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Form 10K
1997
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended May 31, 1997
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)
3260 Eagle Park Drive, N.E., Grand Rapids, MI 49505
(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:
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: $7,671,140 as of August 15, 1997. On August 15, 1997 the
registrant had outstanding 5,235,776 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 1997 annual meeting are incorporated by reference into
Part III of this report, to the extent set forth in said Part III.
PART I
ITEM 1 - BUSINESS
THE COMPANY
SofTech, Inc. was founded in Massachusetts on June 10, 1969. The
Company had an initial public offering in August 1981 and a secondary
offering in December 1982.
Today, SofTech is a leading provider of CAD/CAM solutions and is the
largest reseller of Parametric Technology Corporation's ("PTC")(NASDAQ:
PMTC) software in the United States. Through its eleven offices in ten
states SofTech offers its customers turn-key solutions to their mechanical
engineering problems. In addition to the PTC software offerings, the
Company also markets, distributes and supports several other popular
Computer Aided Design ("CAD") and Product Data Management ("PDM") software
offerings to its customers. The Company is an authorized reseller of
numerous hardware platforms on which the software operates and provides a
full spectrum of services including hardware and software maintenance,
installation, training, consulting, product design and placement services.
The Company had been a reseller of PTC's popular Pro/ENGINEER
("Pro/E") software offering since that product was introduced in 1988. As
more fully detailed below under the caption "Product Transition", effective
September 30, 1996 the Company was no longer allowed to resell Pro/E but
instead was licensed to market a PTC mid-range software offering known as
PT/Modeler ("PT"). PT/Modeler is aimed at the large (relative to the Pro/E
market) user base of the 2D mechanical CAD marketplace. PT's list price is
approximately one-fourth the price of Pro/E and the software operates only
on the Intel platform. The total cost over an assumed five year life of a
seat of PT software with hardware is approximately one-fifth the cost of
operating and maintaining a Pro/E seat.
During fiscal 1996 the Company had an operating division known as the
Network Systems Group ("NSG") which marketed a wide variety of well known
network computer hardware and off-the-shelf software products as well as a
full array of computer related services to its customers in Michigan, North
Carolina, and New York. NSG was sold to Data Systems Network Corporation
("DSN") (NASDAQ Smallcap: DSYS, Pacific Stock Exchange: DSY) on September
12, 1996. The results of the NSG business have been presented as a
discontinued operation. The NSG assets and liabilities have been
reclassified in the Consolidated Balance Sheets as net assets of
discontinued operations. The NSG operating results are shown net of income
taxes in the Consolidated Statements of Operations and Retained Earnings
under the caption "Discontinued operations". The analysis below is directed
exclusively to the continuing operations which are composed solely of the
CAD business. See also the discussion under the caption "Discontinued
Operation" and Notes A, H and J to the Consolidated Financial Statements of
the Company included herein.
CAD PRODUCT AND SERVICE OFFERINGS
As noted previously, the Company's core software product offering is
that of PTC's PT/Modeler family of products. SofTech is the largest
reseller of PTC's products in North America and one of only two PTC
resellers that are publicly traded.
The CAD Division's sales of PTC software amounted to approximately
$2.2 million, $2.9 million, and $1.4 million in fiscal 1997, 1996, and 1995,
respectively. In addition, the Company markets software of related and
complementary technology providers such as Product Data Management ("PDM")
offerings of Workgroup Technology Corporation (NASDAQ: "WKGR"). With the
exception of PTC's products, none of these software offerings were material
to fiscal 1997 or 1996 results.
In addition to the software offerings, the Company provides a full
array of hardware platforms on which the software operates. Hardware
revenue and margin have been and are expected to continue to be a
significant component of total revenue and margin. Hardware revenue is
generally dependent on the sale of the core software, at least initially.
Prior to the transition to PT/Modeler, the hardware platforms sold by the
Company had been primarily UNIX-based workstations. With the software
product shift to PT, the hardware platform is a personal computer with a
Windows NT operating system. During fiscal 1997 the Company continued to
market and distribute workstations to its customers. It is uncertain as to
whether the Company will be able to retain workstation business in the
future given the trend toward the NT operating system.
The Company provides full maintenance support for the software and
hardware it markets to its customers. Recurring hardware maintenance
revenue amounted to approximately $830,000, $650,000, and $560,000 in fiscal
1997, 1996 and 1995, respectively. The Company is an authorized reseller of
PTC maintenance for the PT/Modeler family of products and for Pro/ENGINEER.
The Company's right to market and support the maintenance of Pro/E software
is valid only through September 30, 1997 and it is uncertain as to whether
that right will be extended beyond that date. Revenue generated from the
sale of PTC maintenance was approximately $1.9 million, $1.5 million and
$860,000 in fiscal years 1997, 1996 and 1995, respectively.
In December and February of fiscal year 1997 the Company acquired two
services-only organizations with locations in Indiana and North Carolina.
In addition, in December the Company hired a sole proprietor of a services-
only business in Texas. These service businesses provide discreet
engineering services related to the mechanical CAD/CAM marketplace including
contract consulting, design and placement services. These three businesses
generated approximately $1.9 million of service revenue, $730,000 of gross
margin, (gross margin as a percent of revenue of 37.6%), profit before tax
of about $120,000, and cash flow (pretax earnings plus non-cash expenses of
goodwill and depreciation) of $280,000 during fiscal 1997. The Company
expects that this type of revenue will continue to increase and become a
more significant component of the Company's total revenue. The remainder of
the service revenue was composed of services provided to customers related
to installation, training and consulting.
PRODUCT TRANSITION
In January 1995, PTC introduced a mid-range product known as Pro/JR.
Pro/JR. had approximately 30% of the functionality of Pro/ENGINEER, was
priced at about $8,000 per seat ("unit") and was upwardly compatible with
Pro/ENGINEER. The Junior offering was aimed at the relatively large user
base of two dimensional software products and the perceived need of a
significant number of those 2D users to migrate to a 3D solid modeling
product. The Pro/JR. product was to be a reseller only product. At the
time Pro/JR. was introduced, the resellers were allowed to market both
Pro/ENGINEER and Pro/JR.
In March 1996 PTC informed its resellers that, effective September 30,
1996, the Pro/ENGINEER product was to be distributed only through the direct
salesforce of PTC. The reseller channel would only be allowed to market the
Pro/JR. successor family of products known as PT/Modeler . This successor
product was enhanced, renamed and repositioned in the marketplace. PTC
established a dedicated, in-house product group with the sole responsibility
of supporting the reseller channel and the new product. The Company
believes that the mid-range software offering can perform many, if not all,
of the basic product design through manufacturing functions as the Pro/E
software for a fraction of the cost. The mid-range offering would not be
appropriate for complex surface design, cabling, harness manufacturing and
five axis machining needs.
In connection with the transition from the Pro/ENGINEER offering to
the new product, PTC offered the following plan to the reseller channel:
* margin on the new product would be 75% for the first year as compared to
37% for Pro/ENGINEER. PTC has informed the resellers that this 75%
margin will be extended for one additional year through approximately
September 1998;
* ability to resell PTC maintenance on Pro/ENGINEER through September 30,
1997;
* royalty of 20% of the gross software sales by PTC to the Company's
installed base by the direct salesforce for the period from October 1,
1996 to December 31, 1996;
* opportunity to partner with the PTC direct salesforce for the sale of
hardware, hardware maintenance, and consulting services to their software
customers in the Company's markets; and
* various other support efforts intended to increase the likelihood of
success for the new product and therefore the resellers.
As a final inducement to accept the new program, PTC stated that the direct
salesforce would never be given the PT/Modeler product line to market in
that it was not financially feasible given the price point of this product.
It was also represented to the Company that Rand Technology, a Company that
had historically been the largest reseller of Pro/E, would not be a reseller
of the new product line. During the Company's fiscal 1997 PTC did allow the
direct salesforce to market PT and did, on a limited basis, allow Rand
Technology to do the same
COMPETITION
In marketing the Pro/ENGINEER family of products, competition was
primarily from other resellers of PTC software, PTC's direct salesforce, and
direct or reseller salesforces offering software products of other
technology providers such as Structural Dynamics Research Corporation,
Computervision, Dassault, EDS, Intergraph and IBM.
In marketing the PT/Modeler family of products, most of the PTC
competitors at the high-end of the market have fielded a low and/or mid-
range product offering that is competitive with PT. In addition, companies
such as AutoDesk, CADKey, Intergraph, Matra Datavision, and SolidWorks
(purchased by Dassault in April 1997) that generally do not compete at the
high-end, offer software solutions that are competitive with PT. Lastly, as
the functionality of the mid-range software offerings continues to improve,
the Company believes that the differences between the high-end software
offerings such as Pro/E will diminish to the point where the cost advantage
of the mid-range software offering will even more significantly influence
the customers' buying decisions. When that occurs, and, in the Company's
opinion, it has already happened, the mid-range software offerings will
compete directly and effectively against the high-end offerings.
DURATION OF THE PTC LICENSE AGREEMENT
Licenses to distribute hardware and software offerings of technology
providers generally are subject to renewal annually. PTC is the only such
license that is material to the business. This agreement expires on or
about September 30, 1997 and can be terminated by either party with 30 days
notice. The Company has been informed by PTC that its reseller agreement
would be renewed by PTC for an additional year with no material changes,
although there can be no assurances that the Agreement will be renewed. As
of the date of this filing, such approval for renewal has not been obtained.
In August the Company received a notice from PTC questioning the Company's
hiring of several former PTC employees and threatening termination of the
reseller agreements unless certain assurances are provided to them by
September 15, 1997.
In the event PTC or the Company chooses not to renew the reseller
agreement or chooses to terminate such agreement after renewal, the Company
will seek out other competitive software offerings to market and distribute.
The reseller agreement with PTC prohibits the Company from offering any
competitive products while reselling its products. It is expected that such
a change would have a material negative financial impact on the Company
while it transitioned. The service businesses acquired during fiscal 1997
are expected to partially offset the adverse financial impact of such
changes by technology vendors.
PERSONNEL
As of May 31, 1997, the Company employed 102 persons related to the
continuing operation. This headcount distributed over functional lines is
as follows: Sales representatives = 22; Engineers = 66; General &
Administrative = 14.
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, 1997 and 1996 was approximately $944,000 and
$490,000, respectively. Deferred maintenance revenue, which represents
hardware maintenance services to be performed during the following year,
totaled approximately $358,000 and $670,000 at May 31, 1997 and 1996,
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
The Company is currently focused in a business in which it is
marketing and distributing hardware and software of technology providers to
its customers. As such, the Company has not incurred any expenditures
related to research and development during the years ended May 31, 1997 and
1996. It is not expected that this situation will change in fiscal 1998.
CUSTOMERS
During fiscal 1995 a single customer accounted for approximately 21%
of the Company's revenue. No single customer accounted for more than 10% of
the Company's revenue in fiscal 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 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.
DISCONTINUED OPERATION
On September 12, 1996, the Company completed the sale of its Network
Systems Group to Data Systems Network Corporation. DSN purchased certain
assets and assumed certain liabilities of NSG with a net book value of
approximately $200,000 in exchange for $890,000 in cash and 540,000 shares
of DSN which represented about 19.9% of its outstanding stock. This
transaction resulted in an after tax loss of approximately $970,000.
The assets sold to DSN were primarily fixed assets and service parts
used to service the installed base. Liabilities assumed by DSN from SofTech
included deferred revenue associated with maintenance contracts and other
accrued expenses. DSN purchased the NSG inventory from the Company at cost
as delivery and invoicing occurred during the subsequent quarters following
the transaction.
The consolidated financial statements and accompanying notes have been
restated to reflect the net assets and operating results of NSG as
discontinued operations.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
Name Age Position
- --------------------------------------------------------------------------
Mark R. Sweetland 48 President and Chief Executive Officer,
Director
Timothy J. Weatherford 32 Executive Vice President, Sales, Director
Joseph P. Mullaney 40 Vice President, Treasurer and Chief Financial
Officer
Andrew C. Bristol 37 Vice President, Sales
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.
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 ("PTC") in
various sales and sales management positions within the Great Lakes Region.
ITEM 2 - PROPERTIES
The Company leases office space in Grand Rapids, Michigan; Orlando,
Florida; Indianapolis, Indiana; Louisville, Kentucky; Cincinnati, Ohio;
Yardley, Pennsylvania; Knoxville, Tennessee; Austin and Houston, Texas; and
Herndon, Virginia. The total space leased for these locations is
approximately 25,000 square feet. The fiscal 1997 rent was approximately
$270,000. 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 is being occupied by the Company's Southeast Services Group.
ITEM 3 - LEGAL PROCEEDINGS
As stated in the Company's 1996 Form 10-K, the Company had filed a
complaint against several former NSG employees in a civil case in the courts
of the State of Michigan alleging, among other things, violation of non-
compete and confidentiality agreements, as well as breach of loyalty to the
Company. The Company was seeking enforcement of the agreements and
compensation for damages incurred due to these violations. Subsequent to
year end 1997, the Company assigned its litigation claim against certain
former employees of its Network Systems Group to DSN in exchange for
indemnification from DSN against all losses that the Company may incur as a
result of all counterclaims filed by these former employees.
The Company is not a party to any other material legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The following matters were voted upon and approved at the Company's
Annual Meeting of Stockholders on April 17, 1997.
1) Elect three Class I Directors to hold office until the Annual Meeting of
Stockholders in 1999.
Joseph C. McNay(a) - 3,531,565 votes for; 483,072 votes withheld
Mark R. Sweetland - 3,760,865 votes for; 253,772 votes withheld
Timothy L. Tyler - 3,760,565 votes for; 254,072 votes withheld
(a) As planned and disclosed in Note L to the Company's 1996 Financial
Statement, Mr. McNay resigned from his position as Director of the
Company as of June 23, 1997, following the completion of the
distribution of the DSN shares.
2) Approve the amendment to the Company's 1994 Stock Option Plan (the
"Plan") to increase the number of shares authorized under the Plan; and
provide that, in lieu of a director fee, each non-employee Director
shall receive such fee in stock options of the Company.
Votes: For 1,574,455
Against 691,671
Abstain 32,062
Broker non-votes 1,717,449
3) Approve the Company's Employee Stock Purchase Plan.
Votes: For 2,066,263
Against 312,712
Abstain 38,887
Broker non-votes 1,597,775
4) Approve the issuance of 204,750 shares of the Company's common stock,
par value $.10 per share, to each of Mr. Sweetland and Mr. Weatherford.
Votes: For 2,203,303
Against 163,992
Abstain 52,569
Broker non-votes 1,595,775
5) Ratify the appointment of Coopers & Lybrand as the Company's independent
public accountants for the fiscal year ending May 31, 1997.
Votes: For 3,988,154
Against 7,303
Abstain 19,180
Broker non-votes 1,000
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, 1997, there were approximately 334 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, which totaled
approximately 3.7 million shares, or 71% 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.
1997 1996
-------------- ------------
High Low High Low
----------------------------
First Quarter 3 1/2 2 1/2 5 3/4 3 1/2
Second Quarter 3 2 1/2 5 3 3/4
Third Quarter 4 1/16 2 1/16 4 1/2 3 1/4
Fourth Quarter 3 1/2 2 1/4 4 5/8 3
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. 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 notes A and
H to the Consolidated Financial Statements of the Company included herein.
The Company has not paid any cash dividends in the past and it does not
anticipate future cash dividends.
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.
(in thousands, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
Revenue from continuing operations $14,704 $13,658 $10,403 $6,662 $5,491
Income(loss) from continuing operations 2,282 (456) (18) 966 660
Earnings per share:
Income (loss) from continuing operation .50 (.11) (.00) .25 .17
Net income (loss) .09 (1.44) (.60) .70 .45
Weighted average number of shares outstanding 4,530 4,076 3,848 3,810 3,914
Working capital 2,920 12,191 17,929 20,441 18,708
Total assets 10,158 17,037 23,505 22,063 20,273
Capital lease obligations 250 - - - -
Total liabilities 3,321 2,080 2,811 1,221 1,317
Stockholders' equity 6,837 14,957 20,694 20,842 18,956
Note: The results for fiscal year 1997 include an investment gain on the
distribution of DSN stock of approximately $2.1 million and the effect of
the acquisitions of Computer Graphics Corporation and Ram Design and
Graphics Corp. in December and February of fiscal 1997, respectively. The
results for fiscal years 1997, 1996 and 1995 include the effect of the
acquisition of Micro Control in January 1995. 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.
The financial information for fiscal 1993 has been restated to reflect the
operating results of the Government Services Division as a discontinued
operation. Certain amounts for prior years have been reclassified to
conform with the 1997 presentation.
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, 1997. In addition, the change in those items, again
expressed as a percentage, for each of the two years ended May 31, 1997 is
presented.
Percentage change
Items as a percentage of revenue year to year
1997 1996 1995 1996 to 1997 1995 to 1996
------------------------------------------------------------
Revenue
Products 63.4% 75.4% 78.9% (9.4)% 25.4%
Services 36.6 24.6 21.1 59.8 53.3
-------------------------------
Total revenue 100.0 100.0 100.0 7.7 31.3
Cost of sales
Products 41.7 53.5 58.2 (16.0) 20.6
Services 25.5 18.5 14.1 48.3 71.9
-------------------------------
Total cost of sales 67.2 72.0 72.3 .5 30.6
Gross margin
Products 34.3 29.1 26.2 17.9 39.1
Services 30.3 24.9 33.0 21.7 15.6
-------------------------------
Total gross margin 32.8 28.0 27.7 17.1 33.1
S.G.&A. 31.8 31.2 28.3 9.5 45.1
Gain on investments 14.5 - - N/A N/A
Interest income - - 1.3 N/A (100.0)
-------------------------------
Income (loss) from continuing
operations before tax 15.5 (3.2) .7 622.7 (672.1)
Tax provision - .1 .9 (115.0) 78.4
-------------------------------
Income (loss) from continuing
operations 15.5 (3.3) (.2) 600.4 (2,396.3)
===============================
DESCRIPTION OF THE BUSINESS
SofTech, Inc. was formed in 1969 and its stock has been publicly
listed on the NASDAQ Exchange since 1981 under the symbol "SOFT". Today,
SofTech is a leading provider of CAD/CAM solutions and is the largest
reseller of Parametric Technology Corporation's software in the United
States. Through its eleven offices in ten states SofTech offers its
customers turn-key solutions to their mechanical engineering problems. In
addition to the PTC software offerings, the Company also markets,
distributes and supports several other popular Computer Aided Design and
Product Data Management software offerings to its customers. The Company is
an authorized reseller of numerous hardware platforms on which the software
operates and provides a full spectrum of services including hardware and
software maintenance, installation, training, consulting, product design and
placement services.
The Company had been a reseller of PTC's popular Pro/ENGINEER software
offering since that product was introduced in 1988. As more fully detailed
in "Item 1 - Business" under the caption "Product Transition", effective
September 30, 1996 the Company was no longer allowed to resell Pro/E but
instead was licensed to market a mid-range software offering known as
PT/Modeler. PT/Modeler is aimed at the large (relative to the Pro/E market)
user base of the 2D mechanical CAD marketplace. PT's list price is
approximately one-fourth the price of Pro/E and the software operates only
on the Intel platform. The total cost over the five year life of a seat of
PT software with hardware is approximately one-fifth the cost of operating
and maintaining a Pro/E seat.
During fiscal 1996 the Company had an operating division known as the
Network Systems Group which marketed a wide variety of well known network
computer hardware and off-the-shelf software products as well as a full
array of computer related services to its customers in Michigan, North
Carolina, and New York. NSG was sold to Data Systems Network Corporation on
September 12, 1996. The results of the NSG business have been presented as
a discontinued operation. The NSG assets and liabilities have been
reclassified in the Consolidated Balance Sheets as net assets of
discontinued operations. The NSG operating results are shown net of income
taxes in the Consolidated Statements of Operations and Retained Earnings
under the caption "Discontinued operations". The analysis below is directed
exclusively to the continuing operations which are composed solely of the
CAD business. See also the discussion under "Item 1 - Business --
Discontinued Operation" and Notes A, H and J to the Consolidated Financial
Statements of the Company included herein.
RESULTS OF OPERATIONS
Total revenue increased from $13.7 million in fiscal 1996 to $14.7
million in fiscal 1997, an increase of approximately 8%. The increase in
revenue is primarily the result of the acquisitions of services-only
businesses in December and February of fiscal 1997 which generated $1.9
million in revenue during the year offset by a decrease in product (hardware
and software) sales with the transition to a mid-range software offering as
discussed above and in "Item 1 - Business" under the caption "Product
Transition". The fiscal 1996 revenue increased approximately $3.3 million
from $10.4 million in fiscal 1995, an increase of approximately 31%. The
acquisition of Micro Control in mid-fiscal year 1995 accounted for $2.5
million of this increase.
During fiscal 1997 the Company opened three new offices to market its
products and services. These new offices were in Washington, D.C., Orlando,
Florida and Louisville, Kentucky. These three offices generated
approximately $300,000 of revenue and lost a total of about $71,000. During
the first quarter of fiscal 1998 the Company expects to establish three new
office locations to market its solutions within the States of Alabama,
Arizona and Kansas/Missouri. It is expected that the new offices opened in
fiscal 1997 and 1998, as a group, will contribute to revenue and earnings in
fiscal 1998. The Company also expects to continue to seek opportunities to
grow through new office expansion as it identifies qualified individuals in
selected markets.
Product revenue decreased approximately 9% in fiscal 1997 from 1996.
The decrease resulted primarily from the Company's transition on October 1,
1996 from being a reseller of Pro/ENGINEER software that was sold primarily
on UNIX hardware to the PT/Modeler family of software products that operate
only on Intel machines. The average sale price for one seat of Pro/E with a
UNIX hardware platform was approximately $35,000 to $40,000. A seat of
PT/Modeler operating on an Intel hardware platform now sells for
approximately $8,000 to $10,000 per seat. In fiscal 1997 product revenue
included approximately $168,000 of commissions from PTC related to sales of
Pro/E to our former Pro/E customers or sales of PT within our sales
territory. These commissions are not expected to be significant in the
future.
Service revenue increased nearly 60% from fiscal 1996 to 1997. This
increase was primarily the result of the acquisitions completed in December
and February of fiscal 1997 of services-only businesses as described in Note
I to the Financial Statements. Service revenue as a percent of total
revenue was 36.6% in fiscal 1997 as compared to 24.6 % and 21.1% in the two
previous years. Included in service revenue in fiscal 1997 was
approximately $1.9 million of software maintenance primarily related to
Pro/E, with an incremental cost of approximately $1.0 million. The
Company's right to market and support Pro/E software terminates on September
30, 1997 and it is uncertain as to whether that right will be extended
beyond that time period. Service revenue increased approximately 53%
from fiscal 1995 to 1996.
Product gross margins improved to 34.3% in fiscal 1997 as compared to
29.1% in fiscal 1996 and 26.2% in fiscal 1995. The improvement in the
current year is due to the 75% margin earned on the PT/Modeler family of
products that the Company began marketing in October 1996 and the non-
recurring PTC indirect commissions of $168,000 noted above. Margins on the
Pro/E software that the Company sold in fiscal 1995, 1996 and through
October 1996 had a margin of between 37% and 40%. Parametric Technology
Corporation has informed the resellers that this 75% margin will be extended
for one additional year through approximately September 1998.
Service gross margins improved to 30% in fiscal 1997 as compared to
24.9% in fiscal 1996 and 33.0% in fiscal 1995. The improvement from fiscal
1996 to 1997 is due primarily to the additional higher margin service
revenue generated from the acquired services-only businesses.
The current agreement (the "Agreement") between the Company and PTC to
market its products and software maintenance services expires on or about
September 30, 1997. The Company has been verbally notified by PTC and it is
expected that the Agreement will be renewed on the same terms for another
year, although there can be no assurances that the Agreement will be
renewed. The Agreement contains certain cancellation provisions which allow
either party to terminate the relationship for any reason with 30 days
notice. In August the Company received a notice from PTC questioning the
Company's hiring of several former PTC employees and threatening termination
of the reseller agreements unless certain assurances are provided to them by
September 15, 1997. The ability to continue the relationship as a PTC
business partner is material to the business.
Selling, general and administrative expense increased approximately 9%
from fiscal 1996 to 1997 and 45% from fiscal 1995 to 1996. This category of
expense as a percent of revenue was 31% for fiscal years 1996 and 1997 and
was 28% of revenue in fiscal 1995. Fiscal 1996 SG&A included a $426,000
one-time charge related to an amendment to the Micro Control Purchase
Agreement (see Note I to the Company's Consolidated Financial Statements
included herein.) Before this one-time charge, SG&A increased approximately
21% from fiscal 1996 to 1997 as a result of increased overhead expenditures
from the fiscal 1997 acquisitions.
The Company did not earn any interest income in fiscal 1996 and 1997.
The cash generated from the sale of the NSG in fiscal 1997 was distributed
to shareholders on December 30, 1996 in the form of a $1.50 per share cash
dividend. During fiscal 1996 and 1997 available cash was invested at short
term rates and the interest generated from that activity was offset against
bank fees for other services provided to the Company, such as lockbox
charges. During fiscal 1995 the Company generated approximately $139,000 in
interest income.
The fiscal 1997 results from continuing operations include a realized
gain from the distribution of the DSN shares to the SofTech shareholders
effective May 23, 1997. The DSN shares were received by the Company from
DSN as part of the proceeds from the sale of the NSG in September 1996. On
September 12, 1996 the DSN shares had a market price of $5.63 per share.
The market price of the DSN shares on the record date, May 23, 1997, was
$10.25 which generated the realized gain. During fiscal 1998 the remaining
84,000 shares of DSN held by the Company were sold.
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 provision of
$105,000 which was offset by the recovery of $179,000 of taxes paid in
fiscal 1994 through the utilization of net operating losses ("NOL") carried
back. The effective tax rate was 5% in fiscal 1996 and 124% for fiscal
1995. The provision in each of the years is related primarily to state and
local taxes. The 1997 effective rate was different from the statutory rate
primarily due to NOL carried back to recover taxes paid in fiscal 1994. The
Company has research and development tax credits of $847,000 and net
operating loss carryforwards of approximately $1,800,000 to offset future
federal taxes that may be payable.
CAPITAL RESOURCES AND LIQUIDITY
The Company ended fiscal 1997 with approximately $1,367,000 in cash
and available-for-sale securities, a decrease of approximately $1,650,000
from the previous year. The net cash provided from operating activities
totaled approximately $4,274,000 for fiscal 1997, of which approximately
$1,063,000 was generated from continuing operations and approximately
$3,063,000 was provided by discontinued operations. Significant cash
outflows included the December 30, 1996 cash distribution totaling
$6,256,000, or $1.50 per share, and capital expenditures of $571,000.
In April 1997, the Company renegotiated the financial covenants of its
$4.0 million line of credit arrangement with Deutsche Financial Services
Corporation to accommodate the distribution to shareholders that took place
in June 1997. In June 1997 the line of credit was extended for an
additional year through June 1998.
At the end of fiscal year 1997 the Company had approximately $1.4
million in cash and available-for-sale securities along with the $4.0
million line of credit to fund operations. The Company anticipates that it
will need to utilize, and will be dependent on, the line of credit during
the fiscal year to finance working capital needs. The line of credit
contains several financial covenants that must be maintained. The financial
covenants require that the Company will at all times maintain the following:
1) tangible net worth and subordinated debt in the combined amount of not
less than $3.0 million; 2) ratio of debt minus subordinated debt to tangible
net worth of not more than two to one (2.0:1.0); and 3) for each fiscal
year, before tax net income of not less than $1.00. The Company is in
compliance with the financial covenants of the line of credit at this time.
However, given the Company's history, minimal operating income, dependence
on the PTC relationship and limited financial resources there can be no
assurances the Company will be able to maintain the financial covenants. In
the event that the line of credit was terminated the Company would seek
other sources of funds through the sale or pledging of assets or through
other means.
The statements made above with respect to SofTech's outlook for fiscal
1998 represent "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and are subject to a number of risks and uncertainties.
These include general business and economic conditions, maintaining key
reseller agreements with technology providers (especially the reseller
agreement with Parametric Technology Corporation which expires on or about
September 30, 1997), ability to quickly transition to a competitive software
offering in the event the PTC reseller agreement is not renewed, acceptance of
the market of a mid-range software offering, and the ability of the
Company to attract and retain qualified personnel both in our existing
markets and in new office locations.
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 "Election of Directors" in the Company's
definitive proxy statement to be filed in connection with the Company's 1997
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.
As was previously planned and announced in the Company's 1996 Form
10-K, and upon the completion of the cash distribution of $1.50 per share at
the end of December 1996 and the distribution of the Data Systems shares on
June 6, 1997, Messrs. Strehle and McNay resigned from the SofTech Board of
Directors as of June 23, 1997. Messrs. Strehle and McNay have agreed to be
available upon request to consult with the SofTech Board through June 30,
1998.
ITEM 11-EXECUTIVE COMPENSATION
The information required under this item will be included in the
Company's definitive proxy statement, to be filed in conjunction with the
Company's 1997 annual meeting, and is incorporated by reference herein.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under "Election of Directors" and "Principal
Stockholders" in the Company's definitive proxy statement, to be filed in
connection with the Company's 1997 annual meeting, is incorporated by
reference herein.
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under "Election of Directors" in the Company's
definitive proxy statement, to be filed in connection with the Company's
1997 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 Independent Accountants 13
Consolidated Statements of Operations and Retained Earnings
(Deficit) - Years ended May 31, 1997, 1996 and 1995 14
Consolidated Balance Sheets - May 31, 1997 and 1996 15
Consolidated Statements of Cash Flows -
Years ended May 31, 1997, 1996 and 1995 16
Notes to Consolidated Financial Statements 17-23
(2) Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Acounts 24
The report of the registrant's independent accountants with respect to
the above-listed financial statements and financial statement schedule
appears on page 13 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) Acquisition Agreement by and among SofTech, Inc., CACI
International Inc., and CACI Inc., filed as Exhibit 7 (c) to Form 8-K, dated
December 1, 1993, is incorporated herein by reference.
(2)(ii) Stock Purchase Agreement by and among SofTech, Inc., System
Constructs, Inc. and the Stockholders of System Constructs, Inc., filed as
Exhibit 2.1 to Form 8-K, dated June 24, 1994, is incorporated herein by
reference.
(2)(iii) Asset Purchase Agreement by and among Information Decisions,
Incorporated, SofTech, Inc., Computersmith Corporation, and Stockholders of
Computersmith Corporation, filed as Exhibit 2.2 for Form 8-K, dated June 24,
1994, is incorporated herein by reference.
(2)(iv) Asset Purchase Agreement by and among Information Decisions,
Inc. as buyer and SofTech, Inc. and Micro Control, Inc. as seller and
Stockholders of Micro Control, Inc., filed as Exhibit 2.1 to Form 8-K, dated
January 5, 1995, is incorporated herein by reference.
(2)(v) 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)(vi) Registration Rights Agreement by and among SofTech, Inc.,
Information Decisions, Inc., System Constructs, Inc., and Data Systems
Network Corporation filed as Exhibit 2.2 to Form 8-K, dated September 12,
1996, is incorporated herein by reference.
(2)(vii) 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)(viii) 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.
(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) Employment Agreement dated as of January 1, 1994, between
SofTech, Inc. and Norman L. Rasmussen, filed as Exhibit (10)(ii) to 1994
Form 10-K, is incorporated herein by reference.
(10)(iii) Amended Employment Agreement between SofTech, Inc. and
Norman L. Rasmussen, filed as Exhibit (10)(I) to Form 10-Q for the fiscal
quarter ended August 31, 1995, is incorporated herein by reference.
(11) Statement re: computation of per share earnings, filed herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23.1) Consent of Coopers and Lybrand L.L.P., filed herewith.
(27) Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission for the fourth quarter of fiscal 1997.
(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 schedules listed in Item 14(a)(2) above.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of SofTech, Inc.:
We have audited the consolidated financial statements and the
financial statement schedule of SofTech, Inc. 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 1996, and the consolidated
results of its operations and its cash flows for each of the three 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, present 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
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
For the Years Ended May 31,
1997 1996 1995
-------------------------------------
(in thousands, except per share data)
Revenue:
Products $ 9,329 $10,294 $ 8,208
Services 5,375 3,364 2,195
------------------------------------
Total Revenue 14,704 13,658 10,403
Cost of sales:
Cost of products sold 6,133 7,303 6,057
Cost of services provided 3,761 2,526 1,469
------------------------------------
Total Cost of sales 9,894 9,829 7,526
Gross margin 4,810 3,829 2,877
Selling, general and administrative 4,657 4,265 2,940
------------------------------------
Income (loss) from operations 153 (436) (63)
Gain on available-for-sale securities 2,126 - -
Interest income - - 139
------------------------------------
Income (loss) from continuing operations
before income taxes 2,279 (436) 76
Provision (benefit) for income taxes (Note B) (3) 20 94
------------------------------------
Income (loss) from continuing operations 2,282 (456) (18)
Discontinued operations (Note H):
Loss from discontinued operations (less
applicable provision (benefit) for income
taxes of $(294), $132 and $167, respectively) (1,587) (4,701) (2,303)
Loss from disposal (net of applicable (benefit)
for income taxes of $(50) and $0, respectively) (269) (700) -
------------------------------------
Net income (loss) 426 (5,857) (2,321)
Retained earnings (deficit), beginning of year (478) 5,379 7,700
------------------------------------
Retained earnings (deficit), end of year $ (52) $ (478) $ 5,379
====================================
Income (loss) from continuing operations
per common share (Note A) $0.50 ($0.11) ($0.00)
====================================
Net income (loss) per common share (Note A) $0.09 ($1.44) ($0.60)
====================================
The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31,
1997 1996
-------------------------------------
(in thousands, except per share data)
Assets:
Current assets:
Cash and cash equivalents $ 580 $ 3,017
Marketable securities - -
Available-for-sale securities (Note A) 787 -
Accounts receivable (less allowance of $305
and $200 in 1997 and 1996, respectively) 3,300 3,211
Unbilled costs and fees 491 134
Inventory 378 341
Other receivables 263 345
Prepaid expenses and other assets 264 177
Deferred and refundable income tax (Note B) - -
Net assets of discontinued operations (Note H) 6 7,046
------------------------------------
Total current assets 6,069 14,271
------------------------------------
Property and equipment, at cost:
Data processing equipment 1,646 917
Office furniture 120 51
Leasehold improvements 62 55
Land and building 514 514
------------------------------------
Total property and equipment 2,342 1,537
Less accumulated depreciation and amortization 864 543
------------------------------------
1,478 994
Goodwill, net (Note A) 2,497 1,763
Other assets 114 9
------------------------------------
$10,158 $17,037
====================================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 1,664 $ 862
Accrued expenses 1,024 550
Deferred maintenance revenue 383 668
Current portion of capital lease obligation (Note G) 78 -
------------------------------------
Total current liabilities 3,149 2,080
------------------------------------
Capital lease obligation (Note G) 172 -
------------------------------------
Commitments and contingencies (Note G)
Stockholders' equity (Notes D and E):
Common stock, $.10 par value; authorized 10,000,000
shares; issued 5,678,433 and 4,537,933 shares in
1997 and 1996, respectively 568 454
Capital in excess of par value 7,488 16,463
Unrealized gain on available-for-sale securities 315 -
Retained deficit (52) (478)
Less treasury stock, 443,157 shares in 1997 and
1996, at cost (1,482) (1,482)
------------------------------------
Total stockholders' equity 6,837 14,957
------------------------------------
$10,158 $17,037
====================================
The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended May 31,
1997 1996 1995
----------------------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 426 $(5,857) $(2,321)
============================
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 907 708 364
Loss on sale of NSG 269 700 -
Gain on sale of available-for-sale securities (2,126) - -
Gain on disposal of equipment - (60) -
Deferred provision for income taxes - 593 (380)
Change in current assets and liabilities:
Accounts receivable and unbilled costs and fees (68) 412 (1,349)
Inventory 155 (51) (82)
Other receivables 82 537 -
Prepaid expenses and other assets (187) 56 (251)
Accounts payable 479 (533) 627
Accrued expenses (27) (198) 263
Deferred maintenance revenue (286) - 368
Net assets of discontinued operations 4,650 4,379 (1,574)
----------------------------
Total adjustments 3,848 6,543 (2,014)
----------------------------
Net cash provided (used) by operating activities 4,274 686 (4,335)
----------------------------
Cash flows from investing activities:
Capital expenditures (571) (419) (249)
Proceeds from sale of capital equipment - 248 -
Proceeds from sale of available-for-sale securities 26 - 9,155
Purchase of net assets of CGC and RAM, less cash acquired (151) - -
Payments for purchase of CCS, SCI and MCI - (28) (6,366)
Other investing activities - 45 (9)
----------------------------
Net cash provided (used) by investing activities (696) (154) 2,531
----------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 114 112 200
Proceeds from capital lease financing 145 - -
Principal payments under capital lease obligations (18) - -
Payment of cash distribution to shareholders (6,256) - -
----------------------------
Net cash provided (used) by financing activities (6,015) 112 200
----------------------------
Net increase (decrease) in cash and cash equivalents (2,437) 644 (1,604)
Cash and cash equivalents, beginning of year 3,017 2,373 3,977
----------------------------
Cash and cash equivalents, end of year $ 580 $ 3,017 $ 2,373
============================
Supplemental disclosures of cash flow information:
Non cash investing activities:
Fair value of shares issued in connection with
acquisitions of CGC, RAM, SCI and MCI $1,193 $ 8 $ 1,972
Income taxes paid $ 51 $ 33 $ 45
The accompanying notes are an integral part of the consolidated financial statements.
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), Computer Graphics Corp. (CGC), Ram Design and
Graphics Corp (RAM), System Constructs, Inc. (SCI), SofTech Investments,
Inc., 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. Certain amounts
for prior years have been reclassified to conform with the 1997
presentation.
On September 12, 1996, the Company sold its Network Systems Group to
Data Systems Network Corporation (DSN) (NASDAQ Small Cap: DSYS, Pacific
Stock Exchange: DSY). Data Systems purchased certain assets and assumed
certain liabilities of NSG with a net book value of approximately $200,000
in exchange for $890,000 in cash and 540,000 shares of DSN common stock.
The assets acquired included equipment, maintenance agreements, customer
lists, intangibles and certain other assets.
The operating results of NSG, Government Services Division (GSD), and
Compass are shown net of income taxes in the Consolidated Statements of
Operations and Retained Earnings under the caption "Discontinued
operations."
PLAN OF OPERATION
The Company faces two significant risks associated with its
operations. First, the relationship between the Company and Parametric
Technology Corporation ("PTC"), the technology provider of the Company's
core software offering, is critical for the Company. The current agreement
(the "Agreement") between the Company and PTC to market its products and
software maintenance services expires on or about September 30, 1997. The
Company has been verbally notified by PTC that PTC will renew the
Agreement on the same terms for another year, although there
can be no assurances that the Agreement will be renewed. The Agreement
contains certain cancellation provisions which allow either party to
terminate the relationship for any reason with 30 days notice. In August
the Company received a notice from PTC questioning the Company's hiring of
several former PTC employees and threatening termination of the reseller
agreement unless certain assurances are provided to them by September 15,
1997. The ability to continue the relationship as a PTC business partner is
material to the business.
Second, at the end of fiscal year 1997 the Company had approximately
$1.4 million in cash and available-for-sale securities and a $4.0 million
line of credit to fund operations. The Company anticipates that it will need
to utilize, and will be dependent on, the line of credit during the fiscal
year to finance working capital needs. The line of credit contains several
financial covenants that must be maintained. The financial covenants require
that the Company will at all times maintain the following: 1) tangible net
worth and subordinated debt in the combined amount of not less than $3.0
million; 2) ratio of debt minus subordinated debt to tangible net worth of
not more than two to one (2.0:1.0); and 3) for each fiscal year, before tax
net income of not less than $1.00. The Company is in compliance with the
financial covenants of the line of credit at this time. However, given the
Company's history, minimal operating income, dependence on the PTC
relationship and limited financial resources there can be no assurances the
Company will be able to maintain the financial covenants. In the event that
the line of credit was terminated the Company would seek other sources of
funds through the sale or pledging of assets or through other means.
INDUSTRY SEGMENT AND SIGNIFICANT CUSTOMER:
The Company operates in one industry segment and is engaged in the
marketing, distribution and support of CAD/CAM computer solutions. A
significant amount of the Company's revenue is attributable to licensing
agreements with a small number of vendors. The Company is unable to
predict the renewal or cancellation of these agreements and the Company's
operations and financial results could be negatively affected by any such
non-renewal or cancellation. Revenue from a single customer accounted for
approximately $2,200,000 in 1995. 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.
INVENTORIES:
Inventories consist of equipment purchased for resale and service
parts and are stated at the lower of cost (first-in, first-out method) or
market. Service parts are amortized over a five-year period on a straight-
line basis. The unamortized book value of the service parts was $34,000 and
$50,000 as of May 31, 1997 and 1996, respectively.
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:
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 was approximately $328,000, $217,000, and
$147,000 for fiscal 1997, 1996 and 1995, 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.
INCOME TAXES:
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 computer systems sales is recognized upon shipment, or
installation and acceptance, if significant performance obligations remain.
Revenue from engineering services is recognized as performed. Revenue from
software maintenance agreements and service contracts are deferred and
amortized into income over the maintenance support period.
GOODWILL:
Goodwill represents the excess of cost over the fair value of tangible
assets acquired and are amortized on a straight-line basis over periods not
to exceed five years. The unamortized excess of cost over fair value of
tangible assets acquired through business combination was $2,497,000 and
$1,763,000 at May 31, 1997 and 1996, respectively. Accumulated amortization
of these intangible assets was $1,260,000 and $681,000 at May 31, 1997 and
1996, respectively.
Included in the loss on disposal of NSG is a write down of
approximately $1.6 million of unamortized excess of cost over fair value of
tangible assets acquired through business combinations.
The carrying value of 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 income 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.
NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the year. Weighted average shares outstanding were 4,529,876 in 1997,
4,075,943 in 1996, and 3,848,151 in 1995. The fiscal 1997 weighted average
shares outstanding included dilutive stock options, using the treasury stock
method. The earnings per share calculation for fiscal years 1996 and 1995
exclude the effect of common stock equivalents as they were antidilutive.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 128 - Earnings
per Share. SFAS No. 128 supersedes Accounting Principles Board Opinion No.
15 (APB No. 15), by establishing new standards for computing and presenting
earnings per share (EPS) and requiring a dual presentation of basic and
dilutive EPS. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997 and earlier adoption is not
permitted. Neither basic nor dilutive EPS as calculated in accordance with
SFAS No. 128 would be materially different from primary EPS as presented in
these financial statements. The Company plans to adopt SFAS No. 128 in its
fiscal quarter ending February 28, 1998 and at that time all historical EPS
data presented will be restated to conform to the provisions of SFAS No.
128.
AVAILABLE-FOR-SALE SECURITIES:
The Company has classified its holdings of DSN stock as available-for-
sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in shareholders' equity. Realized
gains and losses are included in other income (expense). The cost of
securities sold is based on the specific identification method.
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.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130 - Reporting Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and displaying
of comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 with earlier application permitted. The Company is
currently assessing the impact of SFAS No. 130.
B. INCOME TAXES:
The provision for income taxes includes the following:
For the Years ended May 31, (in thousands) 1997 1996 1995
- ---------------------------------------------------------------
Federal $(74) $--- $---
State and Local 71 20 61
-----------------
(3) 20 61
Deferred --- --- 33
-----------------
$ (3) $ 20 $ 94
=================
In 1997, the provision for federal income taxes was reduced due to the
carryback of approximately $1 million in net operating loss benefits.
State taxes of $51,000, $33,000 and $45,000 were paid in 1997, 1996, and
1995, respectively.
For tax purposes, at May 31, 1997, the Company had tax credit
carryforwards generated from research and development activities of $847,000
that expire from 2002 to 2006. In addition, an AMT credit of $133,000 that
has no expiration date was also available. The Company has net operating
loss carryforwards of $1.8 million that expire in 2012.
The Company's effective tax rates were 0% in 1997, 5% in 1996, and
124% in 1995. Reconciliations of the federal statutory rates to the
effective rates were as follows:
For the Years ended May 31, 1997 1996 1995
- --------------------------------------------------------
Statutory rate 34 % (34)% 34%
State and local taxes 2 3 53
Valuation reserve (33) 35 32
Other (3) 1 5
------------------------
Effective tax rates 0 % 5 % 124%
========================
Deferred tax assets(liabilities) were comprised of the following at
May 31:
(in thousands) 1997 1996
- --------------------------------------------------------------
Deferred tax assets (liabilities):
Depreciation $ (13) $ 11
Net operating loss carryovers 1,808 1,471
Tax credits 981 713
Inventory and receivables 394 410
Gain on sale of stock (917) --
Vacation accrual 66 98
Differences in book and tax bases of
assets of acquired businesses 299 143
Deferred revenue -- --
Reserve for loss on disposal 95 280
Other 6 2
Deferred tax assets 2,719 3,128
Less: valuation allowance (2,719) (3,128)
----------------
Net deferred tax liability $ 0 $ 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 1997, 1996 and 1995 was $49,000, $33,000, and
$25,000, 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 recorded 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.
The Company's 1984 Stock Option Plan (the "1984 Plan") provided for
the granting of both incentive and non-qualified options prior to its
expiration in May 1994.
There were options for 433,000 shares available for future grants
under the 1994 Plan at May 31, 1997. The following are the shares
exercisable at the corresponding weighted average exercise price at May 31,
1997, 1996 and 1995, respectively: 212,880 at $2.19; 220,530 at $5.75; and
222,962 at $4.95.
Information for the years 1995 through 1997 with respect to these
plans are as follows:
Weighted
Number of Average
Stock Options Shares Option Price
- -----------------------------------------------------
Outstanding at May 31, 1994 538,500 $5.61
Options granted 122,800 6.24
Options terminated (24,000) 6.25
Options exercised (37,500) 2.83
--------
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 (414,500) 5.48
--------
Outstanding at May 31, 1997 695,100 $1.60
--------
The following table summarizes information about stock options
outstanding at May 31, 1997:
Stock Options Outstanding
Options Outstanding Options Exercisable
Weighted
Shares Average Weighted Shares Weighted
Exercise Outstanding at Contractual Average Exercisable at Average
Price Range May 31, 1997 Remaining Life Exercise Price May 31, 1997 Exercise Price
- --------------------------------------------------------------------------------------------------
$0.010 to $0.440 51,000 0.5 years $0.36 50,000 $0.37
$1.065 to $1.940 566,000 5.5 years $1.35 86,000 $1.39
$3.940 to $4.440 78,100 1.9 years $4.28 76,880 $4.28
------- -------
Total 695,100 212,880
======= =======
In addition, there were options granted outside the plans during
fiscal 1992 to an employee for 125,000 shares at $1.50, of which the final
76,000 were exercised during fiscal 1997.
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, 1997 reflect the
downward price adjustments made following the cash distribution in December
1996 and the DSN stock distribution in May 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. The Company has adopted the disclosure-only
provisions of Financial Accounting Standards No. 123 (SFAS No. 123),
Accounting for Stock-Based Compensation. Accordingly, no compensation cost
was recognized for the stock option plans. 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 No. 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) 1997 1996
- --------------------------------------------------
Net income - as reported $ 426 $(5,857)
Net income - pro forma $ 343 $(5,865)
Earnings per share - as reported $0.09 $ (1.44)
Earnings per share - pro forma $0.08 $ (1.44)
The weighted-average fair value of each option granted in 1997 and
1996 is estimated as $0.81 and $1.17 respectively on the date of grant using
the Black-Scholes model with the following weighted average assumptions:
Expected life 5 years
Assumed annual dividend growth rate 0%
Expected volatility 65%
Risk free interest rate
(the month-end yields on 4 year
treasury strips equivalent zero coupon) 6.24% to 6.36% range
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards
prior to 1995 and additional awards in future years are anticipated.
The Company adopted an Employee Stock Purchase Plan, under which all
employees of the Company and certain of its subsidiaries who have three
months continuous service prior to the Offering Date, at least two times per
year, and are customarily employed for more than twenty hours per week, may
purchase shares of SofTech common stock by payroll deduction. The purchase
price per share during the plan year is 85% of the fair market value of the
common stock on the Offering Date or the Exercise Date, whichever is less.
It is expected that this plan will be introduced to the employees and the
first Offering Date will take place during the second quarter of fiscal
1998. As of May 31, 1997, 150,000 shares of SofTech common stock were
available for sale to employees under the plan.
E. COMMON STOCK:
Common stock changes during the three years ended May 31, 1997, 1996,
and 1995 were as follows:
Capital in
Shares Par Value Excess of
($ in thousands) Outstanding Issued Par Value
- ------------------------------------------------------------------------------------------
Balance, May 31, 1994 3,630,904 $408 $14,216
Shares issued for stock options exercised 91,875 9 191
Shares issued in connection with acquisitions 329,768 33 1,940
----------------------------------
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
==================================
F. LINE OF CREDIT:
In December 1996, the Company's credit facility with a commercial
lending entity was reestablished. The line of credit had been reduced from
$10 million to $1 million during the first quarter of fiscal 1997 pending
the sale of the NSG business. The credit facility provides for borrowings
of up to $4.0 million, limited to 85% of domestic accounts receivable
outstanding less than 90 days from invoice date and bear an interest rate of
prime plus 0.5%. The weighted average interest rate on these borrowings was
8.83%. Availability is subject to compliance with several covenants,
including a minimum tangible net worth. Annual commitment fees under this
agreement are $10,000. The current line of credit agreement expires on June
28, 1998.
G. LEASE COMMITMENTS:
OPERATING LEASES
The Company conducts its operations in facilities leased through 2002.
Rental expense for fiscal years 1997, 1996, and 1995 was approximately
$270,000, $203,000, and $142,000, respectively.
At May 31, 1997, minimum annual rental commitments under
noncancellable leases were as follows:
Fiscal Year
-----------
1998 $302,000
1999 252,000
2000 224,000
2001 152,000
2002 and thereafter 150,000
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 of
approximately $305,000 (included in data processing equipment at May 31,
1997) has been recorded. The approximate minimum lease payments under all
capitalized leases as of May 31, 1997 are as follows: 1998, $104,000; 1999,
$103,000; 2000, $72,000 and 2001, $16,000. The present value of the minimum
lease payments is $250,000, including current maturities of $78,000.
H. DISCONTINUED OPERATIONS:
On September 12, 1996, the Company completed the sale of its Network
Systems Group to Data Systems Network Corporation . Data Systems 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. The DSN shares received in the
transaction were registered with the Securities and Exchange Commission in
May 1997 and were distributed on June 6, 1997 to the Company's shareholders
of record as of May 23, 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 adjustment 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.
Effective December 1, 1993, the Company completed the sale of the
Government Services Division (GSD) to CACI International, Inc. (CACI) of
Arlington, Virginia. CACI paid approximately $4.2 million in cash for
substantially all the active GSD contracts and certain defined assets.
Although the active contracts of the GSD were successfully novated to CACI
in fiscal 1994, the Company remains ultimately liable to the Government
should CACI fail to perform its contractual obligations. As of May 31,
1996, all GSD receivables had either been collected or written off and
there was no GSD related net asset value on the balance sheet.
Revenue from discontinued operations for the years ended May 31, 1997,
1996, and 1995 was approximately $7,490,000, $30,397,000, and $40,164,000,
respectively.
The net assets of discontinued operations, which are included in the
Consolidated Balance Sheets as of May 31, are as follows:
(in thousands) 1997 1996
- ---------------------------------------------------------
Accounts receivable (net) $355 $ 6,466
Unbilled costs and fees --- 686
Inventory --- 1,603
Prepaid expenses and other receivables --- 500
Deferred income taxes receivable 334 4
Fixed assets (net) --- 1,067
Other assets (net) --- 1,730
---------------
Total assets 689 12,056
Accounts payable 129 1,855
Accrued expenses 554 1,844
Deferred revenue --- 1,311
---------------
Total liabilities 683 5,010
---------------
Net assets of discontinued operations $ 6 $ 7,046
===============
I. ACQUISITIONS:
Effective January 1, 1997, the Company acquired 100% of the
outstanding common stock of Computer Graphics Corporation ("CGC") in
exchange for 405,000 shares of SofTech stock ("Initial Consideration"). In
accordance with the Agreement, which provided for the remittance by the
former CGC shareholders directly to the Company of distributions made to the
SofTech shareholders prior to June 30, 1997 of DSN shares or proceeds from
the sale of the shares, the Company received 41,774 shares of DSN which were
sold subsequent to year end for approximately $400,000. The value of the
405,000 SofTech shares on January 1, 1997, net of the value of the DSN
shares, was approximately $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 in January 1997 provides for certain additional
consideration payable in January 1998 if specified operating revenue and/or
income goals are attained for the Engineering Services Group during the
twelve month period ending December 31, 1997. The shareholders of CGC will
earn an additional stock award of 105,000 to 210,000 SofTech shares
("Additional Consideration") if the Engineering Services Group generates
revenue of $2 million to $3.6 million or operating profit of $225,000 to
$405,000 during the twelve month period ending December 31, 1997.
The former shareholders of CGC have the right to require the Company
to repurchase the SofTech shares received by them from the Initial and
Additional Consideration for $1.575 per share if CGC generates total income
of at least $3 million and operating profit of at least $300,000 during the
twelve months ending December 31, 1997. This right is exercisable on July
1, 1998 for 45 days and is not transferable and terminates upon the sale of
such SofTech shares.
Effective February 27, 1997, the Company acquired the stock of Ram
Design and Graphics Corp. ("RAM") in exchange for 250,000 shares of SofTech
stock, valued at $578,000 on the date of the transaction, 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.
The purchase of RAM in February 1997 provides for certain additional
consideration payable in January 1998 if specified operating revenue and
income goals are attained for the Engineering Services Group during the
twelve month period ending December 31, 1997. The former shareholders of RAM
will earn an additional stock award of 100,000 SofTech shares if the
Engineering Services Group generates revenue of at least $4,166,000 and
operating profit of at least $583,000 during the twelve month period ending
December 31, 1997.
In the event the former shareholders of CGC and/or RAM earn certain
additional consideration as a result of attaining performance goals for the
twelve months ending December 31, 1997, the value of the additional
consideration may result in a future charge to income in the period in which
it is earned.
On January 5, 1995, the Company acquired the net assets of Micro
Control, Inc. for approximately $1.0 million in cash and $1.7 million
(281,497 shares) of SofTech stock. The transaction has been accounted for
as a purchase and, accordingly, Micro Control'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 $2,420,000 and is being amortized on a straight-line
basis over five years. On September 20, 1995, the Company amended the
purchase agreement with Micro Control, Inc. ("Seller"). In consideration
for the Seller waiving their right to receive certain contingent payments
that may have been due if certain profit goals were attained (see Note J and
Management's Discussion and Analysis to the 1995 Annual Report which detail
the potential liabilities) over the next two years, the Company made a cash
payment totaling $426,000. The entire payment of $426,000 was expensed and
included in selling, general and administrative expense in fiscal 1996.
J. LITIGATION:
As stated in the Company's 1996 Form 10-K, the Company had filed a
complaint against several former NSG employees in a civil case in the courts
of the State of Michigan alleging, among other things, violation of non-
compete and confidentiality agreements, as well as breach of loyalty to the
Company. The Company was seeking enforcement of the agreements and
compensation for damages incurred due to these violations. Subsequent to
year end 1997, the Company assigned its litigation claim against certain
former employees of its Network Systems Group to Data Systems Network
Corporation in exchange for indemnification from DSN against all losses that
the Company may incur as a result of all counterclaims filed by these former
employees.
SOFTECH, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the two years ended May 31, 1997
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------
Balance at Charged to Balance at
beginning costs and end of
Description of period expenses Deductions period
- ---------------------------------------------------------------------------------------
Allowance for uncollectible
accounts receivable (in thousands):
Year ended May 31, 1997 $200 $125 $20 $305
Year ended May 31, 1996 $ 0 $200 $ 0 $200
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.
Date: August 29, 1997
-------------------------
By /S/ Mark R. Sweetland
---------------------
Mark R. Sweetland, President
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 8/29/97
- ---------------------- (Principal executive officer) and Director
Mark R. Sweetland
/S/ Joseph P. Mullaney Vice President, Treasurer, 8/29/97
- ----------------------- Chief Financial Officer
Joseph P. Mullaney (Principal financial and accounting
officer)
/S/ Timothy J. Weatherford Executive Vice President, Sales and 8/29/97
- -------------------------- Director
Timothy J. Weatherford
/S/ Ronald A. Elenbaas Director 8/29/97
- -----------------------
Ronald A. Elenbaas
/S/ Kenneth Ledeen Director 8/29/97
- -------------------
Kenneth Ledeen
/S/ William Johnston Director 8/29/97
- ---------------------
William Johnston
/S/ Timothy Tyler Director 8/29/97
- ------------------
Timothy Tyler
/S/ Norman L. Rasmussen Director 8/29/97
- ------------------------
Norman L. Rasmussen