1
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
August 31, 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 August 31,
1995 was 4,061,776 shares.
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SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets
August 31, 1995 and May 31, 1995 3
Consolidated Condensed Statements of Income--Three
Months Ended August 31, 1995 and August 31, 1994 4
Consolidated Condensed Statements of Cash Flows--Three
Months Ended August 31, 1995 and August 31, 1994 5
Notes to Consolidated Condensed Financial Statements 6--8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9--10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
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PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
August 31, May 31,
1995 1995
----------- ----------
ASSETS
- - ------
Cash and cash equivalents $ 2,987,918 $ 2,372,946
Accounts receivable 9,113,078 12,659,017
Unbilled costs and fees 1,348,687 1,248,361
Inventory 1,359,832 1,819,184
Prepaid expenses and other assets 1,242,237 1,435,919
Deferred and refundable income taxes 1,030,222 964,560
Net assets of discontinued operations (Note G) 1,111,237 1,166,178
----------- -----------
Total current assets 18,193,211 21,666,165
Property and equipment, net (Note F) 2,339,111 2,338,917
Goodwill 4,339,906 4,621,484
Other assets (Note D) 114,341 118,558
----------- -----------
TOTAL ASSETS $24,986,569 $28,745,124
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,560,771 $ 4,112,334
Accrued expenses 1,539,250 2,112,864
Deferred maintenance revenue 1,306,811 1,734,122
Federal and state income taxes payable 35,725 92,000
----------- -----------
Total current liabilities 5,442,557 8,051,320
Stockholders' equity (Note F) 19,544,012 20,693,804
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,986,569 $28,745,124
=========== ===========
See accompanying notes to consolidated condensed financial statements.
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SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
----------------------------
August 31, August 31,
1995 1994
----------- ----------
Revenue
Products $ 7,439,545 $ 8,394,396
Services 2,624,337 1,974,055
----------- -----------
Total revenue 10,063,882 10,368,451
Cost of products sold 6,063,534 6,721,453
Cost of services provided 1,849,718 1,070,789
----------- -----------
Gross margin 2,150,630 2,576,209
Selling, general and administrative 3,199,976 2,090,858
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Operating income (loss) (1,049,346) 485,351
Interest income 0 37,760
----------- -----------
Income (loss) from continuing operations
before taxes (1,049,346) 523,111
Provision for federal and state income
taxes 45,284 207,978
----------- -----------
Income (loss) from continuing operations (1,094,630) 315,133
Discontinued operations (Notes C and G)
Loss from operations (78,807) ---
----------- -----------
Net income (loss) $(1,173,437) $ 315,133
=========== ===========
Income (loss) from continuing operations
per common share $ (0.27) $ 0.08
=========== ===========
Net income (loss) per common share $ (0.29) $ 0.08
=========== ===========
Weighted average common shares outstanding 4,056,733 3,868,036
See accompanying notes to consolidated financial statements.
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SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
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August 31, August 31,
1995 1994
----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,173,437) $ 315,133
----------- -----------
Adjustments to reconcile income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 536,231 307,915
Current and deferred federal and state taxes (121,937) 46,352
Change in current assets and liabilities net of effects
from purchase of CCS and SCI in fiscal year 1995:
Accounts receivable 3,545,939 (1,352,231)
Unbilled costs and fees (100,326) ---
Inventory 417,902 178,313
Prepaid expenses and other assets 193,682 (587,553)
Accounts payable (1,551,563) 1,002,902
Accrued expenses (573,614) (341,750)
Deferred maintenance revenue (427,311) (388,577)
Net assets from discontinued operations 54,941 (931,796)
----------- -----------
Total adjustments 1,973,944 (2,066,425)
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Net cash provided (used) by operating activities 800,507 (1,751,292)
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Cash flows from investing activities:
Purchase of property and equipment, net (194,377) (476,317)
Proceeds from sale of marketable securities 0 4,114,364
Acquisition of businesses (10,375) (4,903,620)
Other investing activities 4,217 (170,466)
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Net cash used by investing activities (200,535) (1,436,039)
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Cash flows from financing activities:
Exercise of stock options 15,000 97,688
----------- -----------
Net cash provided by financing activities 15,000 97,688
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Net increase (decrease) in cash and cash equivalents 614,972 (3,089,643)
Cash and cash equivalents, beginning of period 2,372,946 3,976,929
----------- -----------
Cash and cash equivalents, end of period $ 2,987,918 $ 887,286
=========== ===========
See accompanying notes to consolidated financial statements.
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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) On July 26, 1995, the Company announced its intention to seek
alternative strategies aimed at enhancing shareholder value including,
but not limited to, the possible sale of all or part of the business.
It is impossible to predict, at this time, the final outcome or even
the eventual structure of such a transaction or transactions as the
case may be, nor the potential effect on results of operations or
financial position.
(C) 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 G). 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 Loss from operations.
(D) The Company capitalizes internal software development costs in
accordance with Statement of Financial Accounting Standards No. 86
(SFAS 86), subsequent to the establishment of technological
feasibility for the product. There were no internal software
development costs incurred during the first quarter of FY96. During
the first quarter of FY95, the Company capitalized $181,757 of
software development costs. During the third quarter of FY95, the
Company determined that the recoverability of these costs had become
uncertain due to significant delays in the product development effort
and wrote off the previously capitalized software development costs
incurred to date, along with all subsequent software development costs
incurred.
(E) The Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, (SFAS No. 109) as of June 1, 1993. SFAS
No. 109 requires a company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that have
been recognized in a company's financial statements or tax returns.
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(F) Details of certain balance sheet captions are as follows:
August 31, May 31,
1995 1995
----------- ----------
Property and equipment $ 5,415,590 $ 5,221,213
Accumulated depreciation and amortization 3,076,479 2,882,296
----------- -----------
Property and equipment, net $ 2,339,111 $ 2,338,917
=========== ===========
Common stock, $.10 par value $ 450,494 $ 449,571
Capital in excess of par value 16,369,418 16,346,696
Retained earnings 4,205,615 5,379,052
Less treasury stock ( 1,481,515) ( 1,481,515)
----------- -----------
Stockholders' equity $19,544,012 $20,693,804
=========== ===========
(G) 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.
Revenue from discontinued operations for the three months ended
August 31, 1995 and 1994 was $37,908 and $293,347, respectively.
At August 31, 1995 and May 31, 1995, the net assets of discontinued
operations, which are included in the Consolidated Condensed Balance
Sheets, are as follows:
August 31, May 31,
1995 1995
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Receivables $1,499,237 $1,554,178
Deferred income taxes ( 388,000) ( 388,000)
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Net assets $1,111,237 $1,166,178
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(H) On September 20, 1995, the Company amended its Purchase Agreement with
the stockholders of Micro Control, Inc. ("Seller"). In consideration
for the Seller waiving their right to receive certain contingent
payments that may have been due if certain profit goals were attained
(see Note J and Management's Discussion and Analysis to the 1995
Annual Report which detail the potential liabilities) over the next
two years, the Company made a cash payment to them totaling $426,497.
In addition, the Seller's primary responsibility subsequent to the
signing of this amendment is to maximize the sale price of the CAD
Division. A commission will be earned for such activity based on the
sale price.
The payment of $426,497 is composed of three separate items which are
as follows:
* $281,497 non-recoverable cash payment;
* an advance of $70,000 recoverable only against commissions
earned through the sale of the CAD Division; and
* a $75,000 cash payment for termination of the final two years
of the building lease at the Pennsylvania facility owned by a
Family Trust of which the Seller is a Trustee. In addition, a
twelve (12) month option to buy out the period from November 5,
1998 to November 4, 2000 for an additional cash payment of
$75,000 was extended to the Company.
The non-recoverable cash payment and the lease buy out which total
$356,497 will be expensed to operations in the second quarter of
fiscal 1996. The advance will be expensed as part of the sale of the
CAD Division.
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SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
- - -------------------
During the first three months of fiscal 1996, cash increased approximately
$615,000. Operating activities provided approximately $800,000. Accounts
receivable and unbilled costs and fees decreased approximately $3.5 million
from year end 1995 due to the revenue decrease of $3.6 million for the first
quarter of fiscal 1996 as compared to the fourth quarter of fiscal 1995. In
addition, the payment of year end trade payables and accrued expenses
utilized approximately $2.1 million.
On September 20, 1995, the Company made a cash payment of $426,497 to the
stockholders of Micro Control, Inc. in exchange for their waiving all rights
to contingent payments that could have been due if certain profit goals were
attained over the next two years. The payment was composed of three
separate items which are detailed in Note H to this Form 10-Q. The specific
amount of the contingent cash payments that could have been due were
dependent on profit goal attainment and future stock price and were detailed
in Management's Discussion and Analysis and in Note J to the 1995 Annual
Report. These payments could have been material if profit goals were
attained and the market price of the Company's stock did not equal or exceed
the defined stock price. This amendment was necessitated by the Company's
announcement on July 26, 1995 to seek alternatives aimed at enhancing
shareholder value, including, but not limited to, the sale of all or part of
the business. By fixing a potentially material unknown liability, potential
acquirers are better able to determine fair value of the Company in
management's opinion.
On July 26, 1995, the Company announced its intention to seek alternative
strategies aimed at enhancing shareholder value including, but not limited
to, the possible sale of all or part of the business. It is impossible to
predict, at this time, the final outcome or even the eventual structure of
such a transaction or transactions as the case may be, nor the potential
effect on results of operations or financial position.
Management believes that available cash and the completion of the GSD
receivable collection effort expected to be completed in the second quarter
will be sufficient for meeting operating needs over the next twelve months.
In addition, the Company has a $10 million available line of credit.
Results of Operations
- - ---------------------
Revenue for the three months ended August 31, 1995 decreased approximately
$300,000 or 3% from the same period in fiscal 1995. The North Carolina
locations recorded revenue of $1.9 million for the first quarter of fiscal
1996 as compared to $3.4 million for the same period of the previous fiscal
year. The prior year's revenue was for two months only and included revenue
from retail operations which have been closed. Historically, IDI's first
quarter, which spans the summer vacation months, has accounted for less than
20 percent of its annual revenue as customers' buying decisions are deferred
until the fall.
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Product revenue, which includes hardware and off-the-shelf software,
decreased by 11% for the three month period ended August 31, 1995 as
compared to the same period in the prior year. The decrease is due
primarily to the reduced revenue at the North Carolina locations. Overall
product gross margins for the three months ended August 31, 1995 were 18.5%
as compared to 19.9% for the comparable period in FY95. The decrease is
consistent with the gradual margin decay of off-the-shelf hardware and
software components as they become more and more available and therefore
subject to intense price sensitivity.
Service revenue increased by 33% for the three months ended August 31, 1995
as compared to the same period in fiscal 1995. Increased service capability
and continued growth in recurring maintenance revenue provided a significant
portion of the increased service revenue. Gross margin as a percentage of
service revenue was 29% for the first quarter of fiscal 1996 as compared to
46% for the comparable period in FY95. The decreased margin is due
primarily to increased staffing in the technical ranks and a delay in a few
relatively large orders with a heavy service revenue mix.
Selling general and administrative cost as a percentage of revenue increased
from 20.2% for the first quarter of fiscal 1995 to 31% for the first quarter
of fiscal 1996. Included in SG&A for Q1 FY96 were approximately $125,000 of
costs associated with the software development group. The costs associated
with this effort were capitalized during the first quarter of fiscal 1995.
The additional increase in SG&A spending is attributable to a combination of
increased staffing and overhead costs, including goodwill expense, that
resulted from the acquisitions during FY95.
The operating loss from continuing operations was approximately $(1,049,000)
for the three months ended August 31, 1995, as compared to operating income
of $485,000 for the first quarter of FY95. Along with the slight decrease
in revenue for the first quarter of fiscal 1996, earnings were negatively
impacted by decreases in both product and service margins, as well as a $1.0
million increase in selling, general and administrative costs.
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, for the first quarter of fiscal 1995. There
were no common equivalent shares arising from shares issued under stock
options during the first quarter of fiscal 1996.
The Company did not generate any interest income during the first quarter of
fiscal 1996. The Company has utilized its available cash to complete three
acquisitions in fiscal 1995 and to fund receivable growth.
The Company's tax provision for the first quarter of fiscal 1996 is
comprised of state taxes computed on a basis other than income. The
Company's effective tax rate for the first quarter of fiscal 1995 was about
40%, which is comprised of a federal rate of 34% and an average state tax
rate of 6%.
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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.
10(ii) Agreement and Amendment Number 1 to the Asset Purchase
Agreement between Information Decisions, Inc., SofTech, Inc.
and Micro Control, Inc.
27(i) Financial Data Schedule as required by Article 5 of
Regulation S-X.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
August 31, 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: October 13, 1995 /S/ Joseph P. Mullaney
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Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: October 13, 1995 /S/ Jan E. Yansak
-----------------------------
Jan E. Yansak
Controller