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SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1998
Commission file number 0-10665
SofTech, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2453033
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
4695 44th Street S.E., Suite B-130, Grand Rapids, MI 49512
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 957-2330
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
Form 10-K. [_]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $27,706,000 as of August 18, 1998. On August 18, 1998 the
registrant had outstanding 6,822,842 shares of common stock of $.10 par value,
which is the registrant's only class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive proxy statement to be filed in connection with
the registrant's 1998 annual meeting are incorporated by reference into Part III
of this report, to the extent set forth in said Part III.
1
PART I
ITEM 1 - BUSINESS
THE COMPANY
SofTech, Inc. was formed in Massachusetts on June 10, 1969. The Company had
an initial public offering in August 1981 and a secondary offering in December
1982.
From inception until the disposition of the Government Systems Division in
December 1993, the Company's primary business was that of custom software
development for the U.S. Government, primarily the Department of Defense.
Today, SofTech is a leading provider of Design through Manufacturing
Technologies and Services. It offers its own proprietary software technology to
the 2D CAD and CAM markets, partners with 3D and Product Data Management ("PDM")
technology companies, and provides hardware and a full array of service
offerings in order to bring complete solutions to its customers' mechanical
engineering problems. The Company believes that this "one-stop-shopping" concept
is important to many of its customers. The following is a brief synopsis of the
Company's evolution over the last two fiscal years.
In June 1996, the Company developed a strategy to focus all of its
resources on the CAD/CAM and PDM marketplace. An important part of implementing
that strategy was to dispose of all unrelated businesses. This process was
completed with the sale of the Company's Network Systems Group ("NSG") in
September 1996 and the distribution of the net proceeds from that sale in the
form of dividends (return of capital) to shareholders in December 1996 and June
1997 totaling approximately $2.56 per share.
As of June 1996 the Company's CAD/CAM and PDM business was that of
marketing and supporting the sale of Parametric Technology Corporation's
(NASDAQ:PMTC) Pro/ENGINEER(TM) family of software offerings. The Company had
been one of the largest distributors of PMTC's products since the introduction
of Pro/ENGINEER(TM) in 1988. The Company had been notified (as had all of PMTC's
distributors) that as of September 30, 1996, it would no longer be allowed to
market the Pro/ENGINEER(TM) software. All PMTC distributors would instead be
focused on marketing a newly introduced mid-range software offering named
PT/Modeler(TM). The capability and the pricing of this product is described in
detail in the Company's 1997 Form 10-K in "ITEM 1 - BUSINESS" under the caption
"PRODUCT TRANSITION". The Company signed a distribution agreement for
PT/Modeler(TM) in July 1996 and marketed that product through September 30,
1997, at which time the distribution agreement terminated and was not renewed.
The change from selling the Pro/ENGINEER(TM) software family of products
caused a significant detrimental impact on the business model of the Company.
Instead of marketing a $20,000 per unit Pro/ENGINEER(TM) software package that
was sold primarily on a $20,000 UNIX workstation and brought with it a $10,000
services contract, the Company was marketing a $4,000 software package that
operated only on an Intel based personal computer.
It became clear that the Company needed to establish itself as an entity
that was not dependent on a third party for its viability. In December 1996 and
in February 1997 the Company completed two acquisitions of CAD/CAM services-only
businesses as the initial step towards that independence. The Company also
opened 5 new offices in 5 new states to broaden its geographic reach in the U.S.
market. By the end of fiscal 1997 the Company had 11 offices in 10 states in the
U.S.
In November 1997 the Company acquired the Advanced Manufacturing Technology
division ("AMT") of CIMLINC Incorporated. This division possessed 2D CAD
technology, an installed base and a newly introduced CAM technology product
called PROSPECTOR(TM). This technology acquisition was followed by the
acquisition of Adra Systems in May 1998. ADRA also has a 2D CAD technology, an
installed base of approximately 20,000 seats eand a recurring service business.
In January 1998 the Company also signed a distribution agreement with Structural
Dynamics Research Corporation (NASDAQ:SDRC) to market its 3D CAD products
throughout North America. Lastly, during fiscal 1998 the Company acquired
another CAD/CAM services-only business and an SDRC distributor. By the end of
fiscal 1998 the Company had 25 offices in 16 states in the U.S., 4 offices in
Western Europe and indirect distribution for its technology in Asia.
2
PRODUCT AND SERVICES
As noted above, the Company has evolved over the last two years through
acquisitions and internal expansion from a distributor of PMTC's products into
an independent technology and services entity. This transition has made it
difficult to draw comparisons from period to period. The following table is
meant to help clarify this issue by detailing the components of product revenue
by fiscal year. Product revenue was composed of the following (000's):
1998 1997 1996
------- ------- -------
SofTech software (AMT & ADRA) $ 3,023 $ -- $ --
Hardware 4,286 6,212 6,717
PMTC software 612 2,442 2,895
Other 3rd party software 618 675 668
Other 113 -- 14
------- ------- -------
Total product revenue $ 8,652 $ 9,329 $10,294
======= ======= =======
The evolution of the business described above is clearly visible in the
preceding table. In fiscal 1996 the Company's product revenue included derived
primarily from the sale of PMTC software (Pro/ENGINEER(TM)) and hardware. The
hardware sold was high-end workstations and was driven by the sale of the
Pro/ENGINEER(TM) software. Sales of Pro/ENGINEER(TM) software and related
high-end workstations carried into fiscal year 1997 (the distribution agreement
for Pro/ENGINEER(TM) ended September 30, 1996). The shift in October 1996 to the
mid-range software offering of PMTC selling on an Intel based machine resulted
in a reduction in revenue derived from both software and hardware and is the
reason for the 9% decrease overall in product revenue in 1997 as compared to
1996. In fiscal 1998 (September 1997) the PT/Modeler(TM) distribution agreement
with PMTC terminated and the revenue from that product ceased. The full impact
of the shift to PT/Modeler(TM) and Intel based machines can be seen in the 31%
decline in hardware revenue in fiscal 1998 as compared to 1997. The acquisitions
of AMT and ADRA by the Company during fiscal 1998 replaced lost revenue from
PMTC software and hardware. For fiscal 1999 it is expected that the revenue
derived from the sale of SofTech technology will be the primary product revenue
source. The strategic relationships with 3D and PDM technology companies should
more than replace the PMTC revenue generated in fiscal 1998.
The components of services revenue has also changed dramatically as a result of
the changes detailed above. Service revenue was composed of the following
(000's):
1998 1997 1996
------- ------- -------
Consulting, discreet services and training $ 6,231 $ 2,228 $ 726
Maintenance of AMT and ADRA software 2,142 -- --
Hardware and 3rd party software maintenance 2,928 3,139 2,638
Other 26 8 --
------- ------- -------
Total service revenue $11,327 $ 5,375 $ 3,364
======= ======= =======
The changes in the make-up of the business are also quite evident when the
components of service revenue are detailed as in the above table over the last
three years. In fiscal 1996, the service revenue was composed primarily of
hardware and 3rd party software maintenance (primarily PMTC software
maintenance). The discreet services revenue generated in fiscal 1996 were, for
the most part, related to the sale of the Pro/ENGINEER(TM) software. With the
acquisition of two services-only businesses in fiscal 1997, the consulting,
discreet services and training revenue more than tripled from fiscal 1996 and is
responsible for the 60% overall growth in service revenue. This consulting,
discreet services and training revenue nearly triples again from fiscal 1997 to
1998 as the 1997 acquisitions contributed for the full 1998 fiscal year and is
the primary reason for the service revenue growth of 111% from fiscal 1997 to
1998. The maintenance revenue generated from hardware and 3rd party software
agreements declined slightly from fiscal 1997 to 1998 but is expected to decline
by about 50% from fiscal 1998 to 1999 due to the termination of the PMTC
distribution agreement.
COMPETITION
The Company competes against much larger entities in an extremely
competitive market for all of its software and service offerings. The 2D
software technologies acquired in the acquisitions in fiscal 1998 compete
directly with the offerings of such companies as AutoDesk and MicroCADAM. This
2D technology is also marketed as a complementary offering to many 3D products
offered by companies such as PMTC, Dassault, Unigraphics and SolidWorks that all
possess some level of 2D drafting capability. These companies all have resources
far in excess of those of the Company.
The Company's CAM technology, PROSPECTOR(TM), is marketed to the Plastic
Injection Mold and Tool & Die industries. While the large CAD companies such as
PMTC, Dassault, SDRC and AutoDesk have modules that compete in this market, none
focus exclusively and therefore the competition is more limited than in the 2D
software technology market.
3
The service offerings of the Company which include consulting, training,
discreet engineering services and contract placement compete with offerings by
all of the large CAD companies noted above, small regional engineering services
companies and the in-house capabilities of its customers.
PERSONNEL
As of May 31, 1998, the Company employed 214 persons. This headcount
distributed over functional lines is as follows: Sales = 47; Product Development
= 32, Engineers = 102; General & Administrative = 33.
The ability of the Company to attract qualified individuals with the
necessary skills is currently, and is expected to continue to be, a constraint
on future growth.
BACKLOG
Backlog as of May 31, 1998 and 1997 was approximately $243,000 and
$944,000, respectively. Deferred maintenance revenue, which represents primarily
software maintenance contracts at May 31, 1998 and hardware maintenance
agreements at May 31, 1997 to be performed during the following year, totaled
approximately $3,522,000 and $358,000 at May 31, 1998 and 1997, respectively.
Given the short time period between receipt of order and delivery, on average 30
days, the Company does not believe that backlog is an important measure as to
the relative health of the business.
RESEARCH AND DEVELOPMENT
With the acquisitions of the software technologies of AMT and ADRA, the
Company now has approximately 32 engineers in its research and development
groups located in Michigan and Massachusetts. In fiscal 1998 the Company
incurred R&D expense of approximately $350,000 related to the continued
development of the technology. The Company's ability to continue to maintain the
ADRA software so it is compatible with the popular 3D offerings in the
marketplace and to continue to improve the PROSPECTOR(TM) technology is critical
to its future success. The Company expects to incur R&D expenditures of
approximately $3 million in fiscal 1999.
CUSTOMERS
No single customer accounted for more than 10% of the Company's revenue in
fiscal 1998, 1997 or 1996. The Company is not dependent on a single customer, or
a few customers, the loss of which would have a material adverse effect on the
business.
SEASONALITY
The first quarter, which begins June 1 and ends August 31, has historically
been the slowest quarter of the Company's fiscal year. Management believes this
weakness is due primarily to the buying habits of the customers and the fact
that the quarter falls during prime vacation periods.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
Name Age Position
- --------------------------------------------------------------------------------
Mark R. Sweetland 49 President and Chief Executive Officer, Director
Timothy J. Weatherford 33 Executive Vice President, Sales, Director
Joseph P. Mullaney 41 Vice President, Treasurer and Chief Financial
Officer
Andrew C. Bristol 38 Vice President, Sales
Jeanne Naysmith 50 Vice President, Product Development
Executive officers of the Company are elected at the first Board of
Directors meeting following the Stockholders' meeting at which the Directors are
elected.
Following is biographical information with respect to those Executive
Officers not identified in the Proxy Statement:
Joseph P. Mullaney was appointed Vice President, Treasurer, and Chief
Financial Officer of the Company in November 1993. He started with the Company
in May 1990 as Assistant Controller and was promoted to Corporate Controller in
June 1990. Prior to his employment with SofTech he was employed for seven years
at the Boston office of Coopers & Lybrand as an auditor in various staff and
management positions.
4
Andrew C. Bristol was appointed Vice President of Sales of the Company upon
his hire in April 1997. Prior to his employment with SofTech he was employed for
seven years with Parametric Technology Corporation ("PMTC") in various sales and
sales management positions within the Great Lakes Region.
Jeanne Naysmith was appointed Vice President of Product Development of the
Company upon his hire in November 1997. Prior to employment with SofTech he was
employed for eighteen years with CIMLINC Incorporated in various sales and
management positions, most recently as Vice President with responsibility for
the AMT division.
ITEM 2 - PROPERTIES
The Company leases office space in Grand Rapids and Troy, Michigan;
Indianapolis, Indiana; Louisville, Kentucky; Charlotte, North Carolina;
Milwaukee, Wisconsin; Cincinnati and Cleveland, Ohio; Yardley, Pennsylvania;
Knoxville, Tennessee; Austin, Dallas and Houston, Texas; Maitland, Florida;
Windsor, Ontario; Lenexa, Kansas; Mobile, Alabama; Mesa, Arizona; Calverton,
Maryland; Nottingham, England, and Ismaning, Germany. The total space leased for
these locations is approximately 57,000 square feet. The fiscal 1998 rent was
approximately $550,000. In July 1998, the Company signed a five-year lease with
an annual cost of approximately $330,000 for 19,500 square feet in Tewksbury,
Massachusetts relating to the ADRA acquisition. The Company believes that the
current office space is adequate for current and anticipated levels of business
activity.
As part of an NSG acquisition in fiscal 1995, the Company purchased a
10,000 square foot, two-story office building in Raleigh, North Carolina. This
property, while currently being marketed for sale, is being occupied by the
Company's Southeast Services Group.
ITEM 3 - LEGAL PROCEEDINGS
On March 26, 1998, plaintiff Parametric Technology Corporation ("PMTC")
filed an action in the Superior Court, Middlesex County, alleging that the
Company owes PMTC $905,942 in unpaid maintenance services and other disputed
items. Upon filing the complaint, PMTC sought to attach, through a trustee
process, that amount of the Company's funds. After a hearing on April 7, 1998,
PMTC's motion for trustee process was denied. The Company filed a counterclaim
against PMTC asserting claims for breach of contract, breach of the implied
covenant of good faith and fair dealing, fraud in the inducement, and
intentional interference with contractual and advantageous relations. The
counterclaims allege damages in excess of those claimed by PMTC.
On May 1, 1998, PMTC filed a second action in the United States District
Court for the District of Massachusetts (PMTC v. SofTech, Inc., Civil Action No.
98CV10764-REK) seeking unspecified damages in connection with the Company's
alleged infringement of PMTC's copyrights. More recently PMTC has sent a letter
to the Company alleging possible claims under the Lanham Act. The Company
intends to vigorously defend against these actions, and believes that it has
meritorious defenses to these claims.
The Company is not a party to any other material legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of the Stockholders of SofTech.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
The Company's common stock trades on the NASDAQ Stock Market under the
symbol "SOFT".
At May 31, 1998, there were approximately 311 holders of record of the
Company's common stock. This does not include the shareholders that have their
shares held in street name with brokers or other agents, that totaled
approximately 4.7 million shares, or 74% of outstanding shares. The table below
sets forth quarterly high and low bid prices of the common stock for the
indicated fiscal periods as provided by the National Quotation Bureau. These
quotations reflect inter-dealer prices without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
1998 1997
---------------------- --------------------
High Low High Low
---------------------------------------------------
First Quarter 3 5/8 1 1/2 3 1/2 2 1/2
Second Quarter 2 1/2 1 7/16 3 2 1/2
Third Quarter 3 3/8 2 1/4 4 1/16 2 1/16
Fourth Quarter 7 7/8 3 1/8 3 1/2 2 1/4
The Company distributed the net proceeds from the sale of its Network
Systems Group in the form of two distributions. On December 30, 1996, the
Company made the first installment in cash at a rate of $1.50 per share to its
shareholders of record on
5
December 26, 1996. The second installment was in the form of a distribution of
DSN shares at a rate of approximately 0.1031 for each share of SofTech owned on
the record date of May 23, 1997. All fractional shares were paid in cash at the
assumed market price of $10.00 per share. The distribution date of this second
installment was June 6, 1997. It is anticipated that these distributions will
qualify for treatment as a distribution in partial liquidation pursuant to
Section 302(b)(4) of the Internal Revenue Code of 1986, as amended. See note H
to the Consolidated Financial Statements of the Company included herein. The
Company has not paid any other cash dividends in the past and it does not
anticipate paying cash dividends in the foreseeable future.
ITEM 6 - SELECTED FINANCIAL DATA
The table set forth below contains certain financial data for each of the
last five fiscal years of the Company. This data should be read in conjunction
with the detailed information, financial statements and notes thereto, as well
as Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
Fiscal Year
(in thousands, except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
Revenue from continuing operations $ 19,979 $ 14,704 $ 13,658 $ 10,403 $ 6,662
Income (loss) from continuing operations 1,334 2,282 (456) (18) 966
Diluted earnings per share:
Income (loss) from continuing
operations .22 .50 (.11) .00 .25
Net income (loss) .22 .09 (1.44) (.60) .70
Basic earnings per share:
Income (loss) from continuing
operations .23 .52 (.11) (.00) .26
Net income (loss) .23 .10 (1.44) (.60) .73
Weighted average number of shares
outstanding - diluted 6,114 4,530 4,076 3,848 3,810
Weighted average number of shares
outstanding - basic 5,711 4,410 4,076 3,848 3,650
Working capital (deficit) (7,519) 2,920 12,191 17,929 20,441
Total assets 36,060 10,152 17,037 23,505 22,063
Total liabilities 24,878 3,315 2,080 2,811 1,221
Stockholders' equity 11,182 6,837 14,957 20,694 20,842
Note: The results for fiscal year 1998 include the effect of the
acquisitions of the AMT division of CIMLINC Incorporated and the ADRA business
of MatrixOne, Inc. in November and May of fiscal 1998, respectively. The results
for fiscal years 1998 and 1997 include an investment gain on the disposal of DSN
shares of approximately $253,000 and $2.1 million, respectively. The results for
fiscal years 1998 and 1997 include the effect of the acquisitions of Computer
Graphics Corporation and Ram Design and Graphics Corp. in December and February
of fiscal 1997, respectively. See Note I to the Consolidated Financial
Statements included herein for certain pro forma information related to these
acquisitions.
The financial information for fiscal 1996 and prior fiscal years have been
restated to reflect the operating results of the Network Systems Group as a
discontinued operation. Certain amounts for prior years have been reclassified
to conform to the 1998 presentation.
6
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCOME STATEMENT ANALYSIS
The table below presents the relationship, expressed as a percentage,
between income and expense items and total revenue, for each of the three years
ended May 31, 1998. In addition, the change in those items, again expressed as a
percentage, for each of the two years ended May 31, 1998 is presented.
Percentage change
Items as a percentage of revenue year to year
1998 1997 1996 1997 to 1998 1996 to 1997
----------------------------------------------------------------
Revenue
Products 43.3% 63.4% 75.4% (7.3)% (9.4)%
Services 56.7 36.6 24.6 110.7 59.8
----- ----- -----
Total revenue 100.0 100.0 100.0 35.9 7.7
Cost of sales
Products 18.6 41.7 53.5 (39.6) (16.0)
Services 32.6 25.5 18.5 73.9 48.3
----- ----- -----
Total cost of sales 51.2 67.2 72.0 3.5 .5
Gross margin
Products 57.1 34.3 29.1 54.6 17.9
Services 43.0 30.3 24.9 201.9 21.7
Total gross margin 49.1 32.8 28.0 104.1 17.1
R&D and S.G.& A 41.8 31.8 31.2 79.4 9.5
Gain on investments 1.3 14.5 -- (88.1) N/A
Interest expense 1.3 -- -- 100.0 N/A
----- ----- -----
Income (loss) from continuing
operations before income taxes 7.3 15.5 (3.2) (35.9) 622.7
Income tax provision .6 -- .1 N/A (115.0)
----- ----- -----
Income (loss) from continuing
operations 6.7 15.5 (3.3) (41.5) 600.4
===== ===== =====
DESCRIPTION OF THE BUSINESS
SofTech was formed in 1969 and its stock has been publicly listed on the
NASDAQ Exchange since 1981 under the symbol "SOFT". For much of its past until
the disposition of the Government Systems Division ("GSD") in December 1993, the
Company's primary business was that of customized software development for the
Department of Defense. In June 1996 the Company devised a strategy to focus all
of its resources on the CAD/CAM and PDM marketplace and either discontinued or
disposed of all of its operations that were not related to that market. In
December 1996 and in June 1997 the Company returned approximately $2.56 per
share of capital to its shareholders in the form of distributions that resulted
from the sale of the non-core business units.
In June 1996 the Company had 6 offices in 5 states marketing the
Pro/ENGINEER(TM) software as its primary offering. As more fully detailed in the
Company's 1997 Form 10-K filing in "Item 1 - BUSINESS" under the caption
"PRODUCT TRANSITION", effective September 30, 1996 the Company was no longer
allowed to resell Pro/ENGINEER(TM) but instead was licensed by PMTC to market a
mid-range offering known as PT/Modeler(TM). The Company marketed this product
through September 30, 1997 when the distribution agreement was terminated and
was not renewed.
As part of the decision to focus all of its resources on the CAD/CAM and
PDM marketplace in June 1996, the Company developed a growth strategy to be
pursued through internal growth and/or acquisitions aimed at reducing its
dependence on technology providers such as PMTC. In fiscal 1997 the Company
acquired two CAD/CAM services-only businesses. In fiscal 1998 the Company
acquired two CAD/CAM technology companies, a CAD/CAM and PDM services business
and a Structural Dynamics Research Corporation ("SDRC") reseller. As a result,
the Company now has 25 offices in 16 states and 4 offices in Western Europe
along with indirect distribution relationships in Asia. Most importantly, the
Company now possesses technology of its own, more than 100 degreed mechanical
engineers and a stable, recurring service business that can reduce the impact of
fluctuations in the software order flow from quarter to quarter due to forces
outside the Company's control.
7
RESULTS OF OPERATIONS
Total revenue increased from $14.7 million in fiscal 1997 to approximately
$20.0 million in fiscal 1998, an increase of 36%. The increase was primarily the
result of the acquisitions of the two services businesses in the last half of
fiscal 1997 that were included in fiscal 1998 results for the full year and the
two technology companies acquired in fiscal 1998. The technologies the Company
now owns through these acquisitions have essentially become the primary
technology offerings although reseller agreements with third party technology
companies is expected to be of continued importance. The dependence on the PMTC
distribution agreement has been eliminated with these acquisitions. Total
revenue increased from $13.7 million in fiscal 1996 to $14.7 million in fiscal
1997, an increase of 8%. This increase in revenue was primarily the result of
the acquisitions of the services-only businesses during fiscal 1997 offset by a
decrease in revenue from hardware and software sales resulting from the
transition to the mid-range software offering as discussed in the 1997 Form 10-K
filing in "Item 1 - BUSINESS" under the caption "PRODUCT TRANSITION".
Product revenue, which includes revenue from the sale of hardware and
software, decreased approximately 7% in fiscal 1998 from fiscal 1997. This
decrease is the result of the termination of the PMTC distribution agreement in
September 1997, the cessation of the Company's marketing of PMTC's
PT/Modeler(TM) product and the shift to the sale of the Company's own technology
acquired in the fiscal 1998 acquisitions of the Advanced Manufacturing
Technology division of CIMLINC ("AMT") and the Adra Systems business of Matrix
One, Incorporated ("ADRA"). The market for the PT/Modeler(TM) software is a
mainstream 3-D market and the sale price for this software was approximately
$4,000. The CAM technology acquired by the Company in the AMT acquisition has a
much higher sale price, approximately $16,000 per unit, and is marketed
primarily to the Plastic Injection Molding and the Tool and Die Industries. This
specialized product offered to a niche market, sold on the basis of improved
throughput, allows for a higher sales price per unit than the 3D design software
previously marketed by the Company. Product revenue decreased approximately 9%
in fiscal 1997 from fiscal 1996, also. This decrease resulted primarily from the
Company's transition on October 1, 1996 from being a reseller of
Pro/ENGINEER(TM) software sold primarily on UNIX hardware to the PT/Modeler(TM)
family of software operating exclusively on Intel based machines.
Service revenue increased approximately 111% from fiscal 1997 to fiscal
1998. This increase of approximately $6.0 million is the result of the two
services-only businesses acquired in the second half of fiscal 1997 contributing
for the entire year in fiscal 1998, the expansion of the Company's Consulting
Services business and the services revenue generated from the acquisitions of
the technology companies (AMT and ADRA) in fiscal 1998. Service revenue
increased nearly 60% from fiscal 1996 to fiscal 1997, or about $2.0 million.
This increase was primarily the result of the fiscal 1997 acquisitions of the
services-only businesses discussed previously.
Product gross margins improved to 57% for fiscal 1998 as compared to 34% in
fiscal 1997. This improvement is the result of the termination of the PMTC
distribution agreement in September 1997, the sale of the Company's own
technology beginning in November 1997 which has a gross margin of about 90% and
the reduced hardware revenue generated in fiscal 1998 as compared to fiscal
1997. The fiscal 1998 product gross margins increased from 41% and 44% in Q1 and
Q2, respectively, to 62% and 67% in Q3 and Q4, respectively, with the technology
acquisitions. It is anticipated that the product gross margins will continue to
increase in fiscal 1999 as an increased percentage of product revenue is derived
from the sale of the Company's own software technology. Product gross margin
improved to 34% in fiscal 1997 from 29% in fiscal 1996. The increased margin was
the result of the transition to the PT/Modeler(TM) family of products with a 75%
margin and an indirect commission included in product revenue. This indirect
commission was earned by the Company for PMTC direct sales of Pro/ENGINEER(TM)
software into the Company's Pro/ENGINEER(TM) customer base for the period from
October 1, 1996 to December 31, 1996. The Pro/ENGINEER(TM) software sold by the
Company in fiscal 1996 had a margin of between 37% and 40%.
Service gross margins improved to 43% in fiscal 1998 as compared to 30% in
fiscal 1997. This improvement is partially the result of the Company's
acquisition of AMT in November and the higher margins enjoyed by that business
unit on service offerings as compared to the Company's fiscal 1997 experience.
In addition, the increase in business generated from the Consulting Services
group, which carries a higher bill rate, and the improved average billing rates
experienced by the service group overall as a result of an increased demand for
these type of services within the marketplace, have caused the service margin to
increase in fiscal 1998 relative to 1997. Service gross margins improved to 30%
in fiscal 1997 as compared to 25% in fiscal 1996. The improvement from fiscal
1996 to 1997 was due primarily to the additional higher margin services revenue
generated from the fiscal 1997 acquisitions of the services-only businesses.
Selling, general and administrative expenses increased approximately 72% in
fiscal 1998 from 1997, an increase of approximately $3.3 million. Approximately
64% or $2.1 million of that increase was the result of increased headcount
related to the acquisitions and internal expansion over the last two years.
Infrastructure expenses related to facilities accounted for approximately
$600,000 of the increase and non-cash expenses primarily related to amortization
of goodwill and software accounted for approximately $500,000 of the increase.
Selling, general and administrative expense for fiscal 1997 increased 9% from
fiscal 1996. A one-time charge of $426,000 was included in fiscal 1996 selling,
general and administrative expenses. Before this one-time charge the increase
from 1996 to 1997 was approximately 21% which was the result of increased
operating expenses associated with the acquisitions of the services-only
businesses in fiscal 1997.
8
In fiscal 1998 and fiscal 1997, the results from continuing operations
included realized gains on available-for-sale securities of $253,000 and
$2,126,000, respectively. These gains resulted from the distribution of shares
received in the sale of the Company's NSG business in September 1996 as
described in the Company's 1997 Form 10-K filing in "Item 1 - BUSINESS" under
the caption `DISCONTINUED OPERATIONS" and in "Item 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" under the caption
"RESULTS OF OPERATIONS".
The effective tax rate for fiscal 1998 was approximately 9%, which included
a current federal tax provision of $164,000 partially offset by a deferred
federal tax benefit of $125,000. The current federal tax provision was reduced
by the use of net operating loss carryforward benefits. In addition, the
effective tax rate includes foreign taxes of $25,000 and state and local taxes
of $63,000. The effective tax rate for fiscal 1997 was zero as a result of a
federal tax benefit of $74,000 offsetting a state tax provision of $71,000. The
federal tax benefit was generated from a current federal tax provision of
$105,000 which was offset by the recovery of $179,000 of taxes paid in fiscal
1995 through the utilization of net operating losses ("NOL") carried back. The
effective tax rate in fiscal 1996 was 5% that related primarily to state and
local taxes. As of May 31, 1998, the Company has research and development tax
credits of approximately $646,000 available to offset future federal taxes that
may be payable.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash position as of May 31, 1998 was $429,000. This
represents a decrease of approximately $938,000 from the fiscal 1997 year-end
balance of $1,367,000. In addition, as described below, the Company has
substantially increased its debt level from fiscal year end 1997. These short
and long term debt arrangements were entered into in order to acquire the ADRA
business.
At fiscal year end 1998 the Company had short-term borrowings of
approximately $9.7 million. These borrowings included a $4.4 million short term
note due on or before July 6, 1998 related to the ADRA acquisition, $2.6 million
of borrowings under the Company's $4.0 million line of credit arrangement and a
$2.5 million short term bridge loan extended by Greenleaf Capital to facilitate
the ADRA acquisition. The President of Greenleaf Capital is also a member of the
Board of Directors of the Company.
In addition to the short-term borrowings, the Company also entered into a
long term borrowing arrangement with Greenleaf Capital whereby the Company
received $5.0 million repayable in approximately four years. These funds,
together with the senior facility described below, were utilized to acquire the
ADRA business.
Subsequent to fiscal year end, the Company entered into a $9.0 million
senior loan facility. The proceeds from this senior facility were utilized to
pay off the $4.4 million short-term note and to pay off the borrowings under the
$4.0 million line of credit. This $4.0 million line of credit has been
terminated. Approximately $1.0 million of the bridge loan was also paid down
with the proceeds from the senior facility.
The short and long term debt of approximately $15.5 million (including the
$9.0 million senior facility entered into subsequent to fiscal year end) going
into fiscal 1999 adds an element of financial risk that the Company has not
experienced in the past. The terms of the senior facility require certain levels
of profitability on a quarterly basis in order to remain in compliance with the
loan covenants. In addition, the Company is completely dependent on cash flow
from operations to meet its near term working capital needs and to make debt
service payments. The monthly interest expense is approximately $130,000 on
these borrowings. In addition, the term loan portion of the senior facility
requires principal repayments of $375,000 on a quarterly basis beginning August
31, 1998.
As noted previously, the loan covenants on the senior facility require that
the Company maintain certain minimum financial ratios in order to remain in
compliance with the loan terms. The key financial ratios are summarized as
follows:
o Operating Cash Flow expressed as a ratio to Debt Service (principal
and interest expense) must be in excess of 1.25;
o Total Funded Debt expressed as a ratio to EBITDA (earnings before
interest, taxes, depreciation and amortization) may not exceed 2.5:1;
o EBITDA expressed as a ratio to Interest Expense may not be less than
1.75:1; and
o EBIT must be in excess of $1,250,000 for the fiscal quarter ended
February 28, 1999 and $1,500,000 for each fiscal quarter thereafter.
While the debt load and the loan covenants summarized above add a
significant level of financial risk to the Company, the financial model which
assumes approximately 5% growth from the ADRA business, approximately 15% growth
for the AMT business and 20% growth for the services business generates
sufficient cash flow and profitability to meet the debt service requirements,
provide working capital and increase the cash balance throughout the year.
However, future operating results are dependent on a number of factors,
many of which are outside the control of the Company. These factors include, but
are not limited to, market acceptance of the Company's PROSPECTOR(TM)
technology, continued revenue generated from the CADRA(TM) product family, the
ability to assimilate the acquisitions into the Company, the ability of senior
management to manage the expected growth and the ability of the Company to
attract and retain qualified personnel both in our existing markets and in new
office locations. Approximately 25% of the CADRA(TM) revenue has previously been
9
generated from the Asian market and part of the future growth of the
PROSPECTOR(TM) technology revenue is anticipated from that market. It is
anticipated that the growth projected from the Asian market can be replaced with
better than forecasted growth from North America and Western Europe in the near
term, however, prolonged instability in the Asian market could have a
detrimental impact on growth in fiscal years beyond 1999.
YEAR 2000
In general, the "Year 2000 Issue" is a looming problem for many companies
in that many computer programs have been written using two rather than four
digits to define the applicable year. Computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000.
With the Company's acquisitions in fiscal 1998 it became a software
developer and owner of technology for the first time. As part of those
acquisitions, Sellers represented through discussions and Company management
attempted to verify through due diligence procedures that the technology
acquired in each acquisition was Year 2000 compliant. Management has continued
to verify such compliance since the acquisitions. It is management's assessment
that the Company's technology, to the extent that it is time-sensitive, allows
for date recognition using four digits thereby reducing or eliminating the risk
associated with the Year 2000 issue for its own technology. However, the Company
has not determined the impact of third party technologies which interface and
communicate with its technology at its customers' sites.
During fiscal 1999, the Company will replace its financial computer
software including all underlying subledger modules which will be Year 2000
compliant. The third party package chosen is in the process of being
implemented. The expected out-of-pocket cost of purchasing this package is
estimated to be approximately $150,000. The expected cost of implementing this
package, which will be performed by the Company's internal resources, is not
expected to be material.
The Company has been working with its significant suppliers and customers
to determine the extent to which the Company may be vulnerable to a failure by
any of these third parties to correct their Year 2000 problems. There can be no
assurance that the technology of other companies on which the Company's systems
and technologies rely will be timely converted and will not have an adverse
effect on the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are included herein and are
indexed under item 14(a)(1)-(2).
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under "Nomination and Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement to be filed in connection with the Company's 1998 annual meeting
is incorporated by reference herein. The current executive officers of the
Company are set forth under the caption "Executive Officers" in ITEM 1 of this
Form 10-K.
ITEM 11 - EXECUTIVE COMPENSATION
The information under "Nomination and Election of Directors" will be
included in the Company's definitive proxy statement, to be filed in conjunction
with the Company's 1998 annual meeting, and is incorporated by reference herein.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under "Security Ownership of Management and Principal
Stockholders" in the Company's definitive proxy statement, to be filed in
connection with the Company's 1998 annual meeting, is incorporated by reference
herein.
10
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under "Nomination and Election of Directors" in the
Company's definitive proxy statement, to be filed in connection with the
Company's 1998 annual meeting, is incorporated by reference herein.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following items are filed as part of this report:
(1) Consolidated Financial Statements:
Report of Ernst & Young L.L.P., Independent Auditors 13
Report of Coopers & Lybrand LLP, Independent Accountants 14
Consolidated Statements of Operations and Retained Earnings
(Deficit) - Years ended May 31, 1998, 1997 and 1996 15
Consolidated Balance Sheets - May 31, 1998 and 1997 16
Consolidated Statements of Cash Flows -
Years ended May 31, 1998, 1997 and 1996 17
Notes to Consolidated Financial Statements 18-27
(2) Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 28
The reports of the registrant's independent accountants with respect to the
above-listed financial statements and financial statement schedule appear on
pages 13 and 14 of this report.
All other financial statements and schedules not listed have been omitted
because they are either not required or not applicable or because the required
information has been included elsewhere in the financial statements or
footnotes.
(3) Exhibits:
(2)(i) Asset Purchase Agreement by and among SofTech, Inc., Information
Decisions, Inc., System Constructs, Inc., and Data Systems Network Corporation
filed as Exhibit 2.1 to Form 8-K, dated September 12, 1996, is incorporated
herein by reference.
(2)(ii) Stock Purchase Agreement dated as of December 31, 1996 by and among
SofTech, Inc., Information Decisions, Inc., Computer Graphics Corporation, and
the Stockholders of Computer Graphics Corporation, filed as Exhibit 2.1 to Form
S-3, dated June 30, 1997, is incorporated herein by reference.
(2)(iii) Stock Purchase Agreement dated as of February 27, 1997 by and
among SofTech, Inc., Information Decisions, Inc., Ram Design and Graphics
Corporation, and the Stockholders of Ram Design and Graphics Corp., filed as
Exhibit 2.2 to Form S-3, dated June 30, 1997, is incorporated herein by
reference.
(2)(iv) Asset Purchase Agreement by and among SofTech, Inc., Information
Decisions, Inc., CIMLINC Incorporated and CIMLINC GmbH, filed as Exhibit 2.1 to
Form 8-K, dated November 10, 1997, is incorporated herein by reference.
(2)(v) Asset Purchase Agreement by and among SofTech, Inc., Adra Systems,
Inc., Adra Systems, GmbH, and MatrixOne, Inc., filed as Exhibit 2.1 for Form
8-K, dated May 7, 1998, is incorporated herein by reference.
(3)(i) Articles of Organization filed as Exhibit 3(a) to Registration
Statement No. 2-73261 are incorporated herein by reference. Amendment to the
Articles of Organization filed as Exhibit (19) to Form 10-Q for the fiscal
quarter ended November 28, 1986 is incorporated by reference.
(3)(ii) By-laws of the Company, filed as Exhibit (3)(b) to 1990 Form 10K
are incorporated herein by reference. Reference is made to Exhibit (3)(a) above,
which is incorporated by reference. Form of common stock certificate, filed as
Exhibit 4(A), to Registration statement number 2-73261, is incorporated by
reference.
(10)(i) Board resolutions relating to 1981 Non-qualified Stock Option Plan,
1981 Incentive Stock Option Plan, and forms of options, filed as Exhibits 28(A)
and 28(B) to registration statement No. 2-82554, are incorporated by reference.
Also, the Company's 1984 Stock Option Plan is incorporated by reference to
Exhibit 28(c) to Registration Statement 33-5782.
(10)(ii) Imperial Bank Credit Agreement dated July 1, 1998, filed herewith.
(10)(iii) Imperial Bank Warrant Agreement dated July 1, 1998, filed
herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23.1) Consent of Ernst & Young LLP, filed herewith.
(23.2) Consent of PricewaterhouseCoopers LLP, filed herewith.
11
(27) Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange Commission on
May 22, 1998 pursuant to Item 7 of Form 8-K, reporting the purchase of
substantially all of the net assets of the Adra Systems business of
MatrixOne, Incorporated on May 7, 1998. In addition, the Company filed a
Form 8-K/A with the Securities and Exchange Commission on July 21, 1998
providing the required audited financial statements of the Adra Systems
business.
(c) The Company hereby files, as part of this Form 10-K, the exhibits listed in
Item 14(a)(3) above that are not incorporated by reference.
(d) The Company hereby files, as part of this Form 10-K, the consolidated
financial statement schedule listed in Item 14(a)(2) above.
12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SofTech, Inc.
We have audited the accompanying consolidated balance sheet of SofTech,
Inc. and subsidiaries as of May 31, 1998 and the related consolidated statements
of operations and retained earnings (deficit) and cash flows for the year then
ended. Our audit also included the information for the year ended May 31, 1998,
included in the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SofTech, Inc. and subsidiaries as of May 31, 1998, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
August 10, 1998
13
REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
SofTech, Inc.
We have audited the accompanying consolidated balance sheet of SofTech,
Inc. as of May 31, 1997, and the related consolidated statements of operations
and retained earnings (deficit) and cash flows for the two years in the period
ended May 31, 1997 and the financial statement schedule for the years ended May
31, 1997 and 1996 listed in Item 14(a) of this Form 10-K. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SofTech, Inc. as of May 31, 1997 and the consolidated results of its operations
and its cash flows for each of the two years in the period ended May 31, 1997,
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has generated minimal
operating income and the Company's product offerings have been limited by a
major supplier. These factors raise substantial doubt as to the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note A under the caption "Plan of Operations." The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 7, 1997
14
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
For the Years Ended May 31,
1998 1997 1996
-------- -------- --------
(in thousands, except per share data)
Revenue:
Products $ 8,652 $ 9,329 $ 10,294
Services 11,327 5,375 3,364
-------- -------- --------
Total Revenue 19,979 14,704 13,658
Cost of sales:
Cost of products sold 3,708 6,133 7,303
Cost of services provided 6,454 3,761 2,526
-------- -------- --------
Total Cost of sales 10,162 9,894 9,829
Gross margin 9,817 4,810 3,829
Research and development expenses 354 -- --
Selling, general and administrative 8,001 4,657 4,265
-------- -------- --------
Income (loss) from operations 1,462 153 (436)
Gain on available-for-sale securities 253 2,126 --
Interest expense 254 -- --
-------- -------- --------
Income (loss) from continuing operations
before income taxes 1,461 2,279 (436)
Provision (benefit) for income taxes (Note B) 127 (3) 20
-------- -------- --------
Income (loss) from continuing operations 1,334 2,282 (456)
Discontinued operations (Note H):
Loss from discontinued operations (less
applicable provision (benefit) for income taxes of $(294)
in 1997 and $132 in 1996) -- (1,587) (4,701)
Loss from disposal (net of applicable benefit for income
taxes of $50 in 1997 and $0 in 1996) -- (269) (700)
-------- -------- --------
Net income (loss) 1,334 426 (5,857)
Retained earnings (deficit), beginning of year (52) (478) 5,379
-------- -------- --------
Retained earnings (deficit), end of year $ 1,282 $ (52) $ (478)
-------- -------- --------
Per Share Data (Note A):
Per Common Share - Diluted:
Income (loss) from continuing operations $ 0.22 $ 0.50 $ (0.11)
======== ======== ========
Net income (loss) $ 0.22 $ 0.09 $ (1.44)
======== ======== ========
Per Common Share - Basic:
Income (loss) from continuing operations $ 0.23 $ 0.52 $ (0.11)
======== ======== ========
Net income (loss) $ 0.23 $ 0.10 $ (1.44)
======== ======== ========
See accompanying notes to consolidated financial statements.
15
SOFTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31,
1998 1997
-------- --------
(in thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents $ 429 $ 580
Available-for-sale securities (Note A) -- 787
Accounts receivable (less allowance of $649 and $305
in 1998 and 1997, respectively) 9,290 3,300
Unbilled costs and fees 1,153 491
Inventory 338 378
Other receivables 232 263
Current portion of notes receivable from officers 421 --
Prepaid expenses and other assets 233 264
Deferred income taxes (Note B) 125 --
-------- --------
Total current assets 12,221 6,063
-------- --------
Property and equipment, at cost:
Data processing equipment 2,849 1,646
Office furniture 216 120
Leasehold improvements 89 62
Land and building 583 514
-------- --------
Total property and equipment 3,737 2,342
Less accumulated depreciation and amortization 1,457 864
-------- --------
2,280 1,478
Other assets:
Capitalized software costs, less amortization of
$184 (Note A) 13,816 --
Goodwill, net (Note A) 7,252 2,497
Notes receivable from officers, less current portion 368 --
Other assets 123 114
-------- --------
$ 36,060 $ 10,152
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 2,386 $ 1,664
Accrued expenses 3,470 1,024
Deferred maintenance revenue 3,522 383
Accrued income taxes 335 --
Net liabilities (assets) of discontinued operations (Note H) 338 (6)
Current portion of capital lease obligations (Note G) 180 78
Current portion of long term debt (Note F) 9,509 --
-------- --------
Total current liabilities 19,740 3,143
-------- --------
Long-term liabilities:
Capital lease obligations, less current portion (Note G) 238 --
Long-term debt, less current portion (Note F) 4,900 172
-------- --------
Total long term liabilities 5,138 172
-------- --------
Commitments and contingencies (Notes G and J)
Stockholders' equity (Notes D and E):
Common stock, $.10 par value; authorized 10,000,000 shares;
issued 6,793,699 and 5,678,433 shares in 1998 and 1997,
respectively 679 568
Capital in excess of par value 10,703 7,488
Retained earnings (deficit) 1,282 (52)
Unrealized gain on available-for-sale securities -- 315
Treasury stock, 443,157 shares, at cost (deduct) (1,482) (1,482)
-------- --------
Total stockholders' equity 11,182 6,837
-------- --------
$ 36,060 $ 10,152
======== ========
See accompanying notes to consolidated financial statements.
16
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended May 31,
1998 1997 1996
-------- -------- --------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 1,334 $ 426 $ (5,857)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 1,455 907 708
Loss on sale of NSG -- 269 700
Gain on sale of available-for-sale securities (253) (2,126) --
Gain on disposal of equipment -- -- (60)
Provision (benefit) for deferred income taxes (125) -- 593
Change in operating assets and liabilities, net of effects of
businesses acquired:
Accounts receivable and unbilled costs and fees (3,398) (68) 412
Inventory 160 155 (51)
Other receivables 95 82 537
Prepaid expenses and other assets 264 (187) 56
Accounts payable and accrued expenses (571) 452 (731)
Deferred maintenance revenue (75) (286) --
Net assets/liabilities of discontinued operations 344 4,650 4,379
-------- -------- --------
Total adjustments (2,104) 3,848 6,543
-------- -------- --------
Net cash provided (used) by operating activities (770) 4,274 686
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (770) (571) (419)
Proceeds from sale of capital equipment -- -- 248
Proceeds from sale of available-for-sale securities 810 26 --
Payments for business acquisitions (13,315) (151) (28)
Loans to officers (789) -- --
Other investing activities (10) -- 45
-------- -------- --------
Net cash used by investing activities (14,074) (696) (154)
-------- -------- --------
Cash flows from financing activities:
Borrowings under subordinated debt agreements 7,500 -- --
Proceeds from bank line of credit 2,778 -- --
Note payable 4,400 -- --
Proceeds from exercise of stock options 16 114 112
Proceeds from capital lease financing 300 145 --
Principal payments on capital lease obligations (132) (18) --
Payments on bank line of credit (169) -- --
Payment of cash distribution to shareholders -- (6,256) --
-------- -------- --------
Net cash provided (used) by financing activities 14,693 (6,015) 112
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (151) (2,437) 644
Cash and cash equivalents, beginning of year 580 3,017 2,373
-------- -------- --------
Cash and cash equivalents, end of year $ 429 $ 580 $ 3,017
======== ======== ========
Supplemental disclosures of cash flow information:
Non cash investing activities:
Fair value of shares issued in connection with
acquisitions $ 3,211 $ 1,193 $ 8
Income taxes paid $ 70 $ 51 $ 33
Interest paid $ 140 $ -- $ --
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated financial statements.
17
SOFTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The consolidated financial statements of the Company include the accounts
of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc.
(IDI), Softech Technologies Ltd., Adra Systems, GmbH, Ram Design and Graphics
Corp (RAM), System Constructs, Inc. (SCI), SofTech Investments, Inc. ("SII"),
Compass, Inc. (Compass) and AMG Associates, Inc. (AMG). SCI, SII, Compass and
AMG are all inactive subsidiaries. The Network Systems Group (NSG) of IDI and
SCI were operations sold in September 1996 and are therefore presented as
discontinued operations (See Note H). All significant intercompany transactions
have been eliminated upon consolidation.
BUSINESS TRANSITION:
At May 31, 1997, the Company faced two significant risks associated with
its operations. First, the relationship with Parametric Technology Corporation
(NASDAQ:PMTC), the technology provider of the Company's core software offering,
was uncertain. Second, there was uncertainty whether the Company had sufficient
financial resources given the Company's history, minimal operating income and
dependence on the PMTC relationship.
During 1998, the Company elected not to renew and terminated its reseller
agreement with PMTC and acquired four businesses including two CAD/CAM
technology companies, a CAD/CAM and Product Data Management ("PDM") services
business and a Structural Dynamics Research Corporation ("SDRC") reseller. As a
result, the Company has eliminated its dependence upon technology providers and
now possesses technology of its own, more than 100 degreed mechanical engineers,
and a stable, recurring service business that can reduce the impact of
fluctuations in the software order flow from quarter to quarter due to forces
outside the Company's control. The Company now has 25 offices in 16 states and 4
offices in Western Europe along with indirect distribution relationships in
Asia. In addition, subsequent to year end, the Company entered into a senior
credit facility to refinance short-term debt obligations outstanding at May 31,
1998.
INDUSTRY SEGMENT AND CONCENTRATION OF RISKS:
The Company operates in one industry segment and is engaged in the
development, marketing, distribution and support of CAD/CAM and Product Data
Management ("PDM") computer solutions. As the Company has expanded and evolved
into more of a service provider, its operations are no longer as dependent on
one or a small group of vendors. In addition, the Company believes there is no
concentration of risk with any single customer or small group of customers whose
failure or nonperformance would materially affect the Company's results. No
customer exceeds ten percent of net sales. Foreign operations acquired in 1998
represent approximately 4% of consolidated revenues and assets.
AVAILABLE-FOR-SALE SECURITIES:
The Company classified its holdings of DSN stock as available-for-sale as
of May 31, 1997. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in stockholders' equity. Realized gains and
losses are included in other income (expense). The cost of securities sold is
based on the specific identification method. Such holdings were sold in fiscal
1998.
INVENTORY:
Inventory consists of equipment purchased for resale and service parts and
is stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. The Company provides for
depreciation and amortization on a straight-line basis over the following
estimated useful lives:
Data processing equipment 3-5 years
Office furniture 5-10 years
Leasehold improvements Lesser of useful life or life of lease
Depreciation expense, including amortization of assets under capital lease,
was approximately $602,000, $328,000, and $217,000 for fiscal 1998, 1997 and
1996, respectively.
Maintenance and repairs are charged to expense as incurred; betterments are
capitalized. At the time property and equipment are retired, sold, or otherwise
disposed of, the related costs and accumulated depreciation are removed from the
accounts. Any resulting gain or loss on disposal is credited or charged to
income.
18
INCOME TAXES:
The provision for income taxes is based on the earnings reported in the
consolidated financial statements. The Company recognizes deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company provides a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax assets will not be realized.
REVENUE RECOGNITION:
Revenue from software license and service revenue is accounted for in
accordance with The AICPA's Statement of Position (SOP) 91-1. Software license
revenue is recognized upon delivery, provided that there are no significant
obligations remaining and collectibility of the revenue is probable. Service
revenue from customer maintenance fees for post-contract support is recognized
ratably over the maintenance term, which is typically 12 months. Other service
revenue from engineering services, training, installation and consulting is
recognized as the related service is performed. Revenue from third party
software and computer system sales is recognized upon shipment, or installation
and acceptance, if significant performance obligations are required. Deferred
revenue represents payments received by the Company in advance of product
delivery or service performance. Effective in fiscal 1999, the Company is
required to adopt SOP 97-2, "Software Revenue Recognition." The effect of
adoption is not expected to have a significant effect on the Company's revenue
recognition policies.
CAPITALIZED SOFTWARE COSTS:
The Company capitalizes certain costs incurred to internally develop and/or
purchase software that is licensed to customers. Capitalization of internally
developed software begins upon the establishment of technological feasibility.
Costs incurred prior to the establishment of technological feasibility are
expensed as incurred. The Company evaluates the realizability and the related
periods of amoritization on a regular basis.
During fiscal 1998, the Company capitalized $14 million of software
development costs in connection with the acquisitions of AMT and ADRA (see Note
I). Such costs are amortized over estimated useful lives ranging from eight to
fifteen years using both the ratio of current gross revenues for the product to
the total of current and anticipated future gross revenues and straight line
methods. During fiscal 1998, the Company amortized approximately $184,000 of
such costs to cost of product sold.
GOODWILL:
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired and is amortized on a straight-line basis over periods
ranging from five to fifteen years. Accumulated amortization of goodwill was
$2,093,000 and $1,260,000 at May 31, 1998 and 1997, respectively.
Included in the loss on disposal of NSG in the year ended May 31, 1996 is a
write down of approximately $1.6 million of goodwill acquired through business
combinations.
The carrying value of all intangible assets is periodically reviewed by the
Company, and if necessary, impairments of values are recognized. If there is a
permanent impairment in the carrying value, the amount of such impairment is
computed by comparing the anticipated discounted future operating cash flows of
the acquired business to the carrying value of the assets. In performing this
analysis, the Company considers current results and trends, future prospects and
other economic factors.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS:
The Company's financial instruments, as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments", consist of cash, accounts receivable, notes receivable, accounts
payable, and short- and long-term debt. The Company's estimate of the fair value
of these financial instruments approximates their carrying amounts at May 31,
1998 and 1997. The fair value of the long-term debt was determined using
discounted cash flow analyses and current interest rates for similar
instruments.
FOREIGN CURRENCY TRANSLATION:
The functional currency of the Company's foreign operations (England,
France and Germany), which were all acquired during fiscal 1998, is the local
currency. As a result, assets and liabilities are translated at period-end
exchange rates and revenues and expenses are translated at the average exchange
rates. Foreign currency gains and losses arising from transactions were included
in operations in fiscal 1998, but were not significant. Translation gains and
losses were not significant in fiscal 1998.
NET INCOME (LOSS) PER COMMON SHARE:
In February of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share".
SFAS 128 simplifies the standards for computing earnings per share, replacing
the presentation of primary earnings per share with a presentation of basic
earnings per share. SFAS 128 also requires dual presentation of basic and
19
diluted earnings per share on the face of the statement of operations for all
entities with complex capital structures. Basic earnings per share is computed
by dividing earnings available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
is computed similar to fully diluted earnings per share pursuant to APB Opinion
No. 15, "Earnings per Share", which is superseded by SFAS 128. All earnings per
share amounts for all periods have been restated to conform to SFAS 128
requirements.
The following table sets forth the reconciliation of weighted average
shares used in the computation of basic and diluted earnings per share:
1998 1997 1996
--------- --------- ---------
Basic-weighted average shares
outstanding during the year 5,710,917 4,410,099 4,075,943
Effect of employee stock options 402,924 119,777 --
--------- --------- ---------
Diluted 6,113,841 4,529,876 4,075,943
========= ========= =========
Options to purchase shares of common stock totaling 1,027,509, 575,323, and
637,600, in 1998, 1997 and 1996, respectively, and common stock warrants have
not been included in the denominator for computation of diluted earnings per
share because related exercise prices were greater than the average market
prices for the period and, therefore, were antidilutive.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain amounts in 1997 and 1996 have been reclassified to conform with the
presentation used in 1998.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
"Comprehensive Income" which is the total of net income and all other non-owner
changes in stockholders' equity and its components. SFAS 130 is effective for
fiscal years beginning after December 15, 1997 with earlier application
permitted. The Company will adopt the standard in fiscal 1999 and does not
expect comprehensive income to differ significantly from previously reported net
income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131, which supersedes
SFAS Nos. 14, 18, 24 and 30, establishes new standards for segment reporting in
which reportable segments are based on the same criteria on which management
disaggregates a business for making operating decisions and assessing
performance. SFAS 131 is effective for fiscal years beginning after December 15,
1997 with earlier application permitted. The Company will adopt the standard in
fiscal 1999 and does not expect the new standard to have a significant effect on
previously reported information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which provides a consistent standard
for recognition and measurement of derivatives and hedging activities. The
Company is required to adopt the standard in fiscal 2001 and is in the process
of evaluating SFAS 133 and its impact.
B. INCOME TAXES:
The provision for income taxes includes the following:
For the Years ended May 31, (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal $ 164 $ (74) $--
Foreign 25 -- --
State and Local 63 71 20
----- ----- ----
252 (3) 20
Deferred (125) -- --
----- ----- ----
$ 127 $ (3) $ 20
===== ===== ====
20
The provision (benefit) for federal income taxes was reduced due to the use
of approximately $2.6 million and $1.0 million in net operating loss benefits in
1998 and 1997, respectively.
At May 31, 1998, the Company had tax credit carryforwards generated from
research and development activities of $646,000 that are available to offset
against income taxes and expire from 2002 to 2006. In addition, an alternative
minimum tax credit of $155,000 that has no expiration date was also available.
The Company's effective tax rates can be reconciled to the federal
statutory tax rates as follows:
For the Years ended May 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Statutory rate 34% 34% (34)%
State and local taxes 3 2 3
Benefit of previously unrecognized net
operating loss and credit carryforwards (27) (33) --
Expenses not deductible for tax purposes 8 -- --
Valuation reserve (9) -- 35
Other -- (3) 1
---- ---- ----
Effective tax rates 9% 0% 5%
==== ==== ====
Deferred tax assets (liabilities) were comprised of the following at May
31:
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Depreciation $ (8) $ (13)
Net operating loss carryovers -- 877
Tax credits 780 981
Receivables 175 394
Gain on sale of stock -- (917)
Vacation accrual 56 66
Differences in book and tax bases of
assets of acquired businesses 514 299
Reserve for loss on disposal -- 95
Other -- 6
------- -------
Deferred tax assets 1,517 1,788
Less: valuation allowance (1,392) (1,788)
------- -------
Net deferred tax assets $ 125 $ 0
======= =======
Due to the uncertainty surrounding the realization of certain favorable tax
attributes in future tax returns, the Company has established a valuation
reserve against a portion of the otherwise recognizable deferred tax assets.
C. EMPLOYEE RETIREMENT PLANS:
The Company has an Internal Revenue Code Section 401(k) plan covering
substantially all employees. The aggregate retirement plan expense, which
consists of an employer match of a portion of employee voluntary contributions,
for fiscal 1998, 1997 and 1996 was $59,000, $49,000 and $33,000, respectively.
Four former key employees participate in a defined supplemental retirement
plan that was established to supplement retirement benefits from other sources
such as social security and the Company's defined contribution retirement plan.
During fiscal year 1996 the four beneficiaries agreed to a change in benefit.
The Company has purchased irrevocable, non-participating annuity contracts to
fund the future benefits due these four individuals. The net gain realized from
this settlement was $286,000 and was included in the 1996 results from
discontinued operations.
D. EMPLOYEE STOCK PLANS:
The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the
granting of both incentive and non-qualified options. Incentive stock options
granted under the Plan have an exercise price not less than fair market value of
the stock at the grant date and have vesting schedules as determined by the
Company's Board of Directors. The Plan permits the granting of non-qualified
options at exercise prices and vesting schedules as determined by the Board of
Directors.
There were options for 144,167 shares available for future grants under the
1994 Plan at May 31, 1998. The following are the shares exercisable at the
corresponding weighted average exercise price at May 31, 1998, 1997 and 1996,
respectively: 316,304 at $1.98; 212,880 at $2.19; and 220,530 at $5.75.
21
Information for the years 1996 through 1998 with respect to this plan is as
follows:
Weighted
Number of Average
Stock Options Shares Option Price
- --------------------------------------------------------------------------------
Outstanding at May 31, 1995 599,800 $5.89
Options granted 165,000 4.54
Options terminated (167,700) 5.40
Options exercised (35,500) 2.95
--------
Outstanding at May 31, 1996 561,600 5.82
Options granted 549,000 1.32
Options terminated (415,500) 5.48
--------
Outstanding at May 31, 1997 695,100 1.60
Options granted 449,000 2.59
Options terminated (153,167) 1.61
Options exercised (18,000) 0.89
--------
Outstanding at May 31, 1998 972,933 $2.07
========
The following table summarizes information about stock options outstanding at
May 31, 1998 under the 1994 Plan:
Options Outstanding Options Exercisable
-------------------------------- ------------------------------
Weighted
Options Average Weighted Options Weighted
Exercise Outstanding at Contractual Average Exercisable at Average
Price Range May 31, 1998 Remaining Life Exercise Price May 31, 1998 Exercise Price
- ----------------------------------------------------------------------------------------------------------
$0.010 to $0.440 43,000 1.22 years $0.37 43,000 $0.37
$1.065 to $1.75 460,833 4.75 years 1.24 124.604 1.07
$1.878 to $2.375 294,000 7.12 years 2.07 68,200 1.91
$3.940 to $5.063 175,100 3.22 years 4.70 80,500 4.32
------- -------
Total 972,933 316,304
======= =======
In addition, there were 460,000 options granted outside of the plan during
fiscal 1998 to employees of AMT and ADRA; companies acquired during the year. At
May 31, 1998, 457,500 of these options were outstanding, of which 91,500 were
exercisable, at a weighted average exercise price of $3.64.
The 1994 Plan calls for the adjustment of option exercise prices to reflect
equity transactions such as stock issuances, dividend distributions and stock
splits. The outstanding options at May 31, 1998 reflect the downward price
adjustments made following the cash distribution in December 1996 and the DSN
stock distribution in June 1997 of $1.50 and $1.06, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its plans. Because the number of shares is known and the exercise price of
options granted have been equal to fair value at date of grant, no compensation
expense has been recognized in the statement of operations. The Company has
adopted the disclosure-only provisions of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation." Had compensation cost
for the Company's stock option plans been determined based on the fair value at
the grant date for awards under these plans, consistent with the methodology
prescribed under SFAS 123, the Company's net income and earnings per share
at May 31 would have approximated the pro forma amounts indicated below:
(000's omitted) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income (loss) - as reported $1,334 $426 $(5,857)
Net income (loss) - pro forma $1,141 $343 $(5,865)
Earnings (loss) per share - diluted -
as reported $0.22 $0.09 $(1.44)
Earnings (loss) per share -
diluted - pro forma $0.19 $0.08 $(1.44)
22
The weighted-average fair value of each option granted in 1998, 1997 and
1996 is estimated as $2.04, $0.81 and $1.17, respectively on the date of grant
using the Black-Scholes model with the following weighted average assumptions:
Expected life 4 to 5 years
Assumed annual dividend growth rate 0%
Expected volatility .65 to .85
Risk free interest rate
(the month-end yields on 4 year
treasury strips equivalent zero coupon) 5.6% - 6.36%
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts. SFAS 123 does not apply to awards prior to 1996
and additional awards in future years are anticipated.
In 1998, the Company adopted an Employee Stock Purchase Plan, under which
all employees of the Company and certain of its subsidiaries who meet certain
minimum requirements will be able to purchase shares of SofTech common stock
through payroll deductions. The purchase price per share is 85% of the fair
market value of the common stock on the Offering Date or the Exercise Date,
whichever is less. It is expected that this plan will be implemented during the
second quarter of fiscal 1999. As of May 31, 1998, 150,000 shares of SofTech
common stock were available for sale to employees under the plan.
E. COMMON STOCK:
Common stock changes during the three years ended May 31, 1998, 1997, and
1996 were as follows:
Par Value Capital in
Shares of Shares Excess of
($ in thousands) Outstanding Issued Par Value
- --------------------------------------------------------------------------------------------------
Balance, May 31, 1995 4,052,547 $ 450 $ 16,347
Shares issued for stock options exercised 40,500 4 108
Shares issued in connection with acquisitions 1,729 -- 8
---------- ---------- ----------
Balance, May 31, 1996 4,094,776 454 16,463
Shares issued for stock options exercised 76,000 8 106
Shares issued in connection with acquisitions 655,000 65 1,141
Shares issued in lieu of compensation 409,500 41 708
Distributions of cash and DSN stock (Notes A
and H) -- -- (10,930)
---------- ---------- ----------
Balance, May 31, 1997 5,235,276 568 7,488
Shares issued for stock options exercised 18,000 2 14
Shares issued in connection with acquisitions 1,097,266 109 3,101
Warrants issued in connection with subordinated
note -- -- 100
---------- ---------- ----------
Balance, May 31, 1998 6,350,542 $ 679 $ 10,703
========== ========== ==========
F. DEBT OBLIGATIONS:
Debt obligations of the Company consist of the following obligations at May
31, 1998 (in thousands):
Revolving credit facility, maturing in June 1998, with interest
payable monthly at the prime rate (8.5% at May 31, 1998) plus 0.5% $ 2,609
Note payable to MatrixOne, payable by July 6, 1998 with interest
at 7% 4,400
$5,000,000 subordinated note, maturing in December 2002, with
interest payable monthly at 10.5%, net of unamortized debt
discount of $100 at an imputed interest rate of 11% 4,900
Bridge loan, maturing upon finalization of senior loan facility,
with interest payable monthly at 12% 2,500
-------
14,409
Less current maturities (9,509)
-------
$ 4,900
=======
23
At May 31, 1998, the Company had a credit facility with a commercial
lending institution that provided for borrowings of up to $4.0 million, limited
to 85% of domestic accounts receivable outstanding less than 90 days from
invoice date. Availability was subject to compliance with several covenants,
including a minimum tangible net worth. Annual commitment fees under this
agreement were $10,000. That line of credit agreement expired on June 28, 1998
and was repaid in full on July 1, 1998 as part of the closing of a new senior
loan facility (see discussion below).
The Company had a short term note payable to MatrixOne, an unaffiliated
company, in the amount of $4.4 million relating to the acquisition of ADRA that
was payable within 60 days of the acquisition. This note was also repaid in full
on July 1, 1998 upon the closing of the new senior loan facility.
The Company has a subordinated note to Greenleaf Capital ("Greenleaf") in
the amount of $5 million. The note is due in December 2002 and carries a 1%
commitment fee. In addition, the note provides Greenleaf with warrants to
purchase up 300,000 shares of SofTech stock at an exercise price of $8.00 per
share through December 31, 2002. The estimated fair value of the warrants is
$100,000 and the related debt discount is being amortized through December 2002
using the interest method. The number of warrants earned by Greenleaf is a
function of the amount owed under the subordinated debt facility at various
dates in the future. The following table outlines those dates and amounts:
Cumulative
Date Borrowing # of Warrants
---- --------- -------------
December 31, 2000 $2.0 million 120,000
December 31, 2000 3.0 million 180,000
December 31, 2001 4.0 million 240,000
December 31, 2002 5.0 million 300,000
The Company has a short-term bridge note payable to Greenleaf in the amount
of $2.5 million that was used to fund the acquisition of ADRA. Interest is
payable monthly at 12%. The bridge note includes a 1% commitment fee and is
payable upon the completion of the senior loan facility.
William D. Johnston, a director of SofTech since September 1996, is the
President of Greenleaf. Management sought and received non-binding commitments
from several sources for the subordinated debt facility and the bridge loan that
were ultimately provided by Greenleaf. Management recommended and the Board of
Directors, other than Mr. Johnston who abstained from such vote, unanimously
approved the transaction with Greenleaf.
Subsequent to May 31, 1998, the Company entered into a $9.0 million senior
loan facility, consisting of a $6 million term loan and a $3 million revolving
credit facility, with interest payable monthly at prime plus 2.25%. The proceeds
from this senior facility were utilized to pay off the $4.4 million note to
MatrixOne and the borrowings under the revolving credit facility which has been
terminated. Approximately $1.0 million of the bridge loan was also paid down
with the proceeds from the senior facility.
The Company's aggregate short and long term borrowings of approximately
$15.5 million (including the $9.0 million senior facility entered into
subsequent to fiscal year end) going into fiscal 1999 adds an element of
financial risk that the Company has not experienced in the past. The terms of
the senior facility require certain levels of profitability on a quarterly basis
in order to remain in compliance with the loan covenants. In addition, the
Company is completely dependent on cash flow from operations to meet its near
term working capital needs and to make debt service payments. The monthly
interest expense is approximately $130,000 on these borrowings. In addition, the
term loan portion of the senior facility requires principal repayments of
$375,000 on a quarterly basis beginning August 31, 1998.
Annual maturities of debt obligations subsequent to May 31, 1998, adjusted
for the senior facility, are as follows: 1999 - $3 million; 2000 - $4.5 million;
2001 - $1.5 million; 2002 - $1.5 million; 2003 - $5.0 million.
The loan covenants on the senior facility require that the Company maintain
certain minimum financial ratios related to cash flows, funded debt and earnings
in order to remain in compliance with the loan terms.
G. LEASE COMMITMENTS:
OPERATING LEASES
The Company conducts its operations in facilities leased through 2003.
Rental expense for fiscal years 1998, 1997, and 1996 was approximately $550,000,
$270,000 and $203,000, respectively.
At May 31, 1998, minimum annual rental commitments under noncancellable
leases were as follows:
Fiscal Year
--------------------------------------
1999 $562,000
2000 408,000
2001 287,000
2002 236,000
2003 226,000
24
CAPITAL LEASES
The Company has equipment-leasing arrangements with commercial lending
institutions. These leases are secured by computer equipment acquired in one of
the services-only acquisitions. For financial reporting purposes, the leases
have been classified as capital leases; accordingly, assets with a net book
value of approximately $295,000 (included in data processing equipment in the
accompanying balance sheet at May 31, 1998) have been recorded. The approximate
minimum annual lease payments under all capitalized leases as of May 31, 1998
are as follows: 1999, $221,000; 2000, $191,000; and 2001, $64,000. The present
value of the minimum lease payments is $418,000, including current maturities of
$180,000.
H. DISCONTINUED OPERATIONS:
On September 12, 1996, the Company completed the sale of its Network
Systems Group ("NSG") to Data Systems Network Corporation ("DSN"). DSN purchased
certain assets and assumed certain liabilities of NSG with a net book value on
July 31, 1996 of approximately $200,000 in exchange for $890,000 in cash and
540,000 shares of DSN common stock, which were registered with the Securities
and Exchange Commission in May 1997. The tangible assets acquired by DSN from
SofTech totaled approximately $1.7 million and were primarily composed of fixed
assets and service inventory for maintaining the NSG installed base of hardware
and software. Liabilities assumed by DSN from SofTech included deferred revenue
associated with maintenance contracts and other accrued expenses with a total
book value of about $1.5 million. The sale agreement provides for dollar for
dollar adjustments based on the net book value of the assets as of the
transaction date. This transaction resulted in an after tax loss of
approximately $970,000, of which an estimate of $700,000 was provided for in the
1996 results.
The Company distributed the net proceeds from the sale of its Network
Systems Group in the form of two distributions. On December 30, 1996, the
Company made the first installment in cash at a rate of $1.50 per share to its
shareholders of record on December 26, 1996, totaling $6,256,164. The second
installment was in the form of a distribution of 455,988 DSN shares at a rate of
approximately 0.1031 for each share of SofTech owned on the record date of May
23, 1997. All fractional shares were paid in cash at the assumed market price of
$10.00 per share. The distribution date of this second installment was June 6,
1997.
Revenue from discontinued operations for the years ended May 31, 1997 and
1996 was approximately $7,490,000 and $30,397,000, respectively.
The net assets (liabilities) of discontinued operations, which are included
in the Consolidated Balance Sheets as of May 31, are as follows:
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Accounts receivable (net) $ -- $ 355
Deferred income taxes receivable -- 334
----- -----
Total assets -- 689
----- -----
Accounts payable -- 129
Accrued expenses 338 554
----- -----
Total liabilities 338 554
----- -----
Net assets (liabilities) of discontinued
operations $(338) $ 6
===== =====
I. ACQUISITIONS:
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"). AMT is a technology group
that targets its application software products to the mold and die industry. AMT
employed 31 full time employees and was 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. The assets acquired included office
furniture, computer equipment and off-the-shelf software currently marketed and
supported by AMT as PROSPECTOR(TM), EXPERTCAD(TM), EXPERTCAM(TM),
TOOLDESIGNER(TM) AND TOOLMAKER(TM).
The purchase price for the acquired AMT assets was $1,750,000 in cash,
200,000 shares of the Company's common stock and the assumption of certain
liabilities. The source of the funds used in the acquisition came from existing
working capital resources including the Company's prior credit facility. 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. It is the Company's understanding that
all 200,000 shares issued to CIMLINC have been sold thereby negating the
guarantee.
25
In addition, the Company issued a total of 507,266 shares of common stock
to certain AMT employees to satisfy certain amounts due and as a replacement for
stock options and stock ownership in CIMLINC.
The acquisition was accounted for as a purchase and, accordingly, AMT's
assets, liabilities and results of operations have been consolidated with those
of the Company since the date of acquisition. The purchase resulted in the
recording of capitalized software of $4.0 million, fixed assets of $.2 million
and goodwill of approximately $1.7 million, which is being amortized on a
straight-line basis over fifteen years.
On May 7, 1998, the Company completed the acquisition of certain assets and
assumed certain liabilities of the Adra Systems, Inc. ("ADRA"), a technology
company with products primarily related to the two-dimensional computer aided
design ("2D CAD") marketplace. SofTech acquired all of the material assets of
the ADRA operation including accounts receivable and fixed assets including
office furniture and computer equipment. The Company also acquired all
intellectual property rights, as defined in the Asset Purchase Agreement, used
in the ADRA operations. Goodwill of $2.0 million recorded in connection with the
acquisition is being amortized on a straight-line basis over fifteen years.
The purchase price for the acquired assets was $11.4 million of which $7.0
million was paid at the closing and $4.4 million was paid on July 1, 1998. In
addition, contingent cash payments of up to $2.2 million could be due if certain
license revenue goals are attained over the twelve month period immediately
following the transaction. Payment of these amounts will be accounted for as
additional purchase price. The source of the funds for the initial cash payment
of $7.0 million came from a $5.0 million subordinated debt facility with
Greenleaf Capital, Inc. ("Greenleaf") and $2.0 million of a $2.5 million bridge
loan also provided by Greenleaf. This acquisition has been accounted for as a
purchase and, accordingly, ADRA's assets, liabilities and results of operations
have been consolidated with those of the Company since the date of acquisition.
Effective April 1, 1998, the Company acquired certain assets of Design Tech
Consulting, Inc., an engineering services company, in exchange for 80,000 shares
of the Company's common stock valued at $340,000. The transaction has been
accounted for as a purchase and, accordingly, Design Tech's assets, liabilities
and results of operations have been consolidated with those of the Company since
the date of acquisition. The excess of cost over the fair value of the net
assets acquired was approximately $365,000 and is being amortized on a
straight-line basis over ten years.
The purchase of Design Tech in April 1998 provides for certain additional
contingent payments if specified revenue goals are attained during each of the
twelve-month periods ending March 31, 1999, 2000 and 2001. The former
shareholders of Design Tech will earn an additional award of 50,000 SofTech
shares if service revenue generated in the Chicago Region equals or exceeds
specified levels for the three years following the purchase. Payment of these
amounts, if required, will be accounted for as additional purchase price.
Effective May 1, 1998, the Company acquired certain assets of CompuCore LLC
in exchange for 100,000 shares of the Company's common stock valued at $462,500.
CompuCore is a value-added reseller of Structural Dynamics Research
Corporation's ("SDRC") software products. The transaction has been accounted for
as a purchase and, accordingly, CompuCore's assets, liabilities and results of
operations have been consolidated with those of the Company since the date of
the acquisition. The excess of cost over the fair value of the net assets
acquired was approximately $474,000 and is being amortized on a straight-line
basis over ten years.
Effective January 1, 1997, the Company acquired all of the outstanding
common stock of Computer Graphics Corp. (CGC) in exchange for 405,000 shares of
the Company's common stock with a value of $628,000. The transaction has been
accounted for as a purchase and, accordingly, CGC's assets, liabilities and
results of operations have been consolidated with those of the Company since the
date of acquisition. The excess of cost over the fair value of the net assets
acquired was approximately $635,000 and is being amortized on a straight-line
basis over five years.
The purchase of CGC also provided for additional consideration of up to
210,000 additional shares of the Company's common stock if certain revenue and
operating profit goals were achieved during the twelve months ended December 31,
1997. The maximum additional consideration was earned in fiscal 1998 and
resulted in additional goodwill of $709,000.
Effective February 27, 1997, the Company acquired the stock of Ram Design
and Graphics Corp. ("RAM") in exchange for 250,000 shares of the Company's
common stock valued at $578,000 plus 50,000 stock options that vest equally over
five years. The transaction has been accounted for as a purchase and,
accordingly, RAM's assets, liabilities and results of operations have been
consolidated with those of the Company since the date of acquisition. The excess
of cost over the fair value of the net assets acquired was approximately
$600,000 and is being amortized on a straight-line basis over five years.
Effective January 5, 1995, the Company acquired the net assets of Micro
Control, Inc. for approximately $1.0 million in cash and 281,497 shares of the
Company's common stock valued at $1.7 million. The transaction has been
accounted for as a purchase and, accordingly, RAM's assets, liabilities and
results of operations have been consolidated with those of the Company since the
date of acquisition. The excess of cost over the fair value of the net assets
acquired was approximately $2,420,000 and is being amortized on a straight-line
basis over five years. On September 20, 1995, the purchase agreement with the
seller was modified to eliminate contingent payments dependent upon future
operating results in exchange for an additional cash payment to the
26
seller of $426,000. The entire payment of $426,000 was expensed and included in
selling, general and administrative expense in fiscal 1996.
The unaudited pro forma revenue, net income from continuing operations and
net income from continuing operations per share - diluted of the Company,
assuming AMT, ADRA, Design Tech, CompuCore, CGC and RAM had been acquired as of
the beginning of fiscal 1997, would have been $39,250,000, $2,200,000 and $.33
and $41,895,000, $3,125,000, $.53, for fiscal 1998 and 1997, respectively.
J. LITIGATION:
On March 26, 1998, plaintiff Parametric Technology Corporation ("PMTC")
filed an action in the Superior Court, Middlesex County, alleging that the
Company owes PMTC $905,942.10 in unpaid maintenance services and other disputed
items. Upon filing the complaint, PMTC sought to attach, through trustee
process, that amount of the Company's funds. After a hearing on April 7, 1998,
PMTC's motion for trustee process was denied. The Company filed a counterclaim
against PMTC asserting claims for breach of contract, breach of the implied
covenant of good faith and fair dealing, fraud in the inducement, and
intentional interference with contractual and advantageous relations. The
counterclaims allege damages in excess of those claimed by PMTC.
On May 1, 1998, PMTC filed a second action in the United States District
Court for the District of Massachusetts (PMTC v. SofTech, Inc., Civil Action No.
98CV10764-REK) seeking unspecified damages in connection with the Company's
alleged infringement of PMTC's copyrights. More recently PMTC has sent a letter
to the Company alleging possible claims under the Lanham Act. The Company
intends to vigorously defend against all of these cases, and believes that it
has meritorious defenses to these claims.
27
SOFTECH, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended May 31, 1998
Col. A Col. B Col. C Col. D Col. E Col. F
- ------ --------- --------- ---------- ------ --------
Balance, Charged Balance,
beginning costs and end of
Description of period expenses Deductions Other period
- ---------------------------------------------------------------------------------------------------------------
Allowance for uncollectible
accounts receivable (in thousands):
Year ended May 31, 1998 $ 305 $ -- $201(1) $ 545(2) $ 649
Year ended May 31, 1997 200 125 20 -- 305
Year ended May 31, 1996 -- 200 -- -- 200
(1) Represents uncollectible accounts written off, net of recoveries.
(2) Relates to amounts acquired in the acquisitions of AMT and ADRA.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Mark R. Sweetland
------------------------------
Mark R. Sweetland, President
Date: August 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------
/S/ Mark R. Sweetland President and Chief Executive Officer 8/31/98
- ---------------------------- (Principal executive officer) and
Mark R. Sweetland Director
/S/ Joseph P. Mullaney Vice President, Treasurer, 8/31/98
- ---------------------------- Chief Financial Officer (Principal
Joseph P. Mullaney financial and accounting officer)
/S/ Timothy J. Weatherford Executive Vice President, Sales and 8/31/98
- ---------------------------- Director
Timothy J. Weatherford
/S/ Ronald A. Elenbaas Director 8/31/98
- ----------------------------
Ronald A. Elenbaas
/S/ William Johnston Director 8/31/98
- ----------------------------
William Johnston
/S/ Kenneth Ledeen Director 8/31/98
- ----------------------------
Kenneth Ledeen
/S/ Timothy Tyler Director 8/31/98
- ----------------------------
Timothy Tyler
29