SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1999
Commission file number 0-10665
SofTech, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2453033
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(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
4695 44th Street S.E., Suite B-130, Grand Rapids, MI 49512
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 957-2330
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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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: $12,549,000 as of August 20, 1999. On August 20, 1999 the
registrant had outstanding 8,150,289 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 1999 annual meeting are incorporated by reference into Part III
of this report, to the extent set forth in said Part III.
1
PART I
ITEM 1 - BUSINESS
THE COMPANY
SofTech, Inc. was formed in Massachusetts on June 10, 1969. The Company
had an initial public offering in August 1981 and a subsequent offering in
December 1982.
From inception until the disposition of the Government Systems Division in
December 1993, the Company's primary business was that of custom software
development for the U.S. Government, primarily the Department of Defense.
Today, SofTech is a leading provider of Design through Manufacturing
Technologies and Services. It offers software technology of its own to the 2D
Computer Aided Design ("CAD") and the Computer Aided Manufacturing ("CAM")
markets, partners with 3D and Product Data Management ("PDM") technology
companies, provides hardware and a full array of services offerings in order to
bring complete solutions to its customers' mechanical engineering problems. The
Company believes that this "one-stop-shopping" concept is important to many of
its customers. The following is a brief synopsis of how the Company evolved over
the last three fiscal years from a reseller to a technology and services
solution provider.
In June 1996 the Company developed a strategy to focus all of its
resources on the CAD/CAM and PDM marketplace. An important part of implementing
that strategy was to dispose of all unrelated businesses through sale or
otherwise. This focus was completed with the sale of the Company's Network
Systems Group ("NSG") in September 1996 and the distribution of the net proceeds
from that sale in the form of dividends (return of capital) to shareholders in
December 1996 and June 1997 totaling approximately $2.56 per share.
As of June 1996 the Company's CAD/CAM and PDM business was that of
marketing and supporting the sale of Parametric Technology Corporation's
(NASDAQ:PMTC) Pro/ENGINEER family of software offerings. The Company had been
one of the largest distributors of PMTC's products since the introduction of
Pro/ENGINEER in 1988. The Company had been notified (as had all of PMTC's
distributors) that as of September 30, 1996 it would no longer be allowed to
market the Pro/ENGINEER software. All PMTC distributors would instead be focused
on marketing a newly introduced mid-range software offering named PT/Modeler.
The capability and the pricing of this product was described in detail in the
Company's 1997 Form 10-K filing in "ITEM 1 - BUSINESS" under the caption
"PRODUCT TRANSITION". The Company signed a distribution agreement for PT/Modeler
in July 1996 and marketed that product through September 30, 1997, at which time
the distribution agreement terminated and was not renewed.
PMTC's decision in 1996 to terminate its distributors' right to sell the
Pro/ENGINEER family of products caused a significant detrimental impact on the
business model of the Company. Instead of marketing a $20,000 per unit
Pro/ENGINEER software package that was sold primarily on a $20,000 UNIX
workstation and brought with it a $10,000 services contract, the Company was
marketing a $4,000 software package that operated only on an Intel based
personal computer.
In December 1996 and in February 1997 the Company completed two
acquisitions of CAD/CAM services-only businesses. The Company also opened 5 new
offices in 5 new states to broaden its geographic reach in the U.S. market. By
the end of fiscal 1997 the Company had 11 offices in 10 states in the U.S.
In November 1997 the Company acquired the Advanced Manufacturing
Technology group ("AMT") from CIMLINC Incorporated. This group possessed 2D CAD
technology, an installed base and a newly introduced CAM technology product
called PROSPECTOR(TM). This technology acquisition was followed by the
acquisition of Adra Systems, Inc. in May 1998. Adra also had a 2D CAD
technology, an installed base of approximately 20,000 seats and a recurring
service business. In January 1998 the Company also signed a distribution
agreement with Structural Dynamics Research Corporation (NASDAQ:SDRC) to market
its 3D CAD products throughout North America. Lastly, during fiscal 1998 the
Company acquired another CAD/CAM services-only business and an SDRC distributor.
By the end of fiscal 1998 the Company had 25 offices in 16 states in the U.S., 4
offices in Western Europe and indirect distribution for its technology in Asia.
In March 1999, the Company signed a distribution agreement with think3,
Inc., a privately held start up company. think3's product is a mid-range solid
modeling solution targeted to a fast growing segment of the mechanical CAD
marketplace. Its solid modeling solution is NT based and is sold on a
subscription basis rather than a licensing arrangement. SofTech has developed an
interface between its 2D technology and the think3 solid modeling solution. It
is expected that the think3 solution will complement SofTech's own technology
but it is not expected that this arrangement will have a significant impact on
SofTech's revenue or profitability in the next year.
2
Today, the mechanical CAD market place is composed of approximately 1
million 2D users and 400,000 high-end 3D users. AutoCAD is the dominant 2D
system in use. Primarily four technology providers, PTC, SDRC, Unigraphics and
Dassault, share the 3D user base. In 1996, Solidworks Corporation introduced a
3D solid modeling product that was developed for the NT operating platform and
was priced substantially below the popular high-end 3D systems available at that
time. Since its introduction, Solidworks has shipped approximately 35,000 units.
That success has resulted in the introduction of several other midrange products
and has forced the high-end modelers to reduce unit price and unbundle their
technology.
It is anticipated that over the next several years many of the 1 million
2D users will begin to add 3D capability given the ease of use and affordability
available in today's technologies. The think3 agreement provides the Company a
mid-range solid modeling solution to offer its 2D users that wish to add that
capability.
PRODUCTS AND SERVICES
As noted above, the Company has evolved over the last three years through
seven acquisitions and internal expansion from a distributor of PMTC's products
into an independent technology and services entity. This transition has made it
difficult to draw comparisons from period to period.
The following table is meant to help clarify this transition by detailing
the components of product revenue by fiscal year. Product revenue was composed
of the following (000's):
1999 1998 1997 1996
---- ---- ---- ----
SofTech software (AMT & Adra) $ 8,815 $3,023 $ -- $ --
Hardware 3,141 4,286 6,212 6,717
PMTC software -- 612 2,442 2,895
Other 3rd party software 2,324 731 675 682
------- ------ ------ -------
Total product revenue $14,280 $8,652 $9,329 $10,294
======= ====== ====== =======
In fiscal 1996 and 1997 the Company's product revenue was derived almost
exclusively from the sale of PMTC software (Pro/ENGINEER) and hardware. The
hardware sold in those periods was high-end workstations with gross margins in
excess of 30% driven primarily by the sale of the Pro/ENGINEER software. Sales
of Pro/ENGINEER software and related high-end workstation carried into fiscal
year 1997 (the distribution agreement for Pro/ENGINEER ended September 30,
1996). The shift in October 1996 to sales of the mid-range software offering of
PMTC which runs on an Intel based hardware platform caused a reduction in
revenue derived from both software and hardware and was the reason for the 9%
decrease overall in product revenue from fiscal 1996 to 1997. In fiscal 1998,
the PT/Modeler distribution agreement with PMTC terminated in September 1997 and
the revenue from that product ceased. The full impact of the shift to PT/Modeler
and Intel based hardware can be seen in the 31% decline in hardware revenue in
fiscal 1998 as compared to 1997. The acquisitions of AMT and ADRA by the Company
during fiscal 1998 replaced the lost revenue from PMTC software and hardware
from fiscal 1996 and 1997.
For fiscal 1999, revenue derived from the sale of SofTech owned technology
was 62% of product revenue, up from 35% in fiscal 1998. Hardware revenue
declined 27% from fiscal 1998 to 1999 as that component of revenue has become
less important to the Company's business model. Other third party software
increased nearly three times from fiscal 1998 levels to equal the amount of
software revenue generated from the sale of PMTC software in fiscal 1997.
The components of service revenue have also changed dramatically as a
result of the changes detailed above. Service revenue was composed of the
following (000's):
1999 1998 1997 1996
---- ---- ---- ----
Consulting, discreet services and training $ 6,448 $ 6,231 $2,228 $ 726
Maintenance of AMT and ADRA software 8,580 2,142 -- --
Hardware and 3rd party software maintenance 1,249 2,954 3,147 2,638
------- ------- ------ ------
Total service revenue $16,277 $11,327 $5,375 $3,364
======= ======= ====== ======
3
The changes in the make-up of the business are also quite evident when the
components of service revenue are detailed as in the above table over the last
four years. In fiscal 1996, the service revenue was composed primarily of
hardware and 3rd party software maintenance (PMTC software maintenance
primarily). The discreet service revenue generated in fiscal 1996 was, for the
most part, related to the sale of the Pro/ENGINEER software. With the
acquisition of the two services-only businesses in fiscal 1997, the consulting,
discreet services and training revenue more than tripled from fiscal 1996 and is
responsible for the 60% overall growth in service revenue. This consulting,
discreet services and training revenue nearly tripled again from fiscal 1997 to
1998 as the 1997 acquisitions contributed for the full year 1998 and was the
primary reason for the service revenue growth of 111% from fiscal 1997 to 1998.
This component of revenue increased only about 3% from fiscal 1998 to 1999 as
the businesses were integrated into the Company and greater focus was brought to
bear on performing higher margin consulting services rather than lower margin
design services. Maintenance of SofTech owned technology generated about 53% of
fiscal 1999 service revenue as the full year maintenance revenue was included in
fiscal 1999 as compared to fiscal 1998's partial year for each product line from
the acquisition dates forward. The maintenance revenue generated from hardware
and 3rd party software agreements declined slightly from fiscal 1997 to 1998 and
by about 58% from fiscal 1998 to 1999 due to the termination of the PMTC
distribution agreement.
COMPETITION
The Company competes against much larger entities in an extremely
competitive market for all of its software and service offerings. The 2
D-software technologies acquired in the acquisitions in fiscal 1998 compete
directly with the offerings of such companies as AutoDesk and MicroCADAM. This
2D technology is also marketed as a complementary offering to many 3D products
offered by companies such as PMTC, Dassault, Unigraphics and SolidWorks that all
possess some level of 2D drafting capability. These companies all have financial
resources far in excess of those of the Company.
The Company's CAM technology, PROSPECTOR(TM), is marketed to the Plastic
Injection Mold and Tool & Die industries. While the large CAD companies such as
PMTC, Dassault, SDRC and AutoDesk have modules that compete in this market, none
focus exclusively on CAM technology.
The service offerings of the Company which include consulting, training,
discreet engineering services and contract placement compete with offerings by
all of the large CAD companies noted above, small regional engineering services
companies and the in-house capabilities of its customers.
PERSONNEL
As of May 31, 1999, the Company employed 170 persons. These employees were
distributed over functional lines as follows: Sales = 34; Product Development =
40; Engineers = 63; General and Administrative = 33.
The ability of the Company to attract qualified individuals with the
necessary skills is currently, and is expected to continue to be, a constraint
on future growth.
BACKLOG
Backlog as of May 31, 1999 and 1998 was approximately $1,316,000 and
$243,000, respectively. Deferred revenue, which represents primarily software
maintenance contracts to be performed during the following year, totaled
approximately $4,725,000 and $3,522,000 at May 31, 1999 and 1998, respectively.
Given the short time period between receipt of order and delivery, on average
less than 30 days, the Company does not believe that backlog is an important
measure as to the relative health of the business.
RESEARCH AND DEVELOPMENT
With the acquisitions of the software technologies of AMT and ADRA, the
Company now has approximately 40 engineers in its research and development
groups located in Michigan and Massachusetts. In fiscal 1999 and 1998 the
Company incurred research and development expense of approximately $5,520,000
and $350,000, respectively, related to the continued development of technology.
The Company's ability to continue to maintain the ADRA software so it is
compatible with the other 3D offerings in the marketplace and to continue to
improve the PROSPECTOR(TM) technology is critical to its future success. The
Company expects to incur research and development expenditures of approximately
$6 million in fiscal 2000.
CUSTOMERS
No single customer accounted for more than 10% of the Company's revenue in
fiscal 1999, 1998, or 1997. 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.
4
SEASONALITY
The first quarter, which begins June 1 and ends August 31, has
historically been the slowest quarter of the Company's fiscal year. Management
believes this weakness is due primarily to the buying habits of the customers
and the fact that the quarter falls during prime vacation periods.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
Name Age Position
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Mark R. Sweetland 50 President and Chief Executive Officer,
Director
Timothy J. Weatherford 34 Executive Vice President, Sales, Director
Joseph P. Mullaney 42 Vice President, Treasurer and Chief
Financial Officer
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 the Executive
Officer not identified in the Proxy Statement:
Joseph P. Mullaney was appointed Vice President, Treasurer, and Chief
Financial Officer of the Company in November 1993. He started with the Company
in May 1990 as Assistant Controller and was promoted to Corporate Controller in
June 1990. Prior to his employment with SofTech he was employed for seven years
at the Boston office of Coopers & Lybrand LLP (now PriceWaterhouseCoopers LLP)
as an auditor in various staff and management positions.
ITEM 2 - PROPERTIES
The Company leases office space in Grand Rapids and Bloomfield Hills,
Michigan; Tewksbury, Massachusetts; Indianapolis, Indiana; Milwaukee, Wisconsin;
Cincinnati and Cleveland, Ohio; Yardley, Pennsylvania; Austin and Houston,
Texas; Maitland, Florida; Windsor, Ontario; Lenexa, Kansas; Nottingham, England,
Ismaning, Germany and Milan, Italy. The total space leased for these locations
is approximately 95,000 square feet. The fiscal 1999 rent was approximately
$1,042,000. The Company believes that the current office space is adequate for
current and anticipated levels of business activity.
ITEM 3 - LEGAL PROCEEDINGS
In July 1999, the Company settled its litigation brought against it by
PMTC in March 1998. This litigation was described in the Company's 1998 Annual
Report on Form 10-K under Item 3 - Litigation. Under the terms of the settlement
agreement, the Company agreed to, among other things, limit its training
activities with respect to PMTC products and both companies agreed not to pursue
their respective claims against each other.
On June 25, 1997, the Company served notice to Data Systems Network
Corporation ("DSNC") in accordance with the Asset Purchase Agreement that the
Company had incurred losses as a result of DSNC's breach of the provisions of
the Asset Purchase Agreement and the Registration Rights Agreement.
On June 16, 1998, plaintiff Data Systems Network Corporation ("DSNC")
filed suit in the Circuit Court in the County of Oakland, Michigan alleging that
the Company wrongfully retained amounts of money due DSNC pursuant to the Asset
Purchase Agreement, that the Company owes DSNC outstanding rent under a sublease
agreement, has failed to pay invoices for work completed by DSNC and that
certain financial software sold by the Company to DSNC in the transaction was
not working properly. The Complaint alleges breach of contract, conversion,
unjust enrichment and fraud. The Company has filed a Demand for Arbitration
pursuant to the Asset Purchase Agreement, and discovery in the arbitration
matter is proceeding. The Company intends to pursue its claims through the
arbitration process against DSNC and to vigorously defend itself against the
counterclaims for which it believes it has meritorious defenses.
On January 29, 1999 claimant CIMLINC Incorporated ("CIMLINC") sought a
demand for arbitration pursuant to the Asset Purchase Agreement between CIMLINC,
Inc., CIMLINC, Ltd., CIMLINC GmbH and the Company. In its demand, CIMLINC claims
entitlement based on an alleged failure of SofTech to register stock received in
the acquisition transaction, receivables allegedly due to CIMLINC, royalty
payments and an alleged failure to assume and pay certain liabilities of
CIMLINC, and other relief, including costs and fees. Discovery in the case has
begun and the arbitration hearing is scheduled for September 29, 1999.
Management believes that amounts accrued at May 31, 1999 for matters
discussed above are sufficient to cover resulting settlements and costs and does
not anticipate a material impact on the financial position or results of
operations of the Company beyond such amounts accrued.
5
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of the Stockholders of SofTech.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
The Company's common stock trades on the NASDAQ Stock Market under the
symbol "SOFT". At May 31, 1999, there were approximately 296 holders of record
of the Company's common stock. This does not include the shareholders that have
their shares held in street name with brokers or other agents, that totaled
approximately 5.2 million shares, or 63% of outstanding shares. The table below
sets forth quarterly high and low bid prices of the common stock for the
indicated fiscal periods as provided by the National Quotation Bureau. These
quotations reflect inter-dealer prices without retail mark-up, markdown, or
commission and may not necessarily represent actual transactions.
1999 1998
---- ----
High Low High Low
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First Quarter 8 2 7/8 3 5/8 1 1/2
Second Quarter 4 1/4 2 7/8 2 1/2 1 7/16
Third Quarter 4 1/4 1 15/16 3 3/8 2 1/4
Fourth Quarter 2 11/16 1 15/16 7 7/8 3 1/8
The Company distributed the net proceeds from the sale of its Network
Systems Group in the form of two distributions. On December 30, 1996, the
Company made a distribution of cash at a rate of $1.50 per share to its
shareholders of record on December 26, 1996. On June 6, 1997, the second
installment was in the form of DSN shares at a rate of approximately 0.1031 for
each share of SofTech owned on the record date of May 23, 1997. All fractional
shares were paid in cash at the assumed market price of $10.00 per share. It is
anticipated that these distributions will qualify for treatment as a
distribution in partial liquidation pursuant to Section 302(b)(4) of the
Internal Revenue Code of 1986, as amended. See note H to the Consolidated
Financial Statements of the Company included herein. The Company has not paid
any other cash dividends in the past and it does not anticipate paying cash
dividends in the foreseeable future.
6
ITEM 6 - SELECTED FINANCIAL DATA
The table set forth below contains certain financial data for each of the
last five fiscal years of the Company. This data should be read in conjunction
with the detailed information, financial statements and notes thereto, as well
as Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
Fiscal Year
(in thousands, except per share data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Revenue from continuing operations $30,557 $19,979 $14,704 $13,658 $10,403
Income (loss) from continuing operations (5,750) 1,334 2,282 (456) (18)
Diluted earnings per share:
Income (loss) from continuing
operations (.77) .22 .50 (.11) .00
Net income (loss) (.77) .22 .09 (1.44) (.60)
Basic earnings per share:
Income (loss) from continuing
operations (.77) .23 .52 (.11) (.00)
Net income (loss) (.77) .23 .10 (1.44) (.60)
Weighted average number of shares
outstanding - diluted 7,485 6,114 4,530 4,076 3,848
Weighted average number of shares
Outstanding - basic 7,485 5,711 4,410 4,076 3,848
Working capital (deficit) 1,491 (7,519) 2,920 12,191 17,929
Total assets 32,669 36,060 10,152 17,037 23,505
Total liabilities 22,988 24,878 3,315 2,080 2,811
Stockholders' equity 9,681 11,182 6,837 14,957 20,694
Note: The results for fiscal year 1999 and 1998 include the effect of the
acquisitions of the AMT division of CIMLINC Incorporated and the ADRA business
of MatrixOne, Inc. in November and May of fiscal 1998, respectively. The results
for fiscal years 1998 and 1997 include an investment gain on the disposal of DSN
shares of approximately $253,000 and $2.1 million, respectively. The results for
fiscal years 1998 and 1997 include the effect of the acquisitions of Computer
Graphics Corporation and Ram Design and Graphics Corp. in December and February
of fiscal 1997, respectively. See Note I to the Consolidated Financial
Statements included herein for certain pro forma information related to these
acquisitions.
The financial information for fiscal 1996 and prior fiscal years have been
restated to reflect the operating results of the Network Systems Group as a
discontinued operation. Certain amounts for prior years have been reclassified
to conform to the 1999 presentation.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements. The words "believe",
"expect," "anticipate," "intend," "estimate," and other expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. These statements include
statements regarding the Company's intent, belief or current expectations. You
are cautioned that any forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Among the factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include, but are not limited to, market acceptance of the Company's
PROSPECTOR(TM) technology, continued revenue generated from the CADRA(TM)
product family, the ability to continue to assimilate the acquisitions into the
Company, the ability of senior management to manage the expected growth and the
ability of the Company to attract and retain qualified personnel both in our
7
existing markets and in new office locations. Approximately 25% of the CADRA(TM)
revenue has previously been generated from the Asian market and part of the
future growth of the PROSPECTOR(TM) technology revenue is anticipated from that
market.
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, 1999. In addition, the change in those items, again expressed as a
percentage, for each of the two years ended May 31, 1999 is presented.
Percentage change
Items as a percentage of revenue year to year
1999 1998 1997 1998 to 1999 1997 to 1998
-----------------------------------------------------------------
Revenue
Products 46.7% 43.3% 63.4% 65.0% (7.3)%
Services 53.3 56.7 36.6 43.7 110.7
----- ----- -----
Total revenue 100.0 100.0 100.0 52.9 35.9
Cost of sales
Products 15.2 18.6 41.7 25.0 (39.6)
Services 25.2 32.6 25.5 19.5 73.9
----- ----- -----
Total cost of sales 40.4 51.2 67.2 21.5 3.5
Gross margin
Products 67.5 57.1 34.3 95.1 54.6
Services 52.6 43.0 30.3 75.7 201.9
Total gross margin 59.6 49.1 32.8 85.5 104.1
S.G.& A., including R&D 73.0 41.8 31.8 167.0 79.4
Gain on investments -- 1.3 14.5 (100.0) (88.1)
Interest expense 5.1 1.3 -- 518.5 100.0
----- -----
Income (loss) from continuing
operations before income tax (18.5) 7.3 15.5 (488.0) (35.9)
Income tax provision .3 .6 -- (37.8) N/A
----- ----- -----
Income (loss) from continuing
operations (18.8) 6.7 15.5 (531.0) (41.5)
===== ===== =====
DESCRIPTION OF THE BUSINESS
SofTech was formed in 1969 and its stock has been publicly listed on the
NASDAQ Exchange since 1981 under the symbol "SOFT". For much of its past until
the disposition of the Government Systems Division ("GSD") in December 1993, the
Company's primary business was that of customized software development for the
Department of Defense. In June 1996 the Company devised a strategy to focus all
of its resources on the CAD/CAM and PDM marketplace and either discontinued or
disposed of all of its operations that were not related to that market. In
December 1996 and in June 1997 the Company returned approximately $2.56 per
share of capital to its shareholders in the form of distributions that resulted
from the sale of the non-core business units.
In June 1996 the Company had 6 offices in 5 states marketing the
Pro/ENGINEER software as its primary offering. As more fully detailed in the
Company's 1997 Form 10-K filing in "Item 1 - BUSINESS" under the caption
"PRODUCT TRANSITION", effective September 30, 1996 the Company was no longer
allowed to resell Pro/ENGINEER but instead was licensed by PMTC to market a
mid-range offering known as PT/Modeler. The Company marketed this product
through September 30, 1997 when the distribution agreement was terminated and
was not renewed.
As part of the decision to focus all of its resources on the CAD/CAM and
PDM marketplace in June 1996, the Company developed an acquisition and internal
growth strategy aimed at reducing its dependence on technology providers such as
PMTC. In fiscal 1997 the Company acquired two CAD/CAM services-only businesses.
In fiscal 1998 the Company acquired two CAD/CAM technology companies, a CAD/CAM
and PDM services business and a Structural Dynamics Research Corporation
("SDRC") reseller. As a result, the Company now has 25 offices in 16 states and
4 offices in Western Europe along with strong indirect distribution
relationships in Asia. Most importantly, the Company now possesses technology of
its own and approximately 100 degreed mechanical engineers. The Company believes
that its access to a stable, recurring service business can reduce the impact of
fluctuations in the software order flow from quarter to quarter.
8
RESULTS OF OPERATIONS
Total revenue increased from $20.0 million in fiscal 1998 to $30.6 million
in fiscal 1999, an increase of 53%. The increase was due to the acquisitions of
the CAD/CAM technology companies acquired during fiscal 1998 that were included
in fiscal 1999 results for the full year which increased from $5.2 million in
1998 to $17.4 million in 1999. Total revenue increased from $14.7 million in
fiscal 1997 to approximately $20.0 million in fiscal 1998, an increase of 36%.
The increase was primarily the result of the acquisitions of the two services
businesses in the last half of fiscal 1997 that were included in fiscal 1998
results for the full year and the two technology companies acquired in fiscal
1998. The technologies the Company now owns through these acquisitions have
essentially become the primary technology offerings although reseller agreements
with third party technology companies is expected to be of continued importance.
Product revenue, which includes revenue from the sale of hardware and
software, increased approximately $5.6 million, or 65%, in fiscal 1999 from
fiscal 1998. The increase is the result of the acquisitions of the CAD/CAM
technology companies during fiscal 1998 that were included in fiscal 1999
results for the full year. Product revenue from the sale of these technologies
grew to $8.8 million in 1999 from $3.0 million in 1998. Product revenue
decreased approximately 7% in fiscal 1998 from fiscal 1997. This decrease is the
result of the termination of the PMTC distribution agreement in September 1997,
the cessation of the Company's marketing of PMTC's PT/Modeler product and the
shift to the sale of the Company's own technology acquired in the November 1997
acquisition of the Advanced Manufacturing Technology group ("AMT"). The CAM
technology acquired by the Company in the AMT acquisition has a much higher sale
price, approximately $16,000 per unit, and is marketed primarily to the Plastic
Injection Molding and the Tool and Die Industries. This specialized product
offered to a niche market, sold on the basis of improved throughput allows for a
higher sales price per unit than the 3D-design software previously marketed by
the Company.
Service revenue increased approximately 44% from fiscal 1998 to fiscal
1999, or about $5.0 million. This increase was the result of the acquisitions of
the CAD/CAM technology companies during fiscal 1998 that were included in fiscal
1999 revenue for the full year which contributed approximately $8.6 million of
software maintenance revenue in fiscal 1999 as compared to $2.1 million in
fiscal 1998. Service revenue increased approximately 111% from fiscal 1997 to
fiscal 1998. This increase of approximately $6.0 million is the result of the
two services-only businesses acquired in the second half of fiscal 1997
contributing for the entire fiscal 1998, the expansion of the Company's
Consulting Services business and the services revenue generated from the AMT
acquisition in November 1997.
Product gross margin improved to 68% in fiscal 1999 from 57% in fiscal
1998. The increased margin was the result of the increase of product revenue
from the sale of the Company-owned technology in fiscal 1999 relative to fiscal
1998. Company-owned technology margins generally carry a margin significantly
higher than 3rd party technology. Product gross margins improved to 57 % for
fiscal 1998 as compared to 34% in fiscal 1997. This improvement is the result of
the termination of the PMTC distribution agreement in September 1997, the sale
of the Company's own technology beginning in November 1997 which has a gross
margin of about 90% and the reduced hardware revenue generated in fiscal 1998 as
compared to fiscal 1997, which carries a lower gross margin. The fiscal 1998
product gross margins increased from 41% and 44% in Q1 and Q2, respectively, to
62% and 67% in Q3 and Q4, respectively, with the technology acquisitions.
Service gross margins improved to 53% in fiscal 1999 as compared to 43% in
fiscal 1998. The improvement from fiscal 1998 to 1999 was due primarily to the
acquisition of the CAD/CAM technology companies during fiscal 1998 that were
included in fiscal 1999 results for the full year. These two technology
companies enjoyed higher margins from service due to the recurring maintenance
revenue on software as compared to the Company's traditional time and material
service offerings. Service gross margins improved to 43% in fiscal 1998 as
compared to 30% in fiscal 1997. This improvement is partly the result of the
Company's acquisition of AMT in November. In addition, the increase in business
generated from the Consulting Services group in the Company which carried a
higher bill rate and the improved average billing rates experienced by the
service group overall as a result of an increased demand for these type of
services within the marketplace have caused the service margin to increase in
fiscal 1998 relative to 1997.
Research and development expenditures during fiscal 1999 totaled
approximately $5.5 million. During fiscal 1998 the total R&D expenditures were
only about $354,000. In fiscal 1997 there were no research and development
expenditures. The increases are a direct result of the Company's acquisitions
during fiscal 1998 of the technology companies noted previously. During fiscal
1999 the Company increased its investments in the technologies acquired in order
to bring these technologies up to date after a period of reduced investment in
research and development prior to the acquisitions. The Company anticipates that
this increased investment will result in a slowing of the degradation of the
software maintenance revenue and the introduction of new products in the future.
Selling, general and administrative expense for fiscal 1999 increased 110%
from fiscal 1998, an increase of approximately $8.8 million. The increased
S.G.&A. spending is the result of the acquisitions made during FY98 which
increased FY99 headcount and related payroll expenses, infrastructure costs
associated with the additional office locations, and non-cash amortization
expense related to goodwill and capitalized software. Selling, general and
administrative expenses increased approximately 72% in fiscal 1998 from 1997, an
increase of approximately $3.3 million. Approximately 60% or $2.1 million of
that increase was the result of increased headcount resulting from the
acquisitions and internal expansion over the last two years. Infrastructure
expenses related to expenses from facilities accounted for approximately
$600,000 of the increase and non-cash expenses primarily related to amortization
of goodwill and software accounted for approximately $500,000 of the increase.
9
In fiscal 1998 and fiscal 1997, the results from continuing operations
included realized gains on available-for-sale securities of $253,000 and
$2,125,000, respectively. These gains resulted from the distribution of shares
received in the sale of the Company's NSG business in September 1996 as
described in the Company's 1997 Form 10-K filing in "Item 1 - BUSINESS" under
the caption `DISCONTINUED OPERATIONS" and in "Item 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" under the caption
"RESULTS OF OPERATIONS".
The effective tax rate in fiscal 1999 was 1%, which related primarily to
foreign and state tax provisions partially offset by recovery of federal taxes
previously paid. The effective tax rate for fiscal 1998 was approximately 9%
which included a current federal tax provision of $164,000 partially offset by a
deferred federal tax benefit of $125,000. In addition, the effective tax rate
included foreign taxes of $25,000 and state and local taxes of $63,000. The
effective tax rate for fiscal 1997 was zero as a result of a federal tax benefit
of $74,000 offsetting a state tax provision of $71,000. The federal tax benefit
was generated from a current federal provision of $105,000 which was offset by
the recovery of $179,000 of taxes paid in fiscal 1995 through the utilization of
net operating losses ("NOL") carried back. As of May 31, 1999, the Company has
net operating loss carryforwards of approximately $4,363,000, research and
development tax credits of approximately $842,000 and alternative minimum tax
credits of $200,000 available to offset future federal taxes that may be
payable.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash position as of May 31, 1999 was $1.6 million. This
represents an increase of approximately $1,171,000 from the fiscal 1998 year-end
balance of $429,000.
For fiscal 1999, operating activities utilized approximately $1 million
with reductions in receivables being offset by reductions in liabilities.
Investing activities utilized approximately $400,000 with capital expenditures
totaling about $1.1 million offset by repayments of loans and the sale of a
building in North Carolina. Financing activities generated approximately $2.6
million as a result of new loan facilities and stock option exercises exceeding
loan repayments.
As of May 31, 1999, working capital (defined as current assets less
current liabilities) was $1.5 million as compared to a deficit of $(7.5) million
at May 31, 1998. This improvement was largely due to the debt refinancing
subsequent to fiscal year end 1999 as detailed in Note F to the consolidated
financial statements, which has been incorporated in determining the current
portion of long-term debt as of May 31, 1999. In addition, the current
liabilities include about $4.7 million in deferred revenue, of which $3.7
million will be amortized into revenue in fiscal 2000 as the maintenance service
is provided. The remaining $1 million in deferred revenue will be recognized in
fiscal 2000 as contractual obligations are met.
In addition, in fiscal 1998 the Company entered into a long term borrowing
arrangement with Greenleaf Capital whereby the Company received $5.0 million
repayable in approximately four years. These funds together with the Imperial
Bank senior facility were utilized to acquire the Adra business in fiscal 1998.
Total short and long-term debt of approximately $12.8 million as of May
31, 1999 was down from the $14.4 million in debt as of the end of fiscal 1998.
This debt load adds an element of financial risk that the Company has not
experienced prior to fiscal 1998. The Company is dependent on its unused line of
credit and its cash flow from operations to meet its near term working capital
needs and to make debt service payments. The monthly principal and interest
payments from August 1999 forward are approximately $165,000 on these
borrowings.
The Company currently believes that it will generate sufficient cash flow
from operations to meet its debt service requirements.
MARKET RISK DISCLOSURE
The Company has assets and liabilities outside the United States that are
subject to fluctuations in foreign currency exchange rates. The Company's
primary exposure is related to local currency revenue and operating expenses in
Europe. However, the Company does not engage in forward foreign exchange or
similar contracts to reduce its economic exposure to changes in exchange rates
as the associated risk is not considered significant. Because the Company
markets, sells and licenses its products throughout the world, it could be
significantly affected by weak economic conditions in foreign markets that could
reduce demand for its products.
The Company is exposed to changes in interest rates primarily as a result
of its long-term debt requirements. The Company's interest rate risk management
objectives are to limit the effect of interest rate changes on earnings and cash
flows and to lower overall borrowing costs. To achieve these objectives, the
Company has converted substantially all of its debt to a fixed rate.
10
The table that follows provides principal cash flows and related interest
rates of the Company's short and long-term debt by fiscal year of maturity and
reflects the refinancing with Greenleaf Capital subsequent to year end.
There- Fair
(thousands of dollars) 2000 2001 2002 2003 2004 after Total Value
- ---------------------- ---- ---- ---- ---- ---- ----- ----- -----
Fixed Rate Debt $220 $278 $310 $5,344 $384 $6,339 $12,875 $12,875
Average interest rate 10.7% 10.7% 10.7% 10.7% 10.8% 10.8%
The Company does not enter into contracts for speculative or trading
purposes, nor is it a party to any leveraged derivative instruments.
Year 2000 Computer System Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, rather than a four-digit format to define the applicable year.
Computer programs that have time-sensitive software may be unable to interpret
dates beyond the year 1999, which could cause a system failure or other computer
errors, leading to disruptions in operations. The Y2K issue could effect the
Company's products, computers, software and other equipment used, operated or
maintained by the Company. Accordingly, the Company has completed the process of
assessing the readiness of its software product offerings, internal
infrastructure and major suppliers.
With the Company's acquisitions in fiscal 1998 it became a software
developer and owner of technology for the first time. The Company has completed
testing its current product offerings for Y2K compliance. Based on its review to
date, the Company believes that the current versions of its Cadra(TM),
Prospector(TM) and ToolMaker(TM) and ToolDesigner(TM) products are Y2K
compliant. However, management also believes that it is not possible to
determine with complete certainty that all Y2K issues affecting the Company's
software products have been identified or corrected due to the complexity of
these products and the fact that these products interact with other third-party
vendor products and operate on computer systems which are not under the
Company's control.
The Company believes that it has identified the major computers, software
applications and related equipment used in connection with its mission critical
internal operations and has completed an assessment of these systems in regards
to Y2K compliance. During fiscal 1999, the Company replaced its financial
computer software including all underlying subledger modules with a third-party
package that is Y2K compliant. The Company expects to continue testing its
internal systems and to undertake necessary corrective measures, if necessary,
throughout the remainder of calendar year 1999.
The Company has initiated communications with third-party suppliers of the
major computers, software and other equipment used, operated or maintained by
the Company to identify and, to the extent possible, to resolve issues involving
Y2K. However, the Company has limited or no control over the actions of these
third-party suppliers. Where the Company believes that a particular vendor or
supplier poses unacceptable Y2K risks, it will identify an alternative supply
source.
To date, costs incurred in our Y2K compliance efforts include the
allocation of personnel to test our products and systems as well as to upgrade
internal systems. The out-of-pocket cost of purchasing the new financial
computer software was approximately $150,000. To date, Y2K compliance efforts
performed by the Company's internal resources have not been material nor does
the Company expect the Y2K problem to have a material impact on its business or
operating results.
The Company expects to identify and resolve Y2K issues that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Y2K issues affecting the Company have been identified or corrected. The Company
cannot predict the nature or materiality of the impact on its operations or
operating results of Y2K disruption by parties over whom it has no control.
Furthermore, the purchasing patterns of the Company's customers or potential
customers may be affected by Y2K issues if they must expend significant
resources to correct their own systems. As a result, they may have fewer funds
available to purchase the Company's products and services.
As part of its Y2K compliance planning process, the Company will also
consider contingency plans to be implemented if the need arises. Depending on
the systems affected, these plans could include accelerated replacement of
affected equipment or software, increased work hours for Company personnel or
use of contract personnel to correct on an accelerated schedule any Y2K issues
that arise or to provide manual workarounds for information systems, and similar
approaches. If the Company is required to implement any of these contingency
plans, it could affect the Company's financial condition and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response to this item is set forth under the caption "MARKET RISK
DISCLOSURE" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is here incorporated by reference.
11
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are included herein and are
indexed under item 14(a)(1)-(2).
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under "Nomination and Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement to be filed in connection with the Company's 1999 annual meeting
is incorporated by reference herein. The current executive officers of the
Company are set forth under the caption "Executive Officers" in ITEM 1 of this
Form 10-K.
ITEM 11 - EXECUTIVE COMPENSATION
The information under "Nomination and Election of Directors" will be
included in the Company's definitive proxy statement, to be filed in conjunction
with the Company's 1999 annual meeting, and is incorporated by reference herein.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under "Security Ownership of Management and Principal
Stockholders" in the Company's definitive proxy statement, to be filed in
connection with the Company's 1999 annual meeting, is incorporated by reference
herein.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under "Nomination and Election of Directors" in the
Company's definitive proxy statement, to be filed in connection with the
Company's 1999 annual meeting, is incorporated by reference herein.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following items are filed as part of this report:
(1) Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors 13
Consolidated Statements of Operations - Years ended May 31,
1999, 1998 and 1997 15
Consolidated Balance Sheets - May 31, 1999 and 1998 16
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss)- Years ended May 31, 1999,
1998 and 1997 17
Consolidated Statements of Cash Flows -
Years ended May 31, 1999, 1998 and 1997 18
Notes to Consolidated Financial Statements 19-27
(2) Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 28
The reports of the registrant's independent accountants with respect to
the above-listed financial statements and financial statement schedule appear on
pages 13 and 14 of this report.
All other financial statements and schedules not listed have been omitted
because they are either not required or not applicable or because the required
information has been included elsewhere in the financial statements or
footnotes.
(3) Exhibits:
12
(2)(i) Asset Purchase Agreement by and among SofTech, Inc., Information
Decisions, Inc., System Constructs, Inc., and Data Systems Network Corporation
filed as Exhibit 2.1 to Form 8-K, dated September 12, 1996, is incorporated
herein by reference.
(2)(ii) Stock Purchase Agreement dated as of December 31, 1996 by and
among SofTech, Inc., Information Decisions, Inc., Computer Graphics Corporation,
and the Stockholders of Computer Graphics Corporation, filed as Exhibit 2.1 to
Form S-3, dated June 30, 1997, is incorporated herein by reference.
(2)(iii) Stock Purchase Agreement dated as of February 27, 1997 by and
among SofTech, Inc., Information Decisions, Inc., Ram Design and Graphics
Corporation, and the Stockholders of Ram Design and Graphics Corp., filed as
Exhibit 2.2 to Form S-3, dated June 30, 1997, is incorporated herein by
reference.
(2)(iv) Asset Purchase Agreement by and among SofTech, Inc., Information
Decisions, Inc., CIMLINC Incorporated and CIMLINC GmbH, filed as Exhibit 2.1 to
Form 8-K, dated November 10, 1997, is incorporated herein by reference.
(2)(v) Asset Purchase Agreement by and among SofTech, Inc., Adra Systems,
Inc., Adra Systems, GmbH, and MatrixOne, Inc., filed as Exhibit 2.1 for Form
8-K, dated May 7, 1998, is incorporated herein by reference.
(3)(i) Articles of Organization filed as Exhibit 3(a) to Registration
Statement No. 2-73261 are incorporated herein by reference. Amendment to the
Articles of Organization filed as Exhibit (19) to Form 10-Q for the fiscal
quarter ended November 28, 1986 is incorporated by reference.
(3)(ii) By-laws of the Company, filed as Exhibit (3)(b) to 1990 Form 10K
are incorporated herein by reference. Reference is made to Exhibit (3)(a) above,
which is incorporated by reference. Form of common stock certificate, filed as
Exhibit 4(A), to Registration statement number 2-73261, is incorporated by
reference.
(10)(i) Board resolutions relating to 1981 Non-qualified Stock Option
Plan, 1981 Incentive Stock Option Plan, and forms of options, filed as Exhibits
28(A) and 28(B) to registration statement No. 2-82554, are incorporated by
reference. Also, the Company's 1984 Stock Option Plan is incorporated by
reference to Exhibit 28(c) to Registration Statement 33-5782.
(10)(ii) Imperial Bank Credit Agreement dated July 1, 1998, filed
herewith.
(10)(iii) Imperial Bank Warrant Agreement dated July 1, 1998, filed
herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23.1) Consent of Ernst & Young LLP, filed herewith.
(27) Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
There were no reports filed on Form 8-k during the quarter ended May 31,
1999.
(c) The Company hereby files, as part of this Form 10-K, the exhibits listed in
Item 14(a)(3) above that are not incorporated by reference.
(d) The Company hereby files, as part of this Form 10-K, the consolidated
financial statement schedule listed in Item 14(a)(2) above.
13
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SofTech, Inc.
We have audited the accompanying consolidated balance sheets of SofTech,
Inc. and subsidiaries as of May 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for the years then ended. Our audits also included the
information for the years ended May 31, 1999 and 1998, included in the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our 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. and subsidiaries as of May 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
Grand Rapids, Michigan
August 19, 1999
14
SOFTECH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended May 31,
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
Revenue:
Products $ 14,280 $ 8,652 $ 9,329
Services 16,277 11,327 5,375
-------- ------- --------
Total Revenue 30,557 19,979 14,704
Cost of sales:
Cost of products sold 4,636 3,708 6,133
Cost of services provided 7,713 6,454 3,761
-------- ------- --------
Total Cost of sales 12,349 10,162 9,894
-------- ------- --------
Gross margin 18,208 9,817 4,810
Research and development expenses 5,521 354 --
Selling, general and administrative 16,787 8,001 4,657
-------- ------- --------
Income (loss) from operations (4,100) 1,462 153
Gain on available-for-sale securities -- 253 2,126
Interest expense 1,571 254 --
-------- ------- --------
Income (loss) from continuing operations
before income taxes (5,671) 1,461 2,279
Provision (benefit) for income taxes (Note B) 79 127 (3)
-------- ------- --------
Income (loss) from continuing operations (5,750) 1,334 2,282
Discontinued operations (Note H):
Loss from discontinued operations (less
applicable benefit for income taxes of $294) -- -- (1,587)
Loss from disposal (less applicable benefit
for income taxes of $50) -- -- (269)
-------- ------- --------
Net income (loss) $ (5,750) $ 1,334 $ 426
======== ======= ========
Per Share Data (Note A):
Per Common Share - Diluted:
Income (loss) from continuing operations $ (0.77) $ 0.22 $ 0.50
======== ======= ========
Net income (loss) $ (0.77) $ 0.22 $ 0.09
======== ======= ========
Per Common Share - Basic :
Income (loss) from continuing operations $ (0.77) $ 0.23 $ 0.52
======== ======= ========
Net income (loss) $ (0.77) $ 0.23 $ 0.10
======== ======= ========
See accompanying notes to consolidated financial statements
15
SOFTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31,
1999 1998
---- ----
(in thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents $ 1,600 $ 429
Accounts receivable (less allowance of $811 and
$649 in 1999 and 1998, respectively) 8,237 9,290
Unbilled costs and fees 789 1,153
Inventory 335 338
Other receivables 100 232
Current portion of notes receivable from officers -- 421
Prepaid expenses and other assets 674 233
Deferred income taxes (Note B) -- 125
-------- --------
Total current assets 11,735 12,221
-------- --------
Property and equipment, at cost:
Data processing equipment 3,385 2,849
Office furniture 507 216
Leasehold improvements 136 89
Land and building -- 583
-------- --------
Total property and equipment 4,028 3,737
Less accumulated depreciation and amortization 2,341 1,457
-------- --------
1,687 2,280
-------- --------
Other assets:
Capitalized software costs, net of amortization of
$1,386 and $184 in 1999 and 1998, respectively) 12,714 13,816
Goodwill, net (Note A) 5,987 7,252
Notes receivable from officers, less current portion 391 368
Other assets 155 123
-------- --------
$ 32,669 $ 36,060
-------- --------
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 2,924 $ 2,386
Accrued expenses 1,981 3,808
Deferred revenue 4,725 3,522
Accrued income taxes 186 335
Current portion of capital lease obligations 208 180
Current portion of long term debt 220 9,509
-------- --------
Total current liabilities 10,244 19,740
-------- --------
Long-term liabilities:
Capital lease obligations, less current portion (Note G) 215 238
Long-term debt, less current portion (Note F) 12,529 4,900
-------- --------
Total long term liabilities 12,744 5,138
-------- --------
Commitments and Contingencies (Note G and J)
Stockholders' equity (Note D):
Common stock, $.10 par value; authorized 10,000,000 shares;
issued 8,150,289 in 1999 and 6,793,699 in 1998 859 679
Capital in excess of par value 14,790 10,703
Retained earnings (deficit) (4,468) 1,282
Accumulated other comprehensive loss (18) --
Treasury stock, 443,157 shares, at cost (deduct) (1,482) (1,482)
-------- --------
Total stockholders' equity 9,681 11,182
-------- --------
$ 32,669 $ 36,060
======== ========
See accompanying notes to consolidated financial statements
16
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended May 31,
1999 1998 1997
---- ---- ----
(in thousands, except share data)
Common Stock
Balance at beginning of year $ 679 $ 568 $ 454
Common stock issued under stock incentive plans
(1999 - 699,799 shares; 1998 - 18,000 shares;
1997 - 76,000 shares) 70 2 8
Shares issued for equity investment (1,099,948 shares) 110 -- --
Shares issued in connection with acquisitions (1998 - 1,097,266
shares; 1997 - 655,000 shares) -- 109 65
Shares issued in lieu of compensation (409,500 shares) 41
-------- -------- --------
Balance at end of year 859 679 568
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 10,703 7,488 16,463
Common stock issued under stock incentive plans (Note D) 1,187 14 106
Shares issued for equity investment (Note F) 2,820 --
Shares issued in connection with acquisitions (Note I) -- 3,101 1,141
Shares issued in lieu of compensation -- 708
Warrants issued in connection with debt transactions (Note F) 80 100
Distributions of cash and DSN stock (10,930)
-------- -------- --------
Balance at end of year 14,790 10,703 7,488
-------- -------- --------
Retained Earnings (Deficit)
Balance at beginning of year 1,282 (52) (478)
Net earnings (loss) (5,750) 1,334 426
-------- -------- --------
Balance at end of year (4,468) 1,282 (52)
-------- -------- --------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year -- 315 --
Foreign currency translation adjustments (18) -- --
Unrealized gain on available-for-sale securities -- 315
Reclassification adjustment for gains included in net income -- (315) --
-------- -------- --------
Balance at end of year (18) -- 315
-------- -------- --------
Treasury Stock
Balance at beginning and end of year (1,482) (1,482) (1,482)
-------- -------- --------
Total stockholders' equity at end of year $ 9,681 $ 11,182 $ 6,837
======== ======== ========
Comprehensive Income (Loss)
Net earnings (loss) (5,750) 1,334 426
Foreign currency translation adjustments (18) -- --
Unrealized gain on available-for-sale securities -- -- 315
Reclassification adjustment for gains included in net income (315)
-------- -------- --------
Total comprehensive income (loss) $ (5,768) $ 1,019 $ 741
======== ======== ========
( ) Denotes deduction.
See accompanying notes to consolidated financial statements
17
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended May 31,
1999 1998 1997
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income (loss) $(5,750) $ 1,334 $ 426
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 3,704 1,455 907
Loss on sale of NSG -- -- 269
Realized gain on sale of available-for-sale securities -- (253) (2,126)
Loss on disposal of equipment 64 -- --
Provision (benefit) for deferred income taxes 125 (125) --
Change in operating assets and liabilities, net of effects of
businesses acquired:
Accounts receivable and unbilled costs and fees 1,417 (3,398) (68)
Inventory 3 160 155
Other receivables 132 95 82
Prepaid expenses and other assets (441) 264 (187)
Accounts payable and accrued expenses (1,448) (227) 452
Deferred maintenance revenue 1,203 (75) (286)
Net assets/liabilities of discontinued operations -- -- 4,650
------- -------- -------
Total adjustments 4,759 (2,104) 3,848
------- -------- -------
Net cash provided (used) by operating activities (991) (770) 4,274
Cash flows from investing activities:
Capital expenditures (1,055) (770) (571)
Proceeds from sale of capital equipment 435 -- --
Proceeds from sale of available-for-sale securities -- 810 26
Payments for business acquisitions, net of cash acquired (169) (13,315) (151)
Repayments (loans) to officers 398 (789) --
Other investing activities (8) (10) --
------- -------- -------
Net cash used by investing activities (399) (14,074) (696)
Cash flows from financing activities:
Borrowings under subordinated debt agreements -- 7,500 --
Borrowings under senior debt agreement 6,000 -- --
Proceeds from bank line of credit 3,000 2,778 --
Proceeds from (repayment of) note payable (4,400) 4,400 --
Proceeds from exercise of stock options 1,257 16 114
Proceeds from capital lease financing 205 300 145
Principal payments on capital lease obligations (197) (132) (18)
Payments on bank line of credit (2,609) (169) --
Repayments under senior debt agreement (1,125) -- --
Repayments of bridge loan (1,000) -- --
Proceeds from sale of common stock, net of expenses 1,430 -- --
Payment of cash distribution to shareholders -- -- (6,256)
------- -------- -------
Net cash provided (used) by financing activities 2,561 14,693 (6,015)
------- -------- -------
Net increase (decrease) in cash and cash equivalents 1,171 (151) (2,437)
Cash and cash equivalents, beginning of year 429 580 3,017
------- -------- -------
Cash and cash equivalents, end of year $ 1,600 $ 429 $ 580
======= ======== =======
Supplemental disclosures of cash flow information:
Non cash investing activities:
Fair value of shares issued in connection with
acquisitions $ -- $ 3,211 $ 1,193
Conversion of bridge loan to equity investment $ 1,500 $ -- $ --
Income taxes paid $ 105 $ 70 $ 51
Interest paid $ 1,570 $ 140 $ --
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated financial statements.
18
SOFTECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The consolidated financial statements of the Company include the accounts
of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc.
(IDI), Softech Technologies Ltd., SofTech, GmbH, Adra Systems, Srl, Ram Design
and Graphics Corp (RAM), System Constructs, Inc. (SCI), SofTech Investments,
Inc. ("SII"), Compass, Inc. (Compass) and AMG Associates, Inc. (AMG). SCI, SII,
Compass and AMG are all inactive subsidiaries. The Network Systems Group (NSG)
of IDI and SCI were operations sold in September 1996 and are therefore
presented as discontinued operations (See Note H). All significant intercompany
accounts and transactions have been eliminated upon consolidation.
BUSINESS TRANSITION:
At May 31, 1997, the Company faced two significant risks associated with
its operations. First, the relationship with Parametric Technology Corporation
(NASDAQ:PMTC), the technology provider of the Company's core software offering,
was uncertain. Second, there was uncertainty whether the Company had sufficient
financial resources given the Company's history, minimal operating income and
dependence on the PMTC relationship.
During 1998, the Company elected not to renew and terminated its reseller
agreement with PMTC and acquired four businesses including two CAD/CAM
technology companies, a CAD/CAM and Product Data Management ("PDM") services
business and a Structural Dynamics Research Corporation ("SDRC") reseller. As a
result, the Company has eliminated its dependence upon technology providers and
now possesses technology of its own, more than 100 degreed mechanical engineers,
and a stable, recurring service business that can reduce the impact of
fluctuations in the software order flow from quarter to quarter due to forces
outside the Company's control. The Company now has 25 offices in 16 states and 4
offices in Western Europe along with indirect distribution relationships in
Asia.
During 1999, the Company further integrated the operations of the
companies acquired over the last 3 years and entered into a distribution
agreement with think3 Inc. ("think3") to market its solid modeling solution to
the Company's customers as a complementary offering. Although the Company has
successfully transitioned to possessing its own technology and expanding its
service business, the Company incurred substantial operating losses in fiscal
1999 due primarily to a cost structure in place for much of the year modeled to
a business with revenues in excess of $40 million. For fiscal 2000, management
believes it is critical and has taken actions to reduce fixed costs to a level
that they believe will allow for the Company to generate positive cash flow at
revenue levels between $25 and $30 million.
CONCENTRATION OF RISK:
As the Company has expanded and evolved into more of a service provider,
its operations are no longer as dependent on one or a small group of vendors. In
addition, the Company believes there is no concentration of risk with any single
customer or small group of customers whose failure or nonperformance would
materially affect the Company's results. No customer exceeds ten percent of net
sales. The Company generally does not require collateral on credit sales.
Management evaluates the creditworthiness of customers prior to delivery of
products and services and provides allowances for potentially uncollectible
accounts.
AVAILABLE-FOR-SALE SECURITIES:
The Company classified its holdings of DSN stock as available-for-sale as
of May 31, 1997. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in stockholders' equity. Realized gains and
losses are included in other income (expense). The cost of securities sold is
based on the specific identification method. Such holdings were disposed of in
fiscal 1998.
INVENTORY:
Inventory consists of equipment purchased for resale and service parts and
is stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. The Company provides for
depreciation and amortization on a straight-line basis over the following
estimated useful lives:
Data processing equipment 3-5 years
Office furniture 5-10 years
Leasehold improvements Lesser of useful life or life of lease
Depreciation expense, including amortization of assets under capital
lease, was approximately $1,061,000, $602,000, and $328,000 for fiscal 1999,
1998 and 1997, respectively.
19
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 provision for income taxes is based on the earnings or losses reported
in the consolidated financial statements. The Company recognizes deferred tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company provides a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax assets will not be realized.
REVENUE RECOGNITION:
Prior to June 1, 1998, revenue from software and service revenue was
accounted for in accordance with SOP 91-1.
Effective June 1, 1998, the Company adopted the provisions of Statement of
Position No. 97-2, "Software Revenue Recognition" (SOP 97-2). Since that date,
revenue from software license sales continues to be recognized when persuasive
evidence of an arrangement exists, delivery of the product has been made, and a
fixed fee and collectibility has been determined; to the extent that obligations
exist for other services, the Company allocates revenue between the license and
the services based upon their relative fair value. Revenue from customer
maintenance support agreements is deferred and recognized ratably over the term
of the agreements. Revenue from engineering, consulting and training services is
recognized as those services are rendered. Due to stricter requirements for
recognizing revenue from the sale of software products, adoption of the
provisions of SOP 97-2 had the effect of reducing revenue in fiscal 1999;
however, quantifying the impact of this change in accounting was not practical.
CAPITALIZED SOFTWARE COSTS:
The Company capitalizes certain costs incurred to internally develop
and/or purchase software that is licensed to customers. Capitalization of
internally developed software begins upon the establishment of technological
feasibility. Costs incurred prior to the establishment of technological
feasibility are expensed as incurred. The Company evaluates the realizability
and the related periods of amortization on a regular basis.
During fiscal year 1998, the Company capitalized $14 million of software
development costs in connection with the acquisitions of AMT and ADRA (see Note
I). Such costs are amortized over estimated useful lives ranging from eight to
ten years using the ratio of current gross revenues for the product to the total
of current and anticipated future gross revenues for a portion of the costs
(approximately $3 million) and straight line methods for the remainder.
GOODWILL:
Goodwill represents the excess of cost over the fair value of net assets
of businesses acquired and is amortized on a straight-line basis over periods
ranging from five to ten years.
LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of all intangible and
other long-lived assets in accordance with FASB Statement No. 121. If indicators
of impairment exist, the Company compares the undiscounted cash flows estimated
to be generated by those assets to the related carrying value of those assets
and will reduce the carrying value of the asset to fair value if the estimated
discounted cash flows exceed the related carrying value.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS:
The Company's financial instruments, as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments", consist of cash, accounts receivable, notes receivable, accounts
payable, and short- and long-term debt. The Company's estimate of the fair value
of these financial instruments approximates their carrying amounts at May 31,
1999 and 1998. The fair value of the long-term debt was determined using
discounted cash flow analyses and current interest rates for similar
instruments.
FOREIGN CURRENCY TRANSLATION:
The functional currency of the Company's foreign operations (England,
France, Germany and Italy) 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
20
exchange rates. Foreign currency gains and losses arising from transactions were
included in operations in fiscal 1999, but were not significant.
COMPREHENSIVE INCOME:
As of June 1, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 130, "Reporting Comprehensive Income." Statement No.
130 establishes rules for the reporting of comprehensive earnings and its
components; however, the adoption of this statement had no impact on the
Company's net earnings (loss) or stockholders' equity. Statement No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in stockholders' equity, to be aggregated and disclosed
as accumulated other comprehensive income (loss) within stockholders' equity.
Prior year financial statements have been reclassified to conform to the
requirements of Statement No. 130 on a retroactive basis.
NET INCOME (LOSS) PER COMMON SHARE:
The following table sets forth the reconciliation of weighted average
shares used in the computation of basic and diluted earnings per share
calculated in accordance with Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share":
1999 1998 1997
---------- ---------- ----------
Basic-weighted average shares
outstanding during the year 7,485,422 5,710,917 4,410,099
Effect of employee stock options -- 402,924 119,777
---------- ---------- ----------
Diluted 7,485,422 6,113,841 4,529,876
========== ========== ==========
Options to purchase shares of common stock and common stock warrants have
been excluded from the denominator for the computation of diluted earnings per
share in fiscal 1999 because their inclusion would be antidilutive. Options to
purchase shares of common stock totaling 1,027,509 and 575,323, in 1998 and
1997, respectively, and common stock warrants have not been included in the
denominator for computation of diluted earnings per share because related
exercise prices were greater than the average market prices for the period and,
therefore, were antidilutive.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain amounts in 1998 and 1997 have been reclassified to conform with
the presentation used in 1999.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which provides a consistent standard
for recognition and measurement of derivatives and hedging activities. The
Company is required to adopt the standard in fiscal 2002 and is in the process
of evaluating SFAS 133 and its impact.
B. INCOME TAXES:
The provision (benefit) for income taxes includes the following:
For the Years ended May 31, (in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------
Federal $(158) $164 $(74)
Foreign 123 25 --
State and Local (11) 63 71
----- ---- ----
(46) 252 (3)
Deferred 125 (125) --
----- ---- ----
$79 $127 $ (3)
===== ==== ====
21
The domestic and foreign components of income (loss) from continuing
operations before income taxes of the consolidated companies were as follows:
1999 1998 1997
---- ---- ----
Domestic $(5,462) $1,073 $2,279
Foreign (209) 388 --
------- ------ ------
$(5,671) $1,461 $2,279
======= ====== ======
The provision (benefit) for federal income taxes was reduced due to the
use of approximately $2.6 million and $1.0 million in net operating loss
benefits in 1998 and 1997, respectively.
At May 31, 1999, the Company had net operating loss carryforwards of $4.9
million that begin expiring in 2113, and are available to reduce future taxable
income. The Company also has tax credit carryforwards generated from research
and development activities of $842,000 that are available to offset against
income taxes payable in the future and expire from 2002 to 2006. In addition, an
alternative minimum tax credit of $200,000 that has no expiration date was
available as of May 31, 1999.
The Company's effective income tax rates can be reconciled to the federal
statutory income tax rate as follows:
For the Years ended May 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Statutory rate (34)% 34% 34%
State and local taxes -- 3 2
Foreign taxes 3 -- --
Benefit of previously unrecognized
net operating loss and tax credit
carryforwards -- (27) (33)
Expenses not deductible for tax
purposes 3 8 --
Other (5) -- (3)
Valuation reserve (reversal) 34 (9) --
-- -- --
Effective tax rate 1% 9 % 0%
== == ==
Deferred tax assets (liabilities) were comprised of the following at May
31:
(in thousands) 1999 1998
- ---------------------------------------------------------------------------
Deferred tax assets (liabilities):
Depreciation $ (13) $ (8)
Net operating loss carryovers 1,673 --
Tax credits 1,042 780
Receivable allowances 144 175
Vacation pay accrual 107 56
Differences in book and tax bases of
assets of acquired businesses 683 514
Asset basis differences (285) --
------- ------
Deferred tax assets 3,351 1,517
Less: valuation allowance (3,351) (1,392)
------- ------
Net deferred tax assets $ 0 $ 125
======= ======
Due to the uncertainties regarding the realization of certain favorable
tax attributes in future tax returns, the Company has established a valuation
reserve against the otherwise recognizable net deferred tax assets.
C. EMPLOYEE RETIREMENT PLANS:
The Company has an Internal Revenue Code Section 401(k) plan covering
substantially all employees. The aggregate retirement plan expense, which
represents an employer match of a portion of employee voluntary contributions,
for fiscal 1999, 1998 and 1997 was $185,000, $59,000 and $49,000, respectively.
D. EMPLOYEE STOCK PLANS:
The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the
granting of both incentive and non-qualified options. Incentive stock options
granted under the Plan have an exercise price not less than fair market value of
the stock at the grant date and have vesting schedules as determined by the
Company's Board of Directors. The Plan permits the granting of non-qualified
22
options at exercise prices and vesting schedules as determined by the Board of
Directors. The 1994 Plan calls for the adjustment of option exercise prices to
reflect equity transactions such as stock issuances, dividend distributions and
stock splits.
Information for the years 1997 through 1999 with respect to this plan is
as follows:
Weighted
Number of Average
Stock Options Shares Option Price
- ---------------------------------------------------------------
Outstanding at May 31, 1996 561,600 $5.82
Options granted 549,000 1.32
Options terminated (415,500) 5.48
---------
Outstanding at May 31, 1997 695,100 1.60
Options granted 449,000 2.59
Options terminated (153,167) 1.61
Options exercised (18,000) 0.89
---------
Outstanding at May 31, 1998 972,933 2.07
Options granted 107,000 3.38
Options terminated (140,334) 3.12
Options exercised (631,499) 1.83
---------
Outstanding at May 31, 1999 308,100 $2.49
=========
The following table summarizes information about stock options outstanding at
May 31, 1999 under the 1994 Plan:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Options Average Weighted Options Weighted
Exercise Outstanding at Contractual Average Exercisable at Average
Price Range May 31, 1999 Remaining Life Exercise Price May 31, 1999 Exercise Price
- ------------------------------------------------------------------------------------------------------
$0.010 to $0.440 43,000 1.22 years $0.37 43,000 $0.37
$1.065 to $1.75 79,000 3.64 years 1.36 38,996 1.26
$1.878 to $2.375 55,000 7.75 years 1.97 30,333 1.93
$3.375 to $5.063 131,100 4.13 years 4.09 31,567 4.27
------- -------
Total 308,100 143,896
======= =======
There were 167,001 shares available for future grants under the 1994 Plan
at May 31, 1999. The following are the shares exercisable and their
corresponding weighted average exercise price at May 31, 1999, 1998 and 1997,
respectively: 143,896 at $1.87; 316,304 at $1.98; and 212,880 at $2.19.
In addition, there were 460,000 options granted outside of the plan during
fiscal 1998 to employees of AMT and ADRA, companies acquired during the year. At
May 31, 1999, 278,600 of these options were outstanding, of which 111,040 were
exercisable, at a weighted average exercise price of $3.67.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Because the number of shares is known and the exercise
price of options granted has been equal to fair value at date of grant, no
compensation expense has been recognized in the statements of operations. The
Company has adopted the disclosure-only provisions of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards under these plans, consistent with
the methodology prescribed under SFAS 123, the Company's net income (loss) and
earnings (loss) per share at May 31 would have approximated the pro forma
amounts indicated below:
(000's omitted) 1999 1998 1997
- -------------------------------------------------------------------
Net income (loss) - as reported $(5,750) $1,334 $426
Net income (loss) - pro forma $(6,400) $1,071 $343
Earnings (loss) per share -
diluted - as reported $ (0.77) $0.22 $0.09
Earnings (loss) per share -
diluted - pro forma $ (0.85) $0.19 $0.08
23
The weighted-average fair value of each option granted in 1999, 1998 and
1997 is estimated as $2.14, $2.04 and $0.81, respectively on the date of grant
using the Black-Scholes model with the following weighted average assumptions:
Expected life 3 to 5 years
Assumed annual dividend growth rate 0%
Expected volatility .65 to .85
Risk free interest rate
(the month-end yields on 4 year
treasury strips equivalent zero coupon) 5.6% - 6.36%
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts. SFAS 123 does not apply to awards prior to 1996
and additional awards in future years are anticipated.
In 1998, the Company adopted an Employee Stock Purchase Plan, under which
all employees of the Company and certain of its subsidiaries who meet certain
minimum requirements will be able to purchase shares of SofTech common stock
through payroll deductions. The purchase price per share is 85% of the fair
market value of the common stock on the Offering Date or the Exercise Date,
whichever is less. It is expected that this plan will be implemented during the
second quarter of fiscal 2000. As of May 31, 1999, 150,000 shares of SofTech
common stock were available for sale to employees under the plan.
E. SEGMENT INFORMATION:
The Company operates in one reportable segment and is engaged in the
development, marketing, distribution and support of CAD/CAM and Product Data
Management ("PDM") computer solutions. The Company's operations are organized
geographically with foreign offices in England, France, Germany and Italy.
Components of revenue and long-lived assets (consisting primarily of intangible
assets, capitalized software and property, plant and equipment) by geographic
location, are as follows:
Revenue: 1999 1998 1997
---- ---- ----
North America $27,634 $19,180 $14,704
Europe 4,105 858 --
Eliminations (1,182) (59) --
------- ------- -------
Consolidated Total $30,557 $19,979 $14,704
======= ======= =======
Long-Lived Assets:
North America $20,642 $23,489 $4,089
Europe 292 350 --
------- ------- ------
Consolidated Total $20,934 $23,839 $4,089
======= ======= ======
F. DEBT OBLIGATIONS:
Debt obligations of the Company consist of the following obligations at
May 31, (in thousands):
1999 1998
---- ----
Revolving credit facility, refinanced in June 1999, with interest
payable monthly at the prime rate (7.75% at May 31, 1999) plus 2.25% $ 3,000 $ --
Revolving credit facility, maturing in June 1998, with interest
payable Monthly at the prime rate plus 0.5% -- 2,609
$4,875,000 term loan, refinanced in June 1999, with interest
payable monthly at the prime rate plus 2.25%, net of
unamortized debt discount of $48 at an imputed interest rate of
10.5%. and principal payments of $375,000 due quarterly 4,827 --
$5,000,000 subordinated note, maturing in December 2002, with
interest payable monthly at 10.5%, net of unamortized debt
discount of ($78 in 1999, $100 in 1998) at an imputed interest
rate of 11% 4,922 4,900
Note payable to MatrixOne, paid on July 6, 1998 with interest at 7% -- 4,400
Bridge loan, with interest payable monthly at 12% -- 2,500
------- -------
Less current portion 12,749 14,409
(220) (9,509)
------- -------
$12,529 $ 4,900
======= =======
24
During fiscal 1999, the Company entered into a $9.0 million senior loan
facility, consisting of a $6 million term loan and a $3 million revolving credit
facility, with interest payable monthly at prime plus 2.25%. The proceeds from
this senior facility were utilized to pay off the $4.4 million note to MatrixOne
and the borrowings under the revolving credit facility that was then terminated.
Approximately $1.0 million of the bridge loan was also paid down with the
proceeds from the senior facility. The loan covenants on the senior facility
required that the Company maintain certain minimum financial ratios related to
cash flows, funded debt and earnings in order to remain in compliance with the
loan term.
During the third quarter of fiscal 1999, the Company defaulted on its $9
million senior facility for failure to meet the required profit and cash flow
thresholds required by the note. As a result of that default, the note became
immediately due and payable. The Company successfully negotiated a forbearance
agreement with the lender and this facility was repaid in June 1999.
Subsequent to May 31, 1999, the Company entered into a $11 million senior
facility with Greenleaf Capital ("Greenleaf"). Principal and interest is payable
monthly at 10.75% and the note has a 15-year loan amortization with the
remaining principal due in a single payment in June 2004. The facility was used
to pay off the prior senior lender and to provide working capital.
The Company also has a subordinated note to Greenleaf in the amount of $5
million. The note is due in December 2002 and carries a 1% commitment fee. In
addition, the note agreement provides Greenleaf with the right to receive
warrants to purchase up to 300,000 shares of SofTech stock at an exercise price
of $8.00 per share through December 31, 2002. The estimated fair value of the
warrants at issue date was determined to be $100,000 and the related debt
discount is being amortized through December 2002 using the interest method. The
number of warrants earned by Greenleaf is a function of the amount owed under
the subordinated debt facility at various dates in the future. The following
table outlines those dates and amounts:
Cumulative
Date Borrowing # of Warrants
---- --------- -------------
December 31, 2000 $2.0 million 120,000
December 31, 2000 3.0 million 180,000
December 31, 2001 4.0 million 240,000
December 31, 2002 5.0 million 300,000
At May 31, 1998, the Company had a short-term bridge loan payable to
Greenleaf in the amount of $2.5 million that was used to fund the acquisition of
ADRA. The bridge note included a 1% commitment fee and was payable upon the
completion of the fiscal 1999 senior loan facility. During 1999, the Company
repaid $1 million of the bridge loan. The remaining $1.5 million balance plus an
additional $1.5 million cash invested by Greenleaf were used to acquire
1,099,948 shares of previously unissued common stock of the Company. A fee of
$70,000 was paid to Greenleaf in connection with this transaction.
William D. Johnston, a director of SofTech since September 1996, is the
President of Greenleaf. Management sought and received non-binding commitments
from other sources for the financing that was ultimately provided by Greenleaf.
Management recommended and the Board of Directors, other than Mr. Johnston who
abstained from such vote, unanimously approved the transactions with Greenleaf.
Annual maturities of debt obligations subsequent to May 31, 1999,
reflecting the effect of the new Greenleaf senior credit facility, are as
follows: 2000 - $220,000; 2001 - $278,000; 2002 - $310,000; 2003 - $5,344,000;
2004 - $384,000; 2005 - $6,339,000.
G. LEASE COMMITMENTS:
OPERATING LEASES
The Company conducts its operations in office facilities leased through
2004. Rental expense for fiscal years 1999, 1998 and 1997 was approximately
$1,040,000, $550,000 and $270,000, respectively.
At May 31, 1999, minimum annual rental commitments under noncancellable
leases were as follows:
Fiscal Year
-------------------------------
2000 974,000
2001 856.000
2002 896,000
2003 908,000
2004 453,000
CAPITAL LEASES
The Company has equipment-leasing arrangements with commercial lending
institutions. These leases are secured by computer equipment and office
furniture. For financial reporting purposes, the leases have been classified as
capital leases; accordingly, assets with a net book value of approximately
$310,000 (included in data processing equipment and office furniture in the
accompanying balance sheet at May 31, 1999) have been recorded. The approximate
minimum annual lease payments under all
25
capitalized leases as of May 31, 1999 are as follows: 2000, $241,000; 2001,
$122,000; 2002, $50,000; 2003, $50,000 and 2004, $17,000. The present value of
the minimum lease payments is $423,000, including current maturities of
$208,000.
H. DISCONTINUED OPERATIONS:
On September 12, 1996, the Company completed the sale of its Network
Systems Group ("NSG") to Data Systems Network Corporation ("DSN"). This
transaction resulted in an after tax loss of approximately $970,000, of which an
estimate of $700,000 was provided for in the 1996 results. The Company
distributed the net proceeds from the sale of its Network Systems Group in the
form of two distributions. On December 30, 1996, the Company made the first
installment in cash at a rate of $1.50 per share to its shareholders of record
on December 26, 1996, totaling $6,256,164. The second installment was in the
form of a distribution of 455,988 DSN shares at a rate of approximately 0.1031
for each share of SofTech owned on the record date of May 23, 1997. All
fractional shares were paid in cash at the assumed market price of $10.00 per
share. The distribution date of this second installment was June 6, 1997.
Revenue from discontinued operations for the year ended May 31, 1997 was
approximately $7,490,000.
I. ACQUISITIONS:
On November 10, 1997, the Company completed the acquisition of certain
assets and assumed certain liabilities of the Advanced Manufacturing Technology
("AMT") division of CIMLINC, Incorporated ("CIMLINC"). AMT is a technology group
that targets its application software to the mold and die industry. The purchase
price for the acquired AMT assets was $1,750,000 in cash, 200,000 shares of the
Company's common stock and the assumption of certain liabilities. The source of
the funds used in the acquisition came from existing working capital resources
including the Company's prior credit facility.
In addition, the Company issued a total of 507,266 shares of common stock
to certain AMT employees to satisfy certain amounts due and as a replacement for
stock options and stock ownership in CIMLINC.
The acquisition was accounted for as a purchase and, accordingly, AMT's
assets, liabilities and results of operations have been consolidated with those
of the Company since the date of acquisition. The purchase resulted in the
recording of capitalized software of $4.0 million, fixed assets of $.2 million
and goodwill of approximately $1.7 million, which is being amortized on a
straight-line basis over ten years.
On May 7, 1998, the Company completed the acquisition of certain assets
and assumed certain liabilities of Adra Systems, Inc. ("ADRA"), a technology
company with products primarily related to the two-dimensional computer aided
design ("2D CAD") marketplace. SofTech acquired all of the material assets of
the ADRA operation including accounts receivable and fixed assets including
office furniture and computer equipment. The Company also acquired all
intellectual property rights, as defined in the Asset Purchase Agreement, used
in the ADRA operations. Goodwill of $2.0 million recorded in connection with the
acquisition is being amortized on a straight-line basis over ten years.
The purchase price for the acquired assets was $11.4 million of which $7.0
million was paid at closing and $4.4 million was paid on July 1, 1998. In
addition, contingent cash payments of up to $2.2 million could be due if certain
license revenue goals are attained over the twelve month period immediately
following the transaction. No additional contingent payments were earned during
the applicable period. The source of the funds for the initial cash payment of
$7.0 million came from a $5.0 million subordinated debt facility with Greenleaf
Capital, Inc. ("Greenleaf") and $2.0 million of a $2.5 million bridge loan also
provided by Greenleaf. This acquisition has been accounted for as a purchase
and, accordingly, ADRA's assets, liabilities and results of operations have been
consolidated with those of the Company since the date of acquisition.
Effective April 1, 1998, the Company acquired certain assets of Design
Tech Consulting, Inc., an engineering services company, in exchange for 80,000
shares of the Company's common stock valued at $340,000. The transaction has
been accounted for as a purchase and, accordingly, Design Tech's assets,
liabilities and results of operations have been consolidated with those of the
Company since the date of acquisition. The excess of cost over the fair value of
the net assets acquired was approximately $365,000 and is being amortized on a
straight-line basis over ten years.
The purchase of Design Tech in April 1998 provides for certain additional
contingent payments if specified revenue goals are attained during each of the
twelve-month periods ending March 31, 1999, 2000 and 2001. The former
shareholders of Design Tech will earn an additional award of 50,000 SofTech
shares if service revenue generated in the Chicago Region equals or exceeds
specified levels for the three years following the purchase. Payment of these
amounts, if required, will be accounted for as additional purchase price. No
additional contingent payments have been earned through May 31, 1999 under the
agreement.
Effective May 1, 1998, the Company acquired certain assets of CompuCore
LLC in exchange for 100,000 shares of the Company's common stock valued at
$462,500. CompuCore is a value-added reseller of Structural Dynamics Research
Corporation's ("SDRC") software products. The transaction has been accounted for
as a purchase and, accordingly, CompuCore's assets, liabilities and results of
operations have been consolidated with those of the Company since the date of
the acquisition. The excess of cost over the fair value of the net assets
acquired was approximately $474,000 and is being amortized on a straight-line
basis over ten years.
Effective January 1, 1997, the Company acquired all of the outstanding
common stock of Computer Graphics Corp. (CGC) in exchange for 405,000 shares of
the Company's common stock with a value of $628,000. The purchase of CGC also
provided for
26
additional consideration of up to 210,000 additional shares of the Company's
common stock if certain revenue and operating profit goals were achieved during
the twelve months ended December 31, 1997. The maximum additional consideration
was earned in fiscal 1998. The transaction has been accounted for as a purchase
and, accordingly, CGC's assets, liabilities and results of operations have been
consolidated with those of the Company since the date of acquisition. The excess
of cost over the fair value of the net assets acquired was approximately
$1,344,000 and is being amortized on a straight-line basis over five years.
Effective February 27, 1997, the Company acquired the stock of Ram Design
and Graphics Corp. ("RAM") in exchange for 250,000 shares of the Company's
common stock valued at $578,000 plus 50,000 stock options that vest equally over
five years. The transaction has been accounted for as a purchase and,
accordingly, RAM's assets, liabilities and results of operations have been
consolidated with those of the Company since the date of acquisition. The excess
of cost over the fair value of the net assets acquired was approximately
$600,000 and is being amortized on a straight-line basis over five years.
The unaudited pro forma revenue, net income from continuing operations and
net income from continuing operations per share - diluted of the Company,
assuming AMT, ADRA, Design Tech, CompuCore, CGC and RAM had been acquired as of
the beginning of fiscal 1997, would have been $39,250,000, $2,200,000 and $.33
and $41,895,000, $3,125,000, $.53, for fiscal 1998 and 1997, respectively.
J. LITIGATION:
In July 1999, the Company settled its litigation brought against it by
Parametric Technology Corporation ("PMTC") in March 1998. This litigation was
described in the Company's 1998 Annual Report on Form 10-K under Item 3
Litigation. Under the terms of the settlement agreement, the Company agreed to
among other things, limit its training activities with respect to PMTC products
and both companies agreed not to pursue their respective claims against each
other.
On June 25, 1997, the Company served notice to Data Systems Network
Corporation ("DSNC") in accordance with the Asset Purchase Agreement that the
Company had incurred losses as a result of DSNC's breach of the provisions of
the Asset Purchase Agreement and the Registration Rights Agreement.
On June 16, 1998, plaintiff Data Systems Network Corporation ("DSNC")
filed suit in the Circuit Court in the County of Oakland, Michigan alleging that
the Company wrongfully retained amounts of money due DSNC pursuant to the Asset
Purchase Agreement, that the Company owes DSNC outstanding rent under a sublease
agreement, has failed to pay invoices for work completed by DSNC and that
certain financial software sold by the Company to DSNC in the transaction was
not working properly. The Complaint alleges breach of contract, conversion,
unjust enrichment and fraud. The Company has filed a Demand for Arbitration
pursuant to the Asset Purchase Agreement, and discovery in the arbitration
matter is proceeding. The Company intends to pursue its claims through the
arbitration process against DSNC and to vigorously defend itself against the
counterclaims for which it believes it has meritorious defenses.
On January 29, 1999 claimant CIMLINC Incorporated ("CIMLINC") sought a
demand for arbitration pursuant to the Asset Purchase Agreement between CIMLINC,
Inc., CIMLINC, Ltd., CIMLINC GmbH and the Company. In its demand, CIMLINC claims
entitlement based on an alleged failure of SofTech to register stock received in
the acquisition transaction, receivables allegedly due to CIMLINC, royalty
payments and an alleged failure to assume and pay certain liabilities of
CIMLINC, and other relief, including costs and fees. Discovery in the case has
begun and the arbitration hearing is scheduled for September 29, 1999.
Management believes that amounts accrued at May 31, 1999 for matters
discussed above are sufficient to cover any resulting settlements and costs and
does not anticipate a material impact on the financial position or results of
operations of the Company beyond such amounts accrued.
27
SOFTECH, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended May 31, 1999
Col. A Col. B Col. C Col. D Col. E Col. F
- ------ ------ ------ ------ ------ ------
Balance, Charged Balance,
beginning Costs and end of
Description of period Expenses Deductions Other period
- -------------------------------------------------------------------------------------------------
Allowance for uncollectible
accounts receivable (in thousands):
Year ended May 31, 1999 $649 $ 873 $711(1) -- $811
Year ended May 31, 1998 $305 $ -- $201(1) $545(2) $649
Year ended May 31, 1997 200 125 20 -- 305
(1) Represents uncollectible accounts written off, net of recoveries.
(2) Relates to amounts acquired in the acquisitions of AMT and ADRA.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SofTech, Inc.
By /S/ Mark R. Sweetland
------------------------
Mark R. Sweetland, President
Date: August 30, 1999
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
------------------------------------------------------------------------------
/S/ Mark R. Sweetland President and Chief Executive Officer 8/30/99
---------------------------- (Principal executive officer) and
Mark R. Sweetland Director
/S/ Joseph P. Mullaney Vice President, Treasurer, 8/30/99
---------------------------- Chief Financial Officer (Principal
Joseph P. Mullaney financial and accounting officer)
/S/ Timothy J. Weatherford Executive Vice President, Sales and 8/30/99
---------------------------- Director
Timothy J. Weatherford
/S/ Ronald A. Elenbaas Director 8/30/99
----------------------------
Ronald A. Elenbaas
/S/ William Johnston Director 8/30/99
----------------------------
William Johnston
/S/ Kenneth Ledeen Director 8/30/99
----------------------------
Kenneth Ledeen
/S/ Timothy Tyler Director 8/30/99
----------------------------
Timothy Tyler
29