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, 2002
Commission file number 0-10665
SofTech, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2453033
------------- ----------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
2 Highwood Drive, Tewksbury, Massachusetts 01876
----------------------------------------------------------
(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
----------------------------
(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: $616,608 as of August 31, 2002. On August 31, 2002 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 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. 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.
At the end of fiscal 1999, the Company made a strategic decision to focus
its efforts exclusively on the development, support and marketing of its own
technology and limited its service offerings to high margin training and
implementation services. All efforts to sell other complementary third party
software products, hardware and/or low margin design services were phased out
over time.
PRODUCTS AND SERVICES
The Company operates in one reportable segment and is engaged in the
development, marketing, distribution and support of CAD/CAM and Product Data
Management ("PDM") computer solutions. The Company's operations are organized
geographically with 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.
The following table is meant to help clarify the transition from a
business entirely focused and dependent on reselling other companies technology
to one entirely focused on offering its technology to the marketplace.
2
Product revenue was composed of the following (000's):
For the fiscal years ended May 31,
2002 2001 2000
------- ------- -------
SofTech software (AMT & Adra) $ 2,300 $ 5,008 $ 7,640
Hardware -- 98 960
Other 3rd party software -- 141 946
------- ------- -------
Total product revenue $ 2,300 $ 5,247 $ 9,546
======= ======= =======
The decision to focus on offering Company owned technology only is clearly
seen in the table above. The $1.9 million in revenue from hardware and third
party software products in fiscal 2000 decreased to about $239,000 generated in
early 2001 and is non-existent in fiscal 2002 results. The decreases in software
revenue for Company owned technology from fiscal 2000 through 2002 is due to the
worldwide economic slow down that has impacted our customers in the design and
manufacturing marketplace especially hard. It is our expectation that product
revenue for the coming 12 months will stabilize at or near fiscal 2002 results.
The components of service revenue have also changed dramatically as a
result of the changes detailed above. Service revenue was composed of the
following (000's):
For the fiscal years ended May 31,
2002 2001 2000
------- ------- -------
Consulting, services and training $ 250 $ 923 $ 2,238
Maintenance of AMT and ADRA software 6,234 6,484 7,464
Hardware and 3rd party software maintenance -- 75 617
------- ------- -------
Total service revenue $ 6,484 $7,482 $10,319
======= ======= =======
As was the case with the above comparative description of product revenue,
the impact of deciding to focus on our technology first has negatively impacted
total service revenue. The consulting, services and training component of
service revenue has decreased quite dramatically from $2.2 million in fiscal
2000 to about $250,000 in fiscal 2002. However, this decision has allowed for
cost reductions not possible under the previous model and generated higher gross
margins from services. The recurring software maintenance revenue is generally
offered under one year contractual arrangements which provide the Company with a
more predictable revenue stream from its customers. While this component of
revenue has been declining, it has done so at a very modest rate as compared to
the weakness experienced in product revenue. The expectation for the coming year
is that the service revenue can be maintained at or near fiscal 2002 levels as
the manufacturing sector improves slightly as compared to the last few years.
The Adra Systems product known as CadraTM is a drafting and design
technology for the professional mechanical engineer. The CADRA family of CAD/CAM
products includes CADRA Design Drafting, a fast and highly productive mechanical
design documentation tool; CADRA NC, a comprehensive 2 through 5 axis NC
programming application; CADRA integration with SolidWorks, an integrated
3
drawing production system and 3D solid modeler. The CADRA family is rounded out
by an extensive collection of translators and software options that make it a
seamless fit into today's multi-platform and multi-application organizations.
In May 2000, SofTech announced the availability of a new product called
DesignGatewayTM. DesignGateway is an enabling technology that allows the user to
extract engineering and geometric data from 3-D solid modeling applications for
reviewing, manipulating and exporting to 2D drafting systems. DesignGateway
works with Pro/Engineer, SolidWorks 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 - weeks rather than months.
The design software technologies used by mechanical engineers make up a
fragmented market composed of dueling, proprietary technologies. The proprietary
technologies create huge inefficiencies for the global design and manufacturing
enterprises trying to deal with these various design tools. There is no one
solid modeling software company with more than 25% market share. For example,
the big three automobile companies all use different design products as their
primary design tool. The problems created for 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. The plans for DesignGateway over the next 12 months are to continue
modest investment in R&D and marketing and to target potential users in a "rifle
shot" approach.
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. An
alternative marketing strategy may be to offer this solution as an enhancement
to Cadra maintenance customers with the intent of increasing renewal rates and
positively impacting our maintenance pricing. We expect to gain a better
understanding of the value this technology brings to our customers over the next
few years as a more normalized capital spending environment returns.
In the last 12 months we have broadened the application of DesignGateway
by improving the AutoCad "plug-in" capability. With this improvement we have
increased our efforts to attract the AutoCad resellers. In addition, we are
continuing to invest in developing our interfaces to other proprietary modelers.
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,
4
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.
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 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 31, 2002, the Company employed 51 persons, 47 on a full time
basis and 4 part time. These employees were distributed over functional lines as
follows: Sales = 7; Product Development = 16; Engineers = 14; General and
Administrative = 14.
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, 2002 and 2001 was insignificant. Deferred revenue,
which represents primarily software maintenance contracts to be performed during
the following year, totaled approximately $2,600,000 and $2,700,000 at May 31,
2002 and 2001, respectively. As of May 31, 2002, the Company also had $459,000
of deferred revenue that will be delivered in fiscal 2004 and 2005. Given the
short time period between receipt of order and delivery, on average less than 30
days, the Company does not believe that backlog is an important measure as to
the relative health of the business.
RESEARCH AND DEVELOPMENT
The Company has approximately 16 engineers in its research and development
groups located in Michigan and Massachusetts. In fiscal 2002 and 2001 the
Company incurred research and development expense of $1.6 million and $2.0
million, respectively, related to the continued development of technology. The
5
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 2002 or 2001. 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 PROPERTIES
The Company leases office space in Grand Rapids and Troy, Michigan;
Tewksbury, Massachusetts; Milwaukee, Wisconsin; Cincinnati, Ohio; Schaumburg,
Illinois; Ismaning, Germany, Le Fontanil, France and Milan, Italy. The office
space in Grand Rapids, Michigan; Schaumburg, Illinois; and Cincinnati, Ohio are
sublet to third parties. The total space leased for these locations is
approximately 45,000 square feet of which approximately 13,000 square feet are
sublet. The fiscal 2002 rent was approximately $621,000. The Company believes
that the current office space is adequate for current and anticipated levels of
business activity.
The Company is currently engaged in a dispute with the lessor of its
Schaumburg, Illinois location. The sub-tenant that had been occupying the space
walked out on the lease during the fiscal year. A replacement tenant was
negotiating to assume the sub-tenants obligation but sought other space when the
lessor unreasonably withheld their consent. It is the Company's position that
the withholding of reasonable consent violated the terms of the contract.
Further, it is the Company's position that, in the event whereby the lessor is
successful in a claim, indemnification of the claim will be sought against the
subtenant that wrongfully exited their contract and the real estate broker that
was being compensated by both the lessor and the subtenant.
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, 2002 are sufficient to cover any resulting settlements and costs and
does not anticipate a material adverse impact on the financial position or
results of operations of the Company beyond such amounts accrued.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of the Stockholders of the company.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
6
The Company's common stock are traded on the NASDAQ's Over-the-Counter
Exchange under the symbol "SOFT.OB".
At May 31, 2002, there were approximately 273 holders of record of the Company's
common stock. This does not include the shareholders that have their shares held
in street name with brokers or other agents, that totaled approximately 6.3
million shares, or 51.7% of outstanding shares. The table below sets forth
quarterly high and low close prices of the common stock for the indicated fiscal
periods as provided by the National Quotation Bureau. These quotations reflect
inter-dealer prices without retail mark-up, markdown, or commission and may not
necessarily represent actual transactions.
2002 2001
---- ----
High Low High Low
---------------------------------------------------
First Quarter .22 .08 1.25 .625
Second Quarter .15 .06 .938 .25
Third Quarter .15 .05 .6562 .25
Fourth Quarter .19 .09 .20 .06
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, 2002:
Number of shares
to be issued upon Weighted average Number of
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 313,000 $ .96 105,335
Not approved
By shareholders 60,000 $8.00 --
------- -------
Total 373,000 105,335
======= =======
The 60,000 warrants detailed above in the plan category Not approved by
shareholders was issued in connection with a debt arrangement between the
Company and Greenleaf Capital as described in Note H to the financial
statements.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Form 10-KSB contains forward-looking statements. The words "believe",
7
"expect," "anticipate," "intend," "estimate," and other expressions which are
predictions of, or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. These financial
statements include statements regarding the Company's intent, belief or current
expectations. You are cautioned that any forward-looking statements are not
guarantees of future performance and involve a number of risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Among the factors that
could cause actual results to differ materially from those indicated by such
forward-looking statements include, but are not limited to, market acceptance of
the Company's PROSPECTOR(TM) technology and the recently released
DesignGateway(TM) technology, continued revenue generated from the CADRA(TM)
product family, the ability of management to manage the expected growth and the
ability of the Company to attract and retain qualified personnel both in our
existing markets and in new office locations.
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. 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.
At the end of fiscal 1999, the Company made a strategic decision to focus
its efforts exclusively on the development, support and marketing of its own
technology and limited its service offerings to high margin training and
implementation services. All efforts to sell other complementary third party
software products, hardware and/or low margin design services were phased out
over time.
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, 2002. In addition, the change in those items, again expressed as a
percentage, for each of the two years ended May 31, 2002 is presented.
Included in Item 1 of this Form 10-KSB under the section labeled "PRODUCTS
AND SERVICES" there are tabular summaries of the significant components of
Product and Service revenue from fiscal 2000 through fiscal 2002. These tables
were used in preparing this analysis and may assist the reader in understanding
8
the changes that have taken place over the last three years in the Company's
business.
Items as a percentage Percentage change
of revenue year to year
2002 2001 2001 to 2002
------------------------------------------------------
Revenue
Products 26.2% 41.2% (56.2)%
Services 73.8 58.8 (13.3)
---- ----
Total revenue 100.0 100.0 (31.0)
Cost of sales
Products .6 3.4 (86.4)
Services 4.2 9.9 (70.9)
--- ---
Total cost of sales 4.8 13.3 (74.8)
Gross margin
Products 97.5 91.9 (53.5)
Services 94.4 83.2 ( 1.7)
Total gross margin 95.2 86.8 (24.3)
S.G.& A., including R&D 111.0 130.0 (40.8)
Interest expense 14.5 10.8 (7.1)
Loss before income tax (30.4) (53.6) 60.9
9
RESULTS OF OPERATIONS
Total revenue for fiscal year 2002 was $8.8 million, a decrease of $3.8
million or 31% from fiscal year 2001 revenue of $12.7 million. Product revenue
decreased $2.9 million or 56% during the current year as compared to the prior
year and service revenue declined $1.0 million or 13%.
The decrease in product revenue is due to the worldwide slowdown in
technology spending that has impacted the manufacturing sector particularly hard
over the last few years. For fiscal 2002, our product revenue was down in all
geographies but North America was especially difficult and accounted for the
majority of the decrease.
The majority of the decrease in service revenue is the result of a
strategic decision by the Company at the end of fiscal 1999 to focus its
resources and to limit its service offerings as much as possible to high margin
consulting projects, training services and software maintenance. Approximately
75% of the decrease from fiscal 2001 to 2002 in service revenue is related to
the decrease in lower margin offerings.
Product gross margin improved to 97.5% in fiscal 2002 from 91.9% in fiscal
2001. This improvement is primarily due to the sale of low margin third party
software and hardware in early 2001 that pulled the overall margin on product
down in fiscal 2001 by 3 percentage points. The company no longer offers third
party hardware or software.
Service gross margins improved to 94.4% in fiscal 2002 from 83.2% in
fiscal 2001. This improvement is the direct result of the Company's cost
reductions in engineering personnel that in the past performed low margin design
services. In fiscal 2002, maintenance revenue from Company owned technology was
96% of service revenue as compared to 87% in fiscal 2001.
Research and development expenditures totaled approximately $1.6 million
in fiscal 2002 as compared to $2.0 million in fiscal 2001, a decrease of about
23%. This reduced spending is due to cost cutting actions implemented during
fiscal 2001 and 2002 focused on aligning our cost structure with our expected
revenue. The R&D headcount stood at 16 employees as of May 31, 2002, down only
slightly from the 19 R&D employees at the end of fiscal 2001. However, the
headcount at the beginning of fiscal 2001 was 29 employees which resulted in a
much higher average headcount for this function during the course of fiscal
2001.
The Company has invested a significant portion of its R&D spending on the
introduction and the continuing development of its DesignGateway technology over
the last several fiscal years. It is our belief that this technology provides an
easy to use tool that enhances the productivity of a large subset of the
mechanical engineering marketplace. The features and functionality of this
technology provides our Cadra users a significant enhancement that allows them
to extract engineering data from other proprietary solid modeling technologies.
However, we have not generated any material revenue from this technology since
the product was introduced in May 2000. It is our belief that the successful
introduction was burdened by an economic climate that has not been at all
receptive to new software products in our marketplace. We have sought to focus
the technology on large installed bases of proprietary solid modeling and 2D
technologies and have reduced our development efforts as we continue to gather
intelligence as to this technologies value to our customers. This market
10
information should allow us to hone our marketing and pricing strategy in a more
normalized capital spending environment. It is our expectation that
approximately 20% of our development effort will be devoted to this technology
over the coming year.
Selling, general and administrative expense for fiscal 2002 decreased by
$6.3 million or about 43% from fiscal 2001 levels. These reduced expenditures
are a direct result of cost cutting measures enacted over the last 24 months as
the Company has strategically repositioned itself to focus on selling its
technology primarily and targeting high margin service opportunities. This
repositioning has resulted in a significant reduction in headcount. Headcount as
of May 31, 2002 totaled 50 employees, down from 71 at the end of fiscal 2001 and
109 employees at the beginning of that year. Of those totals, the SG&A headcount
was 29 at the end of the current year compared to 47 at the end of fiscal 2001
and 70 at the beginning of that year. This represents an SG&A headcount
reduction from June 1, 2000 to May 31, 2002 of 58%. Included in those reductions
were several senior management positions including the CEO and the Vice
President of Sales.
In addition, the Company has aggressively reduced its building facilities
over the course of the last year, expensed notes from the two senior officers in
fiscal 2001 for nearly $500,000 and incurred non-cash intangible impairment
expenses totaling $660,000 in fiscal 2001. Lastly, the bad debt provision in
fiscal 2001 was approximately $611,000 as compared to $80,000 in fiscal 2002.
Interest expense in fiscal 2002 declined by about $100,000 or 7% as
compared to fiscal 2001. This reduced expense was the result of negotiated lower
average borrowing costs on the Company's average outstanding debt in fiscal 2002
of about $11.5 million. The average interest rate for the current year was
11.1%. In May 2002, this rate was reduced to 9.75%.
CAPITAL RESOURCES AND LIQUIDITY
The Company's cash position as of May 31, 2002 was $708,000. This
represents an increase of approximately $160,000 from the fiscal 2001 year-end
balance of $548,000. In addition, the Company purchased 104,000 shares of
Workgroup Technology Corporation ("WKGP"), about 5.6% of its outstanding shares,
for approximately $154,000 which are classified on the balance sheet as
marketable securities. The Company has filed two Form 13-D's with the Securities
and Exchange Commission detailing its intentions regarding this investment.
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 $2.6 million in fiscal 2002 and
approximately $3.2 million in fiscal 2001.
For fiscal 2002, operating activities generated cash of approximately
$427,000. The reduction in accounts receivable provided $432,000. These positive
cash inflows were utilized for other operating activities of $252,000. Investing
activities utilized cash of approximately $174,000. In addition to the $154,000
used to purchase shares of WTC the Company purchased approximately $25,000 of
capital expenditures. Financing activities used cash of approximately $93,000 of
cash primarily through net debt pay down.
11
At May 31, 2002, long-term obligations totaled approximately $11.1
million, up about 3% from $10.8 million as of the end of fiscal 2001. This
increase is due to the aforementioned increase in deferred revenue from a long
term maintenance agreement. The Company is dependent on availability under the
line of credit and its cash flow from operations to meet its near term working
capital needs and to make debt service payments. The monthly principal and
interest payments are approximately $145,000 on these borrowings.
The Company currently funds its operations through a combination of cash
flow from operations and a $3.0 million Line of Credit with Greenleaf Capital.
This debt facility expires annually in June. As of May 31, 2002, approximately
$2.1 million was available under this facility which has been extended an
additional year through June 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.
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.
12
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; 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. The Company does 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. For the last three
full fiscal years prior to fiscal 2002 we generated significant cash losses from
operations. The Company has taken aggressive cost cutting steps that have
greatly reduced our fixed costs and resulted in positive cash flow from
operations for the current fiscal year. However, our revenue continued to
decline from fiscal 2001 to 2002. 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 particularly in light of the decline in the business
climate throughout 2001 and 2002 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 further adversely impacted.
OUR DESIGNGATEWAY TECHNOLOGY MAY NOT GAIN MARKET ACCEPTANCE. The Company
recently introduced a product known as DesignGateway. The technology is
important in the Company's future plans as a means of providing revenue growth
whether offered as a stand-alone product or as an enhancement for our Cadra
installed base. Providing productivity solutions such as DesignGateway can
further strengthen customer relationships and prolong the utilization of our
Cadra product while improving maintenance renewal rates and pricing. However,
there can be no assurances that we will be successful in gaining market
acceptance for this new technology especially during the recent economic
challenges facing our customers in the manufacturing sector.
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.
ITEM 7 - FINANCIAL STATEMENTS
Financial statements are included herein and are
13
indexed under item 13 (a).
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 29, 2002, based
on information furnished by them to the Company.
DIRECTORS
Ronald Elenbaas, 49, term expires at the next Annual Meeting planned for
January 2002; Mr. Elenbaas is currently retired. From 1975 to 1999, Mr. Elenbaas
was employed by Stryker Corporation in various positions, most recently as
President of Stryker Surgical Group, a division of Stryker Corporation. Mr.
Elenbaas also serves on the Board of the American Red Cross (Kalamazoo and Cass
County, Michigan). Mr. Elenbaas was appointed a Director of the Company in
September 1996.
William Johnston, 55, terms expires at the next Annual Meeting planned for
January 2002; Mr. Johnston has served since 1991 as President of Greenleaf
Capital, Inc., a Michigan-based investment advisory and venture capital firm.
Mr. Johnston was appointed a Director of the Company in September 1996.
Timothy L. Tyler, 48, term expires in 2002; Mr. Tyler has served since
1995 as President of Borroughs Corporation, a privately held, Michigan-based
business that designs, manufactures and markets industrial and library shelving
units, metal office furniture and check out stands primarily in the United
States. Mr. Tyler served as President and General Manager of Tyler Supply
Company from 1979 to 1995. Mr. Tyler was appointed a Director of the Company in
September 1996.
Barry Bedford, 44, term expires at the next Annual Meeting planned for
January 2002; Mr. Bedford has served as Chief Financial Officer of the Greenleaf
Companies since April 2000. Prior to joining Greenleaf, Mr. Bedford was the
Chief Financial Officer of Johnson and Rauhofs, a Michigan advertising firm,
since 1991.
Frederick A. Lake, 67, term expires at the next Annual Meeting planned for
January 2002; Mr. Lake is a partner in the law firm of Lake and Schau, a
Michigan based law firm. Mr. Lake has been with Lake and Schau for more than
five years. Mr. Lake also serves as corporate counsel for Greenleaf Ventures.
Each member of the Board of Directors also serves on the Audit Committee
of the Board of Directors. The Audit Committee recommends the engagement of the
14
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 45 President and Chief Operating Officer
Jean J. Croteau 47 Vice President, Operations
Victor G. Bovey 45 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-K:
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 at the 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.
15
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, 2002, 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 2002, 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, 2002, there were 24,000 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 2000, 2001 and 2002 fiscal years for services in all
capacities to the Company.
16
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Other Annual Securities All Other
Name and Principal Fiscal Salary($) Bonus Compensation Underlying Compensation
Position ($)(2) Year (1) ($) ($)(6) Options(#) ($) (2)
----------------------------------------------------------------------------------------------------------------
Joseph P. Mullaney - 2002 195,000 45,000 13,400 -- 2,640
Current President and COO 2001 160,000 -- 13,400 -- 3,200
Former Vice President and CFO 2000 144,000 -- -- 50,000 1,231
Jean Croteau (3) - 2002 127,348 33,000 -- 50,000 1,573
Vice President, Operations 2001 121,275 20,000 -- -- 2,820
2000 115,500 20,000 -- 50,000 1,158
Victor G. Bovey(4) - 2002 125,000 4,000 -- 15,000 2,604
Vice President, Research & Development 2001 125,000 -- -- -- 2,500
2000 96,922 -- -- 50,000 1,000
Mark R. Sweetland (5) - 2002 80,388 -- -- -- --
Former President and CEO 2001 190,000 -- -- -- --
2000 171,000 -- -- 50,000 1,169
Timothy J. Weatherford(6) - 2002 25,960 -- -- -- --
Former Vice President, Sales 2001 167,231 -- -- -- 21,345
2000 153,000 -- -- 50,000 1,569
(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. Prior to September 1996, Mr. Weatherford served as
Branch Manager of the Company's Indianapolis sales office. In March 2001 Mr.
Weatherford's base compensation was adjusted to $80,000 per annum and he was
advanced funds as a draw against future commissions. In fiscal 2001 he received
$18,000 in advances under this arrangement which has been summarized in the
above table in the All Other Compensation column. In July 2001, Mr. Weatherford
departed his employment with the Company and shortly thereafter was removed as a
17
Director at the regularly scheduled meeting of the Board of Directors in July
2001.
(6) Includes imputed compensation related to the non-interest bearing note
receivable described in Note K to the financial statements.
OPTION GRANTS IN THE LAST FISCAL YEAR
No stock appreciation rights ("SARs") have been granted to the Named
Executive Officers of the Company during fiscal year 2002. Mr. Croteau received
an option grant of 50,000 shares and Mr. Bovey received an option grant of
15,000 shares during fiscal 2002.
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND OPTION VALUE AT MAY 31,
2002.
The following table sets forth certain information concerning the number
and value of unexercised options held by the President and Chief Operating
Officer and each Named Executive.
Value of Unexercised
Number of Number of Unexercised In-the-Money Options
Shares Acquired Value Realized Options at May 31, 2002 At May 31, 2002 ($)
Name On Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
Joseph P. Mullaney -- -- --/ -- --/--
Victor G. Bovey -- -- 3,000/12,000 --/--
Jean Croteau -- -- 10,000/40,000 --/--
(1) Market value of underlying securities at May 31, 2002 based on a per share
value of $.09 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, 2002.
ITEM 11 - SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Information concerning beneficial ownership of the Company's Common Stock,
as of August 19, 2002, 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, 2002, (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.
18
Percentage of
Outstanding Common
Shares of Common Stock Stock Beneficially
Beneficially Owned as Owned as of
Name of Beneficial Owner of August 23, 2002 (1) August 23, 2002 (2)
--------------------------------------------------------------------------------
Joseph P. Mullaney 94,319 *
Jean Croteau 10,000(3) *
Victor G. Bovey 23,350(3) *
William Johnston 5,315,372(3)(4) 43.1%
Timothy L. Tyler 21,000(3) *
Ronald Elenbaas 16,000(3) *
Frederick Lake 5,800(3) *
Barry Bedford 5,000(3) *
All Directors and executive
officers as a group (8 persons) 5,490,841(5) 44.5%
----------
* 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 23, 2002. In addition,
77,600 shares issuable upon exercise of stock options and 60,000 shares
issuable upon exercise of warrants held by certain Directors and executive
officers of the Company are deemed to be outstanding as of August 23, 2002
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. Croteau -
10,000; Mr. Bovey - 3,000; Mr. Tyler - 21,000; Mr. Johnston - 16,000; Mr.
Elenbaas - 16,000; Mr. Bedford - 5,400; and Mr. Lake - 6,200.
(4) Includes warrants for 60,000 shares issuable in exchange for $8.00 per
share.
(5) Includes 77,600 shares issuable upon exercise of stock options and 60,000
shares issuable upon exercise of warrants 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 2002 Annual Report on Form
10-KSB, the Company has entered into three distinct financing arrangements with
Greenleaf Capital during fiscal 2001, 2000 and 1999. Greenleaf Capital continues
to be the Company's primary source of capital. William D. Johnston, a director
of SofTech since September 1996, is the President of Greenleaf Capital. The
Company paid Greenleaf Capital approximately $1.7 million and $1.9 million in
fiscal 2002 and 2001, respectively, in finance charges and management fees.
Greenleaf Trust, a wholly-owned subsidiary of Greenleaf Capital also serves as
the trustee and investment advisor for the Company's 401-K Plan.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
19
(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
herein by reference.
(2)(ii) Stock Purchase Agreement dated as of December 31, 1996 by and
among SofTech, Inc., Information Decisions, Inc., Computer Graphics Corporation,
and the Stockholders of Computer Graphics Corporation, filed as Exhibit 2.1 to
Form S-3, dated June 30, 1997, is incorporated herein by reference.
(2)(iii) Stock Purchase Agreement dated as of February 27, 1997 by and
among SofTech, Inc., Information Decisions, Inc., Ram Design and Graphics
Corporation, and the Stockholders of Ram Design and Graphics Corp., filed as
Exhibit 2.2 to Form S-3, dated June 30, 1997, is incorporated herein by
reference.
(2)(iv) Asset Purchase Agreement by and among SofTech, Inc., Information
Decisions, Inc., CIMLINC Incorporated and CIMLINC GmbH, filed as Exhibit 2.1 to
Form 8-K, dated November 10, 1997, is incorporated herein by reference.
(2)(v) Asset Purchase Agreement by and among SofTech, Inc., Adra Systems,
Inc., Adra Systems, GmbH, and MatrixOne, Inc., filed as Exhibit 2.1 for Form
8-K, dated May 7, 1998, is incorporated herein by reference.
(3)(i) Articles of Organization filed as Exhibit 3(a) to Registration
Statement No. 2-73261 are incorporated herein by reference. Amendment to the
Articles of Organization filed as Exhibit (19) to Form 10-Q for the fiscal
quarter ended November 28, 1986 is incorporated by reference.
(3)(ii) By-laws of the Company, filed as Exhibit (3)(b) to 1990 Form 10K
are incorporated herein by reference. Reference is made to Exhibit (3)(a) above,
which is incorporated by reference. Form of common stock certificate, filed as
Exhibit 4(A), to Registration statement number 2-73261, is incorporated by
reference.
(10)(i) Board resolutions relating to 1981 Non-qualified Stock Option
Plan, 1981 Incentive Stock Option Plan, and forms of options, filed as Exhibits
28(A) and 28(B) to registration statement No. 2-82554, are incorporated by
reference. Also, the Company's 1984 Stock Option Plan is incorporated by
reference to Exhibit 28(c) to Registration Statement 33-5782.
(10)(ii) 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)(iii)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.
(21) Subsidiaries of the Registrant, filed herewith.
(23) (i)Consent of Grant Thornton LLP, filed herewith.
(99.1) 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, 2002.
20
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, 2002 and the related consolidated statements
of operations, changes in stockholders' deficit and cash flows for the fiscal
years ended May 31, 2002 and 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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, 2002, 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, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
Boston Massachusetts
September 6, 2002
21
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Years Ended May 31,
2002 2001
------ ------
(in thousands, except per share data)
Revenue:
Products $ 2,300 $ 5,247
Services 6,484 7,482
------ ------
Total Revenue 8,784 12,729
Cost of sales:
Cost of products sold 58 427
Cost of services provided 366 1,256
------ ------
Total Cost of sales 424 1,683
Gross margin 8,360 11,046
Research and development expenses 1,572 2,036
Amortization of capitalized software 1,601 1,605
Selling, general and administrative 6,579 12,854
------ ------
Loss from operations (1,392) (5,449)
Interest expense 1,277 1,375
------ ------
Loss before income taxes (2,669) (6,824)
Provision for income
taxes 11 4
------ ------
Net Loss $ (2,680) $ (6,828)
====== ======
Per Common Share Data:
Net Loss - basic and diluted $ (.24) $ (.64)
Weighted Average Shares Outstanding,
basic and diluted 10,986 10,742
The accompanying notes are an integral part of the consolidated financial
statements.
22
SOFTECH, INC.
CONSOLIDATED BALANCE SHEET
AS OF MAY 31, 2002
(in thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents $ 708
Accounts receivable (less allowance for
uncollectible accounts of $475) 1,671
Prepaid expenses and other assets 170
------
Total current assets 2,549
Property and equipment, at cost
Data processing equipment 2,863
Office furniture 537
Leasehold improvements 168
------
Total property and equipment 3,568
Less accumulated depreciation and amortization (3,238)
------
Property and equipment, net 330
Other assets:
Capitalized software costs, net of amortization of
$5,849 9,371
Goodwill, net of amortization of
$7,229 2,197
Note receivable from officer 134
Marketable securities 106
Other assets 9
------
Total Assets $ 14,696
======
Liabilities and Stockholders' Deficit:
Current liabilities:
Accounts payable $ 372
Accrued expenses 694
Deferred revenue 2,642
Current portion of capital lease obligations 79
Current portion of long term debt 714
------
Total current liabilities 4,501
Long-term liabilities:
Capital lease obligations, less current portion 23
Long-term debt with related party,
less current portion 10,589
Deferred revenue 459
------
Total long term liabilities 11,071
Commitments and Contingencies
23
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 (19,919)
Cumulative translation adjustment (166)
Unrealized loss on marketable securities (48)
Treasury stock at cost, 538,300 shares (1,561)
------
Total stockholders' deficit (876)
------
Total Liabilities and Stockholders Deficit $ 14,696
======
The accompanying notes are an integral part of the consolidated financial
statements.
24
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended May 31,
2002 2001
-------- -------
(in thousands, except share data)
Common Stock:
Balance at beginning of year $ 1,128 $ 1,128
Shares issued in 2002 related to 2000
debt to equity conversion 146 --
-------- -------
Balance at end of year 1,274 1,128
-------- -------
Capital in Excess of Par Value:
Balance at beginning of year 19,690 19,690
Shares issued in 2002 related to 2000
Debt to equity conversion (146) --
-------- -------
Balance at end of year 19,544 19,690
-------- -------
Accumulated Deficit:
Balance at beginning of year (17,239) (10,411)
Net loss (2,680) (6,828)
-------- -------
Balance at end of year (19,919) (17,239)
-------- -------
Cumulative Translation Adjustment:
Balance at beginning of year (91) (43)
Foreign currency translation adjustments (75) (48)
-------- -------
Balance at end of year (166) (91)
-------- -------
Unrealized Loss on Marketable Securities:
Balance at beginning of year -- --
Change in market value of marketable
securities (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) equity at
end of year $ (876) $ 1,927
======== ========
Comprehensive Loss
Net loss $ (2,680) $ (6,828)
Foreign currency translation adjustments (75) (48)
25
Loss on marketable equity securities (48) --
-------- -------
Total comprehensive loss $ (2,803) $ (6,876)
======== =======
( ) Denotes deduction.
The accompanying notes are an integral part of the consolidated financial
statements.
26
SOFTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years Ended May 31,
2002 2001
-------- -------
(in thousands)
Cash flows from operating activities:
Net loss $ (2,680) $ (6,828)
Adjustments to reconcile net loss to net
cash provided by (used in)operating activities:
Depreciation and amortization 2,927 3,744
Change in operating assets and liabilities,
net of effects of businesses acquired:
Accounts receivable and unbilled costs and fees 432 2,883
Other receivables -- 538
Prepaid expenses and other assets 152 388
Accounts payable and accrued expenses (692) (1,226)
Deferred maintenance revenue 363 (974)
Other (75) (28)
-------- -------
Total adjustments 3,107 5,325
-------- -------
Net cash provided by (used in)
operating activities 427 (1,503)
Cash flows from investing activities:
Capital expenditures (25) (44)
Proceeds from sale of capital equipment 5 --
Purchase of marketable securities (154) --
Other investing activities -- (163)
-------- -------
Net cash used in investing activities (174) (207)
Cash flows from financing activities:
Borrowings under Greenleaf debt agreements 500 1,534
Repayments under Greenleaf debt agreements (530) (423)
Principal payments on capital lease obligations (63) (131)
-------- -------
Net cash (used in) provided by financing activities (93) 980
-------- -------
Net increase (decrease) in cash and
cash equivalents 160 (730)
Cash and cash equivalents, beginning of year 548 1,278
-------- -------
Cash and cash equivalents, end of year $ 708 $ 548
======== =======
27
Supplemental disclosures of cash flow information:
Interest paid $ 1,296 $ 1,388
Income taxes paid $ 11 $ 21
( ) Denotes reduction in cash and cash equivalents.
The accompanying notes are an integral part of the consolidated financial
statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The consolidated financial statements of the Company include the accounts
of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc.
("IDI"), SofTech Technologies Ltd., SofTech, GmbH, Adra Systems, Srl, Adra
Systems, Sarl, Compass, Inc. ("COMPASS"), System Constructs, Inc. ("SCI"),
SofTech Investments, Inc. ("SII"), RAM Design and Graphics Corp. ("RAM") and AMG
Associates, Inc. ("AMG"). SCI, SII, RAM, 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
2001 $ 744 $ 611 $ 681 $ 704
2002 704 80 309 475
A majority of the Company's revenue is generated from licensing and
maintenance services of its Cadra technology. This product family generated
approximately 75% and 70% of the Company's revenue in fiscal year 2002 and 2001,
respectively.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. The Company provides for
depreciation and amortization on a straight-line basis over the following
estimated useful lives:
Data processing equipment 3-5 years
Office furniture 5-10 years
Leasehold improvements Lesser of useful life or life of lease
Depreciation expense, including amortization of assets under capital
lease, was approximately $397,000 and $566,000, for fiscal 2002 and 2001,
respectively.
Maintenance and repairs are charged to expense as incurred; betterments
29
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. To the extent that obligations exist for other services, the Company
allocates revenue between the license and the services based upon their relative
fair value. Revenue from customer maintenance support agreements is deferred and
recognized ratably over the term of the agreements. Revenue from engineering,
consulting and training services is recognized as those services are rendered.
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. The Company evaluates the realizability
and the related periods of amortization on a regular basis. Such costs are
amortized over estimated useful lives ranging from eight to ten years.
Research and development expense for the years ended May 31, 2002 and 2001
was $1,572,000 and $2,036,000, respectively. Research and development expense
for 2001 included $2,943,000 of amortization and allocated overhead costs that
have been reclassified to selling, general and administrative expense to conform
with the current year presentation.
GOODWILL:
Goodwill represents the excess of cost over the fair value of net assets
of businesses acquired and is amortized on a straight-line basis over periods
ranging from five to ten years.
LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of all intangible
30
(primarily goodwill and capitalized software costs) and other long-lived assets.
If indicators of impairment exist, the Company compares the undiscounted cash
flows estimated to be generated by those assets over their estimated economic
life to the related carrying value of those assets to determine if the assets
are impaired. If the carrying value of the asset is greater than the estimated
undiscounted cash flows, the carrying value of the assets would be decreased to
their fair value through a charge to operations.
During the fourth quarter of fiscal 2001, the Company evaluated the
carrying value of the fixed assets, capitalized software and goodwill of its AMT
product line and as a result recorded a charge to earnings to adjust the assets
to their estimated fair value. The charge totaled $660,000 and was recorded as a
reduction of the related goodwill and a corresponding increase to selling,
general and administrative expense. The Company does not have any additional
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,
2002, $67,000 of cash was temporarily restricted. This restriction was related
to a claim by the Company to collect a past due accounts receivable. As of July
31, 2002, this matter was settled and the restriction was removed. Cash held in
foreign bank accounts at May 31, 2002 totaled $322,000.
FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash, accounts receivable,
notes receivable, marketable securities, 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, 2002. The fair value
of the long-term debt was determined using discounted cash flow analyses and
current interest rates for similar instruments.
FOREIGN CURRENCY TRANSLATION:
The functional currency of the Company's foreign operations (England,
France, Germany and Italy) is the local currency. As a result, assets and
liabilities are translated at period-end exchange rates and revenues and
expenses are translated at the average exchange rates. Adjustments resulting
from translation of such financial statements are classified in accumulated
other comprehensive income (loss). Foreign currency gains and losses arising
from transactions were included in operations in fiscal 2002 and 2001, 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.
31
NET INCOME (LOSS) PER COMMON SHARE:
The basic and diluted weighted average shares outstanding during fiscal
years 2002 and 2001 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 10,986,000 and 10,742,000,
respectively.
Options to purchase shares of common stock of 12,697 and 57,425,
respectively, have been excluded from the denominator for the computation of
diluted earnings per share in fiscal 2002 and 2001, 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.
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 and capitalized software costs) and deferred tax assets.
Actual results could differ from those estimates.
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, 2002 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.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," which is effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 must be adopted prospectively and retroactive application is not
permitted. SFAS No. 133 requires the Company to record all derivatives on the
balance sheet at fair value. Changes in derivative fair values are either
recognized in earnings as offsets to the changes in fair value of related hedged
assets, liabilities and firm commitments or for forecasted transactions,
deferred and recorded as a component of accumulated other income (loss) in
stockholders' equity until the hedged transactions occur and are recognized in
earnings. The Company adopted SFAS No. 133 on June 1, 2001 and there was no
material effect on our consolidated financial position or results of operations.
In July 2001, FASB issued SFAS 141, "Business Combination", and SFAS No.
142, "Goodwill and Intangible Assets". SFAS 141 is effective for all business
combinations initiated after June 30, 2001. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. For the Company, SFAS No. 142 will be
adopted for the first quarter of fiscal 2003 which begins on June 1, 2002. Major
32
provisions of these Statements and their effective dates for the Company are as
follows:
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interests method of
accounting is prohibited;
o Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability;
o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective June
1, 2002, all previously recognized goodwill and intangible assets
with indefinite lives will no longer be subject to amortization;
o Effective June 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator;
o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company's Cadra product line has net intangible assets of
approximately $8.9 million which have been amortized using the straight line
method over 10 years since acquisition in May 1998. The annual amortization for
this product line will be approximately $1.1 million for fiscal 2003 under SFAS
142. The Company's AMT product line has net intangible assets of approximately
$2.7 million which have been amortized primarily under the straight line method
over 8 years since acquisition in November 1997. The annual amortization for the
AMT product line will be approximately $.4 million for fiscal 2003 under SFAS
142. The net goodwill amount as of May 31, 2002 for the Cadra and AMT product
lines are $2.2 million and $134,000, respectively, and will no longer be subject
to amortization as discussed above. Management is currently evaluating the
carrying value of the net assets of each of these reporting units in conjunction
with the adoption of SFAS 141 in the first quarter of fiscal 2003. Amortization
of goodwill amounted to $934,000 and $1,587,000 in fiscal 2002 and 2001,
respectively.
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
33
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. Management believes the adoption of
SFAS No. 144 will not have a material effect on the financial position or
results of operations of the Company.
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. Management
believes the adoption of SFAS No. 145 will not have a material effect on the
financial position or results of operations or retained earnings.
In July 2002, FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities", which becomes effective January
2003. 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. Management believes the adoption of SFAS No. 146 will not have a
material effect on the financial position or results of operations or retained
earnings.
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 has incurred significant net losses of $2.7 and $6.8 million
over the last two fiscal years. While more than half the net losses incurred in
fiscal 2001 were composed of non-cash expenses, the losses were significant and
were far below the business plan. Fiscal year 2002's results were dramatically
improved with net losses of only $2.7 million but, more importantly, positive
cash results of approximately $427,000 from operations. This represented the
first cash positive result since fiscal 1997 and was in line with the budget
adopted by the Board of Directors at the beginning of the year. During fiscal
2002 the Company was also successful in negotiating financial settlements to
several long term office leases in Indiana, Michigan and the United Kingdom.
These settlements have been fully provided for in the results for fiscal 2001
and 2002. Despite these recent events, the Company remains dependent on its debt
facilities with Greenleaf Capital to fund operations.
34
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 2003, 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) 2002 2001
--------------------------------------------------------------------------------
Federal $ -- $ --
Foreign -- (7)
State and Local 11 11
------ ------
11 4
Deferred -- --
------ ------
$ 11 $ 4
====== ======
The domestic and foreign components of loss from operations before income
taxes of the consolidated companies were as follows (in thousands):
2002 2001
------ ----
Domestic $ (2,407) $(6,422)
Foreign (273) (402)
------- -------
$ (2,680) $(6,824)
======= =======
At May 31, 2002, the Company had net operating loss carryforwards of $12.5
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 $646,000 that are available to
offset income taxes payable in the future and expire from 2003 to 2006. In
addition, an alternative minimum tax credit of approximately $200,000 that has
no expiration date was available as of May 31, 2002.
The Company's effective income tax rates can be reconciled to the federal
statutory income tax rate as follows:
35
For the Years ended May 31, 2002 2001
--------------------------------------------------------------------------------
Statutory rate (34)% (34)%
Expenses not deductible for tax purposes 6 8
Other - (1)
Valuation reserve 28 27
-- --
Effective tax rate 0% 0%
=== ===
Deferred tax assets (liabilities) were comprised of the following at May
31:
(in thousands) 2002 2001
--------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 4,234 $ 4,053
Tax credit carryforwards 846 902
Receivable allowances 160 336
Vacation pay accrual 18 33
Other accruals 66 --
Unrealized loss on investments 16 --
Depreciation 6 6
Differences in book and tax bases of assets
of acquired businesses 1,609 1,376
Asset basis difference -- (95)
------ ------
Deferred tax assets 6,955 6,611
Less: valuation allowance (6,955) (6,611)
------ ------
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 2002
$(344,000) and fiscal 2001 $(1,864,000).
D. EMPLOYEE RETIREMENT PLANS:
The Company has an Internal Revenue Code Section 401(k) plan covering
substantially all employees. The aggregate retirement plan expense, which
represents an employer match of a portion of employee voluntary contributions,
for fiscal 2002 and 2001 was $50,000 and $87,000, respectively.
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 2001 through 2002 with respect to this plan is as
follows:
36
Weighted Average
Stock Options Number of Shares Option Price
--------------------------------------------------------------------------------
Outstanding at May 31, 2000 257,667 1.91
Options granted 72,500 .97
Options terminated (65,667) 3.15
Options lapsed -- --
Options exercised -- --
--------
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
The following table summarizes information about stock options outstanding at
May 31, 2002 under the 1994 Plan:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Exercise Options Average Weighted Options Weighted
Price Range Outstanding at Contractual Average Exercisable at Average
Price May 31, 2002 Remaining Life Exercise Price May 31, 2002 Exercise Price
---------------------------------------------------------------------------------------------
$.09 to $.19 131,000 8.58 years $ .10 21,400 $ .09
$.781 to $1.688 127,000 6.01 years 1.21 51,399 1.24
$1.878 to $2.063 44,000 6.29 years 1.92 40,400 1.90
$3.375 to $4.625 11,000 6.07 years 4.40 8,533 4.43
------- -------
Total 313,000 $ .96 121,732 $ 1.48
======= =======
There were 105,335 shares available for future grants under the 1994 Plan
at May 31, 2002.
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.
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
37
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS 123, the Company's net income (loss) and earnings (loss)
per share at May 31 would have approximated the pro forma amounts indicated
below:
(in thousands) 2002 2001
--------------------------------------------------------------------------------
Net income (loss) - as reported $ (2,680) $ (6,828)
Net income (loss) - pro forma (2,922) (7,310)
Loss per share - diluted - as reported (.24) (.64)
Loss per share - diluted - pro forma (.27) (.68)
The weighted-average fair value of each option granted in 2002 and 2001 is
estimated as $.77 and $1.18, 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) 4.2% - 6.9%
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts. SFAS 123 does not apply to awards prior to 1996
and additional awards in future years are anticipated.
In 1998, the Company adopted an Employee Stock Purchase Plan, under which
all employees of the Company and certain of its subsidiaries who meet certain
minimum requirements will be able to purchase shares of SofTech common stock
through payroll deductions. The purchase price per share is 85% of the fair
market value of the common stock on the Offering Date or the Exercise Date,
whichever is less. As of May 31, 2002, 150,000 shares of SofTech common stock
were available for sale to employees under the 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):
2002 2001
Revenue: --------- ---------
---------
North America $ 5,479 $ 9,473
Asia 1,303 1,569
Europe 2,474 2,817
Eliminations (472) (1,130)
--------- ---------
Consolidated Total $ 8,784 $ 12,729
========= =========
38
Long-Lived Assets:
North America $ 11,720
Europe 97
--------
Consolidated Total $ 11,817
========
Foreign revenue is based on the country in which the sale originates.
Revenues from Germany and Japan were 17% and 15%, respectively, of total
consolidated revenue in fiscal year 2002 and 11% and 12%, respectively, of total
consolidated revenue in fiscal year 2001. No other customer or foreign country
accounted for 10% or more of total revenue in fiscal 2002 or 2001.
H. DEBT OBLIGATION WITH RELATED PARTY:
Debt obligations of the Company consist of the following obligations at
May 31, 2002(in thousands):
$11,000,000 senior credit facility $ 10,378
$3,000,000 line of credit facility 925
------
11,303
Less current portion
(714)
------
$ 10,589
======
During fiscal 2000, the Company entered into a $11 million senior credit
facility with Greenleaf Capital ("Greenleaf"). Principal and interest is payable
monthly at 9.75% and the note has a 15-year loan amortization with the remaining
principal of approximately $9,388,000 due in a single payment in June 2004.
Effective October 31, 1999, the Company entered into a debt conversion
agreement with Greenleaf which allowed the Company, at its discretion, to
convert up to $1.5 million of its subordinated debt to equity. Under the terms
of this Agreement the Company issued 807,972 shares of previously unissued
common stock to Greenleaf on February 28, 2000 in exchange for converting $1.5
million of the subordinated note described above to equity. The conversion price
was established as the average closing price for the five trading days
immediately preceding the effective date.
Effective May 26, 2000, the Company entered into a second debt conversion
agreement with Greenleaf. Under the terms of this second Agreement the Company
had the right to convert up to $3.5 million of subordinated debt to equity at
the lower of the average closing price for the five business days prior to
conversion or $1.0781. The number of shares to be issued under this conversion
agreement was limited to 19.9% of the number of outstanding shares prior to
conversion. On May 31, 2000, the Company converted the remaining $3.5 million of
subordinated debt under the terms of this Agreement 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 July 2001, the Company entered into an agreement with Greenleaf to
extend the then expired Line of Credit for an additional year in exchange for
39
the following: 1) the Company would appoint Greenleaf Trust to act as Trustee
and Investment Advisor for the Company 401-K Plan; and 2) the Company would have
the right, solely at its discretion, to repurchase the $5.0 million of shares
obtained by Greenleaf in the October 1999 and the May 2000 debt conversions at
prices ranging from $1.07 to $1.86 per share. Finally, the Company 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. The Line of
Credit which has a term of one year has been renewed through June 2003 and
carries an interest rate of a bank's prime rate plus 3.0% (9.75%) at May 31,
2002.
Greenleaf has right under the original subordinated debt agreement to
purchase 60,000 shares of SofTech common stock at $8.00 per share on December
31, 2002.
William D. Johnston, a director of SofTech since September 1996, is a
principal and the President of Greenleaf. Management sought and received
non-binding commitments from other sources for the financing that was ultimately
provided by Greenleaf. Management recommended and the Board of Directors, other
than Mr. Johnston who abstained from such vote, unanimously approved the
transactions with Greenleaf.
Annual maturities of debt obligations subsequent to May 31, 2002, are as
follows: 2003 - $714,000; 2004 - $787,000; 2005 - $9,802,000.
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 above that expires annually in
June. 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. The Company paid Greenleaf a management
fee of approximately $500,000 in fiscal 2002 and 2001 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
July 2005. Rental expense for fiscal years 2002 and 2001 was approximately
$621,000 and $1,196,000, respectively.
At May 31, 2002, minimum annual rental commitments under noncancellable
leases and non-cancellable sub-lease arrangements were as follows:
Gross Sub-lease
Fiscal Year Commitment Commitment Net
----------- ---------- ---------- ----
2003 $ 571,000 $ 126,000 $ 445,000
2004 129,000 6,000 123,000
2005 72,000 -- 72,000
2006 12,000 -- 12,000
40
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 charge of $158,000
to reflect the full cost of this settlement.
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, 2002. At May 31, 2002, the accumulated
depreciation on these leased assets was $275,000. The net book value of these
leased assets at May 31, 2002 was approximately $82,000. The approximate minimum
annual lease payments under all capitalized leases as of May 31, 2002 are as
follows: 2003, $79,000; and 2004, $32,000. The present value of the minimum
lease payments is $102,000, including current maturities of $79,000.
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 from May 1998. The note
is 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, 2002 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.
41
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: September 13, 2002
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 9/13/02
------------------------- (Principal executive officer and
Joseph P. Mullaney Principal financial officer)
/s/ Ronald A. Elenbaas Director 9/13/02
-------------------------
Ronald A. Elenbaas
/s/ William Johnston Director 9/13/02
-------------------------
William Johnston
/s/ Timothy Tyler Director 9/13/02
-------------------------
Timothy Tyler
/s/ Barry Bedford Director 9/13/02
-------------------------
Barry Bedford
/s/ Frederick A. Lake Director 9/13/02
-------------------------
Frederick A. Lake
42
CERTIFICATION
I, Joseph P. Mullaney, President and Chief Operating Officer of SofTech, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-KSB of SofTech, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Date: September 13, 2002 /s/ Joseph P. Mullaney
----------------------
Joseph P. Mullaney
President and Chief Operating Officer
43