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, 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 November 30,
1995 was 4,061,776 shares.
SOFTECH, INC.
_____________
INDEX
_____
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
November 30, 1995 and May 31, 1995 3
Consolidated Condensed Statements of Income -
Three and Six Months Ended November 30, 1995 and
November 30, 1994 4-5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended November 30, 1995 and
November 30, 1994 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
November 30, May 31,
1995 1995
------------ -----------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 1,641,334 $ 2,372,946
Accounts receivable 13,017,942 12,659,017
Unbilled costs and fees 868,066 1,248,361
Inventory 1,967,855 1,819,184
Prepaid expenses and other assets 1,547,589 1,435,919
Deferred and refundable income taxes 978,712 964,560
Net assets (liabilities) of discontinued operations (Note G) (324,995) 1,166,178
----------- -----------
Total current assets 19,696,503 21,666,165
Property and equipment, net (Note F) 2,263,246 2,338,917
Goodwill 4,078,232 4,621,484
Other assets (Note D) 9,205 118,558
----------- -----------
TOTAL ASSETS $26,047,186 $28,745,124
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,896,814 $ 4,112,334
Accrued expenses 1,919,054 2,112,864
Deferred maintenance revenue 1,436,935 1,734,122
Federal and state income taxes payable 25,977 92,000
----------- -----------
Total current liabilities 7,278,780 8,051,320
Stockholders' equity (Note F) 18,768,406 20,693,804
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,047,186 $28,745,124
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
November 30, November 30,
1995 1994
------------ ------------
<S> <C> <C>
Revenue
Products $ 8,429,681 $ 9,867,974
Services 3,886,877 2,901,840
----------- -----------
Total revenue 12,316,558 12,769,814
Cost of products sold 6,630,404 7,748,980
Cost of services provided 2,677,778 1,612,365
----------- ----------
Gross margin 3,008,376 3,408,469
Selling, general and administrative 3,518,664 2,979,127
----------- ----------
Operating income (loss) (510,288) 429,342
Interest income -- 40,169
----------- ----------
Income (loss) from continuing operations
before taxes (510,288) 469,511
Provision for federal and state
income taxes 41,000 89,808
----------- ----------
Income (loss) from continuing operations (551,288) 379,703
Discontinued operations (Notes C and G)
Loss from operations (224,318) --
----------- ----------
Net income (loss) $ (775,606) $ 379,703
=========== ===========
Income (loss) from continuing operations
per common share $ (0.14) $ 0.10
=========== ===========
Net income (loss) per common share $ (0.19) $ 0.10
=========== ===========
Weighted average common shares outstanding 4,061,776 3,911,857
</TABLE>
See accompanying notes to consolidated financial statements.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
November 30, November 30,
1995 1994
------------ ------------
<S> <C> <C>
Revenue
Products $15,869,226 $18,262,370
Services 6,511,214 4,875,895
----------- -----------
Total revenue 22,380,440 23,138,265
Cost of products sold 12,693,938 14,470,433
Cost of services provided 4,527,496 2,683,154
----------- -----------
Gross margin 5,159,006 5,984,678
Selling, general and administrative 6,718,640 5,069,985
----------- -----------
Operating income (loss) (1,559,634) 914,693
Interest income -- 77,929
----------- -----------
Income (loss) from continuing operations
before taxes (1,559,634) 992,622
Provision for federal and state
income taxes 86,284 297,786
----------- -----------
Income (loss) from continuing operations (1,645,918) 694,836
Discontinued operations (Notes C and G)
Loss from operations (303,125) --
----------- -----------
Net income (loss) $(1,949,043) $ 694,836
=========== ===========
Income (loss) from continuing operations
per common share $ (0.41) $ 0.18
=========== ===========
Net income (loss) per common share $ (0.48) $ 0.18
=========== ===========
Weighted average common shares outstanding 4,059,241 3,889,827
</TABLE>
See accompanying notes to consolidated financial statements.
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
November 30, November 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,949,043) $ 694,836
----------- -----------
Adjustments to reconcile income (loss) to net
cash used by operating activities:
Depreciation and amortization 1,092,550 690,588
Gain on sale of fixed assets (43,740) --
Current and deferred federal and state taxes (80,175) (138,924)
Change in current assets and liabilities net of effects
from purchase of CCS and SCI in fiscal year 1995:
Accounts receivable (358,925) (2,633,074)
Unbilled costs and fees 380,295 --
Inventory (247,516) (424,282)
Prepaid expenses and other assets (116,670) (874,413)
Accounts payable (215,520) 490,616
Accrued expenses (193,810) (492,778)
Deferred maintenance revenue (297,187) (319,823)
Net assets from discontinued operations 1,491,173 209,746
----------- -----------
Total adjustments 1,410,475 (3,492,344)
----------- -----------
Net cash used by operating activities (538,568) (2,797,508)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net (408,413) (719,546)
Proceeds from sale of property and equipment 147,360 --
Proceeds from sale of marketable securities -- 6,090,448
Acquisition of businesses (36,344) (4,903,620)
Other investing activities 104,353 (410,923)
----------- -----------
Net cash provided (used) by investing activities (193,044) 56,359
----------- -----------
Cash flows from financing activities:
Exercise of stock options -- 97,688
----------- -----------
Net cash provided by financing activities -- 97,688
----------- -----------
Net decrease in cash and cash equivalents (731,612) (2,643,461)
Cash and cash equivalents, beginning of period 2,372,946 3,976,929
----------- -----------
Cash and cash equivalents, end of period $ 1,641,334 $ 1,333,468
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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") as a discontinued operation (see Note G). The assets and
liabilities of the discontinued business have been reclassified in the
Consolidated Condensed Balance Sheets as Net assets (liabilities) of
discontinued operations. The operating results of the GSD 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 half of FY96. As of November 30, 1994, the Company had
capitalized $422,214 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.
(F) Details of certain balance sheet captions are as follows:
<TABLE>
<CAPTION>
November 30, May 31,
1995 1995
------------ ------------
<S> <C> <C>
Property and equipment $ 5,520,795 $ 5,221,213
Accumulated depreciation
and amortization 3,257,549 2,882,296
----------- ------------
Property and equipment, net $ 2,263,246 $ 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 3,430,009 5,379,052
Less treasury stock (1,481,515) (1,481,515)
----------- ------------
Stockholders' equity $18,768,406 $ 20,693,804
=========== ============
</TABLE>
(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 and six months ended
November 30, 1995 was $7,950 and $45,860, respectively. Revenue from
discontinued operations for the comparable periods in fiscal 1995 was
$323,221 and $616,568, respectively.
At November 30, 1995 and May 31, 1995, the net assets of discontinued
operations, which are included in the Consolidated Condensed Balance
Sheets, are as follows:
<TABLE>
<CAPTION>
November 30, May 31,
1995 1995
------------ -------
<S> <C> <C>
Receivables $ 237,599 $1,554,178
Accrued expenses and income taxes (562,594) (388,000)
--------- ----------
Net assets (liabilities) $(324,995) $1,166,178
========= ==========
</TABLE>
(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 were expensed to operations and included in selling, general
and administrative expense in the second quarter of fiscal 1996. The
advance will be expensed as part of the sale of the CAD Division.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Financial Condition
- -------------------
During the first six months of fiscal 1996, cash decreased approximately
$732,000. Operating activities utilized approximately $539,000, much of that
being the nonrecurring cash payment of $426,000 detailed below. The
collection of the majority of the remaining GSD receivables provided $1.5
million during the six months ended November 30, 1995.
On September 20, 1995, the Company made a nonrecurring cash payment of
$426,000 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.
Approximately $356,000 of the cash payment was expensed in this quarter and is
included in selling, general and administrative expense. The remaining
$70,000 is an advance that is recoverable against commissions earned from the
sale of the CAD Division. 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 along with the $10 million available
line of credit will be sufficient for meeting operating needs over the next
twelve months.
Results of Operations
- ---------------------
Revenue for the three and six month periods ended November 30, 1995 decreased
approximately 4% and 3%, respectively, from the same periods in fiscal 1995.
The North Carolina locations recorded revenue of $2.2 million and $4.1
million, respectively, for the three and six months ended November 30, 1995 as
compared to $4.1 million and $7.5 million, respectively, for the same periods
of the previous fiscal year. The decrease in revenue in North Carolina was
partially offset by revenue generated by Micro Control, acquired in January
1995, of $1.2 million and $2.4 million, respectively, for the three and six
months ended November 30, 1995.
Product revenue, which includes hardware and off-the-shelf software, decreased
by 14% and 13%, respectively, for the three and six month periods ended
November 30, 1995 as compared to the same periods 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 and six months ended
November 30, 1995 were 21.0% and 19.8%, respectively, as compared to 21.5% and
20.8%, respectively, for the comparable periods 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 34% for the three and six months ended November
30, 1995 as compared to the same periods 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 31% for the first half of fiscal 1996 as
compared to 45% 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 21.9% for the first half of fiscal 1995 to 30% for the first half of
fiscal 1996. Included in SG&A for the first half of FY96 was the payment of
$356,000 to the shareholders of Micro Control, Inc. (see Footnote H), along
with approximately $166,000 of costs associated with the now shut down
software development group. The costs associated with the software
development group were capitalized during the first half 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 acquisition of Micro Control in January 1995.
The operating loss from continuing operations was approximately $(510,000) and
$(1,560,000), respectively, for the three and six months ended November 30,
1995, as compared to operating income of $470,000 and $915,000, respectively,
for the same periods in FY95. Along with the slight decrease in revenue for
the first half of fiscal 1996, earnings were negatively impacted by decreases
in both product and service margins, as well as a $1.6 million increase in
selling, general and administrative costs, $356,000 of which is related to
the nonrecurring cash payment as outlined above.
The loss from discontinued operations of $224,318 and $303,125, respectively,
for the three and six months ended November 30, 1995 was primarily due to
expenses associated with the collection of approximately $1.3 million of
outstanding GSD receivables and resolving most outstanding regulatory issues
related to that division. This effort is now concluded and all GSD employees
were separated at the end of Q2 FY96.
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 half of fiscal 1995. There were no
common equivalent shares arising from shares issued under stock options during
the first half of fiscal 1996.
The Company did not generate any interest income during the first two quarters
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 two quarters of fiscal 1996 is
comprised of state taxes computed on a basis other than income. The Company's
effective tax rate for the first half of fiscal 1995 was about 30%, which is
comprised of a federal rate of 24% and an average state tax rate of 6%.
PART II. OTHER INFORMATION
---------------------------
SOFTECH, INC. AND SUBSIDIARIES
------------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit
27(i) Financial Data Schedule as required to 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
November 30, 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: January 15, 1996 /S/ Joseph P. Mullaney
---------------- -------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: January 15, 1996 /S/ Jan E. Yansak
---------------- -------------------------------
Jan E. Yansak
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> NOV-30-1995
<CASH> 1,641
<SECURITIES> 0
<RECEIVABLES> 13,018
<ALLOWANCES> 0
<INVENTORY> 1,968
<CURRENT-ASSETS> 19,697
<PP&E> 5,521
<DEPRECIATION> 3,258
<TOTAL-ASSETS> 26,047
<CURRENT-LIABILITIES> 7,279
<BONDS> 0
0
0
<COMMON> 450
<OTHER-SE> 18,318
<TOTAL-LIABILITY-AND-EQUITY> 26,047
<SALES> 22,380
<TOTAL-REVENUES> 22,380
<CGS> 17,221
<TOTAL-COSTS> 23,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,560)
<INCOME-TAX> 86
<INCOME-CONTINUING> (1,646)
<DISCONTINUED> (303)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,949)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
