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, 2000
Commission file number 0-10665
SofTech, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2453033
------------- ----------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
4695 44th Street S.E., Suite B-130, Grand Rapids, MI 49512
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 957-2330
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
Form 10-K. |X|
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $3,987,961 as of August 31, 2000. On August 31, 2000 the
registrant had outstanding 10,741,784 shares of common stock of $.10 par value,
which is the registrant's only class of common stock.
<PAGE>
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.
In June 1996 the Company developed a strategy to focus all of its
resources on the Computer Aided Design/Computer Aided Manufacturing ("CAD/CAM")
and the Product Data Management ("PDM") marketplace. At that time, approximately
95% or more of the revenue in the CAD/CAM operation was generated from the sale
of a high-end, third party solid modeling solution from Parametric Technology
Corporation ("PMTC"). The contractual arrangement that allowed the Company to
offer that technology to its customers was a short term agreement that was
subject to annual renewal and could be cancelled by either party with 30 days
notice. An important part of implementing the CAD/CAM and PDM only strategy was
to dispose of all unrelated businesses. 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.
It was quite obvious to the Company in June 1996 that its dependence on
one product for nearly all of its revenue was a very risky business model
especially when the contract that provided it the right to sell that third party
technology was a short term arrangement. In order to reduce its risk, a strategy
to acquire related service and technology companies was developed and
implemented. From December 1996 through May 1999, the Company acquired seven
companies including two that offered software applications for this marketplace.
The acquisitions of Adra Systems, Inc. ("Adra") in May 1998 and the Advanced
Manufacturing Technology division ("AMT") of CIMLINC, Inc. in November 1997
provided the Company with important technology, an installed base, a recurring
maintenance revenue stream and operations in Europe and Asia. In fiscal 2000,
approximately 80% of the Company's revenue was generated from these two
operations.
Today, SofTech is a leading provider of Design through Manufacturing
Technologies and Services. It offers software technology of its own to the 2D
CAD/CAM markets. In addition, the Company offers a wide range of services to its
customers including consulting, implementation and training. The aggressive
acquisition strategy that was funded primarily through debt, substantially
increased the Company's risk profile but was required in order to create a
viable and sustainable business.
PRODUCTS AND SERVICES
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 outlined in Footnote E to the financial statements.
As noted above, the Company has evolved over the last four years through
seven acquisitions and internal expansion from a distributor of PMTC's products
into an independent technology and services entity. The changes that have taken
place in the business are most obvious in the tables presented below which show
the components of product and service revenue over the last four years.
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):
2000 1999 1998 1997
---- ---- ---- ----
SofTech software (AMT & Adra) $7,640 $ 8,815 $3,023 $ --
Hardware 960 3,141 4,286 6,212
PMTC software -- -- 612 2,442
Other 3rd party software 946 2,324 731 675
------ ------- ------ ------
Total product revenue $9,546 $14,280 $8,652 $9,329
====== ======= ====== ======
2
<PAGE>
In fiscal 1997 the Company's product revenue was derived almost
exclusively from the sale of Parametric Technology Corporation ("PMTC") software
(Pro/ENGINEER) and hardware. The hardware sold in this period 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 September 1997, the PT/Modeler distribution agreement with PMTC
terminated 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 1997. In 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 impact of the Company's decision at the end of fiscal 1999 to focus on
developing, marketing and selling its own technology is clearly visible in the
above table. Hardware revenue was down about 69% in fiscal 2000 from fiscal 1999
and revenue from the sale of 3rd party software was down about 59%. While the
revenue from Company owned technology was down about 13% this was much lower
than the declines experienced by many of the Company's competitors. The Company
expects revenue from hardware and 3rd party software to be negligible in the
future.
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):
<TABLE>
<CAPTION>
2000 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consulting, discreet services and training $ 2,238 $ 6,448 $ 6,231 $2,228
Maintenance of AMT and ADRA software 7,464 8,580 2,142 --
Hardware and 3rd party software maintenance 617 1,249 2,954 3,147
------- ------- ------- ------
Total service revenue $10,319 $16,277 $11,327 $5,375
======= ======= ======= ======
</TABLE>
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. The acquisition of two services-only businesses in fiscal 1997
accounted for the majority of the consulting, discreet services and training
revenue in fiscal 1997. This consulting, discreet services and training revenue
nearly tripled 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.
Again, the late fiscal 1999 decision to stop pursuing low margin, hourly
service projects and to focus the service group towards high margin
opportunities is very visible in the above table. We expect that this trend will
continue.
The Adra Systems product known as CadraTM is a drafting and design
technology for the professional mechanical engineer. The CADRA family of CAD/CAM
products includes CADRA Design Drafting, an extraordinarily fast and highly
productive mechanical design documentation tool; CADRA NC, a comprehensive 2
through 5 axis NC programming application; CADRA integration with SolidWorks, an
integrated drawing production system and a 3D solid modeler. The CADRA family is
rounded out by an extensive collection of translators and software options that
make it a seamless fit into today's multi-platform and multi-application
organizations.
In May 2000, SofTech announced the availability of a new product called
DesignGatewayTM. DesignGateway is an enabling technology that allows the user to
extract engineering and geometric data from 3-D solid modeling applications for
reviewing, manipulating and exporting to 2D drafting systems. DesignGateway will
interface to Pro/Engineer, Catia, SolidWorks, Unigraphics, think3, and I-DEAS
Master Series. DesignGateway also organizes other engineering documents into
project folders providing easy access for many users. The technology is easy to
use and can be implemented company-wide within a short time period -- weeks
rather than months.
The design software technologies used by mechanical engineers make up a
fragmented market composed of dueling, proprietary technologies. The proprietary
technologies create huge inefficiencies for the global design and manufacturing
enterprises trying to deal with these various design tools. There is no one
solid modeling software company with more than 25% market share. For example,
the big three automobile companies all use different design products as their
primary design tool. The problems created for
3
<PAGE>
the suppliers to the automobile industry that do business with all three are
simply enormous. DesignGateway is aimed at improving the interoperability
problems created by the use of the different design tools.
In June 2000, MICROCADAM, a significant technology provider to the 2-D CAD
marketplace with a worldwide installed base of more than 100,000 seats ceased
development efforts and announced that the technology would no longer be
supported beyond June 2001. The Company believes that it offers the MICROCADAM
user base a technology that is very similar to the MICROCADAM technology they
are trained to use and, with the use of the Company's direct translators,
provides access to the legacy data. The Company believes that this market
opportunity is a significant one for fiscal 2001 and beyond as the MICROCADAM
user base must migrate over time to a supported technology.
The AMT group has two primary products. Prospector is a knowledge-based NC
programming package for complex tool production. This Windows based, easy-to-use
package gives you full flexibility for generating and editing NC toolpaths while
utilizing the power of the industry's best knowledge base of tools, speeds,
feeds, and cutting paths. ToolDesigner is an outstanding software package for
developing and designing complex molds and dies. Core and cavity splits, parting
line placement, wireframe design and drafting, photorealistic rendering, surface
modeling, trimmed surfaces, injection and cooling line placement are aptly
handled with this professional package.
In April 2000, the Company launched a vertical portal called the
CADCAMZONE.COM ("CCZ"). This portal is aimed at providing the 2.5 to 3.0 million
mechanical/manufacturing engineers worldwide with a one-stop place on the
Internet for their specialized needs. At introduction this site offered many
services including CAD/CAM news and events, job matching, ask the expert,
automated file translations, unique editorial and analysis of the market and
many other features. Through August 2000 the site has registered 1,143 visitors
and 540,000 page views. The Company intends to attempt to secure financing for
this site in order to segregate it from SofTech and allow it to pursue its
unique purpose. It is contemplated that SofTech would retain a minority
interest.
COMPETITION
The Company competes against much larger entities in an extremely
competitive market for all of its software and service offerings. The 2D
software technologies acquired in the acquisitions in fiscal 1998 compete
directly with the offerings of such companies as AutoDesk. This 2D technology is
also marketed as a complementary offering to many 3D products offered by
companies such as PMTC, Dassault, Unigraphics, Structural Dynamics Research
Corporation 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
and discreet engineering services 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, 2000, the Company employed 109 persons. These employees were
distributed over functional lines as follows: Sales = 20; Product Development =
29; Engineers = 32; General and Administrative = 28.
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, 2000 and 1999 was approximately $1,083,000 and
$1,316,000, respectively. Deferred revenue, which represents primarily software
maintenance contracts to be performed during the following year, totaled
approximately $3,712,000 and $4,725,000 at May 31, 2000 and 1999, 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 30 engineers in its research and development
groups located in Michigan and Massachusetts. In fiscal 2000, 1999 and 1998 the
Company incurred research and development expense of $4,911,000, $5,521,000 and
$354,000, 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
4
<PAGE>
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 $5 million in fiscal 2001.
CUSTOMERS
No single customer accounted for more than 10% of the Company's revenue in
fiscal 2000, 1999 or 1998. The Company is not dependent on a single customer, or
a few customers, the loss of which would have a material adverse effect on the
business.
SEASONALITY
The first quarter, which begins June 1 and ends August 31, has
historically been the slowest quarter of the Company's fiscal year. Management
believes this weakness is due primarily to the buying habits of the customers
and the fact that the quarter falls during prime vacation periods.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
Name Age Position
--------------------------------------------------------------------------------
Mark R. Sweetland 51 President and Chief Executive Officer, Director
Timothy J. Weatherford 36 Executive Vice President, Sales, Director
Joseph P. Mullaney 43 Vice President, Treasurer and Chief Financial
Officer
Victor G. Bovey 43 Vice President, Engineering
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
Officers not identified in Item 10 of this Annual Report on Form 10-K:
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.
Victor G. Bovey was appointed Vice President of Engineering of the Company
in March 2000. He started with the Company in November 1997 as Director of
Product Development. Prior to his employment with SofTech he was employed for
thirteen years with CIMLINC Incorporated in various engineering and product
development positions.
ITEM 2 - PROPERTIES
The Company leases office space in Grand Rapids and Bloomfield Hills,
Michigan; Tewksbury, Massachusetts; Indianapolis, Indiana; Milwaukee, Wisconsin;
Cincinnati and Dayton, Ohio; Yardley, Pennsylvania; Windsor, Ontario;
Nottingham, England, Ismaning, Germany, Le Fontanil, France and Milan, Italy.
The total space leased for these locations is approximately 83,000 square feet.
The fiscal 2000 rent was approximately $1.2 million. 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
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,
among other things, to 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 DSNC filed a countersuit 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.
5
<PAGE>
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. The Arbitration Hearing has been scheduled for mid-November
2000. 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
claimed 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. SofTech filed a counter
arbitration demand against CIMLINC alleging damages for breach of certain
representations and warranties, and fraud in connection with them, regarding
revenue recognition in connection with the Asset Purchase Agreement.
On August 24, 2000, subsequent to the completion of a series of hearings
before the Arbitrator between November 1999 and June 2000, the Arbitrator found
in favor of CIMLINC and awarded $620,923 in damages. The Company has accrued
this award in its fiscal 2000 financial statements and is assessing all of its
alternatives related to this matter including possible appeal.
In addition to the above, the Company is a party to various legal
proceedings and claims that arise in the ordinary course of business. Management
believes that amounts accrued at May 31, 2000 for matters discussed and other
matters not specifically detailed above are sufficient to cover any resulting
settlements and costs and does not anticipate a material adverse impact on the
financial position or results of operations of the Company beyond such amounts
accrued.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
The Company's Annual Meeting of Stockholders was held on April 24, 2000 in
Grand Rapids, Michigan. Two matters were voted upon and approved at this Annual
Meeting; the election of two Class I directors, Mssrs. Timothy L. Tyler and Mark
R. Sweetland, to hold office until the Annual Meeting of Stockholders in 2002;
and the ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending May 31, 2000. The following is a
summary of the votes:
Exception &
Proposal For Against Abstain No Vote
-------- --- ------- ------- -------
Tyler - Director 6,349,448 0 54,070 1,941,751
Sweetland - Director 6,349,498 0 54,020 1,941,751
Ernst & Young LLP -
Independent auditors 6,377,178 18,475 7,865 1,941,751
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, 2000, there were approximately 282 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 6.3 million shares, or 59% of outstanding shares. The table below
sets forth quarterly high and low close 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.
2000 1999
---- ----
High Low High Low
---------------------------------------------------
First Quarter 2 3/8 1 5/16 8 2 7/8
Second Quarter 1 5/8 3/4 4 1/4 2 7/8
Third Quarter 2 7/16 1 1/32 4 1/4 1 15/16
Fourth Quarter 5 17/32 7/8 2 11/16 1 15/16
The Company has not paid any cash dividends since 1997 and it does not
anticipate paying cash dividends in the foreseeable future.
6
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Year
(in thousands, except per share data) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from continuing operations $ 19,865 30,557 $ 19,979 $14,704 $ 13,658
Income (loss) from continuing operations (5,943) (5,750) 1,334 2,282 (456)
Diluted earnings per share:
Income (loss) from continuing
operations (.71) (.77) .22 .50 (.11)
Net income (loss) (.71) (.77) .22 .09 (1.44)
Basic earnings per share:
Income (loss) from continuing
operations (.71) (.77) .23 .52 (.11)
Net income (loss) (.71) (.77) .23 .10 (1.44)
Weighted average number of shares
outstanding - diluted 8,383 7,485 6,114 4,530 4,076
Weighted average number of shares
outstanding - basic 8,383 7,485 5,711 4,410 4,076
Working capital (deficit) (189) 1,491 (7,519) 2,920 12,191
Total assets 26,017 32,669 36,060 10,152 17,037
Total liabilities 17,214 22,988 24,878 3,315 2,080
Stockholders' equity 8,803 9,681 11,182 6,837 14,957
</TABLE>
Note: The results for fiscal year 2000, 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 2000, 1999, 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 H to the
Consolidated Financial Statements included herein for certain pro forma
information related to these acquisitions.
7
<PAGE>
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 financial
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 and the newly released DesignGateway(TM)
technology, continued revenue generated from the CADRA(TM) product family, the
ability of management to manage the expected growth and the ability of the
Company to attract and retain qualified personnel both in our existing markets
and in new office locations.
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, 2000. In addition, the change in those items, again expressed as a
percentage, for each of the two years ended May 31, 2000 is presented.
<TABLE>
<CAPTION>
Percentage change
Items as a percentage of revenue year to year
2000 1999 1998 1999 to 2000 1998 to 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
Products 48.1% 46.7% 43.3% (33.2)% 65.0%
Services 51.9 53.3 56.7 (36.6) 43.7
----- ----- -----
Total revenue 100.0 100.0 100.0 (35.0) 52.9
Cost of sales
Products 10.4 15.2 18.6 (55.3) 25.0
Services 14.0 25.2 32.3 (63.9) 19.5
----- ----- -----
Total cost of sales 24.4 40.4 50.9 (60.7) 21.5
Gross margin
Products 78.3 67.5 57.1 (22.5) 95.1
Services 73.0 52.6 43.0 (12.0) 75.7
----- ----- -----
Total gross margin 75.6 59.6 49.1 (17.6) 85.5
S.G.& A., including R&D 96.9 73.0 41.8 (13.7) 167.0
Gain on investments -- -- 1.3 -- (100.0)
Interest expense 8.6 5.1 1.3 9.1 518.5
----- ----- -----
Income (loss) before income tax (29.9) (18.5) 7.3 (5.0) (488.2)
Income tax provision -- .3 .6 (116.5) (37.8)
----- ----- -----
Income (loss) (29.9) (18.8) 6.7 (3.4) (531.0)
===== ===== =====
</TABLE>
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.
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 other technology providers.
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 9 offices in 7 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 60 degreed mechanical engineers. The
8
<PAGE>
Company believes that it possesses a stable, recurring service business that can
reduce the impact of fluctuations in the software order flow from quarter to
quarter.
RESULTS OF OPERATIONS
Total revenue for fiscal year 2000 was $19.9 million as compared to $30.6
million in fiscal 1999, a decrease of 35%. This decrease in revenue was composed
of a decrease in product revenue of about $4.7 million and a decrease in service
revenue of about $6.0 million. The majority of the decrease in product and
service revenue is the result of a strategic decision by the Company at the end
of fiscal 1999 to focus its limited resources on marketing its technology first
and foremost and to limit its service offerings as much as possible to high
margin consulting projects, training services on its proprietary software and
software maintenance. 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.
The acquisitions were accounted for under the purchase accounting method and
therefore their results were included in the Company's results of operations for
only a portion of fiscal year 1998 but for the full year in fiscal 1999.
Included in Item 1 of this Form 10-K under the section labeled "PRODUCTS
AND SERVICES" there are tabular summaries of the significant components of
Product and Service revenue from fiscal 1997 through fiscal 2000. These tables
were used in preparing this analysis and may assist the reader in understanding
the changes that have taken place over the last four years in the Company's
business.
Product revenue, which includes revenue from the sale of hardware and
software, was $9.5 million in fiscal 2000 as compared to $14.3 million in fiscal
1999, a decrease of $4.7 million or 33%. Approximately $3.6 million of the
decrease was the result of lower revenue generated in fiscal 2000 from the sale
of hardware and 3rd party software. We expect that the revenue from hardware and
3rd party software sales in fiscal 2001 and beyond will continue to shrink as
the Company focuses on marketing its technology. Product revenue increased from
about $8.7 million in fiscal 1998 to about $14.3 million in fiscal 1999, an
increase of about 65%. The increase was due to the acquisitions of the CAD/CAM
technology companies acquired during fiscal 1998. The acquisitions were
accounted for under the purchase accounting method and therefore their results
were included in the Company's results of operations for only a portion of
fiscal year 1998 but for the full year in fiscal 1999.
Service revenue is composed of software maintenance on our proprietary
software, maintenance sold on 3rd party hardware and software and revenue
generated from services performed by our engineers. Service revenue for fiscal
year 2000 was $10.3 million as compared to $16.3 million in fiscal 1999, a
decrease of about $6.0 million or 37%. Approximately $4.8 million of this
decrease was due to the strategic decision to shift away from low margin, hourly
engineering projects that had previously been a significant portion of the
revenue performed by the engineering group in order to improve the profitability
of the service organization. Service revenue increased approximately 44% from
fiscal 1998 to fiscal 1999, or about $5.0 million. The increase was due to the
acquisitions of the CAD/CAM technology companies acquired during fiscal 1998.
The acquisitions were accounted for under the purchase accounting method and
therefore their results were included in the Company's results of operations for
only a portion of fiscal year 1998 but for the full year in fiscal 1999.
Product gross margin improved to 78% in fiscal 2000 from 68% in fiscal
1999. Product gross margin improved to 68% in fiscal 1999 as compared to 57% in
fiscal 1998. The continued improvement in gross margin as a percent of revenue
is a direct result of a larger component of product revenue coming from the sale
of the Company's technology rather than selling other companies' hardware and
software as detailed above. Product revenue from the sale of our technology as
compared to total product revenue was 80%, 62% and 35% for fiscal years 2000,
1999 and 1998, respectively. Margins on the sale of Company owned technology
generally carry a margin significantly higher than 3rd party technology. We
would expect product gross margins to continue to improve as the Company focuses
primarily on the sale of its technology in the future.
Service gross margins improved to 73% in fiscal 2000 from 53% in fiscal
1999 and from 43% in fiscal 1998. The continued improvement in service gross
margin as a percent of revenue is a result of the recurring maintenance revenue
on the Company's proprietary software and the decision to limit service
offerings to high margin consulting projects as detailed above. We would expect
the service gross margins to stabilize at or near the fiscal 2000 rate in the
future.
Research and development expenditures totaled approximately $4.9 million
and $5.5 million in fiscal years 2000 and 1999, respectively. During fiscal 1998
the total R&D expenditures were only about $354,000. These expenditures are a
direct result of the Company's acquisitions during fiscal 1998 of the technology
companies as noted previously. During fiscal 2000 the Company continued 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 our acquisitions of these technologies. The Company anticipates that this
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 2000 decreased
14.6%, or $2.4 million, as compared to fiscal 1999. The reduced expenditures are
a direct result of cost cutting measures enacted over the last twelve months as
the Company has strategically repositioned itself to focus on selling its
technology primarily and high margin service opportunities. This repositioning
has resulted in a significant reduction in headcount that was previously
required to manage, market, and deliver on that low margin business. Selling,
general and administrative expenses for fiscal 1999 increased 110% from fiscal
1998, an increase of approximately
9
<PAGE>
$8.8 million. The increased S.G.&A. spending was 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.
As of May 31, 2000, the Company has net operating loss carryforwards of
approximately $7.4 million, 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. The deferred tax assets
related to these carryforwards and credits have not been recognized in the
Company's financial statements due to the uncertainty concerning their
realization.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash position as of May 31, 2000 was $1.3 million. This
represents a decrease of approximately $300,000 from the fiscal 1999 year-end
balance of $1.6 million.
Included in the Company's results of operations are significant non-cash
expenses related to amortization of intangibles resulting from prior year
acquisitions, which totaled approximately $3.4 million in fiscal 2000. For
fiscal 2000, operating activities utilized cash of approximately $1.2 million
with reductions in receivables being offset by reductions in liabilities.
Investing activities utilized cash of approximately $1.5 million consisting
primarily of capital expenditures. Financing activities generated approximately
$2.3 million of cash as a result of new loan facilities and stock option
exercises exceeding debt repayments. Current liabilities include about $3.7
million in deferred revenue, of which $3.2 million will be amortized into
revenue in fiscal 2001 as the maintenance service is provided. The remaining
$0.5 million in deferred revenue will be recognized in fiscal 2001 as
contractual obligations are met, most likely in the first half of the fiscal
year.
At May 31, 2000, long-term obligations totaled approximately $10.1
million, down from $12.7 million as of the end of fiscal 1999, as a result of
its primary creditor, Greenleaf Capital, Inc., converting subordinated debt to
equity in fiscal 2000. This debt load adds an element of financial risk that the
Company had 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 are approximately $130,000 on these borrowings.
In August 2000, the Company secured an additional $3.0 million in short
term borrowing under a line of credit arrangement through Greenleaf Capital.
The Company currently believes that its cash flow from operations together
with the availability of capital under its existing debt agreements is
sufficient to meet its obligations for at least the next year.
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.
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.
<TABLE>
<CAPTION>
There- Fair
(thousands of dollars) 2001 2002 2003 2004 After Total Value
---------------------- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $328 $366 $407 $453 $8,668 $10,222 $10,222
Average interest rate 10.8% 10.8% 10.8% 10.8% 10.8%
</TABLE>
The Company does not enter into contracts for speculative or trading
purposes, nor is it a party to any leveraged derivative instruments.
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.
10
<PAGE>
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
Set forth below is certain information regarding the Directors and
executive officers of SofTech, Inc. (the "Company") as of August 31, 2000, based
on information furnished by them to the Company.
DIRECTORS
Ronald Elenbaas, 47, term expires in 2000; Mr. Elenbaas is currently
retired. From 1975 to 1999, Mr. Elenbaas was employed by Stryker Corporation in
various positions, most recently as President of Stryker Surgical Group, a
division of Stryker Corporation. Mr. Elenbaas also serves on the Board of the
American Red Cross (Kalamazoo and Cass County, Michigan). Mr. Elenbaas was
appointed a Director of the Company in September 1996.
Kenneth Ledeen, 53, term expires in 2000; Mr. Ledeen is Chairman and CEO
of Nevo Technologies, Inc., a Massachusetts based computer software consulting
and services firm. From 1993 to 1997, Mr. Ledeen was a consultant with Covington
Associates, a Massachusetts based investment advisor. From 1986 to 1993, Mr.
Ledeen was President of Sigma Design, a company that developed CAD/CAM software
products, and from 1980 to 1986 he served as Vice President at Computervision
Corporation. Mr. Ledeen was appointed a Director of the Company in September
1996. Effective September 8, 2000, Mr. Ledeen resigned his position as Director
of the Company.
William Johnston, 53, terms expire in 2001; Mr. Johnston has served since
1991 as President of Greenleaf Capital, Inc., a Michigan-based investment
advisory and venture capital firm. Mr. Johnston was appointed a Director of the
Company in September 1996.
Timothy J. Weatherford, 36, term expires in 2001; Mr. Weatherford has
served as Vice President of the Company since September 1996. Mr. Weatherford
served as Branch Manager of the Indiana office of the Company's Computer Aided
Design ("CAD") Division from his hiring in April 1990 until such appointment.
Prior to joining the Company, Mr. Weatherford was employed by CAD/CAM
Engineering from 1987 to 1990 in various capacities and by General Motors from
1982 to 1987 in various capacities. Mr. Weatherford was appointed a Director of
the Company in September 1996.
Mark R. Sweetland, 51, term expires in 2002; Mr. Sweetland was appointed
President and Chief Executive Officer of the Company in September 1996. Mr.
Sweetland served as Vice President of the Company from March 1994 until such
appointment. Since March 1992, Mr. Sweetland has served the Company as President
of Information Decisions, Inc. ("IDI"), a wholly owned subsidiary of the
Company. Mr. Sweetland has been employed by IDI since 1980 in various account
representative and management roles. Mr. Sweetland was appointed a Director of
the Company in September 1996.
Timothy L. Tyler, 46, term expires in 2002; Mr. Tyler has served since
1995 as President of Borroughs Corporation, a privately held, Michigan-based
business that designs, manufactures and markets industrial and library shelving
units, metal office furniture and check out stands primarily in the United
States. Mr. Tyler served as President and General Manager of Tyler Supply
Company from 1979 to 1995. Mr. Tyler was appointed a Director of the Company in
September 1996.
In July 2000, the Company voted to expand the number of Board of Director
stats by two and voted to approve the appointments of Messrs. Barry Bedford and
Frederick A. Lake to serve as directors.
Barry Bedford, 42, term expires in 2000; Mr. Bedford has served as Chief
Financial Officer of the Greenleaf Companies since April 2000. Prior to joining
Greenleaf, Mr. Bedford was the Chief Financial Officer of Johnson and Rauhofs, a
Michigan advertising firm, since 1991.
Frederick A. Lake, 65, term expires in 2000; Mr. Lake is a partner in the
law firm of Lake and Schau, a Michigan based law firm. Mr. Lake has been with
Lake and Schau for more than five years. Mr. Lake also serves as corporate
counsel for Greenleaf Ventures.
Each member of the Board of Directors also serves on the Audit Committee
of the Board of Directors. The Audit Committee recommends the engagement of the
Company's independent accountants. In addition, the Audit Committee reviews
comments made by the independent accountants with respect to internal controls
and considers any corrective action to be taken by management; reviews internal
accounting procedures and controls within the Company's financial and accounting
staff; and reviews the need for any non-audit services to be provided by the
independent accountants.
Each member of the Board of Directors also serves on the Compensation
Committee of the Board of Directors. The Compensation Committee recommends
salaries and bonuses for officers and general managers and establishes general
policies and procedures for salary and performance reviews and the granting of
bonuses to other employees. It also administers the Company's 1994 Stock Option
Plan (the "Plan") and the SofTech Employee Stock Purchase Plan.
11
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section
16(a)") requires the Company's Directors and executive officers, and persons who
own more than ten percent of a registered class of the Company's equity
securities (collectively, "Section 16 reporting persons"), to file with the
Securities and Exchange Commission ("SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Section 16 reporting persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and on written representations that no other
reports were required, during the fiscal year ended May 31, 2000, the Section 16
reporting persons complied with all Section 16(a) filing requirements applicable
to them.
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION OF NON-EMPLOYEE DIRECTORS
For the 2000 fiscal year, non-employee Directors received options in lieu
of cash remuneration for their services. Employee Directors were not paid any
fees or additional compensation for service as members of the Board of Directors
or any committee thereof.
Pursuant to the Company's 1994 Stock Option Plan (the "1994 Stock Option
Plan"), non-employee Directors may be granted non-qualified options to purchase
shares of Common Stock of the Company. The Compensation Committee of the Board
of Directors administers the 1994 Stock Option Plan and determines which
Directors will receive stock options, the number of shares subject to each stock
option, the vesting schedule of the options, and the other terms and provisions
of the options granted. Stock options typically terminate upon a Director
leaving his or her position for any reason other than death or disability. No
option may be exercised after the expiration of ten years from its date of
grant. Under the Plan, all non-employee Directors receive 10,000 options upon
appointment to the Board and receive 3,000 options on the anniversary date of
the initial award for as long as the Director serves as a Director of the
Company. During the fiscal year ended May 31, 2000, there were 12,000 options
granted to non-employee Directors.
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid to the President and
Chief Executive Officer of the Company and each of the Company's two other most
highly compensated executive officers (the "Named Executives") during or with
respect to the 1998, 1999 and 2000 fiscal years for services in all capacities
to the Company.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Other Annual Securities
Name and Fiscal Salary ($) Bonus Compensation Underlying All Other
Principal Position Year (1) ($) ($) Options (#) Compensation ($)(2)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mark R. Sweetland (3) 2000 171,000 -- -- 50,000 1,169
President and 1999 190,000 -- -- -- 3,000
Chief Executive Officer 1998 80,000 -- -- -- 1,600
Joseph P. Mullaney 2000 144,000 -- -- 50,000 1,231
Vice President and 1999 160,000 -- -- -- 3,000
Chief Financial Officer 1998 80,000 -- -- -- 1,600
Timothy J. Weatherford(4) 2000 153,000 50,000 1,569
Executive Vice 1999 170,000 -- 3,000
President, Sales 1998 80,000 -- 1,600
Victor G. Bovey(5) 2000 96,922 -- -- 50,000 1,000
Vice President, 1999 99,832 10,000 -- -- 2,196
Engineering 1998 50,888 21,825 -- -- 1,454
</TABLE>
(1) Includes amounts deferred by Messrs. Sweetland, Mullaney, Weatherford and
Bovey under the Company's 401(k) plan.
(2) Except as otherwise noted, amounts listed in this column reflect the
Company's contributions to each of the Named Executive's accounts under the
Company's 401(k) plan.
(3) Mr. Sweetland was appointed as Director, President and Chief Executive
Officer in September 1996. Prior to September 1996, Mr. Sweetland served as Vice
President of the Company.
12
<PAGE>
(4) Mr. Weatherford was appointed as Director, Executive Vice President, Sales,
in September 1996. Prior to September 1996, Mr. Weatherford served as Branch
Manager of the Company's Indianapolis sales office.
(5) Mr. Bovey was appointed Vice President, Engineering March 2000. Prior to
March 2000, Mr. Bovey served as Director of Product Development.
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table summarizes the stock options that were granted to the
Named Executive Officers of the Company during fiscal year 2000. No stock
appreciation rights ("SARs") have been granted.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price
Appreciation for Option Term
----------------------------
Exercise
Options % of Total Options Price Expiration
Name Granted Granted in Fiscal Year ($/sh)* Date 5%($) 10%($)
---- ------- ---------------------- ------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Mark R. Sweetland 50,000 4.61% 1.50 9/29/01 7,687 15,750
Timothy J. Weatherford 50,000 4.61% 1.50 9/29/01 7,687 15,750
Joseph P. Mullaney 50,000 4.61% 1.50 9/29/01 7,687 15,750
Victor G. Bovey 50,000 4.61% 1.50 9/29/01 7,687 15,750
</TABLE>
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND OPTION VALUE AT MAY 31,
2000.
The following table sets forth the shares acquired and the value realized
upon exercise of stock options during the 2000 fiscal year by the President and
Chief Executive Officer and each Named Executive and certain information
concerning the number and value of unexercised options.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired on Value Realized Options at May 31, 2000 At May 31, 2000 ($)
Name Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark R. Sweetland -- -- 43,000 / 50,000 32,605 / --
Timothy J. Weatherford -- -- -- / 50,000 -- / --
Joseph P. Mullaney -- -- -- / 50,000 -- / --
Victor G. Bovey -- -- -- / 50,000 -- / --
</TABLE>
(1) Market value of underlying securities at May 31, 2000 based on a per share
value of $1.125 less the aggregate exercise price.
13
<PAGE>
PERFORMANCE COMPARISON
The following graph illustrates the return that would have been realized
over the past five fiscal years of the Company (assuming reinvestment of
dividends) by an investor who invested on May 31, 1995 in each of (i) the
Company's Common Stock, (ii) the NASDAQ Stock Market--US Index, and (iii) the
NASDAQ Computer & Data Processing Index. The historical information set forth
below is not necessary indicative of future performance.
Peer Group Total Return Worksheet
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------------------------------------------------------------------------------------------------------
5/95 5/96 5/97 5/98 5/99 5/00
<S> <C> <C> <C> <C> <C> <C>
SofTech, Inc. 100.00 72.73 119.18 346.82 128.72 64.36
NASDAQ Stock Market (U.S.) 100.00 145.34 163.76 207.72 293.58 402.12
NASDAQ Computer & Data Processing 100.00 153.22 182.34 238.22 383.35 502.93
Begin: 5/31/95
Period End: 5/31/00
SofTech, Inc. (SOFT) End: 5/31/00
<CAPTION>
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- ------- --------- --------- ---- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
31-May-95 Begin 4.125 24.24 24.242 100.00
31-May-96 Year End 3.000 24.24 24.24 100.000 24.242 72.73
31-Dec-96 Dividend 2.766 24.24 1.50 36.36 13.149 37.391 103.41
31-May-97 Year End 3.188 37.39 1.50 36.364 37.391 119.18
9-Jun-97 Dividend 2.000 37.39 1.06 39.63 19.817 57.208 114.42
31-May-98 Year End 6.063 57.21 1.06 39.634 57.208 346.82
31-May-99 Year End 2.250 57.21 1.06 39.634 57.208 128.72
31-May-00 End 1.125 57.21 1.06 39.634 57.208 64.36
</TABLE>
* Specified ending dates or ex-dividend dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
*** 'Begin Shares' based on $100 investment.
EMPLOYMENT CONTRACTS
The Company does not have employment contracts with its Named Executives.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Each of the members of the Board of Directors served as members of the
Compensation Committee of the Company's Board of Directors during the fiscal
year ended May 31, 2000. Messrs. Sweetland and Weatherford, officers of the
Company, participated in the deliberations concerning compensation of all
executive officers other than themselves.
14
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Information concerning beneficial ownership of the Company's Common Stock,
as of August 31, 2000, for (i) each person named in the "Summary Compensation
Table" below as a Named Executive of the Company during the fiscal year ended
May 31, 2000, (ii) each Director and each of the Company's nominees to the Board
of Directors and (iii) all Directors and executive officers of the Company as a
group is set forth below.
Percentage of
Outstanding Common
Shares of Common Stock Stock Beneficially
Beneficially Owned as Owned as of
Name of Beneficial Owner of August 31, 2000 (1) August 31, 2000 (2)
--------------------------------------------------------------------------------
Mark R. Sweetland 356,256(3) 3.19%
Timothy J. Weatherford 259,750(3) 2.33%
Joseph P. Mullaney 141,771(3) 1.27%
Victor G. Bovey 70,350(3) *
William Johnston 3,907,520(3)(4) 35.03%
Timothy L. Tyler 15,600(3) *
Ronald Elenbaas 11,600(3) *
Kenneth Ledeen 11,600(3) *
All Directors and executive
officers as a group (8 persons) 4,774,447(5) 42.80%
----------
* Less than one percent (1%).
(1) Based upon information furnished by the persons listed. Except as
otherwise noted, all persons have sole voting and investment power over
the shares listed. A person is deemed, as of any date, to have "beneficial
ownership" of any security that such person has the right to acquire
within 60 days after such date.
(2) There were 10,741,784 shares outstanding on August 31, 2000. In addition,
293,400 shares issuable upon exercise of stock options and 120,000 shares
issuable upon exercise of warrants held by certain Directors and executive
officers of the Company are deemed to be outstanding as of August 31, 2000
for purposes of certain calculations in this table. See notes 3, 4 and 5
below.
(3) Includes shares issuable under stock options as follows: Mr. Sweetland -
93,000 shares; Mr. Weatherford - 50,000; Mr. Mullaney - 50,000; Mr. Bovey
- 50,000 shares; Mr. Tyler - 15,600; Mr. Johnston - 11,600; Mr. Elenbaas -
11,600; Mr. Ledeen - 11,600.
(4) Includes warrants for 120,000 shares issuable in exchange for $8.00 per
share.
(5) Includes 293,400 shares issuable upon exercise of stock options and
120,000 shares issuable upon exercise of warrants held by all Directors
and executive officers as a group.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANACTIONS
As disclosed in Footnote F to the Company's 2000 Annual Report on Form
10-K, the Company has entered into three distinct financing arrangements with
Greenleaf Capital during fiscal years 1998, 1999 and 2000. William D. Johnston,
a director of SofTech since September 1996, is the President of Greenleaf
Capital.
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 17
Consolidated Statements of Operations - Years ended May 31, 2000,
1999 and 1998 18
Consolidated Balance Sheets - May 31, 2000 and 1999 19
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss)- Years ended May 31, 2000,
1999 and 1998 20
Consolidated Statements of Cash Flows -
Years ended May 31, 2000, 1999 and 1998 21
Notes to Consolidated Financial Statements 22-29
(2) Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 30
15
<PAGE>
All other financial statements and schedules not listed have been omitted
because they are either not required or not applicable or because the required
information has been included elsewhere in the financial statements or
footnotes.
(3) Exhibits:
(2)(i) Asset Purchase Agreement by and among SofTech, Inc., Information
Decisions, Inc., System Constructs, Inc., and Data Systems Network Corporation
filed as Exhibit 2.1 to Form 8-K, dated September 12, 1996, is incorporated
herein by reference.
(2)(ii) Stock Purchase Agreement dated as of December 31, 1996 by and
among SofTech, Inc., Information Decisions, Inc., Computer Graphics Corporation,
and the Stockholders of Computer Graphics Corporation, filed as Exhibit 2.1 to
Form S-3, dated June 30, 1997, is incorporated herein by reference.
(2)(iii) Stock Purchase Agreement dated as of February 27, 1997 by and
among SofTech, Inc., Information Decisions, Inc., Ram Design and Graphics
Corporation, and the Stockholders of Ram Design and Graphics Corp., filed as
Exhibit 2.2 to Form S-3, dated June 30, 1997, is incorporated herein by
reference.
(2)(iv) Asset Purchase Agreement by and among SofTech, Inc., Information
Decisions, Inc., CIMLINC Incorporated and CIMLINC GmbH, filed as Exhibit 2.1 to
Form 8-K, dated November 10, 1997, is incorporated herein by reference.
(2)(v) Asset Purchase Agreement by and among SofTech, Inc., Adra Systems,
Inc., Adra Systems, GmbH, and MatrixOne, Inc., filed as Exhibit 2.1 for Form
8-K, dated May 7, 1998, is incorporated herein by reference.
(3)(i) Articles of Organization filed as Exhibit 3(a) to Registration
Statement No. 2-73261 are incorporated herein by reference. Amendment to the
Articles of Organization filed as Exhibit (19) to Form 10-Q for the fiscal
quarter ended November 28, 1986 is incorporated by reference.
(3)(ii) By-laws of the Company, filed as Exhibit (3)(b) to 1990 Form 10K
are incorporated herein by reference. Reference is made to Exhibit (3)(a) above,
which is incorporated by reference. Form of common stock certificate, filed as
Exhibit 4(A), to Registration statement number 2-73261, is incorporated by
reference.
(10)(i) Board resolutions relating to 1981 Non-qualified Stock Option
Plan, 1981 Incentive Stock Option Plan, and forms of options, filed as Exhibits
28(A) and 28(B) to registration statement No. 2-82554, are incorporated by
reference. Also, the Company's 1984 Stock Option Plan is incorporated by
reference to Exhibit 28(c) to Registration Statement 33-5782.
(10)(ii) Imperial Bank Credit Agreement dated July 1, 1998, filed
herewith.
(10)(iii) Imperial Bank Warrant Agreement dated July 1, 1998, filed
herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23) 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,
2000.
(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.
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
SofTech, Inc.
We have audited the accompanying consolidated balance sheets of SofTech,
Inc. and subsidiaries as of May 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for each of the three fiscal years in the period ended May 31,
2000. Our audits also included the information for the years ended May 31, 2000,
1999 and 1998, included in the financial statement schedule listed in the Index
at Item 14(a)(2). 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended May 31, 2000, in conformity with accounting principles
generally accepted in the United States. 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
September 8, 2000
17
<PAGE>
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Years Ended May 31,
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Revenue:
Products $ 9,546 $ 14,280 $ 8,652
Services 10,319 16,277 11,327
-------- -------- --------
Total Revenue 19,865 30,557 19,979
Cost of sales:
Cost of products sold 2,070 4,636 3,708
Cost of services provided 2,783 7,713 6,454
-------- -------- --------
Total Cost of sales 4,853 12,349 10,162
-------- -------- --------
Gross margin 15,012 18,208 9,817
Research and development expenses 4,911 5,521 354
Selling, general and administrative 14,343 16,787 8,001
-------- -------- --------
Income (loss) from operations (4,242) (4,100) 1,462
Gain on available-for-sale securities -- -- 253
Interest expense 1,714 1,571 254
-------- -------- --------
Income (loss) before income taxes (5,956) (5,671) 1,461
Provision (benefit) for income taxes (Note B) (13) 79 127
-------- -------- --------
Net income (loss) $ (5,943) $ (5,750) $ 1,334
-------- -------- --------
Per Common Share Data (Note A):
Net income (loss) - diluted $ (0.71) $ (0.77) $ 0.22
======== ======== ========
Net income (loss) - basic $ (0.71) $ (0.77) $ 0.23
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
SOFTECH, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31,
<TABLE>
<CAPTION>
2000 1999
---- ----
(in thousands, except share data)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 1,278 $ 1,600
Accounts receivable (less allowance of $774 and
$811 in 2000 and 1999, respectively) 4,670 8,237
Unbilled costs and fees 316 789
Inventory 54 335
Other receivables 122 100
Prepaid expenses and other assets 522 674
-------- --------
Total current assets 6,962 11,735
-------- --------
Property and equipment, at cost (Note G):
Data processing equipment 2,789 3,385
Office furniture 547 507
Leasehold improvements 168 136
-------- --------
Total property and equipment 3,504 4,028
Less accumulated depreciation and amortization 2,294 2,341
-------- --------
1,210 1,687
-------- --------
Other assets:
Capitalized software costs, net of amortization of
$2,643 and $1,386 in 2000 and 1999, respectively 12,577 12,714
Goodwill, net of amortization of $4,708 and $3,488 in
2000 and 1999, respectively (Note A) 4,718 5,987
Notes receivable from officers 550 391
Other assets -- 155
-------- --------
$ 26,017 $ 32,669
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 1,068 $ 2,924
Accrued expenses 1,863 1,981
Deferred revenue 3,712 4,725
Accrued income taxes 53 186
Current portion of capital lease obligations 127 208
Current portion of long term debt 328 220
-------- --------
Total current liabilities 7,151 10,244
-------- --------
Long-term liabilities:
Capital lease obligations, less current portion (Note G) 169 215
Long-term debt with related party, less current portion (Note F) 9,894 12,529
-------- --------
Total long term liabilities 10,063 12,744
-------- --------
Commitments and Contingencies (Note G and I)
Stockholders' equity (Note D):
Common stock, $.10 par value; authorized 20,000,000 shares;
issued 11,280,084 in 2000 and 8,593,446 in 1999 1,128 859
Capital in excess of par value 19,690 14,790
Retained earnings (deficit) (10,411) (4,468)
Accumulated other comprehensive loss (43) (18)
Treasury stock, 538,300 shares in 2000 and
443,157 shares in 1999, at cost (deduct) (1,561) (1,482)
-------- --------
Total stockholders' equity 8,803 9,681
-------- --------
$ 26,017 $ 32,669
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended May 31,
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(in thousands, except share data)
<S> <C> <C> <C>
Common Stock
Balance at beginning of year $ 859 $ 679 $ 568
Common stock issued under stock incentive plans
(2000 - 15,666 shares; 1999 - 699,799 shares;
1998 - 18,000 shares) 2 70 2
Shares issued for equity investment (2000 - 2,590,972 shares;
1999 - 1,099,948 shares) 259 110 --
Shares issued in connection with acquisitions (2000 - 80,000 shares;
1998 - 1,097,266 shares) 8 -- 109
-------- -------- --------
Balance at end of year 1,128 859 679
-------- -------- --------
Capital in Excess of Par Value
Balance at beginning of year 14,790 10,703 7,488
Common stock issued under stock incentive plans (Note D) 23 1,187 14
Shares issued for equity investment (Note F) 4,741 2,820
Shares issued in connection with acquisitions (Note H) 136 -- 3,101
Warrants issued in connection with debt transactions (Note F) -- 80 100
-------- -------- --------
Balance at end of year 19,690 14,790 10,703
-------- -------- --------
Retained Earnings (Deficit)
Balance at beginning of year (4,468) 1,282 (52)
Net earnings (loss) (5,943) (5,750) 1,334
-------- -------- --------
Balance at end of year (10,411) (4,468) 1,282
-------- -------- --------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year (18) -- 315
Foreign currency translation adjustments (25) (18) --
Reclassification adjustment for gains included in net income -- -- (315)
-------- -------- --------
Balance at end of year (43) (18) --
-------- -------- --------
Treasury Stock
Balance at beginning of year (1,482) (1,482) (1,482)
Reacquired shares (79) -- --
-------- -------- --------
Balance at end of year (1,561) (1,482) (1,482)
-------- -------- --------
-------- -------- --------
Total stockholders' equity at end of year $ 8,803 $ 9,681 $ 11,182
======== ======== ========
Comprehensive Income (Loss)
Net earnings (loss) (5,943) (5,750) 1,334
Foreign currency translation adjustments (25) (18) --
Reclassification adjustment for gains included in net income -- -- (315)
-------- -------- --------
Total comprehensive income (loss) $ (5,968) $ (5,768) $ 1,019
======== ======== ========
</TABLE>
( ) Denotes deduction.
See accompanying notes to consolidated financial statements
20
<PAGE>
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended May 31,
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,943) $ (5,750) $ 1,334
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 3,409 3,768 1,455
Realized gain on sale of available-for-sale securities -- -- (253)
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 4,040 1,417 (3,398)
Inventory 281 3 160
Other receivables (22) 132 95
Prepaid expenses and other assets 152 (441) 264
Accounts payable and accrued expenses (2,107) (1,448) (227)
Deferred maintenance revenue (1,013) 1,203 (75)
-------- -------- --------
Total adjustments 4,740 4,759 (2,104)
-------- -------- --------
Net cash used in operating activities (1,203) (991) (770)
Cash flows from investing activities:
Capital expenditures (1,464) (1,055) (770)
Proceeds from sale of capital equipment 16 435 --
Proceeds from sale of available-for-sale securities -- -- 810
Payments for business acquisitions, net of cash acquired -- (169) (13,315)
Repayments from (loans to) officers (159) 398 (789)
Other investing activities 155 (8) (10)
-------- -------- --------
Net cash used in investing activities (1,452) (399) (14,074)
Cash flows from financing activities:
Borrowings under subordinated debt agreements -- -- 7,500
Borrowings under senior debt agreement 10,475 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 25 1,257 16
Proceeds from capital lease financing 98 205 300
Principal payments on capital lease obligations (225) (197) (132)
Payments on bank line of credit (3,000) (2,609) (169)
Repayments under senior debt agreement (5,128) (1,125) --
Repayments of bridge loan -- (1,000) --
Proceeds from sale of common stock, net of expenses -- 1,430 --
Other 88 -- --
-------- -------- --------
Net cash provided by financing activities 2,333 2,561 14,693
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (322) 1,171 (151)
Cash and cash equivalents, beginning of year 1,600 429 580
-------- -------- --------
Cash and cash equivalents, end of year $ 1,278 $ 1,600 $ 429
======== ======== ========
Supplemental disclosures of cash flow information:
Non cash investing activities:
Fair value of shares issued in connection with acquisitions $ 144 $ -- $ 3,211
Conversion of debt to equity investment $ 5,000 $ 1,500 $ --
Income taxes paid $ 83 $ 105 $ 70
Interest paid $ 1,616 $ 1,570 $ 140
</TABLE>
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to consolidated financial statements
21
<PAGE>
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, Adra
Systems, Sarl, Compass, Inc. (COMPASS), System Constructs, Inc. (SCI), SofTech
Investments, Inc. ("SII"), RAM Design and Graphics Corp. ("RAM") and AMG
Associates, Inc. (AMG). SCI, SII, RAM and AMG are all inactive subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CONCENTRATION OF RISK:
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 at levels estimated to be adequate
to cover any potentially uncollectible accounts.
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 $821,000, $1,061,000, and $602,000 for fiscal 2000,
1999 and 1998, respectively.
Maintenance and repairs are charged to expense as incurred; betterments
are capitalized. At the time property and equipment are retired, sold, or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts. Any resulting gain or loss on disposal is credited or
charged to income.
INCOME TAXES:
The 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 method was not
practical.
22
<PAGE>
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. Such costs are
amortized over estimated useful lives ranging from eight to ten years primarily
using the straight line method and to a lesser extent the ratio of current gross
revenues for the product to the total of current and anticipated future gross
revenues.
During fiscal 2000, the Company capitalized $1.1 million of software
development costs incurred primarily in connection with the development of a new
software product, DesignGateway. Amortization of such costs will begin in fiscal
2001 when the product is available for shipment. During fiscal year 1998, the
Company capitalized $14 million of software development costs in connection with
the acquisitions of AMT and ADRA (see Note H).
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
(primarily goodwill and capitalized software costs) and other long-lived assets.
If indicators of impairment exist, the Company compares the undiscounted cash
flows estimated to be generated by those assets over their estimated economic
life to the related carrying value of those assets to determine if the assets
are impaired. If the carrying value of the asset is greater than the estimated
undiscounted cash flows, the carrying value of the assets would be decreased to
their fair value through a charge to operations.
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 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, 2000 and 1999. 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 exchange rates. Adjustments resulting
from translation of such financial statements are classified in accumulated
other comprehensive income (loss). Foreign currency gains and losses arising
from transactions were included in operations in fiscal 2000 and 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 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":
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Basic-weighted average shares outstanding
during the year 8,383,487 7,485,422 5,710,917
Effect of employee stock options -- -- 402,924
--------- --------- ---------
Diluted-weighted average shares outstanding
during the year 8,383,487 7,485,422 6,113,841
========= ========= =========
</TABLE>
Options to purchase shares of common stock of 186,684 and 278,538,
respectively, have been excluded from the denominator for the computation of
diluted earnings per share in fiscal 2000 and 1999 because their inclusion would
be antidilutive.
23
<PAGE>
In fiscal year 1998, options to purchase shares of common stock totaling
1,027,509 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.
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, which at the current time management
believes will not be significant.
B. INCOME TAXES:
The provision (benefit) for income taxes includes the following:
For Years ended May 31, (in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Federal $ -- $ (158) $ 164
Foreign (8) 123 25
State and Local (5) (11) 63
------- ------- -------
(13) (46) 252
Deferred -- 125 (125)
------- ------- -------
$ (13) $ 79 $ 127
======= ======= =======
The domestic and foreign components of income (loss) from operations
before income taxes of the consolidated companies were as follows (in
thousands):
2000 1999 1998
---- ---- ----
Domestic $(5,126) $(5,462) $ 1,073
Foreign (830) (209) 388
------- ------- -------
$(5,956) $(5,671) $ 1,461
======= ======= =======
The provision for federal income taxes in fiscal 1998 was reduced due to
the use of approximately $2.6 million in net operating loss benefits.
At May 31, 2000, the Company had net operating loss carryforwards of $7.4
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 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, 2000.
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, 2000 1999 1998
--------------------------------------------------------------------------------
Statutory rate (34)% (34)% 34%
State and local taxes -- -- 3
Foreign taxes 5 3 --
Benefit of previously unrecognized net
operating loss and tax credit
carryforwards -- -- (27)
Expenses not deductible for tax purposes 3 3 8
Other 3 (5) --
Valuation reserve (reversal) 23 34 (9)
--- --- ---
Effective tax rate 0% 1% 9%
=== === ===
24
<PAGE>
Deferred tax assets (liabilities) were comprised of the following at May
31:
(in thousands) 2000 1999
--------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Depreciation $ 6 $ (13)
Net operating loss carryforwards 2,513 1,673
Tax credit carryforwards 1,042 1,042
Receivable allowances 191 144
Vacation pay accrual 52 107
Legal reserve 218 --
Differences in book and tax bases of assets
of acquired businesses 914 683
Asset basis differences (189) (285)
------- -------
Deferred tax assets 4,747 3,351
Less: valuation allowance (4,747) (3,351)
------- -------
Net deferred tax assets recognized $ 0 $ 0
======= =======
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 2000, 1999 and 1998 was $63,000, $185,000 and $59,000, 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
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 1998 through 2000 with respect to this plan is
as follows:
Weighted Average
Stock Options Number of Shares Option Price
--------------------------------------------------------------------------------
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
Options granted 99,000 1.46
Options terminated (125,667) 2.86
Options lapsed (8,100) 4.44
Options exercised (15,666) 1.61
--------
Outstanding at May 31, 2000 257,667 $ 1.91
========
25
<PAGE>
The following table summarizes information about stock options outstanding at
May 31, 2000 under the 1994 Plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Options Average Weighted Options Weighted
Exercise Outstanding at Contractual Average Exercisable at Average
Price Range May 31, 2000 Remaining Life Exercise Price May 31, 2000 Exercise Price
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.010 to $0.440 43,000 1.22 years $0.37 43,000 $0.37
$1.065 to $1.688 107,000 5.88 years 1.34 20,733 1.23
$1.878 to $2.375 58,667 7.30 years 1.93 41,911 1.91
$3.375 to $5.063 49,000 4.22 years 4.47 29,865 4.54
------- -------
Total 257,667 135,509
======= =======
</TABLE>
There were 193,668 shares available for future grants under the 1994 Plan
at May 31, 2000. The following are the shares exercisable and their
corresponding weighted average exercise price at May 31, 2000, 1999 and 1998,
respectively: 135,509 at $1.90; 143,896 at $1.87; and 316,304 at $1.98.
During fiscal 2000, there were 985,500 options granted outside of the plan
to employees of SofTech. At May 31, 2000, 978,100 options were outstanding
outside of the Plan, of which 96,560 were exercisable, at a weighted average
exercise price of $1.69.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option 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 SFAS No.
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:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported $(5,943) $(5,750) $1,334
Net income (loss) - pro forma $(7,588) $(6,400) $1,071
Earnings (loss) per share - diluted -
as reported $(0.71) $(0.77) $0.22
Earnings (loss) per share - diluted -
pro forma $(0.91) $(0.85) $0.18
</TABLE>
The weighted-average fair value of each option granted in 2000, 1999 and
1998 is estimated as $1.18, $2.14 and $2.04, respectively on the date of grant
using the Black-Scholes model with the following weighted average assumptions:
Expected life 2 to 5 years
Assumed annual dividend growth rate 0%
Expected volatility .65 to 1.77
Risk free interest rate
(the month-end yields on 4 year
treasury strips equivalent zero coupon) 5.6% - 6.40%
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
fiscal 2001. As of May 31, 2000, 150,000 shares of SofTech common stock were
available for sale to employees under the plan.
26
<PAGE>
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 (in thousands):
Revenue: 2000 1999 1998
---- ---- ----
North America $ 17,285 $ 27,634 $ 19,180
Europe 3,371 4,105 858
Eliminations (791) (1,182) (59)
-------- -------- --------
Consolidated Total $ 19,865 $ 30,557 $ 19,979
======== ======== ========
Long-Lived Assets:
North America $ 18,806 $ 20,642 $ 23,489
Europe 249 292 350
-------- -------- --------
Consolidated Total $ 19,055 $ 20,934 $ 23,839
======== ======== ========
F. DEBT OBLIGATION WITH RELATED PARTY:
Debt obligations of the Company consist of the following obligations at
May 31, (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
$11,000,000 senior credit facility $ 10,222 $ --
Revolving credit facility, refinanced in June 1999, with
interest payable monthly at the prime rate plus 2.25% -- 3,000
$4,875,000 term loan, refinanced in June 1999, with interest
payable monthly at the prime rate plus 2.25% -- 4,827
Subordinated note, converted to equity in fiscal 2000, with
interest payable monthly at 10.5% -- 4,922
-------- --------
10,222 12,749
Less current portion (328) (220)
-------- --------
$ 9,894 $ 12,529
======== ========
</TABLE>
During fiscal 2000, the Company entered into a $11 million senior credit
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 of $8,668,000 due in a single payment in June 2004. The
facility was used to refinance debt owed a prior senior lender and to provide
working capital. Subsequent to May 31, 2000, Greenleaf agreed to provide the
Company an unsecured line of credit of $3 million through fiscal 2001 to fund
its working capital needs.
Effective October 31, 1999, the Company entered into a debt conversion
agreement with Greenleaf which allowed the Company, at its discretion, to
convert up to $1.5 million of its subordinated debt to equity. Under the terms
of this Agreement the Company issued 807,972 shares of previously unissued
common stock to Greenleaf on February 28, 2000 in exchange for converting $1.5
million of the subordinated note described above to equity. The conversion price
was established as the average closing price for the five trading days
immediately preceding the effective date.
Effective May 26, 2000, the Company entered into a second debt conversion
agreement with Greenleaf. Under the terms of this second Agreement the Company
had the right to convert up to $3.5 million of subordinated debt to equity at
the lower of the average closing price for the five business days prior to
conversion or $1.0781. The number of shares to be issued under this conversion
agreement was limited to 19.9% of the number of outstanding shares prior to
conversion. On May 31, 2000, the Company converted the remaining $3.5 million of
subordinated debt under the terms of this Agreement and issued 1,783,000 shares
of previously unissued common stock to Greenleaf. The Company has agreed to seek
approval of an additional 1,463,452 shares of previously unissued common stock
to be issued to Greenleaf at the fiscal year 2000 annual shareholder meeting,
which are the additional shares to which Greenleaf is entitled for converting
$3.5 million of subordinated debt at $1.0781 per share.
Greenleaf retained its right under the original subordinated debt
agreement to receive 180,000 warrants to purchase SofTech common stock at $8.00
per share on December 31, 2000; and an additional 60,000 warrants to purchase
SofTech common stock at $8.00 per share on each of December 31, 2001 and 2002.
27
<PAGE>
William D. Johnston, a director of SofTech since September 1996, is a
principal and 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, 2000,
reflecting the effect of the new Greenleaf senior credit facility, are as
follows: 2001 - $328,000; 2002 - $366,000; 2003 - $407,000; 2004 - $453,000;
2005 - $8,668,000.
G. LEASE COMMITMENTS:
OPERATING LEASES
The Company conducts its operations in office facilities leased through
2004. Rental expense for fiscal years 2000, 1999 and 1998 was approximately
$1,161,000, $1,040,000 and $550,000, respectively.
At May 31, 2000, minimum annual rental commitments under noncancellable
leases were as follows:
Fiscal Year
-------------------------------------
2001 977,000
2002 944,000
2003 963,000
2004 480,000
2005 12,000
CAPITAL LEASES
The Company has equipment-leasing arrangements with commercial lending
institutions. These leases are secured by the computer equipment and office
furniture being leased. For financial reporting purposes, the leases have been
classified as capital leases; accordingly, assets with a net book value of
approximately $209,000 (included in data processing equipment and office
furniture in the accompanying balance sheet at May 31, 2000) have been recorded.
The approximate minimum annual lease payments under all capitalized leases as of
May 31, 2000 are as follows: 2001, $151,000; 2002, $79,000; 2003, $79,000 and
2004, $33,000. The present value of the minimum lease payments is $296,000,
including current maturities of $127,000.
H. 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. 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 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. The purchase price for the acquired net assets was $11.4
million cash. Computer software of $10.1 million and goodwill of $2.0 million
were recorded in connection with the acquisition which are being amortized on a
straight-line basis over ten years.
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 former shareholders
of Design Tech received additional purchase price in the form of 50,000 SofTech
shares in fiscal 2000 as a result of certain service revenue targets being
attained subsequent to the purchase. The excess of cost over the fair value of
the net assets acquired was approximately $440,000 and is being amortized on a
straight-line basis over ten years.
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 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.
All of the above acquisitions were accounted for as purchases and,
accordingly, their assets, liabilities, and results of operations have been
consolidated with those of the Company since the acquisition dates.
28
<PAGE>
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 and CompuCore had been acquired as of the
beginning of fiscal 1998, would have been $39,250,000, $2,200,000 and $.33 for
fiscal 1998.
I. LITIGATION:
In July 1999, the Company settled its litigation brought against it by
Parametric Technology Corporation ("PMTC") in March 1998. Under the terms of the
settlement agreement, the Company agreed, among other things, to 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 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. The Arbitration Hearing
has been scheduled for mid-November 2000. 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
claimed 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. SofTech filed a counter
arbitration demand against CIMLINC alleging damages for breach of certain
representations and warranties, and fraud in connection with them, regarding
revenue recognition in connection with the Asset Purchase Agreement.
On August 24, 2000, subsequent to the completion of a series of hearings
before the Arbitrator between November 1999 and June 2000, the Arbitrator found
in favor of CIMLINC and awarded $620,923 in damages. The Company has accrued
this award in its fiscal 2000 financial statements and is assessing all of its
alternatives related to this matter including possible appeal.
In addition to the above, the Company is a party to various legal
proceedings and claims that arise in the ordinary course of business. Management
believes that amounts accrued at May 31, 2000 for matters discussed above and
other matters not specifically detailed are sufficient to cover any resulting
settlements and costs and does not anticipate a material adverse impact on the
financial position or results of operations of the Company beyond such amounts
accrued.
29
<PAGE>
SOFTECH, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended May 31, 2000
<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for uncollectible accounts
receivable (in thousands):
Year ended May 31, 2000 $811 $1,242 $1,279(1) -- $774
Year ended May 31, 1999 $649 $ 873 $ 711(1) -- $811
Year ended May 31, 1998 $305 $ -- $ 201(1) $545(2) $649
</TABLE>
(1) Represents uncollectible accounts written off, net of recoveries.
(2) Relates to amounts acquired in the acquisitions of AMT and ADRA.
30
<PAGE>
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: September 13, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
-------------------------------------------------------------------------------------------------
<S> <C> <C>
/S/ Mark R. Sweetland President and Chief Executive Officer 9/13/00
------------------------------- (Principal executive officer) and Director
Mark R. Sweetland
/S/ Joseph P. Mullaney Vice President, Treasurer, 9/13/00
------------------------------- Chief Financial Officer (Principal
Joseph P. Mullaney financial and accounting officer)
/S/ Timothy J. Weatherford Executive Vice President, Sales and 9/13/00
------------------------------- Director
Timothy J. Weatherford
/S/ Ronald A. Elenbaas Director 9/13/00
-------------------------------
Ronald A. Elenbaas
/S/ William Johnston Director 9/13/00
-------------------------------
William Johnston
/S/ Timothy Tyler Director 9/13/00
-------------------------------
Timothy Tyler
/S/ Barry Bedford Director 9/13/00
-------------------------------
Barry Bedford
/S/ Frederick A. Lake Director 9/13/00
-------------------------------
Frederick A. Lake
</TABLE>
31
