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, 1997 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
3260 EAGLE PARK DRIVE, N.E., GRAND RAPIDS, MICHIGAN 49525
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,
1997 was 5,907,542 shares.
<PAGE>
Form 10-Q
Page 2
SOFTECH, INC.
INDEX
PART I. Financial Information Page Number
-----------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
November 30, 1997 and May 31, 1997 3
Consolidated Condensed Statements of Income -
Three and Six Months Ended November 30, 1997 and
November 30, 1996 4-5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended November 30, 1997 and
November 30, 1996 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
<PAGE>
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,
1997 1997
--------- ---------
ASSETS
Cash and cash equivalents $ -- $ 580
Available-for-sale securities -- 787
Accounts receivable, net 4,591 3,300
Unbilled costs and fees 1,859 491
Inventory 188 378
Prepaid expenses and other assets 1,219 527
Net assets of discontinued operations (Note D) 29 6
------- -------
Total current assets 7,886 6,069
Property and equipment, net (Note C) 5,613 1,478
Goodwill, net 3,127 2,497
Notes receivable 472 114
------- -------
TOTAL ASSETS $17,098 $10,158
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable, line of credit $ 1,925 $ --
Accounts payable 2,793 1,664
Accrued expenses 2,388 1,024
Deferred maintenance revenue 1,175 383
Current portion of capital lease obligations 83 78
------- -------
Total current liabilities 8,364 3,149
------- -------
Capital lease obligations, net of current portion 323 172
------- -------
Stockholders' equity (Note C) 8,411 6,837
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,098 $10,158
======= =======
See accompanying notes to consolidated condensed financial statements.
<PAGE>
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
-----------------------------------------
November 30, November 30,
1997 1996
---------- ----------
<S> <C> <C>
Revenue
Products $ 1,688 $ 3,012
Services 3,012 1,093
---------- ----------
Total revenue 4,700 4,105
Cost of products sold 944 2,022
Cost of services provided 1,720 743
---------- ----------
Gross margin 2,036 1,340
Selling, general and administrative 1,693 1,022
---------- ----------
Income from continuing operations before income taxes 343 318
Provision for federal and state income taxes 20 15
---------- ----------
Net income $ 323 $ 303
========== ==========
Net income per common share $ 0.06 $ 0.07
========== ==========
Weighted average common shares outstanding 5,591,639 4,127,896
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10-Q
Page 5
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except for per share data)
Six Months Ended
------------------------------------------
November 30, November 30,
1997 1996
----------- -----------
<S> <C> <C>
Revenue
Products $ 3,114 $ 5,805
Services 5,980 2,058
----------- -----------
Total revenue 9,094 7,863
Cost of products sold 1,785 3,960
Cost of services provided 3,447 1,472
----------- -----------
Gross margin 3,862 2,431
Selling, general and administrative 3,314 1,940
----------- -----------
Income from continuing operations 548 491
Gain on available-for-sale securities 253 --
----------- -----------
Income from continuing operations before income taxes 801 491
Provision for federal and state income taxes 100 15
----------- -----------
Income from continuing operations 701 476
Discontinued operations (Notes B and D)
Loss from operations -- (750)
----------- -----------
Net income (loss) $ 701 $ (274)
=========== ===========
Income from continuing operations per common share $ 0.13 $ 0.12
=========== ===========
Net income (loss) per common share $ 0.13 $ (0.07)
=========== ===========
Weighted average common shares outstanding 5,533,201 4,094,776
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Form 10-Q
Page 6
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(dollars in thousands)
Six Months Ended
-----------------------------------
November 30, November 30,
1997 1996
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 701 $ (274)
------- -------
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization 682 366
Gain on sale of available-for-sale securities (253) --
Unrealized gain on investment -- 2,025
Change in current assets and liabilities:
Accounts receivable (1,291) (1,051)
Unbilled costs and fees (1,368) (529)
Inventory 326 207
Prepaid expenses and other assets (233) 115
Accounts payable 1,129 183
Accrued expenses (492) 659
Deferred maintenance revenue (171) (198)
Net assets of discontinued operations (23) 4,728
------- -------
Total adjustments (1,694) 6,505
------- -------
Net cash provided (used) by operating activities (993) 6,231
------- -------
Cash flows from investing activities:
Capital expenditures (270) (259)
Receipt of marketable securities in sale of NSG (5,072)
Purchase of net assets of AMT, including acquisition costs (1,850) --
Proceeds from sale of available-for-sale securities 810 --
Loans to officers (358) --
------- -------
Net cash used by investing activities (1,668) (5,331)
------- -------
Cash flows from financing activities:
Net borrowings (repayments) under bank line of credit 1,925 --
Net proceeds from capital lease financing 156 --
------- -------
Net cash provided by financing activities 2,081 --
------- -------
Net increase (decrease) in cash and cash equivalents (580) 900
Cash and cash equivalents, beginning of period 580 3,017
------- -------
Cash and cash equivalents, end of period $ -- $ 3,917
======= =======
Supplemental Disclosure of Cash Flow Information:
Non-Cash Investing Activities:
Fair value of shares issued in connection with acquisition
AMT $ 1,188 $ --
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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,
1997 1997
--------------- -----------
Property and equipment $ 6,783 $ 2,342
Accumulated depreciation
and amortization 1,170 864
--------------- -----------
Property and equipment, net $ 5,613 $ 1,478
--------------- -----------
Common stock, $.10 par value $ 635 $ 568
Capital in excess of par value 8,609 7,488
Unrealized gain - 315
Retained earnings (deficit) 649 (52)
Less treasury stock (1,482) (1,482)
--------------- -----------
Stockholders' equity $ 8,411 $ 6,837
--------------- -----------
(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 and six months ended November
30, 1997 and 1996 was $0 and $7,490,000, respectively.
At November 30, 1997 and May 31, 1997, the net assets of discontinued
operations, which are included in the Consolidated Condensed Balance
Sheets, are as follows:
November 30, May 31,
1997 1997
------------- -----------
Accounts receivable, net $ 187 355
Deferred income taxes receivable 299 334
-------------- -----------
Total assets 486 689
-------------- -----------
Accounts payable -- 129
Accrued expenses 457 554
-------------- -----------
Total liabilities 457 683
-------------- -----------
Net assets of discontinued operations $ 29 6
-------------- -----------
<PAGE>
Form 10-Q
Page 8
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(E) On November 10, 1997, the Company completed the acquisition of certain
assets and assumed certain liabilities of the Advanced Manufacturing
Technology ("AMT") division of CIMLINC, Incorporated ("CIMLINC"). CIMLINC
is a privately held Delaware corporation with headquarters in Itasca,
Illinois.
AMT is a technology group that targets its application software products to
the Mold and Die industry. AMT has been operated as a separate profit
center of CIMLINC since 1992. At the transaction date, AMT employed 31 full
time employees and is located in Troy, Michigan. AMT's software products
have been primarily targeted to the tier two automotive component suppliers
in the U.S. marketplace that create molds and dies from electronic models.
AMT's software technology enhances the efficiency of the mold building
process by reducing project development time and costs and increasing the
quality of molds and tools.
SofTech acquired all of the material assets of AMT except for accounts
receivable with a net value of approximately $2.0 million as of the
transaction date. In the acquisition, SofTech acquired assets with a net
book value of approximately $338,000 (unaudited) and a defined list of
liabilities with a net book value of approximately $2,325,000 (unaudited).
The assets acquired included office furniture, computer equipment and
off-the-shelf software currently marketed and supported by AMT known as
PROSPECTOR(TM), EXPERTCAD(TM), EXPERTCAM(TM), TOOLDESIGNER(TM) and
TOOLMAKER(TM). The Company intends to continue to utilize such physical
assets acquired in the business.
The purchase price for the acquired assets was $1,750,000 in cash, 200,000
shares of SofTech stock and the assumption of the above referenced
liabilities. The source of the funds used in the acquisition came from
existing working capital resources including the Company's credit facility
with Deutsche Financial Services Corporation. SofTech provided CIMLINC with
a guarantee that the shares received in the transaction would have a value
of at least $1.0 million within two years or an additional payment would be
due for the difference. The guarantee is cancelled if, during the two year
period, the shares are sold or if the aggregate value of the shares equals
or exceeds $1.4 million for a specified period. The additional payment, if
due, can be made in cash or shares or any combination thereof at the
discretion of SofTech; provided, however, that in no event will the total
shares issued to complete this transaction exceed 19.9% of shares
outstanding before the transaction. If the additional payment is to be made
in shares the average closing price for the last thirty (30) trading days
of the two year period shall be used to derive the per share value.
In addition, SofTech will issue 157,143 shares of stock to a group of AMT
employees to satisfy certain amounts due to those individuals upon the sale
of AMT by CIMLINC. CIMLINC had entered into these arrangements with the key
AMT employees in order to ensure their cooperation and continued employment
in the event of a sale. SofTech has guaranteed the recipients of 65,714 of
those 157,143 shares that the value of the shares will be at least $3.50 in
two years or an additional payment will be made in cash for the difference.
SofTech will also issue 357,981 shares of stock for the benefit of certain
AMT employees. These individuals received a stock award that vests 50% at
the first anniversary and 50% at the second anniversary of the transaction.
In exchange for the share award these individuals agreed to take a salary
reduction of either 10% or 20% from their current compensation plans. All
of such salary reductions can be recovered by those individuals in the
event that the revenue generated from the AMT business exceeds certain
forecasted targets. If any of the recipients terminate their employment
prior to vesting, their non-vested shares are forfeited and allocated to
the recipients on a pro rata basis. If the employment of any of these
individuals is terminated by the Company for any reason,
<PAGE>
Form 10-Q
Page 9
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
other than fraud or illegal activity, during the two year vesting period
the individuals are allowed to continue to purchase the non-vested shares.
At the one year anniversary any participant can elect to withdraw from the
program but will only receive 40% of the stock awarded to them.
The acquisition was accounted for as a purchase and resulted in the
recording of capitalized software of $4.0 million, fixed assets of $.2
million and goodwill of approximately $1.0 million.
(F) As previously reported in the Proxy Statement for the fiscal 1997 Annual
Meeting, management has been reviewing its relationship with Coopers &
Lybrand LLP due to the relocation of its corporate headquarters from
Massachusetts to Michigan and has been evaluating alternative independent
accountants in the process. Effective January 12, 1998, SofTech management,
its Board of Directors and Coopers & Lybrand LLP, mutually agreed that due
to the aforementioned relocation of corporate headquarters that it no
longer made economic sense to provide audit services from the Boston office
of Coopers & Lybrand LLP. SofTech management has recommended to the Board
of Directors the appointment of Ernst & Young LLP to provide such audit
services for fiscal year 1998. For this purpose, "audit services" include:
examination of annual fiscal statements; review and consultation in
connection with filings of annual reports and registration statements with
the SEC; consultation on accounting matters; preparation of reports to
management covering recommendations on accounting, internal control and
similar matters; meetings with the Audit Committee; and audits of employee
benefit plans. Ernst & Young LLP has also been asked to audit the financial
statements of the Company's most recent acquisition for inclusion in an
amended Form 8-K to be filed on Januay 26, 1998. The appointment of Ernst &
Young LLP was approved by the company's Board of Directors.
For the fiscal year 1996 and 1997 audits, Coopers & Lybrand LLP issued an
unqualified opinion but modified its opinion with a "going concern"
paragraph. This paragraph emphasized that given the company's minimal
operating income and deteriorating relationship with a major supplier there
existed "substantial doubt as to the Company's ability to continue as a
going concern."
<PAGE>
Form 10-Q
Page 10
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 months ended November 30, 1997 was
approximately $4.7 million and $9.1 million, respectively, as compared to
approximately $4.1 million and $7.9 million for the same periods in the prior
fiscal year. The current year revenues represent an increase of about 14% and
16%, respectively, for the three and six months ended November 30, 1997 over the
comparable periods in the prior fiscal year. Service revenue for Q2 of fiscal
1998 was approximately $3.0 million, or 64% of revenue, as compared to
approximately $1.1 million, or 27% of revenue, for the comparable period in
fiscal 1997. Service revenue for the six months ended November 30, 1997 was
approximately $6.0 million, or 66% of revenue, as compared to approximately $2.1
million, or 26% of revenue, for the comparable period in fiscal 1997. The
increase in service revenue is the result of the acquisitions of the
services-only businesses in the third quarter of fiscal year 1997. Product
revenue was approximately $1.7 million for the current quarter as compared to
$3.0 million for the same period in fiscal 1997, a decrease of 44%. Year-to-date
product revenue was approximately $3.1 million as compared to $5.8 million, a
decrease of 46%. 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 as
discussed under the section labeled "Product Transition" in the Company's Form
10-K filing for fiscal 1997.
Product gross margin was 44.1% and 42.7% for the three and six month periods
ended November 30, 1997, respectively, as compared to 32.9% and 31.8% for the
same periods in 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 through September 30,
1996 as discussed in detail under the section labeled "Product Transition" in
the Company's Form 10-K filing for fiscal 1997. Gross margin generated from
service revenue increased to 42.9% and 42.4% for the three and six month periods
ended November 30, 1997, respectively, from 32.0% and 28.5%, respectively, for
the comparable periods in fiscal 1997. 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 second quarter of fiscal
1998 was $1,694,000, an increase of 66% from the second quarter fiscal 1997
expenditures of $1,022,000. Year-to-date Selling, general and administrative
expense for the six months ended November 30, 1997 was $3,315,000 as compared to
$1,940,000, an increase of about 71%. 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 second quarter of fiscal 1998 was
$322,000 or $.06 per share as compared to net income of $318,000 or $.07 per
share for the same period in fiscal 1997. For the six months ended November 30,
1997, net income from continuing operations was $700,000 or $.13 per share as
compared to $476,000 or $.12 per share for the same period in fiscal 1997. The
first quarter of fiscal 1998 earnings included a pretax investment gain of
$253,000. 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.
<PAGE>
Form 10-Q
Page 11
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - continued
The Company, as of the date of this filing, has not yet resolved its differences
with Parametric Technology Corporation ("PTC"). The Reseller Agreement expired
on September 30, 1997. Since that time activity between the Company and PTC has
been limited. It is uncertain at this time if the differences between the
Company and PTC can be resolved amicably. Given the Company's recent acquisition
of AMT, its growing service business, and the opportunities available to the
Company to represent the software products of PTC's competitors, management
believes the loss of the PTC reseller authorization will not be material to its
operations.
Capital Resources and Liquidity
The Company ended the second quarter with borrowings under its line of credit of
$1,925,000. The acquisition of the assets of CIMLINC's Advanced Manufacturing
Technology group in November 1997 as detailed in Note E hereunder was the
primary use of the cash during the second quarter and the reason for the
borrowings under the credit facility.
Net cash used by operations totaled about $993,000 for the six months ended
November 30, 1997. The significant components of this cash utilization was as
follows: net income adjusted for non-cash expenses generated approximately
$1,382,000 and growth in accounts payable and accrued liabilities generated an
additional $443,000 which was offset by accounts receivable growth of about $2.7
million. The accounts receivable growth is primarily due to the concentration of
revenue during the last month of Q2 FY98 as compared to the last month of Q4
FY97, a few large slow-paying accounts and several deferred payment arrangements
on software maintenance.
Investing activities utilized approximately $1.7 million for the six months
ended November 30, 1997. The cash utilized to acquire AMT totaled approximately
$1.9 million. Capital expenditures and loans to officers used approximately
$628,000 during the first half of fiscal 1998. The loans to officers related to
tax payments due by them from the share issuance approved by shareholders in
April 1997. Approximately $810,000 was generated from the sale of securities.
Borrowings under the line of credit facility and certain borrowings for capital
equipment acquisitions generated approximately $2.1 million.
The Company believes that the additional borrowings under the line of credit
together with the cash flow from operations will be sufficient for meeting its
liquidity and capital resource needs for the next year.
The statements made above with respect to 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 and the efficient and effective integration of the AMT
business unit into the Company, acceptance of the new software offering by
potential users, and the ability of the Company to attract and retain qualified
personnel both in our existing markets and in new office locations.
<PAGE>
Form 10-Q
Page 12
PART II. OTHER INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
16 Consent of Accountants
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
November 25, 1997 describing the purchase of substantially all of the net
assets of the Advanced Manufacturing Technology division of CIMLINC,
Incorporated on November 10, 1997. Pro forma financial information and
related audited financial statements, required to be filed pursuant to Item
7 or Form 8-K reflecting the acquisition, will be filed on Form 8 on
January 25, 1998.
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, 1998 /s/ Joseph P. Mullaney
----------------- ----------------------
Joseph P. Mullaney
Vice President
Chief Financial Officer
Date: January 14, 1998 /s/ Jan E. Yansak
----------------- ----------------------
Jan E. Yansak
Controller
Exhibit 16
January 13, 1998
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by SofTech, Inc. (copy attached), which we
understand will be filed with the Commission, pursuant to Item 304 of Regulation
S-K as part of the Company's Form 10Q for the quarter ended November 30, 1997.
We agree with the statements concerning our Firm in such Form 10Q.
Very truly yours,
/s/ Coopers & Lybrand, L.L.P.
Coopers & Lybrand, L.L.P.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> May-31-1998
<PERIOD-END> Nov-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,844
<ALLOWANCES> (253)
<INVENTORY> 188
<CURRENT-ASSETS> 7,886
<PP&E> 6,753
<DEPRECIATION> (1,170)
<TOTAL-ASSETS> 17,098
<CURRENT-LIABILITIES> 8,364
<BONDS> 0
0
0
<COMMON> 635
<OTHER-SE> 7,776
<TOTAL-LIABILITY-AND-EQUITY> 17,098
<SALES> 9,094
<TOTAL-REVENUES> 9,094
<CGS> 5,232
<TOTAL-COSTS> 8,546
<OTHER-EXPENSES> (253)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 801
<INCOME-TAX> 100
<INCOME-CONTINUING> 701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 701
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
