SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2003
Commission file number 0-10665
SofTech, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2453033
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(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
2 Highwood Drive, Tewksbury, Massachusetts 01876
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 640-6222
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $1,361,699 as of August 15, 2003. On August 15, 2003 the
registrant had outstanding 12,205,236 shares of common stock of $.10 par value,
which is the registrant's only class of common stock.
PART I
ITEM 1 - DESCRIPTION OF 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.
After the sale of the Company's Government Systems Division through the end
of calendar year 1996, the Company's only business was reselling hardware and
software products of third parties and offering services related to such
products (the "Reseller Model"). Between December 1996 and December 2002, the
Company acquired eight entities involved in developing, supporting and/or
marketing software products and/or services to the Computer Aided Design and
Manufacturing ("CAD/CAM") and Product Data Management ("PDM") marketplace. The
three most significant acquisitions during that time period were the purchases
of Workgroup Technology Corporation ("WTC") in December 2002, Adra Systems, Inc.
in May 1998, and Advanced Manufacturing Technology ("AMT") in November 1997.
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.
The acquisition of WTC in December 2002 significantly and positively
impacted our fiscal 2003 performance and will be a critical element of our
strategy in the future.
PRODUCTS AND SERVICES
The Company operates in one reportable segment and is engaged in the
development, marketing, distribution and support of CAD/CAM and PDM computer
solutions. The Company's operations are organized geographically with European
sales and customer support offices in 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 Note F to the financial statements.
A description of the Company's primary product offerings is as follows:
CadraTM is a drafting and design technology for the professional mechanical
engineer. The CADRA family of CAD/CAM products includes CADRA Design Drafting, a
fast and highly productive mechanical design documentation tool and CADRA NC, a
comprehensive 2 through 5 axis NC programming application. The CADRA family
offers an extensive collection of translators and software options that make it
a seamless fit into today's multi-platform and multi-application organizations.
ProductCenterTM is a proven enterprise-wide, collaborative PDM solution
delivering a unique and powerful combination of document management, design
integration, configuration control, change management, bill of materials
management and integration capability with other enterprise-wide systems, which
helps companies rapidly optimize the product development process. ProductCenter
provides for the secure management of product information and allows engineers
and the entire design chain to manage, share, modify and track product data and
documents throughout the product development lifecycle. ProductCenter supports
engineering change management and bill of materials management for automating
business processes. ProductCenter's web-based collaboration capabilities allow
employees, customers, suppliers, and other globally dispersed team members to
securely exchange product information while maintaining a centralized database
of critical product data. ProductCenter also enables integration with other
business applications, such as ERP, SCM, or CRM, for continuous data exchange
across the product lifecycle.
The ProductCenter family of products is a suite of modules that, when combined,
offer a unified collaborative product data management software solution.
ProductCenter modules may be deployed in various combinations to meet the
specific needs of a customer.
DesignGatewayTM 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
works with Pro/Engineer, SolidWorks, Cadra and AutoCad. 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.
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 the suppliers to the automobile
industry that do business with all three are simply enormous. DesignGateway is
aimed at improving the interoperability between and among these numerous
proprietary design tools thereby greatly increasing productivity and reducing
cost.
Since its introduction, we have had little success in selling this
interoperability solution to the manufacturing marketplace. It is our view that
the interoperability problem described above exists and will continue to cause
great inefficiencies. Our lack of success to date is the result of a business
climate wherein little or no capital is being invested in new software
technologies. This is, of course, a natural reaction when a company's revenue
declines and cost cutting and reductions in the workforce become the focus of
management.
This technology grew out of perceived interoperability problems of many of our
large Cadra customers. Our marketing strategy to date has been to offer this
technology primarily to those Cadra users that also have some need to work with
Pro/Engineer, SolidWorks and/or AutoCad. To date we have primarily marketed it
as a stand-alone product under a traditional perpetual license arrangement. We
are currently offering this product under a 90 day free trial period as a means
of attempting to attract users who might otherwise be restrained from
experiencing the productivity enhancements offered by this unique technology
given the depressed levels of investment in technology throughout the
manufacturing sector. We expect to market the product in this fashion over the
next 6 to 9 months and then make a decision, based on the results of the free
trial offer, on how best to market and distribute this product.
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 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 a 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.
The Company markets and distributes its products and services primarily
through a direct sales force and through its service organization in North
America and Europe. The majority of the Company's sales in Asia are in Japan.
The Company markets and distributes its products and services in Japan primarily
through authorized resellers. Recently, the Company has been signing resellers
in North America and Europe to reach areas not covered by its direct sales
presence, however, to date, the revenue generated from this indirect
distribution has not been material.
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 and EDS. This 2D
technology is also marketed as a complementary offering to many 3D products
offered by companies such as Parametric Technology Corporation, Dassault, EDS,
AutoDesk 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 PDM and collaborative technology offerings compete against
offerings of all of the same companies listed in the paragraph above and against
other companies that have focused on PDM and collaborative offerings only.
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
Parametric Technology Corporation, Dassault, EDS, and AutoDesk have modules that
compete in this market, we believe 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 August 15, 2003, the Company employed 83 persons, 77 on a full time
basis and 6 part time. These employees were distributed over functional lines as
follows: Sales = 13; Product Development = 28; Engineers = 23; General and
Administrative = 19.
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. However, the availability of such skilled personnel has
increased over the recent past as the worldwide economy has slowed.
BACKLOG
Backlog as of May 31, 2003 and 2002 was insignificant. Deferred revenue,
which represents primarily software maintenance contracts to be performed during
the following year, totaled approximately $4,074,000 and $2,627,000 at May 31,
2003 and 2002, respectively. As of May 31, 2003, the Company also had $204,000
of deferred revenue that will be delivered in fiscal 2005. In addition, as of
May 31, 2003 the Company had a backlog of consulting orders totaling
approximately $.3 million. Given the short time period between receipt of order
and delivery of product revenue, on average less than 30 days, the Company does
not believe that product revenue backlog is an important measure as to the
relative health of the business.
RESEARCH AND DEVELOPMENT
The Company has approximately 28 engineers in its research and development
groups located in Michigan and Massachusetts. In fiscal 2003 and 2002 the
Company incurred research and development expense of $2.1 million and $1.6
million, respectively, related to the continued development of technology. The
Company's ability to continue to maintain the ADRA software so it is compatible
with the other 3D offerings in the marketplace and to continue to improve the
PROSPECTOR(TM) technology is critical to its future success.
CUSTOMERS
No single customer accounted for more than 10% of the Company's revenue in
fiscal 2003 or 2002. 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.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company leases office space in Grand Rapids and Troy,
Michigan; Tewksbury and Burlington, Massachusetts; Milwaukee, Wisconsin;
Ismaning, Germany, Le Fontanil, France and Milan, Italy. The office space in
Grand Rapids, Michigan is sublet to a third party. The liability related to the
office space in Burlington, Massachusetts has been assumed by our lessor for our
headquarters in Tewksbury, Massachusetts as a concession for extending our lease
term at our headquarters. Such concession is being amortized as a reduction of
rent expense over the extended term of the lease. The fiscal 2003 rent was
approximately $443,000. The Company believes that the current office space is
adequate for current and anticipated levels of business activity.
ITEM 3 - LEGAL PROCEEDINGS
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, 2003 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 SECURITYHOLDERS
On April 16, 2003, the Company held its Annual Meeting of Shareholders.
The shareholders were asked to elect all five directors to terms of office that
expire on a staggered basis from 2003 through 2005. The results for each
candidate were as follows:
Candidate Name. . . Votes For Votes Against Votes Withheld Abstentions
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Timothy L. Tyler . . 6,377,610 0 11,550 0
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Ronald A. Elenbaas. 6,377,610 0 11,550 0
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Frederick A. Lake . 6,377,410 0 11,750 0
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William D. Johnston 6,377,510 0 11,650 0
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Barry Bedford . . . 6,377,410 0 11,750 0
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock are traded on the NASDAQ's Over-the-Counter
Exchange under the symbol "SOFT.OB".
At May 31, 2003, there were approximately 2,900 holders of record
of the Company's common stock. 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.
2003 2002
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High Low High Low
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First Quarter .18 .09 .22 .08
Second Quarter .25 .06 .15 .06
Third Quarter .25 .12 .15 .05
Fourth Quarter .19 .10 .19 .09
The Company has not paid any cash dividends since 1997 and it does not
anticipate paying cash dividends in the foreseeable future.
The Company issued 1,463,452 shares of Common Stock on April 1, 2002 in
connection with a debt conversion as described in Note H to the financial
statements.
The table below details information regarding equity compensation plans of
the Company as of May 31, 2003:
Number of Shares
to be issued upon Weighted average Number of shares
exercise of exercise price securities available
outstanding options, of outstanding options, for future
Plan category warrants and rights warrants and rights issuances
Approved by Shareholders . . 403,000 $ .70 15,335
Not Approved by Shareholders 100,000 $ 1.00
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503,000 15,335
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Form 10-KSB 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) and DesignGateway(TM) technologies, continued
revenue generated from the CADRA(TM) product family, the ability of the Company
to integrate the most recent acquisition of WTC and the ability of the Company
to attract and retain qualified personnel both in our existing markets and in
new office locations.
DESCRIPTION OF THE BUSINESS
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.
After the sale of the Company's Government Systems Division through the end
of calendar year 1996, the Company's only business was reselling hardware and
software products of third parties and offering services related to such
products (the "Reseller Model"). Between December 1996 and May 1999, the Company
acquired seven entities involved in developing, supporting and/or marketing
software products and/or services to the Computer Aided Design and Manufacturing
("CAD/CAM") marketplace. The two most significant acquisitions during that time
period were the purchases of Adra Systems, Inc. in May 1998 and the Advanced
Manufacturing Technology ("AMT") in November 1997. In December 2002 the Company
acquired WTC thereby obtaining complementary technology. This acquisition of WTC
had a positive impact on fiscal 2003 results and is expected to be a key element
in the Company's growth strategy. 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.
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 two years
ended May 31, 2003. In addition, the change in those items, again expressed as a
percentage, for each of the two years ended May 31, 2003 is presented.
Items as a percentage Percentage change
of revenue year to year
2003 2002 2002 to 2003
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Revenue
Products 31.7% 26.2% 47.3%
Services 68.3 73.8 12.6
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Total revenue 100.0 100.0 21.7
Cost of sales
Products .6 .6 6.9
Services 7.8 4.2 129.5
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Total cost of sales 8.4 4.8 112.7
Total gross margin 91.6 95.2 17.1
Research and development 19.8 17.9 34.4
S.G.& A. 59.3 64.3 12.4
Amortization of capital software
and other intangible assets 19.1 18.2 27.4
Amortization of goodwill -- 10.6 (100.0)
Interest expense 10.6 14.6 (11.5)
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Loss before income tax (17.2) (30.4) (31.0)
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Critical Accounting Policies and Significant Judgements and Estimates
The Securities and Exchange Commission ("SEC") issued disclosure guidance for
"critical accounting policies." The SEC defines "critical accounting policies"
as those that require the application of management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.
The Company's significant accounting policies are described in Note A to these
financial statements. The Company believes that the following accounting
policies require the application of management's most difficult, subjective or
complex judgments:
Estimating Allowances for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. A significant change in the liquidity or
financial position of any of our significant customers could have a material
adverse effect on the collectibility of our accounts receivable and our future
operating results.
Valuation of Long-lived and Intangible Assets
We assess the recoverability of long-lived assets and intangible assets whenever
we determine that events or changes in circumstances indicate that their
carrying amount may not be recoverable. Our assessment is primarily based upon
our estimate of future cash flows associated with these assets. These valuations
contain certain assumptions concerning estimated future revenues and future
expenses for each of our two reporting units. We have determined that there is
no indication of impairment of any of our assets. However, should our operating
results deteriorate, we may determine that some portion of our long-lived
assets or intangible assets are impaired. Such determination could result in
non-cash charges to income that could materially affect our financial position
or results of operations for that period.
Valuation of Goodwill
Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. This statement affects the Company's
treatment of goodwill and other intangible assets. This statement requires that
goodwill existing at the date of adoption be reviewed for possible impairment
and that impairment tests be periodically repeated, with impaired assets written
down to fair value. Additionally, existing goodwill and intangible assets must
be assessed and classified within the statement's criteria. Intangible assets
with finite useful lives will continue to be amortized over those periods.
Amortization of goodwill and intangible assets with indeterminable lives ceased
as of June 1, 2002.
The Company completed the first step of the transitional goodwill impairment
test during the three months ended November 30, 2002 based on the amount of
goodwill as of the beginning of fiscal year 2003, as required by SFAS No. 142.
Based on the results of the first step of the transitional goodwill impairment
test, the Company has determined that the fair value of each of the reporting
units exceeded their carrying amounts and, therefore, no goodwill impairment
existed as of June 1, 2002. As a result, the second step of the transitional
goodwill impairment test is not required to be completed. The Company will be
required to continue to perform a goodwill impairment test on an annual basis.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which temporary differences reverse. The Company's
deferred tax assets are currently fully reserved.
RESULTS OF OPERATIONS
Total revenue for fiscal year 2003 was $10.7 million, an increase of $1.9
million or 22% from fiscal year 2002 revenue of $8.8 million. Product revenue
increased $1.1 million or 47% during the current year as compared to the prior
year and service revenue increased $.8 million or 13%.
The increase in product revenue is due to the acquisition of WTC in
December 2002 and the inclusion of that entity's results for approximately half
of our fiscal year. Product revenue from our Cadra and AMT technology offerings
was essentially unchanged from fiscal 2002 to 2003.
The increase in service revenue from 2002 to 2003 was due to the inclusion
of the WTC results for a portion of fiscal 2003 which was offset by a decline of
approximately $1.4 million or 22% in service revenue from our Cadra and AMT
technology offerings. The majority of this decrease in service revenue was from
lower Cadra software maintenance renewals in North America.
Product gross margin improved to 98.2% in fiscal 2003 from 97.5% in fiscal
2002. This small increase in margin is due to the addition of WTC product
revenue and the relatively low amount of incremental cost from that additional
product revenue.
Service gross margin was 88.5% in fiscal 2003 as compared to 94.4% in
fiscal 2002. This decrease in gross margin is a direct result of the inclusion
of WTC's consulting revenue and the lower margin earned on that type of labor
intensive effort as compared to software maintenance revenue. It is the
Company's expectation that the consulting revenue will be an important element
of its business plans in the future.
Research and development expenditures totaled approximately $2.1 million
in fiscal 2003 as compared to $1.6 million in fiscal 2002, an increase of about
34%. This increased R&D spending is due to the inclusion of the WTC development
group for approximately half of our fiscal year.
Selling, general and administrative expense for fiscal 2003 increased by
$.7 million or about 12% from fiscal 2002 levels. The addition of WTC for
approximately half of the current fiscal year increased this category of
expenses by approximately $1.3 million which was partially offset by reduced
spending of about 10% from the Company's SG&A spending from its existing
business.
The non-cash expenses related to amortization of capitalized software and
other intangible assets increased by approximately $.4 million or 27% in fiscal
2003 as compared to fiscal 2002. This increase is primarily the result of
amortizing WTC's identifiable intangible assets during fiscal 2003. Goodwill
amortization was $934,000 in fiscal 2002. Beginning May 31, 2002, goodwill was
no longer amortized in accordance with SFAS 142.
Interest expense in fiscal 2003 declined by about $147,000 or 12% as
compared to fiscal 2002. This reduced expense was the result of negotiated lower
average borrowing costs on the Company's average outstanding debt partially
offset by higher average borrowings in fiscal 2003 compared to 2002. In fiscal
2003 our average outstanding debt was $13.2 million as compared to about $11.5
million in 2002. This increase in average borrowing was the result of the debt
financed acquisition of WTC in December 2002. The average interest rate for the
current year was about 8.6% as compared to about 11.1% in fiscal 2002. In
November 2002 we renegotiated our borrowing rate to prime plus 3%. As of May 31,
2003 our borrowing rate based on this agreement is 7.25%.
The tax provision was essentially unchanged from fiscal 2002 to 2003 and
relates to state and local taxes.
The net loss for fiscal 2003 was approximately $1.9 million as compared to
$2.7 million in fiscal 2002. The net loss per share was $(.15) in fiscal 2003 as
compared to $(.24) in fiscal 2002.
The weighted average shares increased to 12.2 million for fiscal 2003 as
compared to about 11.0 million in fiscal 2002 due to a share issuance of 1.5
million related to a debt conversion in April 2002 as described in Note H.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash position as of May 31, 2003 was $719,000 including
$65,000 that is restricted. This represents an increase of $11,000 from the
fiscal 2002 year-end balance of $708,000. Subsequent to the fiscal year end, the
restrictions on $65,000 were removed.
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 $2.0 million in fiscal 2003 and
approximately $2.5 million in fiscal 2002.
For fiscal 2003, operating activities generated cash of approximately
$864,000. The net loss together with non-cash expenses related primarily to
amortization of intangibles and depreciation generated cash of approximately
$460,000. The reduction in accounts receivable and prepaid and other assets
provided $174,000 and a net increase in liabilities provided additional cash of
$230,000. Investing activities utilized cash of approximately $3.6 million
primarily due to the cash required to acquire WTC in December 2002. Financing
activities provided approximately $2.8 million with gross additional borrowings
under our debt facilities totaling about $3.7 million offset by principal pay
downs of $850,000.
At May 31, 2003, long-term obligations totaled approximately $13.3
million, up about 20% from $11.1 million as of the end of fiscal 2002. This
increase is the result of the aforementioned additional borrowings to complete
the WTC acquisition partially reduced by a decrease in deferred revenue to be
earned in more than one year's time. The Company is dependent on availability
under its debt facilities 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 $150,000 on these borrowings.
The Company currently funds its operations through a combination of cash
flow from operations and its debt facilities with Greenleaf Capital. The $3.0
million Line of Credit expires annually in June. As of May 31, 2003,
approximately $2.2 million was available under this facility which has been
extended an additional year through June 2004. In addition, the Company's $15.0
million debt facility with Greenleaf has additional borrowing capacity of
approximately $1.3 million as of May 31, 2003.
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. However, due to the Company's
relatively small size, its highly leveraged balance sheet and the difficulties
in raising capital in the current economic environment, the Company is dependent
on both long term and short term borrowing arrangements with Greenleaf Capital
for its financing needs. Based on the debt balance at May 31, 2003, a
hypothetical change in the interest rate of +2% or -2% would result in a
hypothetical change to interest expense of about $283,000 and $(283,000),
respectively.
The Company does not enter into contracts for speculative or trading
purposes, nor is it a party to any leveraged derivative instruments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business is subject to many uncertainties and risks. This
Form 10-KSB also contains certain forward-looking statements within the meaning
of the Private Securities Reform Act of 1995. The Company's future results may
differ materially from its current results and actual results could differ
materially from those projected in the forward looking statements as a result of
certain risk factors, including but not limited to those set forth below, other
one-time events and other important factors disclosed previously and from time
to time in the Company's other filings with the SEC.
Our quarterly results may fluctuate. The Company's quarterly revenue and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. Our quarterly revenue may fluctuate significantly for
several reasons, including: the timing and success of introductions of our new
products or product enhancements or those of our competitors; uncertainty
created by changes in the market; difficulty in predicting the size and timing
of individual orders; competition and pricing; and customer order deferrals as a
result of general economic decline. Furthermore, the Company has often
recognized a substantial portion of its product revenues in the last month of a
quarter, with these revenues frequently concentrated in the last weeks or days
of a quarter. As a result, product revenues in any quarter are substantially
dependent on orders booked and shipped in the latter part of that quarter and
revenues from any future quarter are not predictable with any significant degree
of accuracy. We typically do not experience order backlog. For these reasons, we
believe that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
We may not generate positive cash flow in the future. During fiscal years
1998 through 2001 we generated significant cash losses from operations. The
Company took aggressive cost cutting steps and reorganized its operations at the
beginning of fiscal 2002. These actions have greatly reduced our fixed costs and
resulted in positive cash flow from operations for the last two fiscal years. It
is our expectation that we can continue to improve on our recent success,
however, there can be no assurances that the Company will continue to generate
positive cash in the future.
Continued decline in business conditions and Information Technology (IT)
spending could cause further decline in revenue. The level of future IT
spending remains very uncertain as does the prognosis for an economic recovery
in the manufacturing sector. If IT spending continues to decline and the
manufacturing sector continues to experience economic difficulty, the Company's
revenues could be adversely impacted.
The Company is dependent on its lender for continued support. We have a
very strong relationship with our sole lender, Greenleaf Capital. They currently
represent our sole source of financing and it is our belief that it would be
difficult to find alternative financing sources in the event whereby the
relationship with Greenleaf changed.
The continued integration of WTC may experience difficulty. Since acquiring
WTC in December 2002, much progress has been made in integrating our operations,
reducing redundant functions and facilities. The strategy includes more closely
integrating our technologies and offering our combined customer base these
solutions. The strategy also includes translating ProductCenter for users other
than the U.S. English speaking market. There can be no assurance that this
continued integration of our technologies or offering ProductCenter outside the
U.S. will be successful.
ITEM 7 - FINANCIAL STATEMENTS
Financial statements are included herein.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting or financial
disclosure matters.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Set forth below is certain information regarding the Directors and
executive officers of SofTech, Inc. (the "Company") as of August 15, 2003, based
on information furnished by them to the Company.
DIRECTORS
Ronald A. Elenbaas, 50, term expires in 2003; Mr. Elenbaas is currently
retired. From 1975 to 2000, 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) as well as director of
Greenleaf Trust and a Special Consultant to Keystone Bank. Mr. Elenbaas was
appointed a Director of the Company in September 1996.
William D. Johnston, 56, term expires in 2004; Mr. Johnston serves as
Chairman of the Company and has been a Director since 1996. Mr. Johnston is
President, Chairman and CEO of the Greenleaf Companies. Included in the
Greenleaf Companies are Greenleaf Trust, a Michigan chartered bank, Greenleaf
Capital, Inc. a venture capital company and primary and secondary lender to
SofTech, Greenleaf Ventures, Inc. a management company delivering management
services to the host industry and Greenleaf Holdings L.L.C., a commercial real
estate development company. Mr. Johnston has served as President, Chairman and
CEO of the Greenleaf Companies since 1991.
Timothy L. Tyler, 49, term expires in 2005; 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.
Barry Bedford, 45, term expires in 2004; 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. Mr. Bedford was appointed a Director of
the Company in July 2000.
Frederick A. Lake, 68, term expires in 2003; Mr. Lake is a partner in the
law firm of Lake, Stover & Schau, PLC, a Michigan based law firm. Mr. Lake has
been with Lake, Stover & Schau, PLC, and its predecessors for more than five
years. Mr. Lake also serves as corporate counsel for Greenleaf Ventures. Mr.
Lake was appointed a Director of the Company in July 2000.
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.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
Name Age Position
--------------------------------------------------------------------------------
Joseph P. Mullaney 46 President and Chief Operating Officer
Jean J. Croteau 48 Vice President, Operations
Victor G. Bovey 46 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.
The following provides biographical information with respect to the
Executive Officers not identified in Item 10 of this Annual Report on Form
10-KSB:
Joseph P. Mullaney was appointed President and Chief Operating Officer in
June 2001. Previously he served as Vice President, Treasurer, and Chief
Financial Officer of the Company from November 1993 to June 2001. He joined 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.
Jean Croteau was appointed Vice President, Operations in July 2001. He
started with the Company in 1981 as Senior Contracts Administrator and was
promoted to various positions of greater responsibilities until his departure in
1995. Mr. Croteau rejoined SofTech in 1998. From 1995 through 1998 he served as
the Director of Business Operations for the Energy Services Division of XENERGY,
Inc.
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.
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, 2003, the Section 16
reporting persons complied with all Section 16(a) filing requirements applicable
to them.
ITEM 10 - EXECUTIVE COMPENSATION
COMPENSATION OF NON-EMPLOYEE DIRECTORS
For fiscal 2003, 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, 2003, there were 15,000 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 fiscal 2001, 2002 and 2003 fiscal years for services in all
capacities to the Company.
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)
--------------------------------------------------------------------------------
Joseph P. Mullaney -
President and COO
2003 210,000 75,000 -- 100,000 (6) 16,005
2002 195,000 45,000 -- -- (6) 16,000
2001 160,000 -- -- -- (6) 13,920
Jean Croteau (3) -
Vice President, Operations
2003 150,000 103,515 -- -- 1,805
2002 127,348 33,000 -- 50,000 1,573
2001 121,275 20,000 -- -- 2,820
Victor G. Bovey(4) -
Vice President, Research & Development
2003 130,000 9,486 -- -- 2,840
2002 125,000 4,000 -- 15,000 2,604
2001 125,000 -- -- -- 2,500
Mark R. Sweetland (5) -
Former President and CEO
2003 -- -- -- -- --
2002 80,388 -- -- -- --
2001 190,000 -- -- -- --
Timothy J. Weatherford(6) -
Former Vice President, Sales
2003 -- -- -- -- --
2002 25,960 -- -- -- --
2001 167,231 -- -- -- 21,345
(1) Includes amounts deferred by Messrs. Sweetland, Mullaney, Weatherford, Bovey
and Croteau 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. Bovey was appointed Vice President, Engineering March 2000. Prior to
March 2000, Mr. Bovey served as Director of Product Development.
(4) 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. In June 2001, Mr. Sweetland resigned his employment
and his position as a director.
(5) Mr. Weatherford was appointed as Director, Executive Vice President, Sales,
in September 1996. In July 2001, Mr. Weatherford departed his employment with
the Company and shortly thereafter was removed as a Director at the regularly
scheduled meeting of the Board of Directors in July 2001.
(6) Includes imputed compensation related to the non-interest bearing note
receivable described in Note K to the financial statements.
OPTION GRANTS IN THE LAST FISCAL YEAR
No stock appreciation rights ("SARs") have been granted to the Named
Executive Officers of the Company during fiscal year 2003. During fiscal 2003,
Mr. Mullaney received an option grant of 100,000 shares with an exercise price
of $.09 per share and an expiration date of August 2012. This represented 87% of
the options granted in fiscal 2003. Mr. Croteau received an option grant of
50,000 shares and Mr. Bovey received an option grant of 15,000 shares during
fiscal 2002.
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND OPTION VALUE AT MAY 31,
2003.
The following table sets forth certain information concerning the number
and value of unexercised options held by the President and Chief Operating
Officer and each Named Executive.
Value of Unexercised
Number of Number of Unexercised In-the-Money Options
Shares Acquired Value Options at May 31, 2003 At May 31, 2003 ($)
Name On Exercise Realized ($) Excercisable/Unexercisable Exercisable/Unexercisable (1)
Joseph P Mullaney -- -- --/100,000 --/4,000
Victor G. Bovey -- -- 6,000/9,000 120/360
Jean Croteau -- -- 20,000/30,000 800/1,200
(1) Market value of underlying securities at May 31, 2003 based on a per share
value of $.13 less the aggregate exercise price.
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, 2003.
ITEM 11 - 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 15, 2003, 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, 2003, (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 15, 2003 (1) August 15, 2003 (2)
--------------------------------------------------------------------------------
Joseph P. Mullaney 114,319(3) *
Jean Croteau 20,000(3) *
Victor G. Bovey 26,350(3) *
William Johnston 5,258,372(3)(4) 43.1%
Timothy L. Tyler 24,000(3) *
Ronald Elenbaas 61,700(3) *
Frederick Lake 10,400(3) *
Barry Bedford 8,400(3) *
All Directors and executive
officers as a group (8 persons) 5,523,541(5) 44.8%
----------
* 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 12,205,236 shares outstanding on August 15, 2003. In addition,
126,800 shares issuable upon exercise of stock options held by certain
Directors and executive officers of the Company are deemed to be
outstanding as of August 15, 2003 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. Mullaney -
20,000; Mr. Croteau - 20,000; Mr. Bovey - 6,000; Mr. Tyler - 24,000; Mr.
Johnston - 19,000; Mr. Elenbaas - 19,000; Mr. Bedford - 8,400; and Mr.
Lake - 10,400.
(4) Mr. Johnston's business address is Greenleaf Capital, 3505 Greenleaf
Boulevard, Kalamazoo, Michigan, 49008.
(5) Includes 126,800 shares issuable upon exercise of stock options
held by all Directors and executive officers as a group.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANACTIONS
As disclosed in Note H and I to the Company's 2003 Annual Report on Form
10-KSB, the Company has entered into various financing arrangements with
Greenleaf Capital over the last several years. Greenleaf Capital,a wholly-owned
subsidiary of Greenleaf Companies is the Company's primary source of capital.
William D. Johnston, a director of SofTech since September 1996, is the
President and sole principal of Greenleaf Companies. The Company paid Greenleaf
Capital approximately $1.6 million and $1.7 million in fiscal 2003 and 2002,
respectively, in finance charges and management fees. Greenleaf Trust, a
wholly-owned subsidiary of Greenleaf Companies, also serves as the trustee and
investment advisor for the Company's 401-K Plan.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
The following items are filed as part of this report:
(a) 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
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 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 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 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 by reference.
(2)(vi) Agreement and Plan of Merger by and among SofTech, Inc., SofTech
Acquisition Corporation, and Workgroup Technology Corporation dated November 13,
2002, filed as Exhibit 6 to Form SC 13D/A, dated November 15, 2002, is
incorporated by reference.
(3)(i) Articles of Organization filed as Exhibit 3(a) to Registration
Statement No. 2-73261 are incorporated 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) Greenleaf Capital $11.0 million Promissory Note, filed as Exhibit
10.2 to the Form 10-K for the fiscal year ended May 31, 2001, is incorporated by
reference.
(10)(ii)Greenleaf Capital $3.0 million Revolving Line of Credit, filed as
Exhibit 10.3 to the Form 10-K for the fiscal year ended May 31, 2001, is
incorporated by reference.
(10)(iii) Amendment to Promissory Note dated November 8, 2002, filed as
Exhibit 4 to Form SC 13D/A filed November 15, 2002, is incorporated by
reference.
(21) Subsidiaries of the Registrant, filed herewith.
(23)(i) Consent of Grant Thornton LLP, filed herewith.
(31) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
(32) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended May 31, 2003.
ITEM 14 - CONTROLS AND PROCEDURES
The Company's Chief Operating Officer is responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such officer has
concluded (based upon their evaluation of these controls and procedures as of a
date within 90 days of the filing of this report) that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in this report is accumulated and communicated to the
Company's management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure.
The Certifying Officer also has indicated that there were no significant changes
in the Company's internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
SofTech, Inc.
We have audited the accompanying consolidated balance sheet of SofTech,
Inc. and subsidiaries as of May 31, 2003 and the related consolidated
statements of operations, changes in stockholders' deficit and comprehensive
loss and cash flows for the fiscal years ended May 31, 2003 and 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2003, and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the two year period ended May 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
-------------------------
Boston Massachusetts
August 8, 2003
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Years Ended May 31,
2003 2002
------ ------
(in thousands, except per share data)
Revenue:
Products $3,389 $2,300
Services 7,299 6,484
------- -------
Total Revenue 10,688 8,784
Cost of sales:
Cost of products sold 62 58
Cost of services provided 840 366
------- -------
Total Cost of sales 902 424
Gross margin 9,786 8,360
Research and development expenses 2,113 1,572
Selling, general and administrative 6,345 5,645
Amortization of capitalized software and
other intangible assets 2,040 1,601
Amortization of goodwill -- 934
------- -------
Loss from operations (712) (1,392)
Interest expense 1,130 1,277
------- -------
Loss before income taxes (1,842) (2,669)
Provision for income
taxes 10 11
------- -------
Net Loss $(1,852) $(2,680)
======== ========
Per Common Share Data:
Net Loss - basic and diluted $(.15) $(.24)
Weighted Average Shares Outstanding,
basic and diluted 12,205 10,986
The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC.
CONSOLIDATED BALANCE SHEET
AS OF MAY 31, 2003
(in thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents $ 654
Restricted cash 65
Accounts receivable (less allowance for
uncollectible accounts of $93) 2,052
Prepaid expenses and other assets 235
------
Total current assets 3,006
Property and equipment, at cost:
Data processing equipment 3,099
Office furniture 551
Leasehold improvements 177
------
Total property and equipment 3,827
Less accumulated depreciation and amortization (3,521)
------
Property and equipment, net 306
Other assets:
Capitalized software costs, net of amortization of
$5,666 9,114
Identifiable intangible purchased assets, net of
amortization of $183 917
Goodwill, net of amortization of
7,229 4,598
Note receivable from officer 134
Other assets 160
------
Total Assets $18,235
======
Liabilities and Stockholders' Deficit:
Current liabilities:
Accounts payable $ 474
Accrued expenses 2,048
Deferred revenue 4,074
Capital lease obligations 30
Current portion of long term debt with related party 1,095
------
Total current liabilities 7,721
Long-term liabilities:
Long term debt with related party,
less current portion 13,058
Deferred revenue 204
------
Total long-term liabilities 13,262
Commitments and Contingencies
Stockholders' deficit:
Common stock, $.10 par value; authorized 20,000,000
shares; issued 12,743,536 1,274
Capital in excess of par value 19,544
Accumulated deficit (21,771)
Cumulative translation adjustment (234)
Treasury stock at cost, 538,300 shares (1,561)
------
Total stockholders' deficit (2,748)
------
Total Liabilities and Stockholders Deficit $18,235
=======
The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT AND COMPREHENSIVE LOSS
For Fiscal Years Ended May 31,
2003 2002
-------- -------
(in thousands, except share data)
Common Stock:
Balance at beginning of year $ 1,274 $ 1,128
Shares issued in 2002 related
to debt to equity conversion -- 146
-------- --------
Balance at end of year 1,274 1,274
-------- -------
Capital in Excess of Par Value:
Balance at beginning of year 19,544 19,690
Shares issued in 2002 related
to debt to equity conversion -- (146)
-------- --------
Balance at end of year 19,544 19,544
-------- --------
Accumulated Deficit:
Balance at beginning of year (19,919) (17,239)
Net loss (1,852) (2,680)
-------- --------
Balance at end of year (21,771) (19,919)
-------- --------
Cumulative Translation Adjustment:
Balance at beginning of year (166) (91)
Foreign currency translation adjustments (68) (75)
-------- --------
Balance at end of year (234) (166)
-------- --------
Unrealized Loss on Marketable Securities:
Balance at beginning of year (48) --
Change in market value of marketable
Securities 48 (48)
-------- --------
Balance at end of year -- (48)
-------- --------
Treasury Stock:
Balance at beginning of year (1,561) (1,561)
Reacquired shares -- --
-------- --------
Balance at end of year (1,561) (1,561)
-------- --------
Total stockholders' deficit at
end of year $ (2,748) $ (876)
======== ========
Comprehensive Loss
Net loss $ (1,852) $ (2,680)
Foreign currency translation adjustments (68) (75)
Gain (loss) on marketable equity securities 48 (48)
-------- --------
Total comprehensive loss $ (1,872) $ (2,803)
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Fiscal Years Ended May 31,
2003 2002
------- -------
(in thousands)
Cash flows from operating activities:
Net loss $(1,852) $(2,680)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 2,323 2,927
Change in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable (1) 432
Prepaid expenses and other assets 17 152
Accounts payable and accrued expenses 496 (692)
Deferred revenue (266) 363
Other (20) (75)
-------- --------
Total adjustments 2,549 3,107
-------- --------
Net cash provided by operating activities 697 427
Cash flows from investing activities:
Payments for business acquisition, net
of cash acquired (3,277) --
Capital expenditures (187) (25)
Proceeds from sale of capital equipment -- 5
Purchase of marketable securities -- (154)
--------- --------
Net cash used in investing activities (3,464) (174)
Cash flows from financing activities:
Borrowings under Greenleaf debt agreements 3,700 500
Repayments under Greenleaf debt agreements (850) (530)
Principal payments on capital lease obligations (72) (63)
--------- --------
Net cash provided (used) by financing activities 2,778 (93)
--------- --------
Net increase in cash and cash equivalents 11 160
Cash and cash equivalents, beginning of year 708 548
--------- --------
Cash and cash equivalents, end of year $ 719 $ 708
========= ========
Supplemental disclosures of cash flow information:
Interest paid $1,145 $1,296
Income taxes paid $ 11 $ 11
The accompanying notes are an integral part of the consolidated financial statements.
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"), Workgroup Technology Corporation ("WTC") acquired in December 2002,
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"),AMG Associates, Inc. ("AMG")
and SofTech Acquisition Corporation. SCI, SII, RAM, AMG and SofTech Technologies
Ltd. 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. The changes in the accounts
receivable reserve are as follows:
Charged
Balance, to Costs Balance,
For the Years Beginning and End of
Ended May 31, of Period Expenses Deductions Period
2002. . . . . $ 704,000 $ 80,000 $ 309,000 $ 475,000
2003. . . . . 475,000 75,000 457,000 93,000
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 2-5 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 $283,000 and $397,000, for fiscal 2003 and 2002,
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:
The Company has adopted the provisions of Statement of
Position No. 97-2, "Software Revenue Recognition" (SOP 97-2) as amended by SOP
No. 98-9, in recognizing revenue from software transactions. Revenue from
software license sales are recognized when persuasive evidence of an arrangement
exists, delivery of the product has been made, and a fixed fee and
collectibility has been determined. The Company does not provide for a right of
return. For multiple element arrangements, total fees are allocated to each of
the elements based on vendor specific objective evidence of 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.
CAPITALIZED SOFTWARE COSTS AND RESEARCH AND DEVELOPMENT:
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. Purchased software is recorded at cost.
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 three to ten years. The Company did not capitalize any internally developed
software in fiscal 2002 or 2003.
Research and development expense for the years ended May 31, 2003 and 2002
was $2,113,000 and $1,572,000, respectively.
GOODWILL:
Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. This statement affects the Company's
treatment of goodwill and other intangible assets. This statement requires that
goodwill existing at the date of adoption be reviewed for possible impairment
and that impairment tests be periodically repeated, with impaired assets written
down to fair value. Additionally, existing goodwill and intangible assets must
be assessed and classified within the statement's criteria. Intangible assets
with finite useful lives will continue to be amortized over those periods.
Amortization of goodwill ceased as of May 31, 2002.
The following unaudited pro forma information for fiscal years 2003 and 2003
presented below is provided for comparative purposes only assuming goodwill had
not been recorded in fiscal 2002 (in thousands):
Fiscal Years Ended
May 31 (unaudited)
-------------------------------
2003 2002
----- ------
Reported net loss $(1,852) $(2,680)
Add back: Goodwill amortization -- 934
----- -----
Adjusted net loss $(1,852) $(1,746)
======== ========
Basic and diluted loss per
share, as reported $ (.15) $ (.24)
======== ========
Basic and diluted loss per share,
as adjusted $ (.15) $ (.16)
======== ========
The Company completed the first step of the transitional goodwill impairment
test during the three months ended November 30, 2002 based on the amount of
goodwill as of the beginning of fiscal year 2003, as required by SFAS No. 142.
Based on the results of the first step of the transitional goodwill impairment
test, the Company has determined that the fair value of each of the reporting
units exceeded their carrying amounts and, therefore, no goodwill impairment
existed as of June 1, 2002.
The Company has tested the goodwill for impairment as of May 31, 2003 and has
concluded based on actual results for fiscal 2003 and projected cash flows from
each of the reporting units that no impairment existed as of May 31, 2003.
LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of all intangible
(primarily capitalized software costs and other intangible assets) 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.
The Company does not have any long-lived assets it considers to be impaired.
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. As of May 31,
2003, $215,000 of cash was restricted as follows: $100,000 held in escrow until
December 2005 to be utilized by the former WTC Directors to reimburse them for
legal representation in the event of a claim related to their service in that
capacity; $50,000 restricted to secure a guarantee on an office lease which ends
December 31, 2004; and $65,000 restricted in a WTC legal dispute with a vendor.
The vendor dispute was settled during the fourth quarter and the restriction
ended subsequent to the fiscal year end. This $65,000 was considered to be a
cash equivalent as of May 31, 2003. The $100,000 cash escrow and the $50,000
security on the lease guarantee have been included in Other assets on the May
31, 2003 balance sheet. Cash held in foreign bank accounts at May 31, 2003
totaled $269,000.
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, 2003. The interest rate on the Company's debt
facilities are variable and fluctuate with changes in the prime rate. In
addition, the Company considers the premium in excess of the prime rate on the
debt facilities to be reasonable based on the Company's revenue, current cash
flow and near term prospects. For these reasons the Company considers the fair
value of the debt to approximate the carrying value.
The Company sells its products to a wide variety of customers in numerous
industries. A large portion of the Company's revenue is derived from customers
for which the Company has an existing relationship and established credit
history. For new customers for which the Company does not have an established
credit history, the Company performs evaluations of the customer's credit
worthiness prior to accepting an order. The Company does not require collateral
or other security to support customer receivables. The Company's provision for
uncollectible accounts has been less that 1% of revenue for both fiscal year
2002 and 2003.
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 2003 and 2002, but were
not significant.
COMPREHENSIVE INCOME:
Financial Accounting standards No. 130, "Reporting Comprehensive Income"
("SFAS 130") requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. To date,
the Company's comprehensive income items include foreign translation adjustments
and unrealized gains and losses on marketable securities. Comprehensive income
has been included in the consolidated Statement of Changes in Stockholder's
Deficit for all periods.
NET INCOME (LOSS) PER COMMON SHARE:
The basic and diluted weighted average shares outstanding during fiscal
years 2003 and 2002 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" were 12,205,000 and 10,986,000,
respectively.
After the application of assumed proceeds, options to purchase shares of
common stock of 57,323 and 12,697, respectively, have been excluded from the
denominator for the computation of diluted earnings per share in fiscal 2003 and
2002, respectively, because their inclusion would be antidilutive.
In addition, the calculation of dilutive earnings per share also excludes
the effect prior to the issuance of common stock in connection with the debt
conversion as discussed in Note H.
STOCK BASED COMPENSATION
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 loss and loss per share at May 31
would have approximated the pro forma amounts indicated below:
(in thousands, except per share data) 2003 2002
-------------------------------------------------------------------
Net income (loss) - as reported $(1,852) $(2,680)
Net income (loss) - pro forma (1,875) (2,728)
Loss per share - diluted - as reported (.15) (.24)
Loss per share - diluted - pro forma (.15) (.25)
The weighted-average fair value of each option granted in fiscal 2003 and
2002 is estimated as $.03 and $.09, respectively on the date of grant using the
Black-Scholes model with the following weighted average assumptions:
Expected life 5 years
Assumed annual dividend growth rate 0%
Expected volatility 1.12
Risk free interest rate
(the month-end yields on 4 year
treasury strips equivalent zero coupon) 2.68% - 3.35%
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. The most significant estimates included in
the financial statements are the valuation of long term assets including
intangibles (goodwill, capitalized software costs and other intangible assets)
and deferred tax assets. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 148 (SFAS 148), Accounting for Stock-Based
Compensation -- Transition and Disclosure, amending FASB Statement No. 123 (SFAS
123), Accounting for Stock-Based Compensation. This Statement amends SFAS 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, SFAS 148 amends APB Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. For entities that voluntarily change to the fair value based method
of accounting for stock-based employee compensation, the transition provisions
are effective for fiscal years ending after December 15, 2002. The Company is
currently evaluating this FASB and has not yet made an election as to which
alternative it will adopt. The Company has complied with the disclosure
provisions in these financial statements.
On November 25, 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies (SFAS 5), relating to the guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees.
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under that
guarantee. FIN 45 covers guarantee contracts that have any of the following four
characteristics: (a) contracts that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, a liability, or an equity security of the guaranteed party
(e.g., financial and market value guarantees), (b) contracts that contingently
require the guarantor to make payments to the guaranteed party based on another
entity's failure to perform under an obligating agreement (performance
guarantees), (c) indemnification agreements that contingently require the
indemnifying party (guarantor) to make payments to the indemnified party
(guaranteed party) based on changes in an underlying that is related to an
asset, a liability, or an equity security of the indemnified party, such as an
adverse judgment in a lawsuit or the imposition of additional taxes due to
either a change in the tax law or an adverse interpretation of the tax law, and
(d) indirect guarantees of the indebtedness of others.
FIN 45 specifically excludes certain guarantee contracts from its scope.
Additionally, certain guarantees are not subject to FIN 45's provisions for
initial recognition and measurement but are subject to its disclosure
requirements. The initial recognition and measurement provisions were effective
for guarantees issued or modified after December 31, 2002. The Company does not
act as a guarantor in any material manner.
In January 2003 the FASB issued FIN 46, an Interpretation of Accounting
Research Bulletin No. 51, Consolidating Financial statements. FIN 46 addresses
consolidating by business enterprises of variable interest entities. Under
current practice, consolidation occurs when one enterprise controls the other
through voting interests. FIN 46 explains how to identify variable interest
entities and how an enterprise assesses its interest in a variable interest
entity to decide whether to consolidate that entity. FIN 46 requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiary if the entities do not effectively disperse risks among the parties
involved. Variable interest entities that effectively disperse risks will not be
consolidated unless a single party holds an interest or combination of interests
that effectively negates such risk dispersion. FIN 46 applies immediately for
variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first interim period beginning after June 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that is
acquired before February 1, 2003. The Company does not have a variable interest
in an entity that is not consolidated in its financial position or its results
of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations. SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, an entity capitalizes a cost
by increasing the carrying amount of the long-lived asset. Over time, the
liability is accreted to its present value each period and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The standard is effective for fiscal
years beginning after June 15, 2002. Management believes the adoption of SFAS
No. 143 will not have a material effect on the financial position or results of
operations of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. It replaces SFAS No. 121. The accounting model for long-lived assets to
be disposed of by sale applies to all long-lived assets, including discontinued
operations. SFAS No. 144 requires that those long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The adoption of SFAS No. 144 did not
have a material effect on the financial position or results of operations of the
Company.
In July 2002, FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". The provisions of this Statement
are effective for such activities that are initiated after December 31, 2002.
SFAS No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of
commitment. The Company has adopted the provisions of this Statement and will
comply in the event whereby it is faced with such an event.
In April 2002, FASB issued Statement No. 145, "Rescission of FASB
Statements No 4, 44, and 64, Amendment of FASB 13, and Technical Corrections",
which is effective for fiscal years beginning after May 15, 2002. Upon adoption
of SFAS 145, companies will be required to apply the criteria in APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions" in determining the classification of gains/losses
resulting from the extinguishment of debt. Upon adoption, extinguishments of
debt shall be classified under the criteria in APB Opinion No. 30. The adoption
of SFAS No. 145 did not have a material effect on the financial position or
results of operations or retained earnings.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which is effective for contracts
entered into or modified after June 30, 2003. This Statement amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities for the purpose of improving financial reporting by requiring
contracts with comparable characteristics to be accounted for similarly. The
adoption of SFAS No. 149 is not expected to have a material impact on the
Company's financial position or results of operations.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which is
effective for financial instruments entered into or modified after May 31, 2003.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The adoption of SFAS No. 150 is not expected to have a material impact
on the Company's financial position or results of operations.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications have no effect on the previously
reported results of operations or retained earnings.
B. LIQUIDITY
The Company generated positive cash flow from operations of $697,000 in
fiscal 2003 and $427,000 in fiscal 2002 after restructuring its operation at the
beginning of fiscal 2002. The fiscal 2002 restructuring noted above was
necessitated by significant cash losses from operations for four consecutive
fiscal years from 1998 through 2001 which totaled approximately $4.4 million.
During fiscal year 2003 the Company also made an important acquisition of a
complementary technology offering that had a beneficial impact on fiscal 2003
results. However, the Company remains a highly leveraged operation that is
dependent on its debt facilities with Greenleaf Capital to fund operations.
Although the Company believes its current cost structure together with
reasonable revenue run rates based on historical performance will continue to
generate positive cash flow in fiscal 2004, the current economic environment
especially in the manufacturing sector makes forecasting revenue based on
historical models difficult and somewhat unreliable. The Company is continuing
to seek out market opportunities both through new products and acquisitions to
grow its revenue base and its product offerings to its customers.
C. INCOME TAXES:
The provision (benefit) for income taxes includes the following:
For Years ended May 31, (in thousands) 2003 2002
---------------------------------------------------------------
Federal $ -- $ --
Foreign -- --
State and Local 10 11
------ -------
10 11
Deferred -- --
------ ------
$ 10 $ 11
======= =======
The domestic and foreign components of loss from operations
before income taxes of the consolidated companies were as follows (in
thousands):
2003 2002
------ -----
Domestic $(1,960) $(2,407)
Foreign 108 (273)
------- -------
$(1,852) $(2,680)
======= =======
At May 31, 2003, the Company had net operating loss carryforwards of $14.2
million that begin expiring in 2013, and are available to reduce future taxable
income. The Company also has tax credit carryforwards generated from research
and development activities of approximately $575,000 that are available to
offset income taxes payable in the future and expire from 2004 to 2006. In
addition, an alternative minimum tax credit of approximately $200,000 that has
no expiration date was available as of May 31, 2003.
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, 2003 2002
----------------------------------------------------------
Statutory rate (34)% (34)%
Expenses not deductible for tax purposes 1 6
Other -- --
Valuation reserve 33 28
---- ----
Effective tax rate 0% 0%
==== ====
Deferred tax assets (liabilities) were comprised of the following at May
31:
(in thousands) 2003 2002
-------------------------------------------------------------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 4,907 $ 4,234
Tax credit carryforwards 775 846
Receivable allowances 31 160
Vacation pay accrual 16 18
Other accruals 70 66
Unrealized loss on investments -- 16
Depreciation 6 6
Differences in book and tax bases of assets
of acquired businesses 1,766 1,609
------ -------
Deferred tax assets 7,571 6,955
Less: valuation allowance (7,571) (6,955)
------- -------
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. Changes in
the valuation reserve impacted deferred tax expense as follows: fiscal 2003
$(616,000) and fiscal 2002 $(344,000).
The Company acquired approximately 89% of the common shares of WTC in
December 19, 2002. As a result, WTC must file a short period tax return for the
period from April 1, 2002 through December 18, 2002. Thereafter, the Company
will include WTC's results in its consolidated tax return. The Company expects
to make a Section 338 election in the WTC short period tax return which will
allow this stock purchase to be treated as an asset purchase for tax purposes.
The Company estimates that this election will provide the consolidated entity
with a tax deduction totaling approximately $4.5 million to be realized in equal
increments over the next 15 years. This deferred tax asset is not included in
the table above because it does not get created until such time as the election
is made.
WTC had substantial net operating loss carryforwards. As a result of the
election, the Company will not be able to utilize such losses and they have not
been included in the table above. As the losses are not expected to carryfoward,
no limitation calculation has been made.
D. EMPLOYEE RETIREMENT PLANS:
The Company maintains two Internal Revenue Code Section 401(k) plans
covering substantially all U.S. based employees. One Plan offers an employer
match of a portion of an employee's voluntary contributions. The aggregate
expense related to this employer match for fiscal 2003 and 2002 was $43,000 and
$50,000, respectively. The second Plan which covers substantially all WTC
employees provides for a discretionary employer match as determined by the Board
of Directors annually. There was no discretionary employer match in fiscal 2003
or 2002 under this Plan.
E. 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 fiscal 2002 through 2003 with respect to this plan is
as follows:
Weighted Average
Stock Options Number of Shares Option Price
--------------------------------------------------------------------------------
Outstanding at May 31, 2001 264,500 $ 1.53
Options granted 134,000 .10
Options terminated (80,500) .79
Options lapsed (5,000) 1.07
Options exercised -
--------
Outstanding at May 31, 2002 313,000 $ 1.03
Options granted 115,000 .10
Options terminated (25,000) 1.22
Options lapsed -- --
Options exercised -- --
--------
Outstanding at May 31, 2003 403,000 $ .70
The following table summarizes information about stock options outstanding at
May 31, 2003 under the 1994 Plan:
Options Options
Outstanding Exercisable
-------------- ---------------
Weighted
Options Average Weighted Options Weighted
Exercise Outstanding Contractual Average Exercisable at Average
Price Range at May 31, 2003 Remaining Life Exercise Price May 31, 2003 Exercise Price
---------------------------------------------------------------------------------------------------
$.09 to $.19 246,000 8.39 years $ 0.10 47,600 $ 0.10
$.781 to $1.688 102,000 3.37 years 1.21 81,000 1.25
$1.878 to $2.063 44,000 4.29 years 1.92 42,200 1.91
$3.375 to $4.625 11,000 4.07 years 4.40 11,000 4.40
-------- -------
Total 403,000 $ 0.70 181,800 $ 1.29
======== =======
There were 15,335 shares available for future grants under the 1994 Plan
at May 31, 2003.
In addition, during fiscal 2001, 100,000 options to purchase shares at
$1.00 were extended to a third party to settle a dispute. These options expire
in January 2006 if not exercised.
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. As of May 31, 2003, 150,000 shares of SofTech common stock
were available for sale to employees under the plan. No shares have been issued
under this Employee Stock Purchase Plan.
F. 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):
2003 2002
Revenue: --------- --------
North America $ 7,734 $ 5,479
Asia 1,115 1,303
Europe 2,558 2,474
Eliminations (719) (472)
-------- --------
Consolidated Total $10,688 $ 8,784
======== ========
Long-Lived Assets:
North America $15,017
Europe 212
--------
Consolidated Total $15,229
========
Foreign revenue is based on the country in which the sale originates.
Revenues from Germany and Japan were 13% and 10%, respectively, of total
consolidated revenue in fiscal year 2003 and 17% and 15%, respectively, of total
consolidated revenue in fiscal year 2002. No other customer or foreign country
accounted for 10% or more of total revenue in fiscal 2003 or 2002.
H. DEBT OBLIGATION WITH RELATED PARTY:
Debt obligations of the Company consist of the following obligations at
May 31, 2003(in thousands):
15,000,000 Promissory Note $13,309
3,000,000 Revolving Line of Credit 844
--------
14,153
Less current portion (1,095)
--------
$13,058
During fiscal 2000, the Company entered into a $11 million borrowing
arrangement ("Promissory Note") with Greenleaf Capital ("Greenleaf"). On
November 8, 2002, the Company amended the Promissory Note. Under the amended
agreement the Company increased its borrowing from $11.0 million to $15.0
million. In addition, the interest rate was reduced from 9.75% to Prime Rate
plus 3.0% (currently 7.25%). Principal and interest is payable monthly and the
Promissory Note has a 15-year loan amortization with the remaining principal of
approximately $9,388,000 due in a single payment in June 2007. This amendment
was entered into in order to provide the Company sufficient capital to complete
the acquisition of Workgroup Technology Corporation (see Note M). The Promissory
Note expires on June 12, 2007.
In addition, the Company has a $3.0 million Revolving Line of Credit with
Greenleaf. This facility is used to supplement cash flows from operations to
meet the Companies short term capital needs. Amounts borrowed under this
facility are due in June 2004 unless otherwise extended. The Company has
agreed to take all necessary actions to provide Greenleaf with a first security
position for its existing debt and for any further increases in the debt.
Effective May 26, 2000, the Company entered into a 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 at a conversion price of
$1.0781. A total of 3,246,452 shares were due Greenleaf related to this
conversion but the Company was only allowed to issue 1,783,000 shares at the
time of the conversion. The Company agreed to take all appropriate action
required to issue the additional 1,463,452 shares. These additional shares were
issued to Greenleaf Capital on April 1, 2002.
In fiscal 2000, the Company entered into agreements with Greenleaf Capital
whereby a total of $5.0 million of then existing debt was converted into equity
through the issuance of a total of 3,246,452 shares of Company common stock.
This common stock was issued between February 2000 and April 2002 at stock
prices between $1.07 and $1.86 per share. The Company has the right, at its sole
discretion, to repurchase these shares at the conversion prices.
William D. Johnston, a director of SofTech since September 1996, is the
sole principal and the President of Greenleaf. Management recommended and the
Board of Directors, other than Mr. Johnston who abstained from such vote,
unanimously approved all transactions with Greenleaf.
Annual maturities of debt obligations subsequent to May 31, 2003,
are as follows: 2004 - $ 1,095,000; 2005 - $1,170,000; 2006 - $1,008,000; 2007 -
$10,880,000.
I. RELATED PARTY TRANSATIONS:
The Company is dependent upon Greenleaf for all of its funding needs. The
Company does not believe that it could obtain similar debt facilities from other
third party lenders. The Company currently funds its operations through a $3.0
million Line of Credit facility as described in Note H above that expires
annually in June. In addition, the Company has a senior credit facility with
Grrenleaf as described in Note H above. Greenleaf's President serves as the
Chairman of the Board for the Company. In addition, Greenleaf provides advisory
services and its President and its CFO serve as Board members to the Company.
Greenleaf is the Company's largest shareholder owning approximately 43% of its
outstanding shares. The Company paid Greenleaf a management fee of approximately
$420,000 in fiscal 2003 and $500,000 in fiscal 2002 in exchange for these
services. The Greenleaf management and advisory fee has been included in SG&A
expense.
J. LEASE COMMITMENTS:
OPERATING LEASES
The Company conducts its operations in office facilities leased through
November 2007. Rental expense for fiscal years 2003 and 2002 was approximately
$443,000 and $621,000, respectively.
At May 31, 2003, minimum annual rental commitments under noncancellable
leases and non-cancellable sub-lease arrangements were as follows:
Gross Sub-lease
Fiscal Year Commitment Commitment Net
----------- ----------- ----------- ----------
2004 $ 918,000 $ (313,000) $ 605,000
2005 728,000 (175,000) 553,000
2006 414,000 -- 414,000
2007 407,000 -- 407,000
2008 205,000 -- 205,000
In the fourth quarter of fiscal 2002, the Company negotiated a termination
of its lease for office space in Bloomfield Hills, Michigan. Under this
arrangement, the Company agreed to forfeit its $50,000 security deposit and to
pay $4,500 per month for 24 months and to exit the space. The Company relocated
its operations to smaller office space nearby and recorded a Q4 charge of
$158,000 to reflect the full cost of this settlement.
In December 2002 the Company extended its lease for office space at its
headquarters in Massachusetts through 2008. As part of that extension, the
Company provided the lessor with a letter of credit for $390,000 which
reduces amounts available under the Company's $15 million Promissory Note. In
addition, the lessor assumed the Company's financial obligations for an
abandoned office lease in Massachusetts that had previously been utilized by WTC
prior to the Company's acquisition of that company. These monies are included
above under the column labeled "Sub-lease Commitment". The benefits derived from
the lessor's assumption of this obligation have been treated as a lease
concession and will reduce rent expense over the life of the lease extension.
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 gross value of $357,000
have been included in data processing equipment and office furniture in the
accompanying balance sheet at May 31, 2003. At May 31, 2003, the accumulated
depreciation on these leased assets was $325,000. The net book value of these
leased assets at May 31, 2003 was approximately $32,000. The approximate minimum
annual lease payments under all capitalized leases as of May 31, 2003 is $30,000
which is due in fiscal year 2004.
K. NOTE RECEIVEABLE FROM OFFICER:
The President of the Company has been extended a non-interest bearing note
in the amount of $134,000 related to a stock transaction in May 1998. The note
is partially secured by all Company shares and stock options held by that
officer.
L. LITIGATION
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, 2003 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.
M. ACQUISITION
On December 18, 2002, the Company closed its all cash tender offer
("Offer") for all of the outstanding shares of common stock of Workgroup
Technology Corporation, a Delaware corporation ("WTC"), at a price of $2.00 per
share. WTC was a publicly traded company listed on the Over the Counter Bulletin
Board. WTC develops, supports and markets a software product to mechanical CAD
("Computer Aided Design") users that allows them to manage their design models.
Its product offerings are compatible with SofTech's.
A total of 1,505,958 shares of WTC's common stock were tendered in the
Offer, which, together with shares beneficially owned by SofTech prior to
commencement of the Offer, represented approximately 88.8% of WTC's outstanding
common stock. The source of the funds used to purchase the tendered shares under
the Offer were borrowed from Greenleaf Capital, Inc., SofTech's principal
stockholder, under an amended Promissory Note arrangement which increased the
Company's available borrowings.
The aggregate purchase price for WTC was approximately $4.0 million including
costs associated with completing the Offer. SofTech assumed net liabilities in
the transaction of approximately $1.1 million bringing the total consideration
paid to approximately $5.1 million. Based on the Company's estimates, $2.7
million of identifiable intangible assets were specified. These identifiable
intangible assets will be amortized over their estimated useful lives of three
(3) years. The remaining $2.4 million of the purchase price has been allocated
to goodwill. Included in the purchase price is an accrual of approximately
$461,000 related to the costs associated with purchasing the 205,000 shares not
tendered in the Offering and payments due certain stock option holders with
"in-the-money" vested stock options at acquisition date.
The operating results of WTC have been included in the Company's results
since the acquisition date. The unaudited pro forma results of operations set
forth below for the fiscal years ended May 31, 2003 and 2002 assume that the WTC
acquisition had occurred as of the beginning of each of these periods.
The following unaudited pro forma comparative information for fiscal year
2003 and 2002 presented below is provided for illustrative purposes only and is
not necessarily indicative of the consolidated results of operations for future
periods or that actually would have been realized had the Company and WTC been a
consolidated entity during the periods presented (in thousands, except per share
data):
(Unaudited)
2003 2002
------------ --------
Revenue $ 14,192 $16,182
------------ --------
Net loss $ (4,098) $(7,282)
------------ --------
Net loss per share as reported:
Basic and diluted $ (.15) $ (.24)
------------ --------
Pro Forma net loss per share:
Basic and diluted $ (.34) $ (.66)
------------ --------
COMBINED PRO FORMA RESULTS
The unaudited pro forma results of operations set forth below for the fiscal
years ended May 31, 2003 and 2002 combine the pro forma adjustments related to
the WTC acquisition detailed above with the pro forma adjustments related to
the cessation in goodwill amortization detailed in Note A:
For the Fiscal Years Ended
May 31 (unaudited)
2003 2002
---- ----
Revenue $ 14,192 $ 16,182
-------- --------
Net loss $(4,098) $(7,282)
Add back: Goodwill amortization -- 934
-------- --------
Adjusted net loss $(4,098) $(6,348)
-------- --------
Net loss per share as reported:
Basic and diluted $ (.15) $ (.24)
-------- --------
Pro Forma net loss per share:
Basic and diluted $ (.34) $ (.58)
-------- --------
Subsequent to the fiscal year end, the Company exercised an option to
purchase an additional 220,000 shares of WTC thereby bringing its ownership of
WTC to 90.02%. On June 18, 2003, the Company filed a short-form merger with the
State of Delaware thereby acquiring the 205,662 WTC shares that had not been
tendered in the Offering. This action provides the beneficial owners of those
205,662 shares to present them to the Company and to receive $2.00 per share in
cash.
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/ Joseph P. Mullaney
-----------------------
Joseph P. Mullaney, President and COO
Date: August 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
----------------------------------------------------------------------------
/S/ Joseph P. Mullaney President and Chief Operating Officer 8/29/03
--------------------------- (Principal executive officer and
Joseph P. Mullaney Principal financial officer)
/S/ Ronald A. Elenbaas Director 8/29/03
-------------------------------
Ronald A. Elenbaas
/S/ William Johnston Director 8/29/03
-------------------------------
William Johnston
/S/ Timothy Tyler Director 8/29/03
-------------------------------
Timothy Tyler
/S/ Barry Bedford Director 8/29/03
-------------------------------
Barry Bedford
/S/ Frederick A. Lake Director 8/29/03
-------------------------------
Frederick A. Lake
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
SofTech, Inc. on Form S-8 (File Nos. 33-5782, 333-61427 and 333-61417) and on
Form S-3 (File Nos. 33-63831, 333-30399 and 333-55759) and in the related
Prospectuses of our report dated August 8, 2003, with respect to the fiscal 2003
consolidated financial statements of SofTech, Inc. included in this Annual
Report on Form 10-KSB for the fiscal year ended May 31, 2003.
/s/ Grant Thornton LLP
Boston, Massachusetts
August 8, 2003