SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________________ to _________________________
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)
(616) 957-2330
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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(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: $ 11,352,823 as of August 16, 1996. On August 16, 1996, the
registrant had outstanding 4,094,776 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 1996 annual meeting are incorporated by reference into
Part III of this report, to the extent set forth in said Part III.
1
PART I
Item 1 - Business
GENERAL
- - -------
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.
During fiscal 1996, the Company had two primary operating divisions,
primarily doing business through its wholly-owned subsidiary Information
Decisions, Inc. ("IDI"). The Network Systems Group ("NSG") markets a wide
variety of well known computer hardware and off-the-shelf software products as
well as a full array of computer related services to its customers through seven
offices located in Michigan, North Carolina and New York. The CAD Division
markets, distributes and supports several popular Computer Aided Design ("CAD")
and Product Data Management ("PDM") software offerings to its customers through
seven offices in six states. CAD also sells and supports the computer platforms
that run these applications, primarily workstations. The core product offering
of this division is a high-end mechanical CAD product developed by Parametric
Technology Corporation ("PTC") called Pro/ENGINEER. CAD was one of the first
distributors of this product in 1988 and has historically been the second
largest reseller of Pro/ENGINEER in the United States.
On July 26, 1995, in conjunction with the release of fourth quarter
results for fiscal year 1995, the Company announced that it had retained an
investment banker to seek alternative strategies aimed at enhancing shareholder
value including, but not limited to, the sale of all or part of its business.
On April 9, 1996, the Company announced that it had signed a
non-binding letter of intent to sell its CAD Division to a management group that
had attracted the financing of a Boston-based leveraged buyout firm. Subsequent
to the signing of the letter of intent but prior to completing the transaction,
PTC made known its intent to change the method of distribution for its
Pro/ENGINEER software package. Specifically, PTC determined that in the near
term Pro/ENGINEER would be sold only by its direct sales force. The reseller
channel would market a mid range software product with upward compatibility to
Pro/ENGINEER. As a result of this product transition, the proposed sale of the
CAD Division was not completed and the letter of intent expired on May 31, 1996.
On June 18, 1996, the Company announced that it had signed a
non-binding letter of intent to sell NSG to Data Systems Network Corporation
("DSN"). DSN is a public company listed on the NASDAQ SmallCap Market under the
symbol "DSYS" and on the Pacific Stock Exchange under the symbol "DSY". This
transaction, if consummated, is expected to be completed in early September
1996. The NSG business has been presented as a discontinued operation. (See
description of this transaction under the "Discontinued Operations" section
below.)
THE CAD DIVISION
- - ----------------
Products
As noted previously, the CAD Division's core software product
offering is that of PTC's Pro/ENGINEER family of products. Pro/ENGINEER is a
high-end mechanical CAD/CAM software tool used to automate the mechanical
development of a product from its conceptual design through its release to the
manufacturing process. PTC distributes its products through a combination of
direct sales and resellers. IDI is the second 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
$2.9 million, $1.4 million and $1.2 million in fiscal 1996, 1995, and 1994,
respectively. In addition, the Company markets software of related and
complementary technology providers such as Product Data Management ("PDM")
offerings of Workgroup Technologies. With the exception of PTC's products, none
of these software offerings were material to fiscal 1996 results.
2
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. Historically, the hardware platforms sold
by the Company have been Unix-based workstations. The Company is an authorized
reseller of computer hardware from Silicon Graphics, Hewlett Packard and Sun
MicroSystems. With the popularity and price performance of Windows 95 and
Windows NT operating systems, it is expected that an increasing number of
Pro/ENGINEER customers will opt for personal computers ("PCs") as the platform
on which to operate the software rather than workstations. This trend is
expected to negatively impact the Company's results given the low margins
generally found in the sale of PCs relative to workstation sales.
The Company provides full maintenance support for the software and
hardware it markets to its customers. Recurring hardware maintenance revenue
amounted to approximately $650,000, $560,000 and $350,000 in fiscal 1996, 1995
and 1994, respectively. The Company is an authorized reseller of PTC maintenance
for its Pro/ENGINEER customers. Essentially all of IDI's Pro/ENGINEER customers
have purchased PTC maintenance in the past. Revenue generated from the sale of
PTC maintenance was approximately $1.5 million, $860,000 and $420,000 in fiscal
1996, 1995, and 1994, respectively. 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 installed base of
this low end mechanical CAD market is estimated to be approximately 2 million
seats. It was expected that as many as 400,000 of those engineers were in need
of more robust software with a three dimensional, parametric capability.
PTC has stated that it intends to pursue the mid-range, 3D solid
modeling market. PTC informed its resellers that, effective September 30, 1996,
the Pro/ENGINEER product will be distributed only through the direct sales force
of PTC. The reseller channel will only market the Pro/JR. successor product that
is expected to be introduced in mid-September. The successor product is to be
enhanced, renamed and repositioned in the marketplace. PTC has established a
dedicated, in-house product group with the sole responsibility of supporting the
reseller channel and the new product.
In connection with the transition from the Pro/ENGINEER offering to
the new product, PTC has, among other things, offered the following plan to the
reseller channel:
* margin on the new product will be 75% for the first year as compared
to 37% for Pro/ENGINEER. The result is that IDI will generate
approximately the same gross margin dollars for one unit of the new
product as it did for Pro/ENGINEER;
* ability to resell PTC maintenance on Pro/ENGINEER for one year ending
September 30, 1997;
* royalty of 20% of the gross software sales by PTC to the Company's
installed base by the direct sales force for the period from October
1, 1996 to December 31, 1996;
* opportunity to partner with the PTC direct sales force 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.
3
Competition
In marketing the Pro/ENGINEER family of products competition was
primarily from other resellers of PTC software, PTC's direct sales force, and
direct or reseller sales forces offering software products of other technology
providers such as Structural Dynamics Research Corporation, Computervision, EDS,
Intergraph and IBM.
During fiscal 1997 when the Company is focused on the distribution of
the new product the Company anticipates that it will encounter competition from
the low and mid-range product offerings of companies such as AutoDesk, CADKey,
Intergraph, Matra Datavision and IBM and a few private companies with comparable
products but generally lacking upward compatibility to a product like
Pro/ENGINEER.
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
October 31, 1997 and can be terminated by either party with 30 days notice. The
Company has a long-standing business relationship with PTC and believes it will
continue to be an authorized reseller of PTC's products for the foreseeable
future.
Personnel
As of May 31, 1996, the Company employed 39 persons related to the
continuing operation. This headcount distributed over functional lines is as
follows: Sales representatives = 11; Engineers = 16; General & Administrative =
12.
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, 1996 and 1995 was approximately $490,000 and
$350,000, respectively. Deferred maintenance revenue, which represents hardware
maintenance services to be performed during the following year, totaled
approximately $670,000 at May 31, 1996 and 1995. 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
CAD 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, 1996 and 1995. It is not
expected that this situation will change in fiscal 1997.
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 1996 or 1994. 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. First quarter revenue
as a percent of full year revenue for fiscal years 1996, 1995 and 1994 was
approximately 22%, 20% and 12%, respectively.
4
DISCONTINUED OPERATION
- - ----------------------
On May 29, 1996, the Board of Directors approved a plan to dispose of
the Network Systems Group and to retain the CAD Division as the sole operating
unit within the Company. The consolidated financial statements have been
restated to reflect the net assets and operating results of NSG as discontinued
operations. The assets and liabilities of NSG have been reclassified in the
Consolidated Balance Sheets as net assets of discontinued operations. The
operating results of NSG are shown net of income taxes in the Consolidated
Statements of Operations and Retained Earnings under the caption "Discontinued
operations."
The sale of NSG is expected to be completed in early September 1996
to DSN on primarily the same terms announced on June 18, 1996. It is anticipated
that DSN will purchase substantially all the operating assets of the NSG
business from the Company including certain defined assets and assume certain
defined liabilities with a net book value of approximately $2.0 million in
exchange for approximately $2.3 million in cash and 540,000 shares of DSN which
represents about 19.9% of its outstanding stock. The assets to be included in
the sale are primarily fixed assets and service parts used to service the
installed base. It is expected that DSN will purchase the NSG inventory from the
Company at cost as delivery and invoicing occurs subsequent to transaction date.
It is expected that this process will be primarily complete within two months
following the transaction.
Cash, accounts receivable, the Raleigh, NC office building and most
liabilities are excluded from the sale. At May 31, 1996 the net tangible asset
value of the NSG assets and liabilities the Company will retain was $4.0
million, excluding cash. It is expected that the majority of these assets will
be collected and liabilities satisfied within three months of the transaction
date. Notwithstanding the foregoing, there can be no assurance that the proposed
sale of NSG assets will, in fact, be consummated. (see Notes A, I and L to the
Consolidated Financial Statements of the Company included herein).
EXECUTIVE OFFICERS
- - ------------------
The current executive officers of the Company are as follows:
Name Age Position
---- --- --------
Norman L. Rasmussen........ 67 President and Chief Executive
Officer, Director
Mark R. Sweetland.......... 47 Vice President of the Company,
President and Chief Executive
Officer, Information Decisions,
Inc.
Joseph P. Mullaney......... 39 Vice President, Treasurer and
Chief Financial Officer
Jean J. Croteau............ 41 Vice President, Business Operations
Sean Q. Flynn.............. 34 Vice President of the Company,
President and Chief Executive
Officer, System Constructs, Inc.
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:
Mark R. Sweetland
5
Mr. Sweetland was appointed Vice President of the Company on March 29,
1994. Since March 1992 he has served the Company as President of Information
Decisions, Inc., a wholly-owned subsidiary of SofTech. He was appointed to the
additional position of Chief Executive Officer of IDI in June 1992. Mr.
Sweetland has been employed by IDI since 1980 in various account representative
and management roles.
Joseph P. Mullaney
Mr. 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.
Jean J. Croteau
Mr. Croteau was appointed Vice President, Business Operations of
SofTech in November 1993. He has been employed at the Company since 1981 and has
held various staff and management positions. Immediately preceding his promotion
to Vice President he held the position of Director of Contract Administration.
Sean Q. Flynn
Mr. Flynn was appointed Vice President of the Company upon completion
of SofTech's acquisition of System Constructs, Inc. in June 1994. From December
1992 through June 1994 he served as President and Chief Executive Officer of
System Constructs after having formed that company. From 1983 to December 1992
Mr. Flynn was employed at Teleprocessing, Inc. holding various staff and
management positions including Vice President.
Item 2 - Properties
- - -------------------
The Company leases office space in Grand Rapids, Michigan;
Indianapolis, Indiana; Covington, Kentucky; Austin and Houston, Texas; and
Yardley, Pennsylvania. The total space leased for these locations is
approximately 14,200 square feet. The fiscal 1996 rent was approximately
$203,000. 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 will not be acquired by DSN. It is expected that the building will be
sold after the close of the DSN transaction.
Item 3 - Legal Proceedings
- - --------------------------
Subsequent to year end, the Company 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 is seeking
enforcement of the agreements and compensation for damages incurred due to these
violations. The case is in the discovery period and it is unclear, at this time,
how this matter will be resolved.
The Company is not a party to any other material legal proceedings.
Item 4 - Submission of Matters to a Vote of Stockholders
- - --------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of the Stockholders of SofTech.
6
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, 1996, there were approximately 352 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. 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.
1996 1995
--------------- ---------------
High Low High Low
----- ----- ----- -----
First Quarter 5 3/4 3 1/2 7 5/8 5 1/2
Second Quarter 5 3 3/4 8 1/4 6 3/8
Third Quarter 4 1/2 3 1/4 6 5/8 4 1/8
Fourth Quarter 4 5/8 3 4 7/8 3 5/8
The Company is currently contemplating the possible distribution of
all or a portion of the net proceeds from the proposed sale of the NSG Division,
if consummated. See Notes A, I and L to the Consolidated Financial Statements of
the Company included herein. The Company has not paid any cash dividends in the
past.
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) 1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------
Revenue from continuing operations $13,658 $10,403 $ 6,662 $ 5,491 $ 3,249
Income(loss) from continuing operations (456) (18) 966 660 361
Earnings per share:
Income (loss) from continuing operations (.11) (.00) .25 .17 .09
Net income (loss) (1.44) (.60) .70 .45 .12
Weighted average number of shares outstanding 4,076 3,848 3,810 3,914 3,803
Working capital 12,668 17,929 20,441 18,708 17,065
Total assets 17,037 23,505 22,063 20,273 17,630
Total liabilities 2,080 2,811 1,221 1,317 422
Stockholders' equity 14,957 20,694 20,842 18,956 17,208
Note: The results for fiscal years 1996 and 1995 include the effect of the
acquisition Micro Control in January 1995. The financial information for all
years presented have been restated to reflect the operating results of the
Network Systems Group as a discontinued operation. The financial information for
fiscal 1993 and prior fiscal years have been restated to reflect the operating
results of the Government Services Division as a discontinued operation.
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, 1996. In addition, the change in those items, again expressed as a
percentage, for each of the two years ended May 31, 1996 is presented.
7
Items as a percentage Percentage change
of revenue year to year
-------------------------- ---------------------------
1996 1995 1994 1995 to 1996 1994 to 1995
------ ------ ------ ------------ ------------
Revenue
Products 75.4% 78.9% 79.3% 25.4% 55.3%
Service 24.6 21.1 20.7 53.3 59.5
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Total revenue 100.0 100.0 100.0 31.3 56.1
Cost of sales
Products 53.5 58.2 56.5 20.6 60.8
Services 18.5 14.1 14.3 71.9 54.8
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Total cost of sales 72.0 72.3 70.8 30.6 59.6
Gross margin
Products 29.1 26.2 28.8 39.1 41.4
Services 24.9 33.0 31.0 15.6 69.8
Total gross margin 28.0 27.7 29.2 33.1 47.7
S.G.& A. 31.2 28.3 18.4 45.1 140.0
Interest income -- 1.3 4.4 (100.0) (52.6)
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Income (loss) from continuing
operations before tax (3.2) .7 15.2 (672.1) (92.5)
Tax provision .1 .9 .8 78.4 87.9
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Income (loss) from continuing
operations (3.3%) (.2%) 14.4% (2,396.3) (101.9)
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Description of the Business
During fiscal 1996 the Company had two primary operating divisions.
The Network Systems Group ("NSG") markets a wide variety of well known computer
hardware and off-the-shelf software products as well as a full array of computer
related services to its customers through seven offices located in Michigan,
North Carolina, and New York. The CAD Division markets, distributes and supports
several popular Computer Aided Design ("CAD") and Product Data Management
("PDM") software offerings to its customers through seven offices in six states.
In addition, this Division is an authorized reseller of numerous hardware
platforms on which the software operates and provides a full spectrum of
services to support the installation.
On June 18, 1996, the Company announced that it had signed a
non-binding letter of intent to sell NSG to Data Systems Network Corporation
("DSN"). This transaction is expected to be completed in early September 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 Division. See also the discussion under "Item 1
Business -- Discontinued Operation" and Notes A, I and L to the Consolidated
Financial Statements of the Company included herein.
Results of Operations
Total revenue increased from $10.4 million in fiscal 1995 to $13.7
million in fiscal 1996, a 31% increase. The revenue increase from fiscal 1994 to
1995 was 55%. The acquisition of Micro Control in January 1995 accounted for
approximately $4.0 million of the fiscal 1996 and $1.5 million of the fiscal
1995 revenue.
Product revenue includes hardware and off-the-shelf software. Product
revenue increased 25% in fiscal 1996 from 1995 and 55% for fiscal 1994 to 1995.
Service revenue, which includes hardware and software maintenance, installation,
training and consulting, increased 53% in fiscal 1996 from 1995 and 60% from
fiscal 1994 to 1995.
8
As described above under "Item 1 - Business -- The CAD Division",
effective September 30, 1996, the Company will no longer be able to sell the
Pro/ENGINEER product line of Parametric Technology Corporation ("PTC"), the
supplier of the core technology for the Company. Pro/ENGINEER is the leading
high-end mechanical CAD/CAM product available today and has been the core
product of the Company. In order to reduce channel conflict and customer
confusion in the marketplace, PTC has established the Pro/ENGINEER offering as a
product of the direct sales force only. Reseller's such as SofTech will market,
distribute and support a mid-range product expected to be introduced by PTC in
September. This mid-range product is expected to sell for approximately one half
the price of Pro/ENGINEER and is more likely to be operated on a personal
computer. Historically, the Company sold primarily UNIX workstation platforms on
which the software would run. It is unclear as to the market acceptance of the
new product and the impact on the Company of the potential loss of hardware
revenue and margin related to workstations. The competitive environment for the
distribution of personal computers is such as to make it difficult for the
Company to pursue it as an opportunity.
Under the new reseller relationship with PTC, the Company will
receive a 20% margin on PTC software sales made to its customers by the PTC
direct sales force for the period from October 1 to December 31, 1996. In
addition, the Company will be permitted to market and support Pro/ENGINEER
maintenance until September 30, 1997. Lastly, it is expected that the Company
will partner with the PTC direct sales force to supply hardware and, in some
cases, support services related to the sales of Pro/ENGINEER. This partnering
with PTC direct has not been an opportunity in the past given the competition
for the same customer's business. This will no longer be the case given the
different product lines offered by each.
The current agreement between the Company and PTC to market products
and services expires on or about October 31, 1997. The Agreement contains
certain cancellation provisions which allow either party to terminate the
relationship for any reason with 30 days notice. The ability to continue the
relationship as a PTC business partner is material to the business.
Selling, general and administrative expense increased 45% from fiscal
1995 to 1996 and 140% from fiscal 1994 to 1995. This category of expense as a
percent of revenue was 31%, 28% and 18% for fiscal years 1996, 1995 and 1994,
respectively. The increases in SG&A in fiscal 1995 and 1996 relative to fiscal
1994 were primarily due to three factors. Those three factors and the impact on
SG&A expenditures in each of the years were as follows:
* Goodwill amortization related to the mid-year FY95 acquisition of
Micro Control totaled $481,000 in fiscal 1996 and $218,000 in fiscal
1995;
* Allocation of SofTech corporate expenses increased from $102,000 in
fiscal 1994 to $724,000 in fiscal 1995 and $610,000 in fiscal 1996.
The increase in fiscal 1995 and 1996 relative to 1994 was due to the
sale of the GSD in fiscal 1994 which had absorbed most of those
corporate expenditures; and
* A one-time charge of $426,000 was recorded in fiscal 1996 related to
an amendment to the Micro Control Purchase Agreement (see Note J to
the Company's Consolidated Financial Statements included herein).
Interest income decreased from $294,000 in fiscal 1994 to $139,000 in
fiscal 1995. In fiscal 1996 the Company did not earn any interest income. The
decrease in interest income since fiscal 1994 is due primarily to the use of
approximately $6.4 million in cash to acquire three companies during fiscal 1995
and the negative impact of that activity on available cash resources for passive
investment. During fiscal 1996 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.
The effective tax rate was 5% in each of fiscal 1996 and 1994. The
effective tax rate for fiscal 1995 was 124%. The provision in each of the years
is related primarily to state and local taxes. The 1996 effective rate was
different from the statutory rate primarily due to valuation reserves
established against the deferred tax asset due to the uncertainty of the
recoverability of those assets against taxes due in the future. The Company has
tax credits of $713,000 and net operating loss carryovers of approximately $3.3
million to offset future federal taxes that may be payable.
Included in the 1996 results is an estimated loss of $700,000
expected to be realized upon completion of the sale of NSG as presented on the
Statement of Operation under the caption "Discontinued operations: Gain (loss)
from disposal." The anticipated premium of $2.7 million in excess of net
tangible value of the assets to be transferred, if the transaction is completed,
would be offset by estimated expenses of $3.4 million directly related to the
transaction. Those estimated expenses include: the write off of approximately
$1.6 million of unamortized NSG goodwill as of the expected transaction date,
projected value of the proposed issuance of 409,500 SofTech shares to certain
key executives as described in Note L, and certain transaction related expenses
of about $1.3 million associated with employment and severance agreements, and
professional fees.
9
Capital Resources and Liquidity
The Company ended fiscal 1996 with approximately $3.0 million in
cash, an increase of approximately $600,000 from the previous year. The net cash
provided from operating activities totaled $686,000 for fiscal 1996 with the
discontinued operations having utilized $322,000 of cash during that period. The
loss from continuing operations, which included the non-recurring charge of
$426,000, adjusted for non-cash expenses of depreciation and amortization,
provided approximately $252,000. Recovery of previously paid federal and state
taxes provided approximately $537,000. A decrease in accounts receivable
provided cash of $616,000 and the decrease of accounts payable and accrued
expenses utilized approximately $731,000 in cash.
Subject to the successful completion of the proposed sale of NSG and
collection of accounts receivable and other assets retained and not sold as part
of the transaction, and the continuing review and oversight by the Board of
Directors of the Company, a possible distribution of all or a portion of the net
proceeds from the proposed NSG sale, if consummated, is being considered (see
Note L to the Company's Consolidated Financial Statements included herein). It
is expected that such a distribution would be made after the NSG cash is
collected from the receivables not sold as part of the transaction, which is
expected to be prior to December 31, 1996. The existing $10 million line of
credit arrangement has been reduced to $1 million until such time as the bank
can assess the creditworthiness of the Company following the planned
distribution.
However, there can be no assurance that the proposed sale of assets of
NSG will in fact be consummated, or that any distribution to stockholders will
be made in any amount or at any time in the future. See also Note L to the
Consolidated Financial Statements of the Company included herein. The Company
has never paid cash dividends on its capital stock in the past.
The Company believes that the cash remaining in the business
following the proposed distribution, together with funds expected to be
available under an amended line of credit agreement reduced to accommodate the
smaller, less capital intensive CAD business and cash generated from operations,
will be sufficient to meet the Company's working capital needs through fiscal
1997.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This statement establishes financial accounting and
reporting standards for stock based employee compensation plans. While the
Company is reviewing the adoption and impact of FAS 123, it is expected that
adoption of this standard will have no material impact on the Company's
financial position or results of operations. The Company will be required to
adopt FAS 123 in fiscal 1997.
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 1996
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.
10
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 1996 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 1996 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 1996
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 14
Consolidated Statements of Operations and Retained Earnings
(Deficit) - Years ended May 31, 1996, 1995 and 1994 15
Consolidated Balance Sheets - May 31, 1996 and 1995 16
Consolidated Statements of Cash Flows - Years ended May 31, 1996,
1995 and 1994 17
Notes to Consolidated Financial Statements 18
(2) Consolidated Financial Statement Schedule:
-------------------------------------------
Schedule VIII - Valuation and Qualifying Accounts 26
The report of the registrant's independent accountants with respect to
the above-listed financial statements and financial statement schedule appears
on page 14 of this report.
All other financial statements and schedules not listed have been
omitted because they are either not required or not applicable or because the
required information has been included elsewhere in the financial statements or
footnotes.
(3) Exhibits:
---------
(2)(i) Acquisition Agreement by and among SofTech, Inc., CACI
International Inc., and CACI Inc., filed as Exhibit 2.1 to
Form 8-K, dated December 1, 1993, are incorporated herein by
reference.
11
(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.
(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
10-K 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 & Lybrand L.L.P., 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 1996.
12
(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.
13
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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended May 31, 1996, 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. As discussed in Note A to the
financial statements, subsequent to the proposed sale of the Company's Network
Systems Group and the possible distribution of the net proceeds to shareholders,
the Company would have limited capital to operate the remaining CAD Division. In
addition, 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 28, 1996
14
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
(in thousands, except per share data)
For the Years ended May 31, 1996 1995 1994
-------- -------- -------
Revenue:
Products $ 10,294 $ 8,208 $ 5,286
Services 3,364 2,195 1,376
-----------------------------------
Total Revenue 13,658 10,403 6,662
Cost of products sold 7,303 6,057 3,766
Cost of services provided 2,526 1,469 949
-----------------------------------
Gross margin 3,829 2,877 1,947
Selling, general and administrative 4,265 2,940 1,225
-----------------------------------
Income (loss) from operations (436) (63) 722
Interest income -- 139 294
-----------------------------------
Income (loss) from continuing operations
before income taxes (436) 76 1,016
Provision for income taxes (Note B) 20 94 50
-----------------------------------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle (456) (18) 966
Discontinued operations (Note I):
Income (loss) from discontinued operations
(less applicable provision for income
taxes of $132,040, $167,072, and $249,067,
respectively) (4,701) (2,303) 364
Gain (loss) from disposal (less applicable
provision for income taxes of $0, $0, and
$301,458, respectively) (700) -- 1,121
Cumulative effect on prior years of change in
accounting for income taxes (Note A) -- -- 233
-----------------------------------
Net income (loss) (5,857) (2,321) 2,684
Retained earnings, beginning of year 5,379 7,700 5,016
-----------------------------------
Retained earnings (deficit), end of year $ (478) $ 5,379 $ 7,700
===================================
Income (loss) from continuing operations
per common share (Note H) ($0.11) ($0.00) $0.25
===================================
Cumulative effect on prior years of change
in accounting for income taxes (Note H) -- -- $0.06
===================================
Net income (loss) per common share (Note H) ($1.44) ($0.60) $0.70
===================================
The accompanying notes are an integral part of the consolidated financial
statements.
15
SOFTECH, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
As of May 31, 1996 1995
-------- ---------
Assets:
Current assets:
Cash and cash equivalents $ 3,017 $ 2,373
Marketable securities -- --
Accounts receivable (less allowance of $200 and
$0 in 1996 and 1995, respectively) 3,211 3,668
Unbilled costs and fees 134 88
Inventory 341 301
Prepaid expenses and other assets 522 578
Deferred and refundable income tax (Note B) -- 1,130
Net assets of discontinued operations (Note I) 7,523 12,602
-----------------------
Total current assets 14,748 20,740
-----------------------
Property and equipment, at cost:
Data processing equipment 917 726
Office furniture 51 63
Leasehold improvements 55 57
-----------------------
Total property and equipment 1,023 846
Less accumulated depreciation and amortization 506 343
-----------------------
517 503
Other assets 1,772 2,262
-----------------------
$ 17,037 $ 23,505
=======================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 862 $ 1,395
Accrued expenses 550 748
Deferred maintenance revenue 668 668
-----------------------
Total current liabilities 2,080 2,811
-----------------------
Commitments and contingencies (Note G)
Stockholders' equity (Notes D and E):
Common stock, $.10 par value; authorized 10,000,000
shares; issued 4,537,933 and 4,495,704 shares in
1996 and 1995, respectively 454 450
Capital in excess of par value 16,463 16,347
Retained earnings (deficit) (478) 5,379
Less treasury stock, 443,157 shares in 1996 and
1995, at cost (1,482) (1,482)
-----------------------
Total stockholders' equity 14,957 20,694
-----------------------
$ 17,037 $ 23,505
=======================
The accompanying notes are an integral part of the consolidated financial
statements.
16
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
For the years ended May 31, 1996 1995 1994
- - ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (5,857) $ (2,321) $ 2,684
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 708 364 106
Gain (loss) on sale of discontinued operations 700 -- (1,003)
Gain on disposal of equipment (60) -- --
Deferred provision for income taxes 593 (380) (750)
Change in current assets and liabilities:
Accounts receivable and unbilled costs and fees 412 (1,349) 5
Inventory (51) (82) 178
Prepaid expenses and other assets 56 (251) (234)
Accounts payable (533) 627 (398)
Accrued expenses (198) 279 120
Deferred maintenance revenue -- 368 175
Current federal and state income taxes 537 (16) 7
Net assets of discontinued operations 4,379 (1,574) 8
---------------------------------------
Total adjustments 6,543 (2,014) (1,786)
---------------------------------------
Net cash provided (used) by operating activities 686 (4,335) 898
---------------------------------------
Cash flows from investing activities:
Capital expenditures (419) (249) (210)
Proceeds from sale of capital equipment 248 -- --
Proceeds from sale of marketable securities -- 9,155 3,480
Payments to acquire marketable securities -- -- (7,492)
Proceeds from the sale of the GSD -- -- 4,226
Payments for purchase of CCS, SCI and MCI (28) (6,366) --
Other investing activities 45 (9) --
---------------------------------------
Net cash provided (used) by investing activities (154) 2,531 4
---------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 112 200 487
Payments to acquire treasury stock -- -- (1,285)
---------------------------------------
Net cash provided (used) by financing activities 112 200 (798)
---------------------------------------
Net increase (decrease) in cash and cash equivalents 644 (1,604) 104
Cash and cash equivalents, beginning of year 2,373 3,977 3,873
---------------------------------------
Cash and cash equivalents, end of year $ 3,017 $ 2,373 $ 3,977
=======================================
Supplemental disclosures of cash flow information:
Non cash investing activities
Fair value of shares issued in connection with
acquisition of SCI and MCI $ 8 $ 1,972 $ --
=======================================
The accompanying notes are an integral part of the consolidated financial
statements.
17
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), System Constructs, Inc. (SCI), SofTech Investments, Inc.,
Compass, Inc. (Compass) and AMG Associates, Inc. (AMG). Compass and AMG are
inactive subsidiaries. The Network Systems Group (NSG) of IDI and SCI are
operations anticipated to be sold subsequent to year end and are therefore
presented as discontinued operations (See Note I). All significant intercompany
transactions have been eliminated. Certain amounts for prior years have been
reclassified to conform with the 1996 presentation.
On July 26, 1995, the Company announced its intention to seek
alternative strategies aimed at enhancing shareholder value including, but not
limited to, the sale of all or part of the business. On June 18, 1996, the
Company announced the signing of a non-binding letter of intent to sell the
Network Systems Group to Data Systems Network Corporation (DSN) (NASDAQ Small
Cap: DSYS, Pacific Stock Exchange: DSY). The acquisition is subject to execution
of a definitive agreement, various customary conditions and approval of the
Boards of Directors of both companies. There can be no assurance that a
definitive agreement will be consummated.
The proposed transaction, as contemplated by the letter of intent,
provides for the acquisition by DSN of certain assets and the assumption of
specified liabilities of NSG which has offices in Michigan, North Carolina and
New York and does business primarily through SofTech's wholly-owned subsidiary,
IDI. The assets to be acquired include inventory, equipment, maintenance
agreements, customer lists, intangibles and certain other assets, and the
assumption of certain liabilities of NSG. SofTech's net carrying value of the
assets to be sold and liabilities to be assumed in this transaction totals
approximately $2.0 million. SofTech will receive cash of about $2.3 million plus
540,000 shares of Data Systems' stock. Cash, accounts receivable, owned real
estate, and most liabilities will not be sold or transferred as part of this
transaction.
Notwithstanding the foregoing, there can be no assurance that the
proposed sale of NSG assets will in fact be consummated. Following the sale of
NSG, if consummated, SofTech's operations will be composed entirely of the CAD
Division. The Company is no longer marketing the CAD business for disposal.
The consolidated financial statements have been restated to reflect
the net assets and operating results of NSG as a discontinued operation. The
assets and liabilities of NSG have been reclassified in the Consolidated Balance
Sheets as net assets of discontinued operations. 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".
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. Revenue from
a single customer accounted for approximately $2,200,000 in 1995.
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 being amortized over a five-year period on a
straight-line basis. The unamortized book value of the service parts was $50,000
and $60,000 as of May 31, 1996 and 1995, 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
18
Depreciation expense was approximately $217,000, $147,000, and
$106,000 for fiscal 1996, 1995 and 1994, 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 adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) as of
June 1, 1993. SFAS No. 109 requires a company to recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in a company's financial statements or tax returns. Under
this method, 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. SFAS No. 109 also requires 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. Adoption of this statement
resulted in a cumulative effect of a change in accounting principle of
approximately $233,000 in fiscal 1994, primarily due to the recognition of
deferred tax assets previously not recorded under SFAS No. 96.
REVENUE RECOGNITION:
Revenue from computer systems sales is recognized upon shipment, or
installation and acceptance, if significant performance obligations remain.
Revenue from software maintenance agreements and service contracts are deferred
and amortized into income over the maintenance support period.
SOFTWARE PRODUCT COSTS:
Software development costs are capitalized, in accordance with
Statement of Financial Accounting Standard No. 86, subsequent to the
establishment of technological feasibility for the product. Capitalization
ceases when the product is available for general release to customers, at which
time amortization of the capitalized costs begins. Included in the results of
discontinued operations are software development costs incurred in the
development of High Performance FORTRAN Compiler technology of $154,000 in 1996,
$935,000 in 1995, and $347,000 in 1994, which have been expensed as incurred due
to the uncertainty of recoverability of these costs. No software costs were
capitalized to continuing operations in 1996, 1995 or 1994.
INTANGIBLE ASSETS:
Intangible assets represent 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 eight years. The unamortized excess of cost over fair value of
tangible assets acquired through business combination was $1,763,000 and
$2,202,000 at May 31, 1996 and 1995, respectively, and is included in other
assets. Accumulated amortization of these intangible assets was $681,000 and
$200,000 at May 31, 1996 and 1995, respectively.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" (FAS 121). FAS 121 requires
that an impairment loss be recognized for long-lived assets and certain
identified intangibles when the carrying amount of these assets may not be
recoverable. The Company will adopt FAS 121 in FY97 and does not expect the
adoption to have a material impact on the consolidated results of operations or
financial position of the Company. Additionally, adoption of FAS 121 will have
no cash flow impact on the Company.
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.
MARKETABLE SECURITIES:
Marketable securities have been carried at cost plus accrued interest
which approximates market value. The Company adopted Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," as of June 1, 1994. Adoption of this standard did not have a
material impact on its financial position or results of operations.
19
RISKS AND UNCERTAINTIES:
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. (Reference Note I - Discontinued Operations) Actual results
could differ from those estimates.
PLAN OF OPERATIONS:
The Company intends to continue to operate its CAD Division after the
proposed sale of the NSG Division and expects the marketing, distribution and
support of Computer Aided Design and Product Data Management software to be its
primary business.
Effective September 30, 1996, the Company will no longer be able to
sell the Pro/ENGINEER product line of Parametric Technology Corporation ("PTC"),
the supplier of the core technology of the Company. PTC has established
Pro/ENGINEER as a product of the direct sales force. Resellers such as the
Company will market, distribute and support a mid range product expected to be
introduced by PTC in September. This product is expected to sell for
approximately one half the price of Pro/ENGINEER and is more likely to be
operated on a personal computer. It is unclear as to the market acceptance of
the new product and the impact on the Company of the potential loss of hardware
revenue and margin related to workstations. The competitive environment for the
distribution of personal computers is such as to make it difficult for the
Company to pursue it as an opportunity.
The Company will receive a 20% margin on PTC software sales to its
customers by PTC for the period October 1 to December 31, 1996. In addition, the
Company will be permitted to market and support Pro/ENGINEER maintenance until
September 30, 1997. Lastly, it is expected that the Company will partner with
the PTC direct sales force to supply hardware and, in some cases, support
services related to sales of Pro/ENGINEER.
The current agreement between the Company and PTC to market products
and services expires on or about October 31, 1997 and is cancelable by either
party with 30 days notice. The ability to continue the relationship as a PTC
business partner is material to the business.
Subsequent to the proposed sale of NSG as described in Note L below,
the Company may have limited capital to operate the remaining CAD Division.
Management of the Company anticipates that the cash resources and net assets
remaining related to the CAD Division, as well as the cash generated from
operations, will be adequate to meet the Company's working capital needs through
fiscal 1997. However, due to the uncertainty related to the outcome of the
change in market direction caused by the actions of PTC described above there
can be no assurance of the Company's ability to fund operations through that
time period.
B. INCOME TAXES:
The provision for income taxes includes the following:
For the Years ended May 31, (in thousands) 1996 1995 1994
- - ----------------------------------------------------------------------
Current:
Federal $ -- $ -- $ --
State and local 20 61 50
----------------------
20 61 50
Deferred -- 33 --
----------------------
$ 20 $ 94 $ 50
======================
The provision for federal income taxes was reduced due to the use of
net operating loss carryforward benefits in 1995 and 1994 of $103,000 and
$864,000, respectively. State taxes of $33,000, $45,000 and $43,000 were paid in
1996, 1995, and 1994, respectively.
For tax purposes, at May 31, 1996, the Company had tax credit
carryforwards generated from research and development activities of $580,000
that expire from 2002 to 2006. In addition, an AMT credit of $133,000 that has
no expiration date was also available.
The Company's effective tax rates were 5% in 1996, 124% in 1995, and
5% in 1994. Reconciliations of the federal statutory rates to the effective
rates were as follows:
20
For the Years ended May 31, 1996 1995 1994
- - ------------------------------------------------------------------
Statutory rate (34)% 34% 34%
State and local taxes 3 53 4
Use of net operating losses -- -- (29)
Other 1 5 (4)
Valuation reserve 35 32 --
-------------------------
Effective tax rates 5% 124% 5%
=========================
Deferred tax assets(liabilities) were comprised of the following at
May 31:
(in thousands) 1996 1995
- - -------------------------------------------------------------------------
Deferred tax assets (liabilities):
Depreciation $ 11 $ 32
Net operating and capital loss carryovers 1,471 363
Tax credits 713 596
Inventory and receivables 410 191
Vacation 98 83
Differences in book and tax bases of assets
of acquired businesses 143 (161)
Deferred revenue -- (411)
Reserve for loss on disposal 280 --
Other 2 --
-------------------
Deferred tax assets 3,128 693
Less: valuation allowance (3,128) (750)
-------------------
Net deferred tax liability $ 0 $ (57)
===================
Balance sheet classification:
Current deferred asset - net $ 0 $ 593
Deferred tax liability - net (Net Assets from
discontinued operations) 0 (650)
-------------------
Net deferred tax liability $ 0 $ (57)
===================
The Company has net operating loss carryforwards of $3.3 million that
expire in 2010 and 2011.
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 BENEFIT 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 employee voluntary contributions, for fiscal
1996, 1995 and 1994 was $33,000 $25,000, and $9,000, 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. STOCK OPTIONS:
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.
21
Information relating to these plans is set forth below:
Number of Option Price
Shares per share
--------- --------------
Outstanding at May 31, 1993 332,050 $1.25 - 4.25
Options granted 456,300 1.875 - 7.00
Options lapsed (10,400) 6.625
Options terminated (64,382) 1.875 - 4.25
Options exercised (175,068) 1.875 - 3.375
--------
Outstanding at May 31, 1994 538,500 1.25 - 7.00
Options granted 122,800 4.00 - 6.375
Options terminated (24,000) 2.625 - 7.00
Options exercised (37,500) 2.625 - 3.00
--------
Outstanding at May 31, 1995 599,800 1.25 - 7.00
Options granted 165,000 4.50 - 4.625
Options terminated (167,700) 2.00 - 7.00
Options exercised (35,500) 2.25 - 3.00
--------
Outstanding at May 31, 1996 561,600 $1.25 - 7.00
--------
There were options for 220,530 shares exercisable at May 31, 1996 and
options for 207,700 shares were available for future grants under the 1994 Plan.
In addition, there were options granted outside the plans during fiscal 1992 to
an employee for 125,000 shares at $1.50, of which 5,000 were exercised during
fiscal 1996 and 76,000 were outstanding and exercisable as of May 31, 1996.
In October 1995, the Financial Accounting Standards Board issued
statement No. 123, "Accounting for Stock-Based Compensation," (FAS 123), which
will be effective for the year ended May 31, 1997. FAS 123 encourages, but does
not require companies to recognize compensation expense for employee stock-based
compensation arrangements using a fair value method of accounting. The Company
has determined that it will elect the disclosure only alternative and,
accordingly, will be required to disclose the pro forma net income or loss and
per share amounts in the notes to the consolidated financial statements using
the fair-value based method beginning in FY97. The adoption of FAS 123 will have
no cash flow impact to the Company.
E. COMMON STOCK:
Common stock changes during the three years ended May 31, 1996, 1995,
and 1994 were as follows:
($ in thousands) Capital in
Shares Par Value Excess of
Outstanding Issued Par Value
----------- --------- ----------
Balance, May 31, 1993 3,804,493 $ 388 $ 13,749
Shares issued for stock options exercised 199,068 20 467
Treasury shares repurchased (372,657) -- --
--------------------------------------
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
======================================
F. LINE OF CREDIT:
On June 29, 1995, the Company obtained a line of credit for up to
$10,000,000 from a commercial lending entity. Borrowings under this line are
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%. Availability is
subject to compliance with several covenants, including a minimum tangible net
worth. The Company was not in compliance with the tangible net worth covenant as
of May 31, 1996. Subsequent to year end, the line of credit was reduced to
$1,000,000 with maximum borrowings and other terms of the line of credit to be
reestablished pending the sale of the NSG business. Annual commitment fees under
this agreement are $25,000. The current line of credit expires on June 29, 1997.
22
G. COMMITMENTS:
The Company conducts its operations in facilities leased through
2002. Rental expense for fiscal years 1996, 1995, and 1994 was approximately
$203,000, $142,000, and $91,000, respectively.
At May 31, 1996, minimum annual rental commitments under
noncancellable leases were as follows:
Fiscal Year
1997 $ 209,165
1998 166,673
1999 117,250
2000 and thereafter None
H. 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 4,075,943 in 1996, 3,848,151 in
1995, and 3,810,331 in 1994. The earnings per share calculated for the fiscal
years 1996 and 1995 exclude the effect of common stock equivalents as they were
antidilutive. The fiscal 1994 weighted average shares outstanding included
dilutive stock options, using the treasury stock method.
I. DISCONTINUED OPERATIONS:
Prior to fiscal year end, the Board of Directors committed to a plan
to dispose of the NSG operations and to focus SofTech on the CAD Division as its
sole operating unit.
Subsequent to year end, on June 18, 1996, the Company announced the
signing of a non-binding letter of intent to sell the NSG operations as
described in Note A, above. The transaction is expected to be completed in early
September 1996.
Included in the 1996 results is an estimated loss of $700,000
expected to be realized upon completion of the sale of NSG, as presented on the
Statement of Operations under the caption "Discontinued operations: Gain (loss)
from disposal." The anticipated premium of $2.7 million in excess of net
tangible value of the assets to be transferred, if the transaction is completed,
would be offset by estimated expenses of $3.4 million directly related to the
transaction. Those estimated expenses include: the write off of approximately
$1.6 million of unamortized NSG goodwill as of the expected transaction date,
projected value of the proposed issuance of 409,500 SofTech shares to certain
key executives as described in Note L, and certain transaction related expenses
of about $1.3 million associated with employment and severance agreements, and
professional fees.
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
have either been collected or written off and there is no GSD related net asset
value on the balance sheet.
Revenue from discontinued operations for the years ended May 31,
1996, 1995, and 1994 was approximately $30,397,000, $40,164,000, and
$42,870,000, respectively.
The net assets of discontinued operations, which are included in the
Consolidated Balance Sheets as of May 31, are as follows:
(in thousands) 1996 1995
- - ----------------------------------------------------------------------
Accounts receivable (net) $ 6,466 $10,406
Unbilled costs and fees 686 1,285
Inventory 1,603 1,518
Prepaid expenses and other receivables 500 917
Deferred income taxes receivable 4 --
Fixed assets (net) 1,544 1,836
Other assets (net) 1,730 2,419
--------------------
Total assets 12,533 18,381
Accounts payable 1,855 2,717
Accrued expenses 1,844 1,351
Deferred revenue 1,311 1,066
Deferred taxes -- 645
--------------------
Total liabilities 5,010 5,779
--------------------
Net assets of discontinued operations $ 7,523 $12,602
====================
23
J. ACQUISITIONS:
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 over the next two years, the Company made a
cash payment totaling $426,000.
The payment of $426,000 is composed of three separate items which are
as follows:
* $281,000 non-recoverable cash payment;
* an advance of $70,000 recoverable only against commissions earned
through the sale of the CAD Division; and
* a $75,000 cash payment for termination of the final two years of the
building lease at the Pennsylvania facility owned by a family trust of
which the majority stockholder of the Seller is a Trustee. In
addition, a twelve (12) month option to buy out the period from
November 5, 1998 to November 4, 2000 for an additional cash payment of
$75,000 was extended to the Company.
The entire payment of $426,000 was expensed and included in selling,
general and administrative expense in fiscal 1996.
K. LITIGATION:
Subsequent to year end, the Company 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 is seeking
enforcement of the agreements and compensation for damages incurred due to these
violations. The case is in the discovery period and it is unclear, at this time,
how this matter will be resolved.
L. SUBSEQUENT EVENT:
On August 13, 1996, the Board of Directors approved a preliminary
plan for the distribution of the net proceeds expected to be realized from the
proposed sale of certain NSG assets and the liquidation of the NSG balance sheet
which primarily involves the collection of receivables, sale of the North
Carolina facility and payment of trade payables. The plan anticipates the
accumulation of the proceeds from the sale following the transaction,
determination of the amount to be distributed to the Company's stockholders,
establishment of a record date and completion of the distribution. It is
expected that this can be completed in calendar 1996. Sufficient resources would
be retained to fund the working capital needs of the remaining CAD Division.
On August 15, 1996, the Company entered into a "Memorandum of
Understanding" with senior management of the CAD Division. The Memorandum
establishes the terms by which the respective parties intend to provide
continuing management and operation of SofTech and its remaining CAD Division
following the proposed sale of NSG, if it is consummated. The terms are
summarized as follows:
* Immediately following the NSG sale, Norman Rasmussen, the Company's
current CEO, would resign that position and the Board of Directors
will elect Mark Sweetland CEO of the Company;
* Mr. Sweetland and Timothy Weatherford, a senior manager of the CAD
Division, would be elected to the Company's Board of Directors;
* Immediately following the record date for payment of the dividend to
shareholders, Messrs. Sweetland and Weatherford would each receive
204,750 shares of the Company's common stock;
* The Company would lend to Messrs. Sweetland and Weatherford amounts
equal to their tax liability for the stock issuance, pursuant to notes
maturing in three years. Such notes will bear interest at the lowest
rate allowed to avoid "imputed interest" under the Internal Revenue
Code and shall be collateralized by the shares; and
24
* Immediately following the distribution of the NSG proceeds, Messrs.
Strehle and McNay would resign from the Board of Directors after
electing at least a comparable number of outside directors to replace
them.
All of the proposed actions described above, including without
limitation the proposed distribution of cash and shares of stock of Data Systems
Network Corporation, the resignation and election of directors and officers, the
granting of shares of the Company's common stock to continuing management and
the loans to be made in conjunction therewith, are subject to successful
consummation of the proposed sale of assets of the NSG, collection of accounts
receivable and other assets retained by the Company and not sold as part of the
transaction, and the continuing review and oversight of the Board of Directors
of the Company. There can be no assurance that the proposed transaction with
Data Systems Network Corporation will in fact be consummated or that any
distribution to stockholders or the proposed related transactions will in fact
take place.
25
SOFTECH, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
For the year ended May 31, 1996
Col. A Col. B Col. C Col. D Col. E
- - ---------------------------- ------------ ---------- ---------- ----------
Balance at Charged to Balance at
beginning of costs and end of
Description period expenses Deductions period
- - ----------- ------------ ---------- ---------- ----------
Allowance for uncollectible
accounts receivable
(in thousands):
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.
By /S/ Norman L. Rasmussen
---------------------------------------
Norman L. Rasmussen, President
Date: August 28, 1996
--------------------------------
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/ Norman L. Rasmussen President and Chief Executive Officer 8/28/96
- - ------------------------------- (Principal Executive Officer and Director)
Norman L. Rasmussen
/S/ Joseph P. Mullaney Vice President, Treasurer, Chief Financial 8/28/96
- - ------------------------------- Officer
Joseph P. Mullaney
/S/ Glenn P. Strehle Director 8/28/96
- - -------------------------------
Glenn P. Strehle