SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8 - K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: May 7, 1998
(Date of earliest event reported)
SofTech, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 0-10665 #04-2453033
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(State or other jurisdic- (Commission (IRS Employer
tion of Incorporation or file number) Identification Number)
organization
4695 44th Street SE, Suite B-130, Grand Rapids, MI 49512
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(Address of principal executive offices) (Zip Code)
(616) 957-2330
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(Registrant's telephone number, including area code)
Item 7 is amended in its entirety as follows:
Item 7. Financial Statements and Exhibits
Item 7(a): Financial Statements of Business Acquired.
The financial statements of the business acquired which are included herein are
summarized as follows:
- The audited balance sheets of the Adra Systems business (consisting of
Adra Systems, Inc., Adra Systems, GmbH, and the Adra Division of
MatrixOne, SARL, the businesses acquired) as of April 30, 1998 and
June 28, 1997 and the statements of operations and investment of
parent and cash flows for the ten month period ended April 30, 1998
and the year ended June 28, 1997;
Report of Independent Auditors
The Board of Directors and Shareholders of MatrixOne, Inc.:
We have audited the accompanying balance sheets of the Adra Systems
business of MatrixOne Inc., as of April 30, 1998 and June 28, 1997 and the
statements of operations and investment of parent and cash flows for the ten
month period and year then ended, respectively. These financial statements are
the responsibility of Adra's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Adra Systems business of
MatrixOne, Inc., as of April 30, 1998 and June 28, 1997, and the results of its
operations and its cash flows for the ten month period and year then ended,
respectively, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG L.L.P.
Grand Rapids, Michigan
July 16, 1998
ADRA SYSTEMS
BALANCE SHEETS
AS OF APRIL 30, 1998 AND JUNE 28, 1997
(in thousands) 1998 1997
-------- -------
Assets:
Current Assets:
Accounts receivable (less allowance of $ 252
and $ 154 in 1998 and 1997, respectively) $ 3,548 $ 4,130
Prepaid expenses and other assets 49 129
Deferred income taxes 963 1,029
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Total Current Assets 4,560 5,288
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Property and equipment, at cost 1,432 1,132
Less: Accumulated depreciation (707) (526)
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Property and equipment, net 725 606
Deferred income taxes 1,657 1,781
Other long term assets 16 26
------- -------
$ 6,958 $ 7,701
======= =======
Liabilities and Investment of Parent Company:
Current Liabilities:
Accounts payable $ 698 $ 379
Accrued expenses 794 425
Deferred revenue 2,124 2,233
Income taxes payable 761 845
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Total Current Liabilities 4,377 3,882
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Investment of parent company 2,581 3,819
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$ 6,958 $ 7,701
======= =======
See the accompanying notes which are an integral
part of these financial statements.
ADRA SYSTEMS
STATEMENTS OF OPERATIONS AND CHANGES IN INVESTMENT OF PARENT COMPANY
FOR THE TEN MONTH PERIOD ENDED APRIL 30, 1998 AND THE YEAR ENDED JUNE 28, 1997
(in thousands) 1998 1997
-------- --------
Revenues:
Software licenses $ 6,698 $ 8,655
Service 5,736 7,290
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Total Revenue 12,434 15,945
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Cost of Sales:
Software licenses 664 1,115
Service 1,613 2,068
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Total Cost of Sales 2,277 3,183
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Gross Margin 10,157 12,762
Operating expenses:
Research and development expenses 2,454 2,870
Sales and marketing 3,476 6,172
General and administrative 1,701 1,068
Other 106 --
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Total Operating Expenses 7,737 10,110
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Income from Operations 2,420 2,652
Provision for income taxes 951 1,042
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Net Income 1,469 1,610
Reduction in Investment of Parent Company (2,707) (3,668)
Investment of Parent Company - Beginning of Period 3,819 5,877
-------- --------
Investment of Parent Company - End of Period $ 2,581 $ 3,819
======== ========
See the accompanying notes which are an integral
part of these financial statements.
ADRA SYSTEMS
STATEMENTS OF CASH FLOWS
FOR THE TEN MONTH PERIOD ENDED APRIL 30, 1998 AND THE YEAR ENDED JUNE 28, 1997
(in thousands) 1998 1997
-------- --------
Cash Flows from Operating Activities:
Net income $ 1,469 $ 1,610
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 182 148
Deferred income taxes 190 197
Changes in operating assets and liabilites:
Accounts receivable 582 1,470
Prepaids and other assets 80 21
Accounts payable 319 (121)
Accrued expenses 369 (151)
Deferred revenue (109) (117)
Income taxes payable (84) 845
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Total Adjustments 1,529 2,292
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Net cash provided by operating activities 2,998 3,902
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Cash Flows used in Investing Activities:
Purchase of equipment, net (301) (254)
Decrease in other long term assets 10 20
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Net cash used by investing activities (291) (234)
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Cash Flows used in Financing Activities:
Distributions to parent company (2,707) (3,668)
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Net increase (decrease) in cash -- --
------- -------
Cash at the Beginning of the Period -- --
Cash at the End of the Period $ -- $ --
======= =======
See the accompanying notes which are an integral
part of these financial statements.
ADRA SYSTEMS
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF THE BUSINESS:
Adra Systems (ADRA) represents the Adra Systems business of MatrixOne, Inc.
which includes Adra Systems, Inc., Adra Systems, GmbH and the Adra Division of
MatrixOne, SARL, all of which are wholly owned subsidiaries of MatrixOne, Inc.
(MatrixOne). ADRA is engaged in the development, licensing and integration of
design and manufacturing automation software. ADRA sells its products both
directly and through a network of domestic and international resellers.
BASIS OF PRESENTATION:
The accompanying financial statements present ADRA's results of operations and
cash flows and its financial position as it operated as part of MatrixOne, Inc.
The financial statements for the ten month period ended April 30, 1998 and the
fiscal year ended June 28, 1997 include an allocation of certain corporate
expenses associated with MatrixOne's financing of ADRA's working capital needs
and certain operating expenses as discussed in Note F. As a result, the
financial statements presented may not be indicative of the results that would
have been achieved had ADRA operated as a non-affiliated, independent entity.
PRINCIPLES OF COMBINATION:
The financial statements presented include the accounts of ADRA and its
operations in the United States and Germany. All significant intercompany
accounts and transactions have been eliminated in combining the financial
statements of the three ADRA subsidiaries of MatrixOne.
INDUSTRY SEGMENT AND SIGNIFICANT CUSTOMERS:
The Company operates in one industry segment and is engaged in the development,
sale and post sale support of off-the-shelf software for computer applications.
No single customer accounted for more than 10% of the Company's revenue.
Geographic segment information is presented in Note E.
CASH:
MatrixOne has funded all of ADRA's operations to date through its corporate cash
balances. Accordingly, no current cash balances are presented in the
accompanying financial statements.
PROPERTY AND EQUIPMENT:
Property and equipment, consisting primarily of computer equipment, and office
furniture and fixtures are stated at cost and are depreciated on a straight line
basis over the estimated useful lives of the assets ranging from two to five
years. Maintenance and repairs are charged to expense as incurred.
INCOME TAXES:
All of the Company's operations are included in the MatrixOne consolidated
federal income tax return. The income taxes for the Company reported in the
accompanying financial statements have been determined on a stand alone or
separate return basis as required by Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No. 109
deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
REVENUE RECOGNITION:
ADRA accounts for software license and service revenue in accordance with 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 training, installation and consulting is
recognized as the related service is performed. Deferred revenue represents
payments received by Adra in advance of product delivery or service performance.
Effective July 1, 1998, ADRA is required to adopt SOP 97-2, "Software Revenue
Recognition." The effect of adoption is not expected to be significant.
SOFTWARE DEVELOPMENT COSTS:
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," certain software development costs are capitalized upon the
establishment of technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs require considerable judgement by management with respect to
certain external factors, including but not limited to anticipated future gross
revenues, estimated economic life and changes in software and hardware
technology. No software development costs were capitalized in 1998 and 1997.
MANAGEMENT'S USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
FOREIGN CURRENCY TRANSLATION:
The functional currency of ADRA's foreign operations (France and Germany) 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 rates.
Foreign currency gains and losses arising from transactions are included in
operations, but were not significant in fiscal 1998 or 1997. Translation gains
and losses were not significant in 1998 or 1997 and are recorded in investment
of parent company.
B. INCOME TAXES
The provision for income taxes includes the following:
For the ten month period and year ended
(in thousands) April 30, June 28,
1998 1997
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Current:
U.S. Federal $ 447 $ 484
Foreign 158 189
State and local 156 172
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761 845
Deferred 190 197
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$ 951 $1,042
====== ======
Reconciliation of the federal statutory rates to the effective tax rates were as
follows:
For the ten-month period and year ended: April 30, June 28,
1998 1997
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Statutory rate 34% 34%
State and local taxes 5 5
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Effective tax rates 39% 39%
======= ======
Deferred tax assets were comprised of the following (in thousands):
April 30, June 28,
1998 1997
---- ----
Software development costs $1,657 $1,781
Deferred revenue 835 877
Other 128 152
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$2,620 $2,810
====== ======
C. COMMITMENTS:
ADRA leases its office facilities under various operating leases that expire
through fiscal 2001. Aggregate rental expense under operating leases was
approximately $18,000 for the ten months ended April 30, 1998. Rental expense in
1997 was not significant.
At April 30, 1998, minimum annual rental commitments under non-cancelable
operating leases were as follows (in thousands):
Fiscal Year Ending June 30,
1998 (Two Months) $ 13
1999 80
2000 58
2001 34
----
$185
====
D. STOCK OPTIONS:
Certain employees of ADRA participated in MatrixOne's stock option plans. Stock
options are granted at fixed exercise prices that are equal to fair value and
are accounted for under APB No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost has been recognized related to stock options
in the financial statements. Had compensation cost been determined based on the
fair value of the stock options at the grant date under Statement 123,
"Accounting for Stock-based Compensation," the effect on reported net income
would not have been material.
E. GEOGRAPHIC INFORMATION:
Information regarding geographic areas is as follows:
United
States Germany France Total
------ ------- ------ -----
Ten months ended April 30, 1998:
Sales to unaffiliated customers $ 9,648 $ 2,118 $ 668 $12,434
Income from operations $ 1,787 $ 137 $ 496 $ 2,420
Identifiable assets $ 5,623 $ 819 $ 516 $ 6,958
Year ended June 28, 1997:
Sales to unaffiliated customers $12,901 $ 2,227 $ 817 $15,945
Income from operations $ 1,907 $ 138 $ 607 $ 2,652
Identifiable assets $ 6,957 $ 667 $ 275 $ 7,701
F. ALLOCATIONS FROM MATRIXONE:
Prior to July 1, 1997, operating expenses of MatrixOne and ADRA were accounted
for on a combined basis. Effective July 1, 1997, operating expenses directly
attributable to MatrixOne and ADRA were accounted for separately with certain
common administrative support services allocated between the two businesses.
Expenses totaling $1,371 in 1998 and $10,110 in 1997 have been allocated to ADRA
using formulas which management believes are reasonable based upon ADRA's
proportionate use of such services or incurrance of such expenses. All other
costs directly attributable to ADRA are reported directly in ADRA's statements
of operations and have been paid by MatrixOne on behalf of ADRA.
G. SUBSEQUENT EVENT:
On May 7, 1998, MatrixOne, Inc. completed the sale of the business and
substantially all of the net assets of the ADRA business to SofTech, Inc., a
public company that is one of the largest engineering through manufacturing
service and product providers.
SofTech acquired substantially all of the assets except for cash of ADRA, which
was an immaterial amount as of the transaction date. The purchase price for the
acquired assets was $11,400,000 in cash and short term note (excluding fees and
expenses of $560,000). In addition, there is contingent consideration of a
maximum of $2,200,000, 50% of which is payable in November, 1998 and 50% in May,
1999 if certain license revenue targets are met.
Item 7(b) Proforma Financial Information.
INTRODUCTION TO PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION (Unaudited)
The Pro Forma Combined Condensed Income Statements for the year ended May
31, 1997 and for the nine months ended February 28, 1998 present the combined
results of the continuing operations of SofTech, Inc. (the "Company") and the
Adra Systems business of MatrixOne, Inc. ("ADRA") assuming the acquisition had
been consummated as of the beginning of the periods indicated. ADRA's operations
are combined using its fiscal year ended June 28, 1997 and the nine months ended
March 31, 1998. The Pro Forma Combined Condensed Balance Sheet as of February
28, 1998 present the combined financial position of the Company at that date and
Adra as of April 30, 1998, assuming the acquisition was consummated on the
balance sheet date.
The pro forma information does not purport to be indicative of the results
of operations or the financial position which would have actually been obtained
if the acquisitions had been consummated on the dates indicated. The pro forma
information does not purport to be indicative of the results of operations or
financial positions which may result in the future.
The pro forma financial information has been prepared by the Company based
upon assumptions deemed appropriate by the Company's management. Certain of the
most significant assumptions are set forth under the Notes to Pro Forma Combined
Condensed Financial Statements.
The pro forma financial information should be read in conjunction with the
Company's historical Consolidated Financial Statements and Notes thereto
contained in the 1997 Annual Report on Form 10-K.
SOFTECH, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 1997
For the twelve month period ended:
(in thousands, except per share data)
SofTech ADRA Pro Forma
May 31, 1997 June 28, 1997 Pro Forma Combined
(Historical - (Historical - Adjustments Condensed
audited) audited) (Unaudited) (Unaudited)
-------- -------- ----------- -----------
Revenue
Product 9,329 8,655 17,984
Service 5,375 7,290 12,665
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Total Revenue 14,704 15,945 -- 30,649
Cost of Sales
Product 6,133 1,115 7,248
Service 3,761 2,068 5,829
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Total cost of sales 9,894 3,183 -- 13,077
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Gross Margin 4,810 12,762 -- 17,572
Research and development -- 2,870 2,870
Selling, general and administrative 4,657 7,240 776 A) 12,673
-------------------------------------------------------------
Income from operations 153 2,652 (776) 2,029
Interest expense -- -- 1,101 B) 1,101
Gain on available-for-sale securities 2,126 -- 2,126
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Income from operations before income taxes 2,279 2,652 (1,877) 3,054
Provision for income taxes (3) 1,042 (1,001) C) 38
-------------------------------------------------------------
Net income $ 2,282 $ 1,610 $ (876) $ 3,016
===========================================================
Basic net income per common share $ 0.52 $ 0.68
=========== =========
Weighted average common shares outstanding 4,410 4,410
Dilutive net income per common share $ 0.50 $ 0.67
=========== =========
Weighted average common shares outstanding 4,530 4,530
SOFTECH, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998
For the nine month period ended:
(in thousands, except per share data)
SofTech ADRA Pro Forma
February 28, 1998 March 31, 1998 Pro Forma Combined
(Historical - (Historical - Adjustments Condensed
(unaudited) (unaudited) (Unaudited) (Unaudited)
---------- ---------- ----------- -----------
Revenue
Product 5,874 6,480 12,354
Service 8,417 5,110 13,527
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Total Revenue 14,291 11,590 -- 25,881
Cost of Sales
Product 2,844 547 3,391
Service 4,757 1,448 6,205
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Total cost of sales 7,601 1,995 -- 9,596
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Gross Margin 6,690 9,595 -- 16,285
Research and development -- 2,130 -- 2,130
Selling, general and administrative 5,759 4,703 582 A) 11,044
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Income from operations 931 2,762 (582) 3,111
Interest expense -- -- 826 B) 826
Gain on available-for-sale securities 253 -- 253
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Income from operations before income taxes 1,184 2,762 (1,408) 2,538
Provision for income taxes 111 1,085 (553)C) 643
---------------------------------------------- --------
Net income 1,073 1,677 (855) 1,895
============================================== ========
Basic net income per common share $ 0.19 $ 0.34
========== ========
Weighted average common shares outstanding 5,515 5,515
Dilutive net income per common share $ 0.18 $ 0.33
========== ========
Weighted average common shares outstanding 5,807 5,807
SOFTECH, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF FEBRUARY 28, 1998
SofTech ADRA Pro Forma
February 28, 1998 April 30, 1998 Pro Forma Combined
(Historical - (Historical - Adjustments Condensed
unaudited) audited) (Unaudited) (Unaudited)
----------- --------- ------------ ----------
ASSETS
Cash $ 106 $ -- $ 106
Available-for-sale securities -- -- --
Accounts receivable, net 4,910 3,548 8,458
Unbilled costs and fees 2,207 -- 2,207
Inventory 97 -- 97
Prepaid expenses and other assets 834 49 883
Deferred income taxes 2,620 (2,620) D) --
Net assets (liabilities) of discontinued operations (200) -- (200)
------------------------------------------ -------
Total current assets 7,954 6,217 (2,620) 11,551
Property and equipment, net 1,856 725 (200) E) 2,381
Goodwill, net 3,893 -- 1,638 E) 5,531
Other assets 4,778 16 10,000 E) 14,794
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TOTAL ASSETS $ 18,481 $ 6,958 $ 8,818 $ 34,257
========================================== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable, line of credit $ 2,464 $ 400 E) $ 2,864
Accounts payable 3,378 698 4,076
Accrued expenses 1,702 794 760 E) 3,256
Income taxes payable 761 (761) D) --
Deferred maintenance revenue 1,071 2,124 3,195
Current portion of long term debt 145 -- 1,500 E) 1,645
------------------------------------------ -------
Total current liabilities 8,760 4,377 1,899 15,036
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Long term debt, net of current portion 217 -- 9,500 E) 9,717
------------------------------------------ -------
Stockholders' equity 9,504 2,581 (2,581) E) 9,504
------------------------------------------ -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,481 $ 6,958 $ 8,818 $ 34,257
========================================== =======
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS (Unaudited)
The Pro Forma Combined Condensed Statement of Income for the year ended May 31,
1997 is derived from the historical audited financial statements of the Company
included in the 1997 Annual Report on Form 10-K and the historical audited
balance sheet as of April 28, 1998 and financial statements of ADRA for the
fiscal year ended June 28, 1997, contained herein. The pro forma financial
information includes adjustments to reflect the purchase of ADRA by SofTech on
May 7, 1998 including the consideration paid and the resulting goodwill.
The Pro Forma Combined Condensed Financial Statements should be read in
conjunction with the Company's historical Consolidated Financial Statements and
Notes thereto contained in the 1997 Annual Report on Form 10-K. The Pro Forma
Combined Condensed Financial Statements do not purport to be indicative of
financial position or results of operations if the acquisitions had been
consummated on the dates indicated or which may be obtained in the future.
Notes to pro forma financial statements:
A) To record the amortization of purchased software totaling $10,000,000 and
goodwill of $1,640,000 over an estimated useful life of fifteen (15) years.
Amortization is recorded on a straight line basis.
B) To record the estimated cost of borrowing $11,400,000 to finance the
acquisition of ADRA at a weighted average interest rate of 9.7%.
C) To record the estimated income tax effects of the pro forma adjustments
referred to in Notes A and B above, assuming a 40% tax rate and considering
the use of SofTech's existing unutilized net operating losses and credit
carryforwards.
D) To eliminate income tax assets and liabilities which were not acquired or
assumed.
E) To record the excess of cost over historical carrying value of assets
acquired resulting from the purchase price allocation as follows:
Cash paid to seller at closing $ 7,000
Cash paid to seller on July 1, 1998 4,400
Fees and expenses 560
-------
Total purchase price $11,960
=======
Purchase price allocated to:
Capitalized software costs $10,000
Goodwill 1,638
Other assets and liabilities
acquired or assumed
in the transaction 322
-------
$11,960
=======
Item 7 ( c ) Exhibits.
2.1 The Asset Purchase Agreement, dated May 7, 1998, by and among SofTech, Inc.,
Adra Systems, Inc., Adra Systems, GmbH, and MatrixOne, Inc. was previously
provided with the original current report on Form 8-K, filed May 22, 1998.
Schedules to the Agreement were not filed but will be provided to the Commission
supplementally upon request.
23.1 Consent of Ernst & Young L.L.P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SofTech, Inc.
Date: July 20, 1998 /s/ Joseph P. Mullaney
By: Joseph P. Mullaney
Its: Vice President and Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
23.1 Consent of Ernst & Young LLP