-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Rw9eCrWpiVJ8U/52sm1w2n4R5MiPtlZWEOe+AkOZ80B4VsB8iRvSkzzHRQwsRBuI sEZ8qSeDBape2wL7jzaqRA== 0000910647-95-000010.txt : 19950424 0000910647-95-000010.hdr.sgml : 19950424 ACCESSION NUMBER: 0000910647-95-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950228 FILED AS OF DATE: 19950414 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTECH INC CENTRAL INDEX KEY: 0000354260 STANDARD INDUSTRIAL CLASSIFICATION: 7371 IRS NUMBER: 042453033 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10665 FILM NUMBER: 95528935 BUSINESS ADDRESS: STREET 1: 460 TOTTEN POND RD CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178906900 MAIL ADDRESS: STREET 1: 460 POND ROAD CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 BODY OF 10-Q FOR PERIOD ENDED FEBRUARY 28, 1995 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 28, 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 February 28, 1995 was 4,050,047 shares. 2 SOFTECH, INC. INDEX Page PART I. Financial Information Number Item 1. Financial Statements Consolidated Condensed Balance Sheets February 28, 1995 and May 31, 1994 3 Consolidated Condensed Statements of Income - Three and Nine Months Ended February 28, 1995 and February 28, 1994 4 - 5 Consolidated Condensed Statements of Cash Flows - Nine Months Ended February 28, 1995 and February 28, 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 - 12 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 13 3 PART I. FINANCIAL INFORMATION SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
February 28, May 31, 1995 1994 ASSETS Cash and cash equivalents $ 720,575 $ 3,976,929 Marketable securities, at cost 993,318 9,154,622 Accounts receivable 12,247,524 6,307,242 Inventory 2,836,376 1,135,325 Prepaid expenses and other assets 1,572,731 515,567 Deferred income taxes ---- 105,214 Net assets of discontinued operations (Note F) 1,434,986 960,366 Total current assets 19,805,510 22,155,265 Property and equipment, net (Note E) 2,417,472 967,515 Goodwill 4,977,485 1,299,423 Other assets 96,692 36,833 Deferred income taxes 760,351 644,925 TOTAL ASSETS $28,057,510 $25,103,961 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2,160,344 $ 1,949,466 Accrued expenses 1,693,836 1,061,871 Deferred maintenance revenue 976,218 1,210,503 Federal and state income taxes payable ---- 40,129 Total current liabilities 4,830,398 4,261,969 Stockholders' equity (Note E) 23,227,112 20,841,992 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,057,510 $25,103,961
See accompanying notes to consolidated condensed financial statements. 4 SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended ----------------------------- February 28, February 28, 1995 1994 Revenue Products $ 9,677,053 $ 3,994,450 Services 3,223,355 2,195,504 Total revenue 12,900,408 6,189,954 Cost of products sold 7,787,466 3,005,529 Cost of services provided 1,765,024 1,664,265 Gross margin 3,347,918 1,520,160 Selling, general and administrative 3,352,460 1,132,026 Software development costs (Note C) 737,030 ---- Operating income/(loss) (741,572) 388,134 Interest income 22,858 76,997 Income/(loss) from continuing operations before taxes (718,714) 465,131 Provision/(benefit) for federal and state income taxes (200,000) 116,103 Income/(loss) from continuing operations (518,714) 349,028 Discontinued operations (Notes B and F) Gain from disposal (less applicable provision for income taxes of $254,508) ---- 1,018,031 Net income/(loss) $ (518,714) $ 1,367,059 Income/(loss) from continuing operations per common share $ (0.13) $ 0.09 Net income/(loss) per common share $ (0.13) $ 0.35 Weighted average common shares outstanding 4,048,893 3,877,873
See accompanying notes to consolidated financial statements. 5 SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Nine Months Ended ------------------------------ February 28, February 28, 1995 1994 Revenue Products $27,939,423 $11,071,904 Services 8,099,250 5,633,181 Total revenue 36,038,673 16,705,085 Cost of products sold 22,257,899 8,510,751 Cost of services provided 4,448,178 4,276,651 Gross margin 9,332,596 3,917,683 Selling, general and administrative 8,458,116 3,148,036 Software development costs (Note C) 737,030 ---- Operating income 137,450 769,647 Interest income 136,457 190,122 Income from continuing operations before taxes 273,907 959,769 Provision for federal and state income taxes 97,786 224,703 Income from continuing operations 176,121 735,066 Discontinued operations (Notes B & F) Income from operations (less applicable provision for income taxes of $236,090) ---- 518,101 Gain from disposal (less applicable provision for income taxes of $301,458) ---- 1,121,082 Cumulative effect on prior years of change in accounting for income taxes (Note D) ---- 232,700 Net income $ 176,121 $ 2,606,949 Income from continuing operations per common share $ 0.04 $ 0.19 Net income per common share $ 0.04 $ 0.69 Weighted average common shares outstanding 3,942,266 3,770,554
See accompanying notes to consolidated financial statements. 6 SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended ----------------------------- February 28, February 28, 1995 1994 Cash flows from operating activities: Net income $ 176,121 $ 2,606,949 Adjustments to reconcile income to net cash provided by operating activities: Depreciation and amortization 1,127,162 516,342 Current and deferred federal and state taxes (216,552) (220,267) Change in current assets and liabilities net of effects from purchase of CCS, SCI and MCI in fiscal year 1995: Accounts receivable (3,975,823) (1,771,357) Inventory 46,907 (791,245) Prepaid expenses and other assets (838,861) (296,001) Accounts payable (117,918) (556,472) Accrued expenses (33,523) 70,114 Deferred maintenance revenue (234,285) 441,181 Net assets from discontinued operations (474,620) 1,885,950 Total adjustments (4,717,513) (721,755) Net cash provided/(used) by operating activities (4,541,392) 1,885,194 Cash flows from investing activities: Purchase of property and equipment, net (996,575) (564,837) Proceeds from sale of marketable securities 8,161,304 4,231,000 Payments to acquire marketable securities (8,504,848) Payment for purchase of CCS, SCI, and MCI, net of cash acquired (8,045,732) ---- Other investing activities (42,959) 3,479 Net cash used by investing activities (923,962) (4,835,206) Cash flows from financing activities: Payments to acquire treasury shares ---- (681,642) Exercise of stock options 192,892 370,044 Shares issued in connection with acquisition of SCI & MCI 2,016,108 ---- Net cash provided/(used) by financing activities 2,209,000 (311,598) Net decrease in cash and cash equivalents (3,256,354) (3,261,610) Cash and cash equivalents, beginning of period 3,976,929 3,872,599 Cash and cash equivalents, end of period $ 720,575 $ 610,989
See accompanying notes to consolidated financial statements. 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 Government Services Division ("GSD") and Compass, Inc. as discontinued operations (see Note F). The assets and liabilities of the discontinued businesses have been reclassified in the Consolidated Condensed Balance Sheets as Net assets of discontinued operations. The operating results of the GSD and Compass are shown net of taxes in the Consolidated Condensed Statements of Income as Income from operations or Gain from disposal. (C) The Company capitalizes internal software development costs in accordance with Statement of Financial Accounting Standards No. 86 (SFAS 86). During the first half of FY95, the Company capitalized $422,214 of software development costs. During the quarter ended February 28, 1995, the Company determined that the recoverability of these costs had become uncertain due to significant delays in the product development effort and has written off the previously capitalized software development costs of $422,214, along with $314,816 of costs incurred during the third quarter of FY95. Future development costs on this project will be expensed as incurred. (D) The Company adopted the provisions of Statement of Financial Accounting Standards No. 109, (SFAS No. 109) as of June 1, 1993. The adoption of this statement resulted in a cumulative effect of a change in accounting principle of approximately $233,000, primarily due to the recognition of deferred tax assets previously not recorded under SFAS No. 96. (E) Details of certain balance sheet captions are as follows:
February 28 May 31, 1995 1994 Property and equipment $ 5,146,419 $ 3,299,136 Accumulated depreciation and amortization 2,728,946 2,331,621 Property and equipment, net $ 2,417,472 $ 967,515 Common stock, $.10 par value $ 449,317 $ 407,407 Capital in excess of par value 16,383,200 14,216,110 Retained earnings 7,876,111 7,699,990 Less treasury stock (1,481,515) (1,481,515) Stockholders' equity $23,227,112 $20,841,992
8 (F) 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. On October 31, 1991, the Company announced the cessation of ongoing operations of its wholly-owned subsidiary, Compass, Inc. Compass was a provider of computer software and software engineering services for supercomputers and other advanced architecture computers. Subsequent to the shutdown, the Company signed agreements to license the Compass technology to several of its former customers. Revenue from discontinued operations for the three and nine months ended February 28, 1995 was $59,000 and $676,000, respectively. Revenue from discontinued operations for the comparable periods in fiscal 1994 was $2,567,000 and $19,164,000, respectively. At February 28, 1995 and May 31, 1994, the net assets of discontinued operations, which are included in the Consolidated Condensed Balance Sheets, are as follows:
February 28, May 31, 1995 1994 Accounts receivable $2,536,786 $3,175,005 Unbilled receivables 935,500 1,716,112 Total assets 3,499,286 4,891,117 Accounts payable 3,355 642,831 Accrued expenses 1,904,798 2,563,261 Deferred income taxes 156,147 724,659 Net assets $1,434,986 $ 960,366
(G) The Company's line of credit agreement with a commercial bank which provided for borrowings of up to $4,000,000 expired on November 1, 1994. Management is currently negotiating with an asset based lender for a new line of credit to provide for borrowings of up to $10,000,000 on substantially the same terms. 9 (H) In connection with a Department of Energy (DOE) procurement initially awarded in January 1992, the DOE issued a report in July 1993 alleging that certain former employees of the Company violated the Procurement Integrity Act. The Company's teaming partner on the procurement submitted a claim to the Company for approximately $636,000 which represented their estimate of lost profits resulting from their inability to qualify for the award due to the Company's alleged actions. During the second quarter of FY95 an arbitrator ruled in favor of the teaming partner and awarded them approximately $424,000, for which the Company has posted a bond. The Company disagrees with the conclusions reached by the arbitrator and is appealing the decision. It is the opinion of management that the ultimate resolution of this matter, net of recoveries and reserves, will not have a materially adverse effect on the Company's financial position. (I) On January 5, 1995, the Company acquired the net assets of Micro Control, Inc. which totaled approximately $600,000 and was composed primarily of accounts receivable and fixed assets offset by liabilities assumed. Micro Control is a distributor of Parametric Technology Corporation's mechanical design software and the hardware on which this software package operates. In addition, Micro Control provides all related services to install and maintain the hardware and software as well as train the users. The purchase price totaled approximately $2.7 million which was composed of $1,031,000 in cash and 279,768 shares of SofTech's stock. The goodwill generated of approximately $2.4 million will be amortized over five years on a straight line basis and will be tax deductible. In addition to the above payments, certain contingent payments (as more fully described in Form 8-K filed on January 19, 1995) could be due if specified operating income growth goals are attained over the next two years for both the Micro Control group and the Company's existing CAD group. If the growth goals are attained, the contingent payments would be equal to certain amounts based on a multiple of the final net asset value of the assets acquired, less the then-current market value of the SofTech stock issued to the sellers in the acquisition. If contingent payments are due, they would be treated as additional goodwill and amortized on a straight line basis over the remaining useful life. 10 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 1995, cash and marketable securities decreased approximately $11.4 million. The acquisitions of Carolina Computer and System Constructs during the first quarter utilized approximately $5.3 million in cash and the acquisition of Micro Control during the third quarter utilized approximately $1.1 million. Operating activities, net of the effects from those acquisitions, utilized an additional $4.5 million. Accounts receivable increased approximately $4.0 million, or 63%, from year end 1994 due primarily to the growth in revenue. Specifically, third quarter fiscal 1995 revenue increased approximately $5.4 million from fourth quarter fiscal 1994 revenue, an increase of 73%. Average days sales outstanding increased to about 85 days at the end of the current quarter from about 76 days at the end of fiscal 1994. In addition to the accounts receivable growth, the discontinued operations that had provided approximately $1.9 million in cash during the first nine months of fiscal 1994, utilized approximately $475,000 during the nine months ended February 28, 1995 as the payment of liabilities and income taxes exceeded the collection of GSD accounts receivable. Management believes that available cash and marketable securities together with an increased accounts receivable collection effort in both continuing and discontinued operations will be sufficient for meeting operating needs over the next twelve months. In addition, the Company is currently negotiating a $10 million line of credit. Results of Operations Revenue for the three and nine months ended February 28, 1995 increased approximately 108% and 116%, respectively, from the same periods in fiscal 1994. IDI's revenue increased $2.3 million and $5.9 million for the three and nine month periods ended February 28, 1995, or 41% and 36%, respectively, from the previous comparable periods. Carolina Computer, System Constructs, Inc. and Micro Control, all acquired during the current fiscal year, generated approximately $4.8 million and $12.8 million for the three and nine month periods ended February 28, 1995. Third quarter fiscal 1995 revenue did not increase from the immediately preceding quarter as expected due to several delays in shipping orders that were received during the quarter. The delays were caused by customers not having sites prepared for the installation of the equipment. Product revenue, which includes hardware and off-the-shelf software, increased by 142% and 152%, respectively, for the three and nine month periods ended February 28, 1995. Product revenue at IDI was $5.7 million and $16.9 million for the three and nine month periods ended February 28, 1995, up 42% and 52%, respectively, from the $4.0 million and $11.1 million in revenue generated in the same periods in fiscal 1994. Carolina Computer generated approximately $3.8 million and $10.8 million, respectively, in product revenue during the three and nine month periods ended February 28, 1995, accounting for nearly 93% of that entities total revenue. Overall product gross margins for the three and nine months ended February 28, 1995 were 19.5% and 20.3%, as compared to 24.7% and 23.1% for the comparable periods in FY94. The decrease from year to year is due primarily to lower margin business from Carolina Computer included in FY95. 11 Service revenue increased by 47% and 44%, respectively, for the three and nine months ended February 28, 1995 as compared to the same periods in 1994. IDI service revenue for the first nine months of FY95 increased 17% over FY94 levels. Carolina Computer and System Constructs contributed service revenue of $0.78 million and $2.1 million, respectively, for the three and nine month periods ended February 28, 1995. The service gross margins for the first nine months of FY95 were 45% as compared to 24% for the same period in FY94. The improved service margin was directly impacted by the acquisition of SCI and the use of internal resources rather than subcontracting the work to third parties. Selling general and administrative cost as a percentage of revenue has increased from 18.8% for the first nine months of fiscal 1994 to 23.5% for the first nine months of fiscal 1995. The net percentage change from fiscal 1994 is due primarily to the absorption of corporate headquarters expenditures by continuing operations in fiscal 1995. During fiscal 1994 much of the headquarters effort was directed towards disposing of the Government Services Division and therefore most of the related costs were allocated to the discontinued operations line of the income statement. As previously announced on March 29th, the Company's Board of Directors approved a cost reduction plan subsequent to the end of the third quarter targeted at consolidating certain G&A functions across the Company. This action is expected to result in a fourth quarter pre-tax charge to continuing operations of approximately $500,000. The charge relates to excess office space, severance payments, and the disposal of excess equipment resulting from this effort. Software development costs of $737,030 included in the derivation of the third quarter fiscal 1995 operating loss is composed of development costs that were capitalized during the first two quarters of fiscal 1995 of $422,214 and current quarter spending. The write-off of previously capitalized expenditures and the change to currently expensing these on-going development efforts was the result of significant delays encountered during the current quarter in getting the first product to market. This effort is expected to have a negative impact on operating results for the next three to four quarters. Operating income/(loss) from continuing operations was approximately $(742,000) and $137,000 for the three and nine months ended February 28, 1995. For the same periods in fiscal 1994 operating income from continuing operations was approximately $388,000 and $770,000, respectively. While IDI experienced an increase in earnings, as well as significant contributions by the new acquisitions, CCS and SCI, operating income was negatively impacted by the complete allocation of corporate overhead expenses to continuing operations as noted previously. 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. Shares outstanding increased during the nine months as a result of issuing 50,000 shares and 279,768 shares as portions of the consideration in the acquisitions of System Constructs, Inc. and Micro Control, respectively and 43,500 shares in the exercise of stock options. 12 Interest income decreased approximately 70% during the first half of fiscal 1995 as compared to the same period in fiscal 1994, due primarily to lower invested cash balances. The cash available for investment was lower due to the previously noted use of cash to complete the three acquisitions in fiscal 1995. 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 tax provision for FY94 consisted primarily of state taxes computed on a basis other than income. 13 PART II. OTHER INFORMATION SOFTECH, INC. AND SUBSIDIARIES Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10)(i) Amended Employment Agreement between SofTech, Inc. and Norman L. Rasmussen. (b) Reports on Form 8-K The Company filed a Form 8-K with the Securities and Exchange Commission on January 19, 1995 describing the purchase of substantially all of the net assets of Micro Control, Inc. on January 5, 1995. Pro forma financial information and audited financial statements, required to be filed pursuant to Item 7 of Form 8-K reflecting the acquisition, were filed on Form 8 on March 20, 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: April 14, 1995 /s/ JOSEPH P. MULLANEY Joseph P. Mullaney Vice President Chief Financial Officer Date: April 14, 1995 /s/ JAN E. YANSAK Jan E. Yansak Controller EX-10 2 EXHIBIT 10(I)--AMENDED EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT Amendment to Employment Agreement (the "Agreement") dated as of January 1, 1994, between SOFTECH, INC., a Massachusetts corporation ("Company"), and Norman L. Rasmussen ("Executive"). Moreover, Section 9 of the Agreement states that the Agreement may be modified by an agreement in writing signed by the parties. The Agreement is hereby amended, effective as of the date hereof, in the following respects: 1. Section 5 of the Agreement, relating to options and deferred compensation, is hereby amended by adding the following new paragraph at the end of such Section 5: "Acting in accordance with such good-faith negotiations, the Company agrees to pay three equal bonuses of $226,215 on each of December 31, 1994, December 31, 1995 and December 31, 1996 to the Executive, provided that the Executive is employed by the Company on each respective date. The net amount of such bonus, after paying federal, state and social security taxes thereon, shall be applied by the Executive to the purchase of a variable annuity contract or contracts, with distributions beginning on or after January 1, 1999, as determined by the Executive. In determining the net amount of such bonus, discretionary withholdings, including but not limited to Section 401(k) deferrals, shall not be made. Executive shall provide documentation to the Company substantiating the purchase of the variable annuity contract within 60 days of the applicable bonus payment. If the Executive is not employed by the Company on the date on which payment is due, no further payment under this paragraph shall be made. The bonus payments referred to in this paragraph represent the entire obligation of the Company with regard to the deferred compensation plan referred to in this Section 5. Risk or benefit from the actual investment return's being higher or lower than the estimated return of 8% shall be that of the Executive." 2. Section 3.2 of the Agreement, relating to regular bonuses, is hereby amended by adding the following sentence at the end thereof: "Any provision contained in this Agreement or elsewhere to the contrary notwithstanding, for the purposes of computing the Executive's Bonus payments under this Section 3.2 and Schedule A of this Agreement, the Company's "Consolidated Profits Before Taxes per Share of Common Stock" shall be determined without regard to the amount of the annual deferred compensation bonus ($226,215) payable to the Executive on each of December 31, 1994, December 31, 1995, and December 31, 1996, pursuant to the terms of Section 5 of this Agreement." 3. Except as modified herein, the Agreement shall continue in full force and effect in accordance with its terms. The parties hereby execute this Agreement, as a sealed instrument, this 16th day of December, 1994. ATTEST: SOFTECH, INC. ___________________________________ ____________________________________ Title: Title: Director and Member, Compensation Committee Witness: Executive: ___________________________________ ____________________________________ Title: Norman L. Rasmussen -----END PRIVACY-ENHANCED MESSAGE-----