Form 10-Q
Page 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
November 30, 1996 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
3260 EAGLE PARK DRIVE, N.E., GRAND RAPIDS, MICHIGAN 49505
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 November 30,
1996 was 4,094,776 shares.
Form 10-Q
Page 2
SOFTECH, INC.
INDEX
Page
PART I. Financial Information Number
------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets November 30, 1996 and
May 31, 1996 3
Consolidated Condensed Statements of Income - Three and Six
Months Ended November 30, 1996 and November 30, 1995 4-5
Consolidated Condensed Statements of Cash Flows - Six Months
Ended November 30, 1996 and November 30, 1995 6
Notes to Consolidated Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
November 30, May 31,
1996 1996
------------ --------
ASSETS
Cash and cash equivalents $ 3,917 $ 3,017
Investment securities (Note D) 5,072 --
Accounts receivable 4,262 3,211
Unbilled costs and fees 663 134
Inventory 263 341
Prepaid expenses and other assets 416 531
Net assets of discontinued operations (Note D) 2,795 7,523
-----------------------
Total current assets 17,388 14,757
Property and equipment, net (Note C) 521 517
Goodwill, net 1,523 1,763
-----------------------
TOTAL ASSETS $ 19,432 $ 17,037
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,045 $ 862
Accrued expenses 1,209 550
Deferred maintenance revenue 470 668
-----------------------
Total current liabilities 2,724 2,080
Stockholders' equity (Note C) 16,708 14,957
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,432 $ 17,037
=======================
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
-----------------------------
November 30, November 30,
1996 1995
------------ ------------
Revenue
Products $ 3,012 $ 2,859
Services 1,093 788
---------------------------
Total revenue 4,105 3,647
Cost of products sold 2,022 2,037
Cost of services provided 743 561
---------------------------
Gross margin 1,340 1,049
Selling, general and administrative (Note E) 1,022 1,328
---------------------------
Income (loss) from continuing operations before taxes 318 (279)
Provision for federal and state income taxes 15 --
---------------------------
Income (loss) from continuing operations 303 (279)
Discontinued operations (Notes B and D)
Loss from operations -- (497)
---------------------------
Net income (loss) $ 303 $ (776)
===========================
Income (loss) from continuing operations per common share $ 0.07 $ (0.07)
===========================
Net income (loss) per common share $ 0.07 $ (0.19)
===========================
Weighted average common shares outstanding 4,127,896 4,061,776
See accompanying notes to consolidated financial statements.
Form 10-Q
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except for
per share data)
Six Months Ended
-----------------------------
November 30, November 30,
1996 1995
------------ ------------
Revenue
Products $ 5,805 $ 5,264
Services 2,058 1,455
--------------------------
Total revenue 7,863 6,719
Cost of products sold 3,960 3,732
Cost of services provided 1,472 1,093
--------------------------
Gross margin 2,431 1,894
Selling, general and administrative (Note E) 1,940 2,209
--------------------------
Income (loss) from continuing operations before taxes 491 (315)
Provision for federal and state income taxes 15 --
--------------------------
Income (loss) from continuing operations 476 (315)
Discontinued operations (Notes B and D)
Loss from operations (750) (1,634)
--------------------------
Net loss $ (274) $ (1,949)
==========================
Income (loss) from continuing operations per common share $ 0.12 $ (0.08)
==========================
Net loss per common share $ (0.07) $ (0.48)
==========================
Weighted average common shares outstanding 4,094,776 4,059,241
See accompanying notes to consolidated financial statements.
Form 10-Q
Page 6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six Months Ended
-----------------------------
November 30, November 30,
1996 1995
------------ ------------
Cash flows from operating activities:
Net loss $ (274) $ (1,949)
-------------------------
Adjustments to reconcile loss to net cash provided
(used) by operating activities:
Depreciation and amortization 366 347
Unrealized gain on investment 2,025 --
Deferred provision for income taxes -- 1,130
Change in current assets and liabilities:
Accounts receivable (1,051) (1,336)
Unbilled costs and fees (529) 88
Inventory 207 (66)
Prepaid expenses and other assets 115 246
Accounts payable 183 (146)
Accrued expenses 659 (68)
Deferred maintenance revenue (198) (118)
Net assets from discontinued operations 4,728 1,279
------------------------
Total adjustments 6,505 1,356
------------------------
Net cash provided (used) by operating activities 6,231 (593)
------------------------
Cash flows from investing activities:
Purchase of property and equipment, net (259) (163)
Receipt of marketable securities in sale of NSG (5,072) --
Acquisition of businesses -- (41)
Other investing activities -- 50
------------------------
Net cash provided (used) by investing activities (5,331) (154)
------------------------
Cash flows from financing activities:
Exercise of stock options -- 15
------------------------
Net cash provided by financing activities -- 15
------------------------
Net increase (decrease) in cash and cash equivalents 900 (732)
Cash and cash equivalents, beginning of period 3,017 2,373
------------------------
Cash and cash equivalents, end of period $ 3,917 $ 1,641
========================
See accompanying notes to consolidated financial statements.
Form 10-Q
Page 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 Company's Network Systems Group
("NSG") as a discontinued operation (see Note D below). The assets and
liabilities of NSG have been reclassified in the Consolidated Condensed
Balance Sheets as Net assets of discontinued operations. The operating
results of NSG are shown net of taxes in the Consolidated Condensed
Statements of Income as Loss from operations.
(C) Details of certain balance sheet captions are as follows:
November 30, May 31,
1996 1996
------------ --------
Property and equipment $ 1,115 $ 1,023
Accumulated depreciation and amortization (594) (506)
-----------------------
Property and equipment, net $ 521 $ 517
=======================
Common stock, $.10 par value $ 454 $ 454
Capital in excess of par value 16,463 16,463
Unrealized gain 2,025 --
Retained deficit (752) (478)
Less treasury stock (1,482) (1,482)
-----------------------
Stockholders' equity $ 16,708 $ 14,957
=======================
(D) On September 12, 1996, the Company sold its Network Systems Group to Data
Systems Network Corporation ("DSN"). The Company had previously announced
the signing of a letter of intent on June 18, 1996. Data Systems purchased
certain assets and assumed certain liabilities of NSG with a net book
value on July 31, 1996 of approximately $200,000 in exchange for $890,000
in cash and 540,000 shares of DSN common stock. The DSN shares received in
the transaction are unregistered shares and the Company is restricted, by
its agreement with DSN, from selling such shares without DSN's prior
approval. The tangible assets acquired totaled approximately $1.7 million
and were primarily composed of fixed assets and service inventory for
maintaining the NSG installed base of hardware and software. Liabilities
assumed included deferred revenue associated with maintenance contracts
and other accrued expenses with a total book value of about $1.5 million.
The agreement provides for dollar for dollar adjustment based on the net
book value of the assets as of the transaction date.
Form 10-Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(D) continued
As is the custom in a transaction such as this, the Company remains liable
for certain breaches of representations made as part of the sale of this
Group to DSN as detailed in the Purchase Agreement filed with the Form 8-K
on September 23, 1996. In addition, the Company remains liable as a
guarantor for certain leases for NSG office space.
Revenue from discontinued operations for the three and six months ended
November 30, 1996 was $0 and $7,490,000, respectively. Revenue from
discontinued operations for the comparable periods in fiscal 1996 was
approximately $8,220,000 and $14,563,000, respectively.
At November 30, 1996 and May 31, 1996, the net assets of discontinued
operations, which are included in the Consolidated Condensed Balance
Sheets, are as follows:
November 30, May 31,
1996 1996
------------ --------
Accounts receivable (net) $ 2,239 $ 6,466
Unbilled costs and fees 315 686
Inventory 470 1,603
Prepaid expenses and other receivables 67 504
Fixed assets (net) 471 1,544
Other assets (net) -- 1,730
-------------------------
Total assets 3,562 12,533
Accounts payable 22 1,855
Accrued expenses 745 1,844
Deferred revenue -- 1,311
Deferred and accrued income taxes -- --
-------------------------
Total liabilities 767 5,010
-------------------------
Net assets from discontinued operations $ 2,795 $ 7,523
=========================
(E) 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 subsequent two years, the
Company made a cash payment to them totaling $426,497.
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
Form 10-Q
Page 9
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(E) continued
* 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. This option was not exercised in September 1996.
The non-recoverable cash payment and the lease buy out which total
$356,497 was expensed to operations in the second quarter of fiscal 1996.
The $70,000 commission advance was expensed in the fourth quarter of
fiscal 1996.
(F) In August 1996, the Company's Board of Directors approved a preliminary
plan for distributing the net proceeds from the NSG sale ("Distribution
Plan") and transitioning management and the Board of Directors
("Transition Plan").
The Distribution Plan contemplated a distribution of the cash realized
from the sale and the subsequent liquidation of the NSG balance sheet
together with the 540,000 shares of DSN received in the transaction upon
approval from the Securities and Exchange Commission ("SEC"). The cash was
distributed on December 30, 1996 and amounted to $1.50 per share. The DSN
shares are expected to be distributed upon registration with the SEC which
is in process.
The following actions have taken place or been approved by the Board of
Directors with regard to the Transition Plan:
* Norman Rasmussen retired as President and CEO of SofTech, Inc. and
Mark Sweetland was appointed to those positions;
* Mr. Sweetland and Timothy Weatherford, a senior manager in the CAD
Division, were elected to the Board of Directors;
* On January 10, 1997, the Board approved the issuance of the 204,750
SofTech shares to each of Messrs. Sweetland and Weatherford as
previously announced with the agreement that any future distribution
of the DSN shares or proceeds from the sale of such shares to
SofTech shareholders received by them by virtue of this issuance
would revert directly to the Company;
* On January 10, 1997, the Board voted to increase the size of the
Board of Directors to nine and appointed four new non-employee
directors. These newly appointed directors are Timothy Tyler,
President of Burroughs Corporation, a privately held Michigan based
manufacturer of industrial shelving and material handling equipment,
William Johnston, President of the Kalamazoo Investment Group, an
investment advisory firm, Ronald Elenbaas, President of Stryker
Medical, a division of Stryker Corporation, a Fortune 500 company,
and Kenneth Ledeen, a consultant with Covington Associates, an
investment advisory firm. The appointment of these directors will be
voted upon by the SofTech shareholders at the 1996 Annual Meeting.
The location, date and time of that meeting will be established in
the very near future.
Form 10-Q
Page 10
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(F) continued
* Other matters approved by the Board of Directors on January 10, 1997
include the following, all of which will be subject to shareholder
approval at the 1996 Annual Meeting:
- Eliminate cash compensation for Board members. Compensation
instead to be in the form of 10,000 stock options immediately
with an additional 3,000 options awarded on the anniversary
date of the initial award; and
- Reprice the exercise price of all outstanding options to
reflect the $1.50 per share distribution as required by 1994
Stock Option Plan.
While it is the present intent of the Board to distribute the DSN shares
as soon as practicable following the approval from the SEC, the final
decision regarding such distribution is subject to the continuing review
and oversight of the Board of Directors. There can be no assurance that
the DSN stock distribution contemplated by the Distribution Plan will in
fact take place.
(G) Subsequent to the end of the quarter, effective January 1, 1997, the
Company acquired the stock of Computer Graphics Corp. ("CGC") in exchange
for 405,000 shares of SofTech stock. The Stock Purchase Agreement (the
"Agreement") provides for the issuance of up to 210,000 additional shares
based on attainment of certain profitability goals for the twelve month
period ended December 31, 1997. The Agreement also provides for the
remittance directly to the Company of future distributions made to the
SofTech shareholders prior to June 30, 1997 of DSN shares or proceeds from
the sale of the shares. The acquisition will be accounted for as a
purchase and is expected to result in goodwill of approximately $700,000.
Form 10-Q
Page 11
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Total revenue for the three and six month periods ended November 30, 1996 was
$4,105,000 and $7,863,000, respectively, as compared to $3,647,000 and
$6,719,000 for the same periods in the prior fiscal year. The current year
revenues represent increases of about 13% for the three month period ended
November 30, 1996 and 17% for the six month period ended over the comparable
periods in the prior fiscal year. Service revenue for Q2 of fiscal 1997 was $1.1
million, an increase of 39% from the same period in fiscal 1996. Year-to-date
1997 service revenue was $2.1 million, an increase of 41% from the previous
year. Service revenue as a percentage of total revenue was about 26% for each of
the fiscal 1997 as compared to 22% in the prior fiscal year.
Gross margin as a percentage of revenue was 32.6% and 30.9% for the three and
six month periods ended November 30, 1996, respectively, as compared to 28.8%
and 28.2% for the same periods in fiscal 1996. Margins improved on both product
and service revenue during both the first and second quarters of fiscal 1997 as
compared to fiscal 1996.
Selling, general and administrative ("SG&A") expense for the second quarter of
fiscal 1997 was approximately $1,022,000, a decrease of 23% from the second
quarter fiscal 1996 spending of $1,328,000. Included in the prior year expense
was a one time charge of $356,000 related to an amendment to the Purchase
Agreement with the stockholders of Micro Control, Inc. (see Note J to the
Company's 1996 Annual Report and Note E to this Form 10-Q). For the six months
ended November 30, 1996 SG&A expense was $1,940,000, a decrease of 12% from the
$2,209,000 of SG&A expenditures for the six months ended November 30, 1995.
Again, the $356,000 one time charge noted above was primarily responsible for
the decrease. Before this one time charge, SG&A spending increased 5.1% and 4.7%
for the three and six month periods ended November 30, 1996, respectively, from
the comparable periods in the prior fiscal year. These increases were primarily
due to the increased revenue.
Net income from continuing operations for the second quarter of fiscal 1997 was
$303,000 or $.07 per share as compared to the loss of $279,000 or $.07 per share
for the same period in fiscal 1996. Net income from continuing operations for
the first six months of fiscal 1997 was $476,000 or $.12 per share as compared
to a loss of $315,000 or $.08 per share for the same period in the prior fiscal
year. The improved performance in fiscal 1997 relative to fiscal 1996 was the
result of increased revenue and gross margin as a percent of revenue, the
absence of any unusual non-recurring charges and keeping percentage increases in
SG&A expense, before the one time charge, in the single digits.
Included in stockholders' equity as of the end of the second quarter is an
unrealized gain of $2,025,000 related to the 540,000 shares of DSN stock
received by the Company in the sale of its Network Systems Group. The gain
represents the increase in value of the Company's DSN holdings from the date the
shares were received, $3,037,500 or $5.625 per share, to the value at the end of
the second quarter, $5,062,500 or $9.375 per share. The difference between the
value of the shares on the day they were received and the value on the day the
shares are ultimately sold or distributed will result in a realized gain or loss
in that period.
The company expects to be sheltered from most, if not all, federal tax in the
current year due to the first quarter loss from discontinued operations and the
utilization of tax carryforwards.
Form 10-Q
Page 12
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
- -------------------------------
The Company ended the second quarter of fiscal 1997 with cash of about $3.9
million, an increase of about $900,000 from fiscal year end 1996. The net loss
adjusted for non-cash expenses generated $92,000 for the first six months of
fiscal 1997. The net income from continuing operations adjusted for non-cash
expenses generated $842,000 which was offset by the loss from discontinued
operations of $750,000 in the first quarter. The sale of the Network Systems
Group and the subsequent collection of accounts receivable from that
discontinued operation generated cash of approximately $1.7 million for the
first half of the year. Changes in working capital accounts related to
continuing operations utilized approximately $753,000. The primary components of
this change were an increase in accounts receivable related to the continuing
operation which utilized about $1,580,000 offset by decreased inventory and
other assets and increased accounts payable which together provided $827,000.
On December 16, 1996, the Company announced a cash distribution of $1.50 per
share, with a record date of December 26, 1996 and a payment date of December
30, 1996. This distribution was completed subsequent to the end of the second
quarter.
The cash distribution of $1.50 per share was part of the preliminary plan
adopted by the Company's Board of Directors to distribute the net proceeds from
the sale of the Network Systems Group, a plan that was disclosed in the year end
Form 10-K filing. This preliminary plan included the distribution of the 540,000
shares of Data Systems Network Corporation that were received in the transaction
directly to the SofTech shareholders upon the registration of such shares with
the Securities and Exchange Commission. It is the present intent of the Board to
distribute these shares as soon as practicable following the registration.
Effective January 1, 1997, the Company acquired the stock of Computer Graphics
Corporation ("CGC") in exchange for 405,000 shares of SofTech, Inc. CGC is an
eight year old, privately held, Indiana based provider of discreet engineering
services related to the CAD/CAM marketplace including contract consulting,
design and placement services. The Stock Purchase Agreement ("Agreement")
provides for the issuance of up to 210,000 additional shares based on attainment
of certain profitability goals for the twelve month period ended December 31,
1997. The Agreement also provides that the CGC principals will not share in the
distribution of the Data Systems shares to SofTech shareholders which is
expected to take place in fiscal 1997 as detailed above so long as that
distribution takes place prior to June 30, 1997. The acquisition will be
accounted for as a purchase.
The Company believes the remaining working capital available following the
distribution will be sufficient to meet working capital needs through at least
fiscal 1997.
Form 10-Q
Page 13
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 with the Securities and Exchange
Commission on September 23, 1996 describing the disposition of its
Network Systems Group ("NSG") to Data Systems Network Corporation
("DSN") on September 12, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: January 14, 1997 /S/ Joseph P. Mullaney
-------------------- --------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: January 14, 1997 /S/ Jan E. Yansak
-------------------- --------------------------------
Jan E. Yansak
Controller