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 29, 1996 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 29,
1996 was 4,094,776 shares.
SOFTECH, INC.
-------------
INDEX
-----
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
February 29, 1996 and May 31, 1995 3
Consolidated Condensed Statements of Income -
Three and Nine Months Ended February 29, 1996 and
February 28, 1995 4-5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended February 29, 1996 and
February 28, 1995 6
Notes to Consolidated Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
PART I. FINANCIAL INFORMATION
SOFTECH INC. AND SUBSIDIARIES
-----------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
February 29, May 31,
1996 1995
------------ -----------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 2,187,864 $ 2,372,946
Trade and other receivables 12,326,736 13,619,854
Unbilled costs and fees 1,108,292 1,248,361
Inventory 2,685,297 1,819,184
Prepaid expenses and other assets 433,180 475,082
Deferred and refundable income taxes 693,917 964,560
Net assets of discontinued operations (Note G) 51,681 1,166,178
----------- -----------
Total current assets 19,486,967 21,666,165
Property and equipment, net (Note F) 2,157,223 2,338,917
Goodwill 3,785,934 4,621,484
Other assets 9,205 118,558
----------- -----------
TOTAL ASSETS $25,439,329 $28,745,124
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable $ 4,073,435 $ 4,112,334
Accrued expenses 1,416,662 2,112,864
Deferred maintenance revenue 1,711,199 1,734,122
Federal and state income taxes payable -- 92,000
----------- -----------
Total current liabilities 7,201,296 8,051,320
Stockholders' equity (Note F) 18,238,033 20,693,804
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,439,329 $28,745,124
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
Revenue
Products $ 7,912,915 $ 9,677,053
Services 3,305,311 3,223,355
----------------------------
Total revenue 11,218,226 12,900,408
Cost of products sold 6,276,394 7,787,466
Cost of services provided 2,432,042 1,765,024
----------------------------
Gross margin 2,509,790 3,347,918
Selling, general and administrative 3,105,680 3,352,460
Software development costs (Note D) ---- 737,030
----------------------------
Operating loss (595,890) (741,572)
Interest income ---- 22,858
----------------------------
Loss from continuing operations before taxes (595,890) (718,714)
Provision (benefit) for federal and state
income taxes 31,609 (200,000)
----------------------------
Loss from continuing operations (627,499) (518,714)
Discontinued operations (Notes C and G)
Loss from operations ---- ----
----------------------------
Net loss $ (627,499) $ (518,714)
============================
Loss from continuing operations per
common share $ (0.15) $ (0.13)
============================
Net loss per common share $ (0.15) $ (0.13)
============================
Weighted average common shares outstanding 4,090,490 4,048,893
</TABLE>
See accompanying notes to consolidated condensed financial statements.
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
February 29, February 29,
1996 1995
------------ ------------
<S> <C> <C>
Revenue
Products $23,782,141 $27,939,423
Services 9,816,525 8,099,250
----------------------------
Total revenue 33,598,666 36,038,673
Cost of products sold 18,970,332 22,257,899
Cost of services provided 6,959,538 4,448,178
----------------------------
Gross margin 7,668,796 9,332,596
Selling, general and administrative 9,658,010 8,458,116
Software development costs (Note C) 166,310 737,030
----------------------------
Operating income (loss) (2,155,524) 137,450
Interest income -- 136,457
----------------------------
Income (loss) from continuing operations
before taxes (2,155,524) 273,907
Provision for federal and state income taxes 117,893 97,786
----------------------------
Income (loss) from continuing operations (2,273,417) 176,121
Discontinued operations (Notes C and G)
Loss from operations (303,125) --
----------------------------
Net income (loss) $(2,576,542) $ 176,121
============================
Income (loss) from continuing operations
per common share $ (0.56) $ 0.04
============================
Net income (loss) per common share $ (0.63) $ 0.04
============================
Weighted average common shares outstanding 4,069,619 3,942,266
</TABLE>
See accompanying notes to consolidated condensed financial statements.
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,576,542) $ 176,121
-------------------------------
Adjustments to reconcile income (loss) to net
cash used by operating activities:
Depreciation and amortization 1,658,479 1,127,162
Gain on sale of fixed assets (49,316) --
Current and deferred federal and state taxes 178,643 (216,552)
Change in current assets and liabilities net of
effects from purchase of CCS and SCI in fiscal
year 1995:
Accounts receivable 1,293,118 (4,629,564)
Unbilled costs and fees 140,069 --
Inventory (1,028,146) 46,907
Prepaid expenses and other assets 41,902 (185,120)
Accounts payable (38,899) (117,918)
Accrued expenses (696,202) (33,523)
Deferred maintenance revenue (22,923) (234,285)
Net assets from discontinued operations 1,114,497 (474,620)
-------------------------------
Total adjustments 2,591,222 (4,717,513)
-------------------------------
Net cash provided (used) by operating
activities 14,680 (4,541,392)
-------------------------------
Cash flows from investing activities:
Purchase of property and equipment, net (532,570) (996,575)
Proceeds from sale of property and equipment 152,674 --
Proceeds from sale of marketable securities -- 8,161,304
Acquisition of businesses (36,344) (6,029,624)
Other investing activities 104,353 (42,959)
-------------------------------
Net cash provided (used) by investing
activities (311,887) 1,092,146
-------------------------------
Cash flows from financing activities:
Exercise of stock options 112,125 192,892
-------------------------------
Net cash provided by financing activities 112,125 192,892
-------------------------------
Net decrease in cash and cash equivalents (185,082) (3,256,354)
Cash and cash equivalents, beginning of period 2,372,946 3,976,929
-------------------------------
Cash and cash equivalents, end of period $ 2,187,864 $ 720,575
===============================
</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. Certain amounts for the prior
year have been reclassified to conform with the 1996 presentation.
(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 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 nine months of FY96.
During the first half of FY95, the Company 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 $314,816 of costs
incurred during the third quarter of FY95. Subsequent software
development costs on this project were expensed as 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>
February 29, May 31,
1996 1995
------------ -----------
<S> <C> <C>
Property and equipment $ 5,606,557 $ 5,221,213
Accumulated depreciation and amortization 3,449,334 2,882,296
----------------------------
Property and equipment, net $ 2,157,223 $ 2,338,917
============================
Common stock, $.10 par value $ 453,794 $ 449,571
Capital in excess of par value 16,463,244 16,346,696
Retained earnings 2,802,510 5,379,052
Less treasury stock (1,481,515) (1,481,515)
----------------------------
Stockholders' equity $18,238,033 $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 nine months
ended February 29, 1996 was $0 and $46,000, respectively. Revenue
from discontinued operations for the comparable periods in fiscal
1995 was $59,000 and $676,000, respectively.
At February 29, 1996 and May 31, 1995, the net assets of
discontinued operations, which are included in the Consolidated
Condensed Balance Sheets, are as follows:
<TABLE>
<CAPTION>
February 29, May 31,
1996 1995
------------ -------
<S> <C> <C>
Receivables $125,681 $1,554,178
Accrued income taxes (74,000) (388,000)
--------------------------
Net assets $ 51,681 $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.
(I) On April 4, 1996, subsequent to the end of Q3 fiscal year 1996, the
Company signed a letter of intent to sell the assets of its CAD
Division for approximately $6.5 million. Two long time employees of
the Company received the financial support of a Boston based
leveraged buyout firm (the "Buyers") in submitting the offer. One of
those employees has also served as a Vice President of the Company
since 1993, namely Mark Sweetland. The proposal is dependent on the
Buyers obtaining debt financing for a portion of the sale price to
complete the transaction. It is also subject to a number of
conditions, including the negotiation and execution of a mutually
agreeable definitive agreement and approval by SofTech's Board of
Directors. There can be no assurance that a definitive agreement
will be reached or that the Buyers will obtain the necessary
financing to complete the proposed transaction.
For the first nine months of fiscal 1996, the CAD Division generated
revenue of approximately $10.7 million, or about 32% of SofTech's
total revenue. At the end of February 1996 the CAD Division had
approximately $3.3 million in net tangible assets composed of the
following assets and liabilities (in thousands):
<TABLE>
<S> <C>
Accounts receivable $4,307
Other assets 745
Property and equipment, net of depreciation 639
Goodwill, net of amortization 2,364
------
Total assets 8,055
Accounts payable and accrued liabilities 2,354
------
Net assets $5,701
======
</TABLE>
If this transaction is consummated on the terms enumerated above,
it is anticipated that it will result in approximately $5.5 million
in net after tax proceeds to SofTech, and a net gain of between
$500,000 and $1.0 million recorded in the quarter in which the
transaction closes.
The Company would anticipate presenting the CAD Division as a
discontinued operation in its future filings as the uncertainties
with regard to this proposal are clarified.
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 1996, cash decreased approximately
$185,000. Net cash provided by operating activities was approximately
$15,000. The net loss adjusted for non-cash items, primarily depreciation
and amortization, utilized approximately $789,000. A decrease in accounts
receivables and unbilled costs and fees, resulting from the revenue
decrease in Q3 FY96 versus Q3 FY95, provided approximately $1.4 million.
An increase in inventory utilized approximately $1.0 million, while a
decrease in accrued expenses utilized approximately $700,000. The
collection of the majority of the remaining GSD receivables, net of
related tax liabilities, provided $1.1 million during the nine months
ended February 29, 1996.
On April 4, 1996, subsequent to the end of Q3 fiscal year 1996, the
Company signed a letter of intent to sell the assets of its CAD Division
for approximately $6.5 million (see Note I to this Form 10-Q). Two long
time employees of the Company received the financial support of a Boston
based leveraged buyout firm (the "Buyers") in submitting the offer. One of
those employees has also served as a Vice President of the Company since
1993, namely Mark Sweetland. The proposal is dependent on the Buyers
obtaining debt financing for a portion of the sale price to complete the
transaction. It is also subject to a number of conditions, including the
negotiation and execution of a mutually agreeable definitive agreement and
approval by SofTech's Board of Directors. There can be no assurance that a
definitive agreement will be reached or that the Buyers will obtain the
necessary financing to complete the proposed transaction.
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 Q2
FY96 and is included in selling, general and administrative expense. The
remaining $70,000 is an advance that is recoverable against commissions
that may be earned upon 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 nine month periods ended February 29, 1996
decreased approximately 13% and 7%, respectively, from the same periods in
fiscal 1995. The North Carolina locations recorded revenue of $1.3
million and $5.6 million, respectively, for the three and nine months
ended February 29, 1996 as compared to $4.1 million and $11.5 million,
respectively, for the same periods of the previous fiscal year. The prior
year's revenue was for eight months only and included revenue from retail
operations which were closed in April 1995. The decrease in revenue in
North Carolina was partially offset by revenue generated by Micro Control,
acquired in January 1995, of $1.0 million and $3.4 million, respectively,
for the three and nine months ended February 29, 1996.
Product revenue, which includes hardware and off-the-shelf software,
decreased by 18% and 15%, respectively, for the three and nine month
periods ended February 29, 1996 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
nine months ended February 29, 1996 were 20.7% and 20.2%, respectively, as
compared to 19.5% and 20.3%, respectively, for the comparable periods in
FY95. Although not apparent from the results, management expects
continuous downward pressure on product margins as off-the-shelf hardware
and software components become more and more available and therefore
subject to intense price sensitivity.
Service revenue increased by 3% and 21%, respectively, for the three and
nine months ended February 29, 1996 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 29% for the first nine months 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 as services
become a more significant portion of total revenue.
Selling, general and administrative cost as a percentage of revenue
increased from 23.5% for the first nine months of fiscal 1995 to 28.7% for
the first nine months of fiscal 1996. Included in SG&A for the first nine
months of FY96 was the payment of $356,000 to the shareholders of Micro
Control, Inc. (see Footnote H). 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 $(596,000)
and $(2,156,000), respectively, for the three and nine months ended
February 29, 1996, as compared to operating income (loss) of $(742,000)
and $137,000, respectively, for the same periods in FY95. Along with the
decrease in revenue for the first nine months of fiscal 1996, earnings
were negatively impacted by a decrease in service margins, as well as a
$1.4 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 $303,125 for the nine months
ended February 29, 1996 was primarily due to expenses associated with the
collection of approximately $1.4 million of outstanding GSD receivables
and resolving most outstanding regulatory issues related to discontinued
operations. 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 nine months of fiscal
1995. There were no common equivalent shares arising from shares issued
under stock options during the first nine months of fiscal 1996.
The Company did not generate any interest income during the first nine
months 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 nine months of fiscal 1996 is
comprised of state taxes computed on a basis other than income. 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 Company has placed a valuation reserve against
approximately $2.0 million of otherwise recognizable deferred tax assets.
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
There were no reports on Form 8-K filed during the three months ended
February 29, 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: April 15, 1996 /s/ JOSEPH P. MULLANEY
---------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: April 15, 1996 /s/ JAN E. YANSAK
---------------------------
Jan E. Yansak
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> FEB-29-1996
<CASH> 2,188
<SECURITIES> 0
<RECEIVABLES> 12,327
<ALLOWANCES> 0
<INVENTORY> 2,685
<CURRENT-ASSETS> 19,487
<PP&E> 5,606
<DEPRECIATION> 3,449
<TOTAL-ASSETS> 25,439
<CURRENT-LIABILITIES> 7,201
<BONDS> 0
0
0
<COMMON> 454
<OTHER-SE> 17,784
<TOTAL-LIABILITY-AND-EQUITY> 25,439
<SALES> 33,599
<TOTAL-REVENUES> 33,599
<CGS> 25,930
<TOTAL-COSTS> 35,754
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,155)
<INCOME-TAX> 188
<INCOME-CONTINUING> (2,273)
<DISCONTINUED> (303)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,576)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
