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
August 31, 1997 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 August 31,
1997 was 5,235,276 shares.
Form 10-Q
Page 2
SOFTECH, INC.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page Number
-----------
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
August 31, 1997 and May 31, 1997 3
Consolidated Condensed Statements of Income -
Three Months Ended August 31, 1997 and
August 31, 1996 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended August 31, 1997 and
August 31, 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 8
</TABLE>
Form 10-Q
Page 3
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(dollars in thousands)
August 31, May 31,
1997 1997
----------------------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 340 $ 580
Available-for-sale securities - 787
Accounts receivable 2,650 3,300
Unbilled costs and fees 1,756 491
Inventory 142 378
Prepaid expenses and other assets 939 527
Net assets (liabilities) of discontinued operations
(Note D) (115) 6
-------------------
Total current assets 5,712 6,069
Property and equipment, net (Note C) 1,439 1,478
Goodwill, net 2,312 2,497
Notes receivable 463 114
-------------------
TOTAL ASSETS $9,926 $10,158
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Note payable, line of credit (Note F) $ - $ -
Accounts payable 1,482 1,664
Accrued expenses 987 1,024
Deferred maintenance revenue 325 383
Current portion of capital lease obligations (Note G) 81 78
-------------------
Total current liabilities 2,875 3,149
-------------------
Capital lease obligations (Note G) 150 172
-------------------
Stockholders' equity (Note C) 6,901 6,837
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,926 $10,158
===================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Form 10-Q
Page 4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except for per share data)
Three Months Ended
-----------------------------------------
August 31, August 31,
1997 1996
---------- ----------
<S> <C> <C>
Revenue
Products $1,426 $2,793
Services 2,968 966
--------------------
Total revenue 4,394 3,759
Cost of products sold 842 1,939
Cost of services provided 1,727 729
--------------------
Gross margin 1,825 1,091
Selling, general and administrative 1,620 918
--------------------
Income from continuing operations 205 173
Gain on available-for-sale securities 253 -
--------------------
Income from continuing operations before income taxes 458 173
Provision for federal and state income taxes 80 -
--------------------
Income from continuing operations 378 173
Discontinued operations (Notes B and D)
Loss from operations - (750)
--------------------
Net income (loss) $ 378 $ (577)
====================
Income from continuing operations
per common share $ 0.07 $ 0.04
====================
Net income (loss) per common share $ 0.07 $(0.14)
====================
Weighted average common shares outstanding 5,405 4,095
</TABLE>
See accompanying notes to consolidated financial statements.
Form 10-Q
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(dollars in thousands)
Three Months Ended
------------------------
August 31, August 31,
1997 1996
------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 378 $ (577)
---------------------
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization 319 184
Gain on sale of available-for-sale securities (253) -
Gain on disposal of equipment - (47)
Change in current assets and liabilities:
Accounts receivable 650 (292)
Unbilled costs and fees (1,265) (164)
Inventory 291 (85)
Prepaid expenses and other assets (412) (22)
Accounts payable (182) 61
Accrued expenses (122) 27
Deferred maintenance revenue (58) (89)
Net assets of discontinued operations 121 (390)
---------------------
Total adjustments (911) (817)
---------------------
Net cash used by operating activities (533) (1,394)
---------------------
Cash flows from investing activities:
Capital expenditures (150) (42)
Proceeds from sale of capital equipment - 106
Proceeds from sale of available-for-sale securities 810 -
Loans to officers (349) -
---------------------
Net cash provided by investing activities 311 64
---------------------
Cash flows from financing activities:
Principal payments under capital lease obligations (18) -
---------------------
Net cash used by financing activities (18) -
---------------------
Net decrease in cash and cash equivalents (240) (1,330)
Cash and cash equivalents, beginning of period 580 3,017
---------------------
Cash and cash equivalents, end of period $ 340 $ 1,687
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
Form 10-Q
Page 6
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
(liabilities) 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:
<TABLE>
<CAPTION>
August 31, May 31,
1997 1997
--------------------
<S> <C> <C>
Property and equipment $ 2,434 $ 2,342
Accumulated depreciation
and amortization 995 864
------------------
Property and equipment, net $ 1,439 $ 1,478
------------------
Common stock, $.10 par value $ 568 $ 568
Capital in excess of par value 7,488 7,488
Unrealized gain - 315
Retained earnings (deficit) 327 (52)
Less treasury stock (1,482) (1,482)
------------------
Stockholders' equity $ 6,901 $ 6,837
==================
</TABLE>
(D) In September 1996, the Company sold its Network Systems Group to Data
Systems Network Corporation ("DSN). The description of the
transaction was described in the Company's Form 10-K filing dated
August 29, 1997. Revenue from discontinued operations for the three
months ended August 31, 1997 and 1996 was $0 and $7,490,000,
respectively.
At August 31, 1997 and May 31, 1997, the net assets (liabilities) of
discontinued operations, which are included in the Consolidated
Condensed Balance Sheets, are as follows:
<TABLE>
<CAPTION>
August 31, May 31,
1997 1997
--------------------
<S> <C> <C>
Accounts receivable, net $ 197 $ 355
Deferred income taxes receivable 321 334
-----------------
Total assets 518 689
Accounts payable -- 129
Accrued expenses 633 554
-----------------
Total liabilities 633 683
-----------------
Net assets (liabilities) of discontinued operations $(115) $ 6
=================
</TABLE>
Form 10-Q
Page 7
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Total revenue for the three months ended August 31, 1997 was $4.4 million,
an increase of 17% from the $3.8 million generated in the first quarter of
fiscal 1997. Service revenue was $3.0 million, or about 68% of revenue for
the first quarter of fiscal 1998 as compared to $966,000, or about 26% of
revenue for the first quarter of fiscal 1997. Product revenue was
approximately $1.4 million for the current quarter as compared to $2.8
million for the same period in fiscal 1997, a decrease of approximately 50%.
The decrease in product revenue is the result of the transition to the mid-
range software offering during the second quarter of fiscal 1997 which has
had a negative impact on both hardware and software revenue.
Product gross margin was 41.0% in Q1'98 as compared to 30.6% for the first
quarter of fiscal 1997. The increase in product gross margin is due
primarily to the increased margin on the mid-range software offering
relative to the high-end software offering marketed by the company in the
first quarter of fiscal 1997. Gross margin generated from service revenue
increased to 41.8% in the first quarter of fiscal 1998 as compared to 24.5%
for Q1'97. The increase in service gross margin is due to the service
businesses acquired in the third quarter of fiscal 1997 and increased
productivity of the engineering group.
Selling, general and administrative expense for the first quarter of fiscal
1998 was $1,620,000, an increase of 76% from the first quarter fiscal 1997
spending of $918,000. The increase is primarily attributable to the service
businesses acquired in the third quarter of fiscal 1997 and the higher
variable compensation from increased gross margin dollars.
Net income from continuing operations for the first quarter of fiscal 1998
was $378,000 or $.07 per share as compared to net income of $173,000 or $.04
per share for the same period in fiscal 1997. The first quarter of fiscal
1998 earnings included an investment gain of $253,000 and a tax provision of
$80,000. The improved performance in fiscal 1998 relative to fiscal 1997
was the result of increased gross margin on products and services and the
increase in service revenue from the fiscal 1997 acquisitions.
The company expects to be sheltered from most, if not all, federal tax in
the current year due to the availability of net operating loss and tax
credit carryforwards.
Capital Resources and Liquidity
- -------------------------------
The Company ended the first quarter of fiscal 1998 with cash of about
$340,000, a decrease of about $240,000 from fiscal year end 1997. Net
income adjusted for non-cash expenses generated $698,000 for the first
quarter of fiscal 1998. Net cash used by operations totaled about $533,000
as a result of accounts receivable growth, an increase in prepaid and other
assets and the paydown of accounts payable and accrued expenses from fiscal
year end 1997. Investing activities generated $311,000 for the quarter from
the sale of securities offset by capital expenditures and loans to officers.
The loans to officers related to tax payments due by them from the share
issuance approved by shareholders in April 1997.
The Company believes that the cash on hand together with the cash flow from
operations and the available credit facility will be sufficient for meeting
its liquidity and capital resource needs for the next year.
The statements made above with respect the SofTech's outlook for fiscal 1998
represent "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and are subject to a number of risks and uncertainties. These include
general business and economic conditions, maintaining key reseller
agreements with technology providers (especially the reseller agreement with
Parametric Technology Corporation which expired on September 30, 1997),
ability to quickly transition to a competitive software offering in the
event the PTC reseller agreement is not renewed, acceptance of the market of
a mid-range software offering, and the ability of the Company to attract and
retain qualified personnel both in our existing markets and in new office
locations.
Form 10-Q
Page 8
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
August 31, 1997.
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 15, 1997 /s/ Joseph P. Mullaney
------------------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: October 15, 1997 /s/ Jan E. Yansak
------------------------------
Jan E. Yansak
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> AUG-31-1997
<CASH> 340
<SECURITIES> 0
<RECEIVABLES> 2,908
<ALLOWANCES> (256)
<INVENTORY> 142
<CURRENT-ASSETS> 5,712
<PP&E> 2,434
<DEPRECIATION> (995)
<TOTAL-ASSETS> 9,926
<CURRENT-LIABILITIES> 2,875
<BONDS> 0
0
0
<COMMON> 568
<OTHER-SE> 6,333
<TOTAL-LIABILITY-AND-EQUITY> 9,926
<SALES> 4,394
<TOTAL-REVENUES> 4,394
<CGS> 2,569
<TOTAL-COSTS> 4,189
<OTHER-EXPENSES> (253)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 458
<INCOME-TAX> 80
<INCOME-CONTINUING> 378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 378
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
