SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended Commission File Number
August 31, 1998 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
4695 44th Street SE, Suite B-130, Grand Rapids, MI 49512
Telephone (616) 957-2330
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No _____
The number of shares outstanding of registrant's common stock at August 31, 1998
was 6,829,542 shares.
Form 10-Q
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets
August 31, 1998 and May 31, 1998 3
Consolidated Condensed Statements of Income -
Three Months Ended August 31, 1998 and
August 31, 1997 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended August 31, 1998 and
August 31, 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
August 31, May 31,
1998 1998
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ASSETS
Cash and cash equivalents $ 538 $ 429
Accounts receivable, net 8,945 9,290
Unbilled costs and fees 1,879 1,153
Inventory 223 338
Prepaid expenses and other assets 1,376 886
Deferred income taxes 125 125
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Total current assets 13,086 12,221
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Property and equipment, net (Note B) 2,255 2,280
Capitalized software costs, net 13,718 13,816
Goodwill, net 6,949 7,252
Other assets 499 491
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TOTAL ASSETS $36,507 $36,060
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LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable, line of credit $ 3,000 $ 2,609
Accounts payable 3,092 2,386
Accrued expenses 1,854 3,805
Deferred maintenance revenue 2,559 3,522
Net liabilities of discontinued operations 233 338
Current portion of capital lease obligations 185 180
Current portion of long term debt 3,032 6,900
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Total current liabilities 13,955 19,740
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Capital lease obligations, net of current portion 190 238
Long-term debt, net of current portion 9,351 4,900
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Total long-term debt 9,541 5,138
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Stockholders' equity (Note B) 13,011 11,182
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,507 $36,060
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See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
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August 31, August 31,
1998 1997
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Revenue
Products $4,389 $1,426
Services 4,649 2,968
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Total revenue 9,038 4,394
Cost of products sold 1,317 842
Cost of services provided 2,232 1,727
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Gross margin 5,489 1,825
Research and development expenses 548 --
Selling, general and administrative 3,668 1,620
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Income from operations 1,273 205
Interest expense 413 --
Gain on available-for-sale securities -- 253
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Income from operations before income taxes 860 458
Provision for federal and state income taxes 173 80
Net income $ 687 $ 378
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Basic net income per common share $ 0.10 $ 0.07
Weighted average common shares outstanding 6,618 5,237
Dilutive net income per common share $ 0.10 $ 0.07
Weighted average diluted common share equivalents outstanding 7,121 5,483
See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended
August 31, August 31,
1998 1997
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Cash flows from operating activities:
Net income $ 687 $ 378
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Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 744 319
Gain on sale of available-for-sale securities -- (253)
Change in current assets and liabilities:
Accounts receivable 345 650
Unbilled costs and fees (726) (1,265)
Inventory 115 291
Prepaid expenses and other assets (537) (412)
Accounts payable and accrued expenses (1,245) (304)
Deferred maintenance revenue (963) (58)
Net liabilities of discontinued operations (105) 121
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Total adjustments (2,372) (911)
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Net cash used by operating activities (1,685) (533)
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Cash flows from investing activities:
Capital expenditures (216) (150)
Proceeds from sale of available-for-sale securities -- 810
Loans to officers -- (349)
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Net cash provided by (used) investing activities (216) 311
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Cash flows from financing activities:
Proceeds from exercise of stock options 1,062 --
Principal payments under capital lease obligations -- (18)
Proceeds from senior debt financing 9,000 --
Repayment of subordinated debt (5,400) --
Repayment of line of credit (2,609) --
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Net cash provided by (used) by financing activities 2,053 (18)
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Increase (decrease) in cash and cash equivalents 152 (240)
Cash and cash equivalents, beginning of period 429 580
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Cash and cash equivalents, end of period $ 581 $ 340
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See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 6
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(A) The consolidated condensed financial statements have been prepared 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.
(B) Details of certain balance sheet captions are as follows:
August 31, May 31,
1998 1998
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Property and equipment $ 3,953 $ 3,737
Accumulated depreciation
and amortization (1,698) (1,457)
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Property and equipment, net $ 2,255 $ 2,280
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Common stock, $.10 par value $ 727 $ 679
Capital in excess of par value 11,797 10,703
Retained earnings 1,969 1,282
Less treasury stock (1,482) (1,482)
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Stockholders' equity $ 13,011 $ 11,182
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Form 10-Q
Page 7
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Description of the Business
As detailed in Management's Discussion and Analysis under the section
"Description of the Business" in the 1998 Annual Report on Form 10-K, the
Company completed two acquisitions of technology companies during the second
half of fiscal 1998 that significantly changed its business model. These two
technology company acquisitions were the Advanced Manufacturing Technology group
("AMT") in November 1997 and Adra Systems, Inc. ("ADRA") in May 1998. Note I to
the 1998 Annual Report on Form 10-K describes these acquisitions in detail.
During the first quarter of fiscal 1998, the Company's revenue was generated
primarily through the sale of Parametric Technology Corporation's ("PTC")
products. The Company had disclosed in its 1997 Annual Report on Form 10-K that
the loss of the PTC distribution agreement could have a material adverse impact
on the business. The distribution agreement expired on September 30, 1997 and
was not renewed. The acquisitions noted above provided the Company with
technology of its own to market in conjunction with its services offerings and
provided it with insulation from the risk noted in the 1997 Form 10-K.
The comparisons below of Q1 1999 results to Q1 1998 reflect the significant
transformation of the business from the reseller business of Q1 1998 to the
technology and service provider business in Q1 1999.
Results of Operations
Total revenue for the three months ended August 31, 1998 was approximately $9.0
million as compared to approximately $4.4 million for the same period in the
prior fiscal year, an increase of 105.7%. Product revenue was approximately $4.4
million in the current fiscal year first quarter as compared to $1.4 million for
the same period in fiscal 1998, an increase of 207.8%. Service revenue was
approximately $4.6 million for the current fiscal year first quarter as compared
to approximately $3.0 million for the same period in fiscal 1998, an increase of
56.6%. The increase in product and service revenue is the result of the
acquisitions of AMT and ADRA. As described above, the acquisitions of these
technology companies during the second half of fiscal 1998 transformed SofTech
from a reseller of other companies' products to a technology and service
provider. Approximately 60% of the first quarter fiscal 1999 revenue was
generated from the sale of products and services related to these technology
company acquisitions.
Product gross margin for the first quarter of fiscal 1999 was $3,072,000, or
70.0% of product revenue as compared to $584,000, or 41.0% of product revenue
for the first quarter of fiscal 1998. The improved product gross margin in Q1
1999 was the result of the revenue generated from the sale of the Company's own
software technologies which carry a gross margin of approximately 95%. This was
offset somewhat by revenue generated from the sale of hardware and other
companies' software technology which generally carry a gross margin of between
20% and 40% of revenue. In the first quarter of fiscal 1998 the Company's
product revenue was entirely composed of sales of other companies' technology
and hardware. The third party software product represented at that time carried
a gross margin of about 75%, however, that relationship ended in September 1997
and was not renewed.
Service gross margin for the first quarter of fiscal 1999 was $2,417,000, or
52.0% of service revenue for the first quarter of fiscal 1999 as compared to
$1,241,000, or 41.8% of service revenue for the first quarter of fiscal 1998.
The improved service gross margin in the current quarter was primarily the
result of the additional software maintenance revenue and services revenue
generated from the acquisitions noted above. Higher margin service revenue
generated from the Consulting Group which was formed in the
Form 10-Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
second half of fiscal 1998 to provide customers with consultative,
process-oriented services also partially contributed to the improved
performance.
During the first quarter of fiscal 1999, the Company expended approximately
$548,000, or 6.1% of total revenue, on research and development efforts
primarily related to the enhancement of its existing software technologies.
These type of expenditures are related to the acquisitions of the software
technology companies in the second half of fiscal 1998 as noted above. In that
the Company did not own technology of its own in the first quarter of fiscal
1998 no research and development expenditures were incurred in that period.
Selling, general and administrative expense ("SG&A") for the first quarter of
fiscal 1999 was approximately $3,668,000, an increase of 126.4% from the first
quarter fiscal 1998 expenditures of $1,620,000. SG&A amounted to 40.6% of total
revenue in Q1 1999 as compared to 36.9% in the same quarter in fiscal 1998. As
noted previously, with the acquisitions in the second half of fiscal 1998, the
business was transformed from a reseller to a technology and service provider.
The increase in SG&A in terms of both the expenditure increase and the increase
as a percentage of total revenue is primarily attributable to three factors: 1)
the acquisitions in the second half of fiscal 1998 which added infrastructure to
the Company's existing operations; 2) increased variable compensation associated
with the 200.7% increase in gross margin dollars; and 3) expansion of the
Company's direct salesforce and sales support group through the opening of seven
new offices, other than those offices added through the technology company
acquisitions.
Income from operations for the first quarter of fiscal 1999 was $1,273,000 as
compared to $205,000 for the same period in fiscal 1998, an increase of 521.0%.
Net income from operations before income taxes for Q1 1999 was $860,000 as
compared to $458,000 for Q1 1998, an increase of 87.8%. The Company incurred
interest expense of $413,000 in the first quarter of fiscal 1999 on the debt
used to finance the fiscal 1998 acquisitions noted above. The interest rate on
borrowings for the first quarter 1999 averaged approximately 11.1%. The Company
utilized short term, unsecured borrowing arrangements during a portion of Q1
1999 while completing its $9.0 million Senior Debt Facility in order to complete
the Adra acquisition in an expedient fashion. These short-term, unsecured
borrowing arrangements were more expensive than the facilities in place as of
the end of Q1 1999. The Company had no debt related to continuing operations in
fiscal 1998's first quarter and therefore had no interest expense. The Company
recorded a gain on the sale of securities in the first quarter of fiscal 1998 of
$253,000. These securities were acquired by the Company in the sale of its
Network Systems Group in September 1996.
Net income for the first quarter of fiscal 1999 was $687,000 as compared to net
income of $378,000 for the same period in fiscal 1998, an increase of 81.7%.
Earnings per share was $.10 for the first quarter of fiscal 1999 as compared to
$.07 for the same period in fiscal 1998. The Company recorded a tax provision of
$173,000 in the first quarter of fiscal 1999, an effective rate of 20%. This
effective rate was lower than the statutory rate due to the use of tax credits
that reduce the federal taxes due. The Company believes that it will utilize all
of its remaining tax credits which totaled approximately $800,000 at May 31,
1998 during fiscal 1999. The tax provision in the first quarter of fiscal 1998
was $80,000, an effective rate of 17.5%. This rate was lower than the statutory
rate due to the use of net operating losses that reduce federal taxes due.
Capital Resources and Liquidity
The Company ended the first quarter of fiscal 1999 with cash of approximately
$538,000, an increase of $109,000 from the May 31, 1998 cash balance of
$429,000. The borrowings under the Company's senior and subordinated debt
facilities described in Note F to the 1998 Annual Report on Form 10-K
Form 10-Q
Page 9
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
totaled $15,383,000 as of August 31, 1998. This represents an increase of
$974,000 from the May 31, 1998 debt balance of $14,409,000. As described in Note
F of the above referenced Form 10-K, during the first quarter of fiscal 1999 the
Company successfully completed its $9.0 million Senior Debt Facility that
replaced short term, unsecured credit agreements utilized to complete the Adra
acquisition in an expedient fashion.
Net cash used by operations totaled about $1,685,000 for the quarter ended
August 31, 1998. Net income adjusted for non-cash expenses generated
approximately $1,431,000. Accounts receivable growth utilized approximately
$381,000, an increase in prepaid expenses and other assets utilized $422,000 and
decreases in various liability accounts utilized approximately $2.3 million. The
increase in prepaid expenses and other assets is related to payments made in the
first quarter of the fiscal year that are amortized over the full fiscal year
and certain deposits required for new facilities related to the Adra
acquisition. A significant portion of the decrease in liabilities was related to
certain liabilities assumed or incurred in the Adra acquisition that were paid
down in Q1 1999.
Investing activities utilized approximately $216,000 during the first quarter of
fiscal 1999. Most of this expenditure was related to the purchase and
implementation of internal financial systems that are year 2000 compliant and
will improve the Company's ability to manage its diverse operations.
Financing activities generated approximately $2.0 million during the first
quarter of fiscal 1999. As noted previously, the Company completed its $9.0
million Senior Debt Facility during the first quarter and utilized the proceeds
to payoff its line of credit which had a balance of $2.6 million at fiscal year
end 1998, the $4.4 million deferred payment related to the Adra acquisition, and
$1.0 million of temporary financing from Greenleaf Capital. In addition,
exercises of stock options by employees generated an additional $1,062,000
during the first quarter of fiscal 1999.
The Company is currently negotiating the conversion of the remainder of the
bridge loan balance of $1.5 million and an additional capital infusion of a
similar amount with Greenleaf Capital. The Company believes that this action
together with the cash flow from operations will be sufficient for meeting its
liquidity and capital resource needs through the end of the fiscal year.
The statements made above with respect to SofTech's outlook for fiscal 1999
represent "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are subject to a number of risks and uncertainties. Future operating results
are dependent on a number of factors, many of which are outside the control of
the Company. These factors include, but are not limited to, general business and
economic conditions, maintaining reseller agreements with 3-D and PDM technology
providers, generating sufficient cash flow from operations to fund working
capital needs, continued integration of acquired entities, potential
obsolescence to the Company's CAD and CAM technologies, potential unfavorable
outcome to existing litigation, maintaining existing relationship with lenders,
remaining in compliance with debt covenants and the ability of the Company to
attract and retain qualified personnel both in its existing markets and in new
office locations. It is also dependent on market acceptance of the Company's
PROSPECTORTM technology and continued revenue generated from the CADRATM product
family at or near the historical rate. Approximately 25% of the CADRATM revenue
has previously been generated from the Asian market and part of the future
growth of the PROSPECTORTM technology revenue is anticipated from that market.
It is anticipated that the growth projected from the Asian market can be
replaced with better than forecasted growth from North America and Western
Europe in the near term, however, prolonged instability in the Asian market
could have a detrimental impact on growth in fiscal years beyond 1999.
Form 10-Q
Page 10
PART II. OTHER INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27(i) Financial Data Schedule as required by Article 5 of Regulation S-X.
(b) Reports on Form 8-K
The Company filed a Form 8-K/A with the Securities and Exchange Commission
on July 21, 1998 providing the required audited financial statements of the
Adra Systems business.
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, 1998 /s/ Joseph P. Mullaney
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Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: October 15, 1998 /s/ Jan E. Yansak
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Jan E. Yansak
Controller