August 31, 2004 was
approximately $250,000 as compared to $253,000 for the same period in fiscal
2004. The average borrowings increased to approximately $14.2 million during the
current quarter as compared to $14.1 million for the same period in fiscal 2004,
however, the interest rate on those borrowings decreased to about 7.0% in the
current quarter from 7.5% for the same period in fiscal 2004.
The net loss for the three month period ended August 31, 2004 was $459,000 as
compared to a net loss of $478,000 for the same period in the prior fiscal year.
The loss per share for the three month periods ended August 31, 2004 and 2003
was $(.04).
CAPITAL RESOURCES AND LIQUIDITY
The Company ended the first three months of fiscal 2004 with cash of
approximately $363,000. Operating activities provided approximately $136,000 of
cash during the first three months of the fiscal year. The net loss adjusted for
non-cash expenditures related to amortization and depreciation together with a
decrease in accounts receivable and other assets generated cash of $750,000. The
reduction in accounts payable and accrued expenses used cash of $177,000 and the
cyclical reduction in deferred revenue utilized an additional $432,000 during
the first quarter.
Although the Company believes its current cost structure together with
reasonable revenue run rates based on historical performance will generate
positive cash flow in fiscal 2005, the current economic environment especially
in the manufacturing sector makes forecasting revenue based on historical models
difficult and somewhat unreliable.
The Company believes that the cash on hand together with cash flow from
operations and its available borrowings under its credit facility will be
sufficient for meeting its liquidity and capital resource needs for the next
year. At August 31, 2004, the Company had available borrowings on its debt
facilities of approximately $3.5 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business is subject to many uncertainties and risks. This Form
10-QSB also contains certain forward-looking statements within the meaning of
the Private Securities Reform Act of 1995. The Company's future results may
differ materially from its current results and actual results could differ
materially from those projected in the forward looking statements as a result of
certain risk factors, including but not limited to those set forth below, other
one-time events and other important factors disclosed previously and from time
to time in the Company's other filings with the SEC.
OUR QUARTERLY RESULTS MAY FLUCTUATE. The Company's quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Our quarterly revenue may fluctuate significantly for
several reasons, including: the timing and success of introductions of our new
products or product enhancements or those of our competitors; uncertainty
created by changes in the market; difficulty in predicting the size and timing
of individual orders; competition and pricing; and customer order deferrals as a
result of general economic decline. Furthermore, the Company has often
recognized a substantial portion of its product revenues in the last month of a
quarter, with these revenues frequently concentrated in the last weeks or days
of a quarter. As a result, product revenues in any quarter are substantially
dependent on orders booked and shipped in the latter part of that quarter and
revenues from any future quarter are not predictable with any significant degree
of accuracy. We typically do not experience order backlog. For these reasons, we
believe that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
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
Form 10-QSB
Page 13
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
costs and resulted in positive cash flow from operations for the last three
fiscal years. It is our expectation that we can continue to improve on our
recent success, however, there can be no assurances that the Company will
continue to generate positive cash in the future.
CONTINUED DECLINE IN BUSINESS CONDITIONS AND INFORMATION TECHNOLOGY (IT)
SPENDING COULD CAUSE FURTHER DECLINE IN REVENUE. The level of future IT spending
remains very uncertain as does the prognosis for an economic recovery in the
manufacturing sector. If IT spending continues to decline and the manufacturing
sector continues to experience economic difficulty, the Company's revenues could
be adversely impacted.
THE COMPANY IS DEPENDENT ON ITS LENDER FOR CONTINUED SUPPORT. We have a very
strong relationship with our sole lender, Greenleaf Capital. They currently
represent our sole source of financing and it is our belief that it would be
difficult to find alternative financing sources in the event whereby the
relationship with Greenleaf changed.
THE CONTINUED INTEGRATION OF WTC MAY EXPERIENCE DIFFICULTY. Since acquiring WTC
in December 2002, much progress has been made in integrating our operations,
reducing redundant functions and consolidating our facilities. The strategy
includes more closely integrating our technologies and offering our combined
customer base these solutions. The strategy also includes translating
ProductCenter for users other than the U.S. English speaking market. There can
be no assurance that this continued integration of our technologies or offering
ProductCenter outside the U.S. will be successful.
Form 10-QSB
Page 14
SOFTECH, INC. AND SUBSIDIARIES
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ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Operating Officer is responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such officer has
concluded (based upon his evaluation of these controls and procedures as of a
date within 90 days of the filing of this report) that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in this report is accumulated and communicated to the
Company's management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure.
The Certifying Officer also has indicated that there were no significant changes
in the Company's internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
The Company filed three Form 8-K's during the quarter ended August 31,
2004. The Form 8-K dated June 1, 2004 related to the Company's dismissal
of its prior independent accountant and the hiring of its current
independent accountant. The Form 8-K dated July 2, 2004 related to the
Company's press release announcing the results of its Annual Meeting
held on June 30, 2004. The Form 8-K dated August 31, 2004 related to the
Company's announcement of fourth quarter results for fiscal 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: October 15, 2004 /s/ Joseph P. Mullaney
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Joseph P. Mullaney
President
Chief Operating Officer