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
___________________
For the Quarter Ended Commission File Number
February 28, 1995 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
460 TOTTEN POND ROAD, WALTHAM, MASSACHUSETTS 02154
Telephone (617) 890-6900
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 February 28,
1995 was 4,050,047 shares.
2
SOFTECH, INC.
INDEX
Page
PART I. Financial Information Number
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
February 28, 1995 and May 31, 1994 3
Consolidated Condensed Statements of Income -
Three and Nine Months Ended February 28, 1995 and
February 28, 1994 4 - 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended February 28, 1995 and
February 28, 1994 6
Notes to Consolidated Condensed Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
February 28, May 31,
1995 1994
ASSETS
Cash and cash equivalents $ 720,575 $ 3,976,929
Marketable securities, at cost 993,318 9,154,622
Accounts receivable 12,247,524 6,307,242
Inventory 2,836,376 1,135,325
Prepaid expenses and other assets 1,572,731 515,567
Deferred income taxes ---- 105,214
Net assets of discontinued operations (Note F) 1,434,986 960,366
Total current assets 19,805,510 22,155,265
Property and equipment, net (Note E) 2,417,472 967,515
Goodwill 4,977,485 1,299,423
Other assets 96,692 36,833
Deferred income taxes 760,351 644,925
TOTAL ASSETS $28,057,510 $25,103,961
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,160,344 $ 1,949,466
Accrued expenses 1,693,836 1,061,871
Deferred maintenance revenue 976,218 1,210,503
Federal and state income taxes payable ---- 40,129
Total current liabilities 4,830,398 4,261,969
Stockholders' equity (Note E) 23,227,112 20,841,992
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,057,510 $25,103,961
See accompanying notes to consolidated condensed financial statements.
4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
-----------------------------
February 28, February 28,
1995 1994
Revenue
Products $ 9,677,053 $ 3,994,450
Services 3,223,355 2,195,504
Total revenue 12,900,408 6,189,954
Cost of products sold 7,787,466 3,005,529
Cost of services provided 1,765,024 1,664,265
Gross margin 3,347,918 1,520,160
Selling, general and administrative 3,352,460 1,132,026
Software development costs (Note C) 737,030 ----
Operating income/(loss) (741,572) 388,134
Interest income 22,858 76,997
Income/(loss) from continuing operations
before taxes (718,714) 465,131
Provision/(benefit) for federal and state
income taxes (200,000) 116,103
Income/(loss) from continuing operations (518,714) 349,028
Discontinued operations (Notes B and F)
Gain from disposal (less applicable provision
for income taxes of $254,508) ---- 1,018,031
Net income/(loss) $ (518,714) $ 1,367,059
Income/(loss) from continuing operations
per common share $ (0.13) $ 0.09
Net income/(loss) per common share $ (0.13) $ 0.35
Weighted average common shares outstanding 4,048,893 3,877,873
See accompanying notes to consolidated financial statements.
5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
------------------------------
February 28, February 28,
1995 1994
Revenue
Products $27,939,423 $11,071,904
Services 8,099,250 5,633,181
Total revenue 36,038,673 16,705,085
Cost of products sold 22,257,899 8,510,751
Cost of services provided 4,448,178 4,276,651
Gross margin 9,332,596 3,917,683
Selling, general and administrative 8,458,116 3,148,036
Software development costs (Note C) 737,030 ----
Operating income 137,450 769,647
Interest income 136,457 190,122
Income from continuing operations before taxes 273,907 959,769
Provision for federal and state income taxes 97,786 224,703
Income from continuing operations 176,121 735,066
Discontinued operations (Notes B & F)
Income from operations (less applicable provision
for income taxes of $236,090) ---- 518,101
Gain from disposal (less applicable provision for
income taxes of $301,458) ---- 1,121,082
Cumulative effect on prior years of change in
accounting for income taxes (Note D) ---- 232,700
Net income $ 176,121 $ 2,606,949
Income from continuing operations per common share $ 0.04 $ 0.19
Net income per common share $ 0.04 $ 0.69
Weighted average common shares outstanding 3,942,266 3,770,554
See accompanying notes to consolidated financial statements.
6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
-----------------------------
February 28, February 28,
1995 1994
Cash flows from operating activities:
Net income $ 176,121 $ 2,606,949
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation and amortization 1,127,162 516,342
Current and deferred federal and state taxes (216,552) (220,267)
Change in current assets and liabilities net of effects
from purchase of CCS, SCI and MCI in fiscal year 1995:
Accounts receivable (3,975,823) (1,771,357)
Inventory 46,907 (791,245)
Prepaid expenses and other assets (838,861) (296,001)
Accounts payable (117,918) (556,472)
Accrued expenses (33,523) 70,114
Deferred maintenance revenue (234,285) 441,181
Net assets from discontinued operations (474,620) 1,885,950
Total adjustments (4,717,513) (721,755)
Net cash provided/(used) by operating activities (4,541,392) 1,885,194
Cash flows from investing activities:
Purchase of property and equipment, net (996,575) (564,837)
Proceeds from sale of marketable securities 8,161,304 4,231,000
Payments to acquire marketable securities (8,504,848)
Payment for purchase of CCS, SCI, and MCI, net of
cash acquired (8,045,732) ----
Other investing activities (42,959) 3,479
Net cash used by investing activities (923,962) (4,835,206)
Cash flows from financing activities:
Payments to acquire treasury shares ---- (681,642)
Exercise of stock options 192,892 370,044
Shares issued in connection with acquisition
of SCI & MCI 2,016,108 ----
Net cash provided/(used) by financing activities 2,209,000 (311,598)
Net decrease in cash and cash equivalents (3,256,354) (3,261,610)
Cash and cash equivalents, beginning of period 3,976,929 3,872,599
Cash and cash equivalents, end of period $ 720,575 $ 610,989
See accompanying notes to consolidated financial statements.
7
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) The consolidated financial statements have been restated to reflect the
net assets and operating results of the Government Services Division
("GSD") and Compass, Inc. as discontinued operations (see Note F). The
assets and liabilities of the discontinued businesses have been
reclassified in the Consolidated Condensed Balance Sheets as Net assets
of discontinued operations. The operating results of the GSD and
Compass are shown net of taxes in the Consolidated Condensed Statements
of Income as Income from operations or Gain from disposal.
(C) The Company capitalizes internal software development costs in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS
86). During the first half of FY95, the Company capitalized $422,214 of
software development costs. During the quarter ended February 28, 1995,
the Company determined that the recoverability of these costs had become
uncertain due to significant delays in the product development effort
and has written off the previously capitalized software development
costs of $422,214, along with $314,816 of costs incurred during the
third quarter of FY95. Future development costs on this project will be
expensed as incurred.
(D) The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, (SFAS No. 109) as of June 1, 1993. The adoption of
this statement resulted in a cumulative effect of a change in accounting
principle of approximately $233,000, primarily due to the recognition of
deferred tax assets previously not recorded under SFAS No. 96.
(E) Details of certain balance sheet captions are as follows:
February 28 May 31,
1995 1994
Property and equipment $ 5,146,419 $ 3,299,136
Accumulated depreciation and amortization 2,728,946 2,331,621
Property and equipment, net $ 2,417,472 $ 967,515
Common stock, $.10 par value $ 449,317 $ 407,407
Capital in excess of par value 16,383,200 14,216,110
Retained earnings 7,876,111 7,699,990
Less treasury stock (1,481,515) (1,481,515)
Stockholders' equity $23,227,112 $20,841,992
8
(F) Effective December 1, 1993, the Company completed the sale of the GSD to
CACI International, Inc. of Arlington, Virginia. CACI paid
approximately $4.2 million in cash for substantially all the active GSD
contracts and certain defined assets, primarily computer equipment, with
a net book value of approximately $900,000.
On October 31, 1991, the Company announced the cessation of ongoing
operations of its wholly-owned subsidiary, Compass, Inc. Compass was a
provider of computer software and software engineering services for
supercomputers and other advanced architecture computers. Subsequent to
the shutdown, the Company signed agreements to license the Compass
technology to several of its former customers.
Revenue from discontinued operations for the three and nine months ended
February 28, 1995 was $59,000 and $676,000, respectively. Revenue from
discontinued operations for the comparable periods in fiscal 1994 was
$2,567,000 and $19,164,000, respectively.
At February 28, 1995 and May 31, 1994, the net assets of discontinued
operations, which are included in the Consolidated Condensed Balance
Sheets, are as follows:
February 28, May 31,
1995 1994
Accounts receivable $2,536,786 $3,175,005
Unbilled receivables 935,500 1,716,112
Total assets 3,499,286 4,891,117
Accounts payable 3,355 642,831
Accrued expenses 1,904,798 2,563,261
Deferred income taxes 156,147 724,659
Net assets $1,434,986 $ 960,366
(G) The Company's line of credit agreement with a commercial bank which
provided for borrowings of up to $4,000,000 expired on November 1, 1994.
Management is currently negotiating with an asset based lender for a new
line of credit to provide for borrowings of up to $10,000,000 on
substantially the same terms.
9
(H) In connection with a Department of Energy (DOE) procurement initially
awarded in January 1992, the DOE issued a report in July 1993 alleging
that certain former employees of the Company violated the Procurement
Integrity Act. The Company's teaming partner on the procurement
submitted a claim to the Company for approximately $636,000 which
represented their estimate of lost profits resulting from their
inability to qualify for the award due to the Company's alleged actions.
During the second quarter of FY95 an arbitrator ruled in favor of the
teaming partner and awarded them approximately $424,000, for which the
Company has posted a bond. The Company disagrees with the conclusions
reached by the arbitrator and is appealing the decision. It is the
opinion of management that the ultimate resolution of this matter, net
of recoveries and reserves, will not have a materially adverse effect on
the Company's financial position.
(I) On January 5, 1995, the Company acquired the net assets of Micro
Control, Inc. which totaled approximately $600,000 and was composed
primarily of accounts receivable and fixed assets offset by liabilities
assumed. Micro Control is a distributor of Parametric Technology
Corporation's mechanical design software and the hardware on which this
software package operates. In addition, Micro Control provides all
related services to install and maintain the hardware and software as
well as train the users.
The purchase price totaled approximately $2.7 million which was composed
of $1,031,000 in cash and 279,768 shares of SofTech's stock. The
goodwill generated of approximately $2.4 million will be amortized over
five years on a straight line basis and will be tax deductible.
In addition to the above payments, certain contingent payments (as more
fully described in Form 8-K filed on January 19, 1995) could be due if
specified operating income growth goals are attained over the next two
years for both the Micro Control group and the Company's existing CAD
group. If the growth goals are attained, the contingent payments would
be equal to certain amounts based on a multiple of the final net asset
value of the assets acquired, less the then-current market value of the
SofTech stock issued to the sellers in the acquisition. If contingent
payments are due, they would be treated as additional goodwill and
amortized on a straight line basis over the remaining useful life.
10
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
During the first nine months of fiscal 1995, cash and marketable securities
decreased approximately $11.4 million. The acquisitions of Carolina Computer
and System Constructs during the first quarter utilized approximately $5.3
million in cash and the acquisition of Micro Control during the third quarter
utilized approximately $1.1 million. Operating activities, net of the effects
from those acquisitions, utilized an additional $4.5 million. Accounts
receivable increased approximately $4.0 million, or 63%, from year end 1994
due primarily to the growth in revenue. Specifically, third quarter fiscal
1995 revenue increased approximately $5.4 million from fourth quarter fiscal
1994 revenue, an increase of 73%. Average days sales outstanding increased to
about 85 days at the end of the current quarter from about 76 days at the end
of fiscal 1994. In addition to the accounts receivable growth, the
discontinued operations that had provided approximately $1.9 million in cash
during the first nine months of fiscal 1994, utilized approximately $475,000
during the nine months ended February 28, 1995 as the payment of liabilities
and income taxes exceeded the collection of GSD accounts receivable.
Management believes that available cash and marketable securities together
with an increased accounts receivable collection effort in both continuing and
discontinued operations will be sufficient for meeting operating needs over
the next twelve months. In addition, the Company is currently negotiating a
$10 million line of credit.
Results of Operations
Revenue for the three and nine months ended February 28, 1995 increased
approximately 108% and 116%, respectively, from the same periods in fiscal
1994. IDI's revenue increased $2.3 million and $5.9 million for the three and
nine month periods ended February 28, 1995, or 41% and 36%, respectively, from
the previous comparable periods. Carolina Computer, System Constructs, Inc.
and Micro Control, all acquired during the current fiscal year, generated
approximately $4.8 million and $12.8 million for the three and nine month
periods ended February 28, 1995. Third quarter fiscal 1995 revenue did not
increase from the immediately preceding quarter as expected due to several
delays in shipping orders that were received during the quarter. The delays
were caused by customers not having sites prepared for the installation of the
equipment.
Product revenue, which includes hardware and off-the-shelf software, increased
by 142% and 152%, respectively, for the three and nine month periods ended
February 28, 1995. Product revenue at IDI was $5.7 million and $16.9 million
for the three and nine month periods ended February 28, 1995, up 42% and 52%,
respectively, from the $4.0 million and $11.1 million in revenue generated in
the same periods in fiscal 1994. Carolina Computer generated approximately
$3.8 million and $10.8 million, respectively, in product revenue during the
three and nine month periods ended February 28, 1995, accounting for nearly
93% of that entities total revenue. Overall product gross margins for the
three and nine months ended February 28, 1995 were 19.5% and 20.3%, as
compared to 24.7% and 23.1% for the comparable periods in FY94. The decrease
from year to year is due primarily to lower margin business from Carolina
Computer included in FY95.
11
Service revenue increased by 47% and 44%, respectively, for the three and nine
months ended February 28, 1995 as compared to the same periods in 1994. IDI
service revenue for the first nine months of FY95 increased 17% over FY94
levels. Carolina Computer and System Constructs contributed service revenue
of $0.78 million and $2.1 million, respectively, for the three and nine month
periods ended February 28, 1995. The service gross margins for the first nine
months of FY95 were 45% as compared to 24% for the same period in FY94. The
improved service margin was directly impacted by the acquisition of SCI and
the use of internal resources rather than subcontracting the work to third
parties.
Selling general and administrative cost as a percentage of revenue has
increased from 18.8% for the first nine months of fiscal 1994 to 23.5% for the
first nine months of fiscal 1995. The net percentage change from fiscal 1994
is due primarily to the absorption of corporate headquarters expenditures by
continuing operations in fiscal 1995. During fiscal 1994 much of the
headquarters effort was directed towards disposing of the Government Services
Division and therefore most of the related costs were allocated to the
discontinued operations line of the income statement. As previously announced
on March 29th, the Company's Board of Directors approved a cost reduction plan
subsequent to the end of the third quarter targeted at consolidating certain
G&A functions across the Company. This action is expected to result in a
fourth quarter pre-tax charge to continuing operations of approximately
$500,000. The charge relates to excess office space, severance payments, and
the disposal of excess equipment resulting from this effort.
Software development costs of $737,030 included in the derivation of the third
quarter fiscal 1995 operating loss is composed of development costs that were
capitalized during the first two quarters of fiscal 1995 of $422,214 and
current quarter spending. The write-off of previously capitalized expenditures
and the change to currently expensing these on-going development efforts was
the result of significant delays encountered during the current quarter in
getting the first product to market. This effort is expected to have a
negative impact on operating results for the next three to four quarters.
Operating income/(loss) from continuing operations was approximately
$(742,000) and $137,000 for the three and nine months ended February 28, 1995.
For the same periods in fiscal 1994 operating income from continuing
operations was approximately $388,000 and $770,000, respectively. While IDI
experienced an increase in earnings, as well as significant contributions by
the new acquisitions, CCS and SCI, operating income was negatively impacted by
the complete allocation of corporate overhead expenses to continuing
operations as noted previously.
Common equivalent shares arising from shares issued under stock options are
the cause of the difference between common shares outstanding and weighted
average shares outstanding. Shares outstanding increased during the nine
months as a result of issuing 50,000 shares and 279,768 shares as portions of
the consideration in the acquisitions of System Constructs, Inc. and Micro
Control, respectively and 43,500 shares in the exercise of stock options.
12
Interest income decreased approximately 70% during the first half of fiscal
1995 as compared to the same period in fiscal 1994, due primarily to lower
invested cash balances. The cash available for investment was lower due to
the previously noted use of cash to complete the three acquisitions in fiscal
1995.
The Company's effective tax rate for the first nine months of fiscal 1995 was
about 36%, which is comprised of a federal rate of 30% and an average state
tax rate of 6%. The tax provision for FY94 consisted primarily of state taxes
computed on a basis other than income.
13
PART II. OTHER INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10)(i) Amended Employment Agreement between SofTech, Inc. and Norman
L. Rasmussen.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange Commission
on January 19, 1995 describing the purchase of substantially all of the
net assets of Micro Control, Inc. on January 5, 1995. Pro forma
financial information and audited financial statements, required to be
filed pursuant to Item 7 of Form 8-K reflecting the acquisition, were
filed on Form 8 on March 20, 1995.
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: April 14, 1995 /s/ JOSEPH P. MULLANEY
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: April 14, 1995 /s/ JAN E. YANSAK
Jan E. Yansak
Controller