10-K 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 2003 Commission file number 0-10665 SofTech, Inc. (Exact name of registrant as specified in its charter) Massachusetts 04-2453033 ------------- ---------- (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: $1,361,699 as of August 15, 2003. On August 15, 2003 the registrant had outstanding 12,205,236 shares of common stock of $.10 par value, which is the registrant's only class of common stock. PART I ITEM 1 - DESCRIPTION OF BUSINESS THE COMPANY SofTech, Inc. was formed in Massachusetts on June 10, 1969. The Company had an initial public offering in August 1981 and a subsequent offering in December 1982. From inception until the disposition of the Government Systems Division in December 1993, the Company's primary business was that of custom software development for the U.S. Government, primarily the Department of Defense. After the sale of the Company's Government Systems Division through the end of calendar year 1996, the Company's only business was reselling hardware and software products of third parties and offering services related to such products (the "Reseller Model"). Between December 1996 and December 2002, the Company acquired eight entities involved in developing, supporting and/or marketing software products and/or services to the Computer Aided Design and Manufacturing ("CAD/CAM") and Product Data Management ("PDM") marketplace. The three most significant acquisitions during that time period were the purchases of Workgroup Technology Corporation ("WTC") in December 2002, Adra Systems, Inc. in May 1998, and Advanced Manufacturing Technology ("AMT") in November 1997. The aggressive acquisition strategy that was funded primarily through debt, substantially increased the Company's risk profile but was required in order to create a viable and sustainable business. The acquisition of WTC in December 2002 significantly and positively impacted our fiscal 2003 performance and will be a critical element of our strategy in the future. PRODUCTS AND SERVICES The Company operates in one reportable segment and is engaged in the development, marketing, distribution and support of CAD/CAM and PDM computer solutions. The Company's operations are organized geographically with European sales and customer support offices in France, Germany and Italy. Components of revenue and long-lived assets (consisting primarily of intangible assets, capitalized software and property, plant and equipment) by geographic location are outlined in Note F to the financial statements. A description of the Company's primary product offerings is as follows: CadraTM is a drafting and design technology for the professional mechanical engineer. The CADRA family of CAD/CAM products includes CADRA Design Drafting, a fast and highly productive mechanical design documentation tool and CADRA NC, a comprehensive 2 through 5 axis NC programming application. The CADRA family offers an extensive collection of translators and software options that make it a seamless fit into today's multi-platform and multi-application organizations. ProductCenterTM is a proven enterprise-wide, collaborative PDM solution delivering a unique and powerful combination of document management, design integration, configuration control, change management, bill of materials management and integration capability with other enterprise-wide systems, which helps companies rapidly optimize the product development process. ProductCenter provides for the secure management of product information and allows engineers and the entire design chain to manage, share, modify and track product data and documents throughout the product development lifecycle. ProductCenter supports engineering change management and bill of materials management for automating business processes. ProductCenter's web-based collaboration capabilities allow employees, customers, suppliers, and other globally dispersed team members to securely exchange product information while maintaining a centralized database of critical product data. ProductCenter also enables integration with other business applications, such as ERP, SCM, or CRM, for continuous data exchange across the product lifecycle. The ProductCenter family of products is a suite of modules that, when combined, offer a unified collaborative product data management software solution. ProductCenter modules may be deployed in various combinations to meet the specific needs of a customer. DesignGatewayTM is an enabling technology that allows the user to extract engineering and geometric data from 3-D solid modeling applications for reviewing, manipulating and exporting to 2D drafting systems. DesignGateway works with Pro/Engineer, SolidWorks, Cadra and AutoCad. DesignGateway also organizes other engineering documents into project folders providing easy access for many users. The technology is easy to use and can be implemented company-wide within a short time period. The design software technologies used by mechanical engineers make up a fragmented market composed of dueling, proprietary technologies. The proprietary technologies create huge inefficiencies for the global design and manufacturing enterprises trying to deal with these various design tools. There is no one solid modeling software company with more than 25% market share. For example, the big three automobile companies all use different design products as their primary design tool. The problems created for the suppliers to the automobile industry that do business with all three are simply enormous. DesignGateway is aimed at improving the interoperability between and among these numerous proprietary design tools thereby greatly increasing productivity and reducing cost. Since its introduction, we have had little success in selling this interoperability solution to the manufacturing marketplace. It is our view that the interoperability problem described above exists and will continue to cause great inefficiencies. Our lack of success to date is the result of a business climate wherein little or no capital is being invested in new software technologies. This is, of course, a natural reaction when a company's revenue declines and cost cutting and reductions in the workforce become the focus of management. This technology grew out of perceived interoperability problems of many of our large Cadra customers. Our marketing strategy to date has been to offer this technology primarily to those Cadra users that also have some need to work with Pro/Engineer, SolidWorks and/or AutoCad. To date we have primarily marketed it as a stand-alone product under a traditional perpetual license arrangement. We are currently offering this product under a 90 day free trial period as a means of attempting to attract users who might otherwise be restrained from experiencing the productivity enhancements offered by this unique technology given the depressed levels of investment in technology throughout the manufacturing sector. We expect to market the product in this fashion over the next 6 to 9 months and then make a decision, based on the results of the free trial offer, on how best to market and distribute this product. The AMT group has two primary products. Prospector is a knowledge-based NC programming package for complex tool production. This Windows based, easy-to-use package gives full flexibility for generating and editing NC toolpaths while utilizing the power of the industry's best knowledge base of tools, speeds, feeds, and cutting paths. ToolDesigner is a software package for developing and designing complex molds and dies. Core and cavity splits, parting line placement, wireframe design and drafting, photorealistic rendering, surface modeling, trimmed surfaces, injection and cooling line placement are aptly handled with this professional package. The Company markets and distributes its products and services primarily through a direct sales force and through its service organization in North America and Europe. The majority of the Company's sales in Asia are in Japan. The Company markets and distributes its products and services in Japan primarily through authorized resellers. Recently, the Company has been signing resellers in North America and Europe to reach areas not covered by its direct sales presence, however, to date, the revenue generated from this indirect distribution has not been material. COMPETITION The Company competes against much larger entities in an extremely competitive market for all of its software and service offerings. The 2D software technologies acquired in the acquisitions in fiscal 1998 compete directly with the offerings of such companies as AutoDesk and EDS. This 2D technology is also marketed as a complementary offering to many 3D products offered by companies such as Parametric Technology Corporation, Dassault, EDS, AutoDesk and SolidWorks that all possess some level of 2D drafting capability. These companies all have financial resources far in excess of those of the Company. The Company's PDM and collaborative technology offerings compete against offerings of all of the same companies listed in the paragraph above and against other companies that have focused on PDM and collaborative offerings only. The Company's CAM technology, PROSPECTOR(TM), is marketed to the Plastic Injection Mold and Tool & Die industries. While the large CAD companies such as Parametric Technology Corporation, Dassault, EDS, and AutoDesk have modules that compete in this market, we believe none focus exclusively on CAM technology. The service offerings of the Company which include consulting, training and discreet engineering services compete with offerings by all of the large CAD companies noted above, small regional engineering services companies and the in-house capabilities of its customers. PERSONNEL As of August 15, 2003, the Company employed 83 persons, 77 on a full time basis and 6 part time. These employees were distributed over functional lines as follows: Sales = 13; Product Development = 28; Engineers = 23; General and Administrative = 19. The ability of the Company to attract qualified individuals with the necessary skills is currently, and is expected to continue to be, a constraint on future growth. However, the availability of such skilled personnel has increased over the recent past as the worldwide economy has slowed. BACKLOG Backlog as of May 31, 2003 and 2002 was insignificant. Deferred revenue, which represents primarily software maintenance contracts to be performed during the following year, totaled approximately $4,074,000 and $2,627,000 at May 31, 2003 and 2002, respectively. As of May 31, 2003, the Company also had $204,000 of deferred revenue that will be delivered in fiscal 2005. In addition, as of May 31, 2003 the Company had a backlog of consulting orders totaling approximately $.3 million. Given the short time period between receipt of order and delivery of product revenue, on average less than 30 days, the Company does not believe that product revenue backlog is an important measure as to the relative health of the business. RESEARCH AND DEVELOPMENT The Company has approximately 28 engineers in its research and development groups located in Michigan and Massachusetts. In fiscal 2003 and 2002 the Company incurred research and development expense of $2.1 million and $1.6 million, respectively, related to the continued development of technology. The Company's ability to continue to maintain the ADRA software so it is compatible with the other 3D offerings in the marketplace and to continue to improve the PROSPECTOR(TM) technology is critical to its future success. CUSTOMERS No single customer accounted for more than 10% of the Company's revenue in fiscal 2003 or 2002. The Company is not dependent on a single customer, or a few customers, the loss of which would have a material adverse effect on the business. SEASONALITY The first quarter, which begins June 1 and ends August 31, has historically been the slowest quarter of the Company's fiscal year. Management believes this weakness is due primarily to the buying habits of the customers and the fact that the quarter falls during prime vacation periods. ITEM 2 - DESCRIPTION OF PROPERTY The Company leases office space in Grand Rapids and Troy, Michigan; Tewksbury and Burlington, Massachusetts; Milwaukee, Wisconsin; Ismaning, Germany, Le Fontanil, France and Milan, Italy. The office space in Grand Rapids, Michigan is sublet to a third party. The liability related to the office space in Burlington, Massachusetts has been assumed by our lessor for our headquarters in Tewksbury, Massachusetts as a concession for extending our lease term at our headquarters. Such concession is being amortized as a reduction of rent expense over the extended term of the lease. The fiscal 2003 rent was approximately $443,000. The Company believes that the current office space is adequate for current and anticipated levels of business activity. ITEM 3 - LEGAL PROCEEDINGS The Company is a party to various legal proceedings and claims that arise in the ordinary course of business. Management believes that amounts accrued at May 31, 2003 are sufficient to cover any resulting settlements and costs and does not anticipate a material adverse impact on the financial position or results of operations of the Company beyond such amounts accrued. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS On April 16, 2003, the Company held its Annual Meeting of Shareholders. The shareholders were asked to elect all five directors to terms of office that expire on a staggered basis from 2003 through 2005. The results for each candidate were as follows:
Candidate Name. . . Votes For Votes Against Votes Withheld Abstentions ------------------- --------- ------------- -------------- ----------- Timothy L. Tyler . . 6,377,610 0 11,550 0 ------------------- --------- ------------- -------------- ----------- Ronald A. Elenbaas. 6,377,610 0 11,550 0 ------------------- --------- ------------- -------------- ----------- Frederick A. Lake . 6,377,410 0 11,750 0 ------------------- --------- ------------- -------------- ----------- William D. Johnston 6,377,510 0 11,650 0 ------------------- --------- ------------- -------------- ----------- Barry Bedford . . . 6,377,410 0 11,750 0 ------------------- --------- ------------- -------------- -----------
PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock are traded on the NASDAQ's Over-the-Counter Exchange under the symbol "SOFT.OB". At May 31, 2003, there were approximately 2,900 holders of record of the Company's common stock. The table below sets forth quarterly high and low close prices of the common stock for the indicated fiscal periods as provided by the National Quotation Bureau. These quotations reflect inter-dealer prices without retail mark-up, markdown, or commission and may not necessarily represent actual transactions.
2003 2002 ---- ---- High Low High Low ------------------------------------------- First Quarter .18 .09 .22 .08 Second Quarter .25 .06 .15 .06 Third Quarter .25 .12 .15 .05 Fourth Quarter .19 .10 .19 .09
The Company has not paid any cash dividends since 1997 and it does not anticipate paying cash dividends in the foreseeable future. The Company issued 1,463,452 shares of Common Stock on April 1, 2002 in connection with a debt conversion as described in Note H to the financial statements. The table below details information regarding equity compensation plans of the Company as of May 31, 2003:
Number of Shares to be issued upon Weighted average Number of shares exercise of exercise price securities available outstanding options, of outstanding options, for future Plan category warrants and rights warrants and rights issuances Approved by Shareholders . . 403,000 $ .70 15,335 Not Approved by Shareholders 100,000 $ 1.00 -------------------- ------------------- 503,000 15,335
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS This Form 10-KSB contains forward-looking statements. The words "believe", "expect," "anticipate," "intend," "estimate," and other expressions which are predictions of, or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. These financial statements include statements regarding the Company's intent, belief or current expectations. You are cautioned that any forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Among the factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, market acceptance of the Company's PROSPECTOR(TM) and DesignGateway(TM) technologies, continued revenue generated from the CADRA(TM) product family, the ability of the Company to integrate the most recent acquisition of WTC and the ability of the Company to attract and retain qualified personnel both in our existing markets and in new office locations. DESCRIPTION OF THE BUSINESS SofTech, Inc. was formed in Massachusetts on June 10, 1969. The Company had an initial public offering in August 1981 and a subsequent offering in December 1982. From inception until the disposition of the Government Systems Division in December 1993, the Company's primary business was that of custom software development for the U.S. Government, primarily the Department of Defense. After the sale of the Company's Government Systems Division through the end of calendar year 1996, the Company's only business was reselling hardware and software products of third parties and offering services related to such products (the "Reseller Model"). Between December 1996 and May 1999, the Company acquired seven entities involved in developing, supporting and/or marketing software products and/or services to the Computer Aided Design and Manufacturing ("CAD/CAM") marketplace. The two most significant acquisitions during that time period were the purchases of Adra Systems, Inc. in May 1998 and the Advanced Manufacturing Technology ("AMT") in November 1997. In December 2002 the Company acquired WTC thereby obtaining complementary technology. This acquisition of WTC had a positive impact on fiscal 2003 results and is expected to be a key element in the Company's growth strategy. The aggressive acquisition strategy that was funded primarily through debt, substantially increased the Company's risk profile but was required in order to create a viable and sustainable business. INCOME STATEMENT ANALYSIS The table below presents the relationship, expressed as a percentage, between income and expense items and total revenue, for each of the two years ended May 31, 2003. In addition, the change in those items, again expressed as a percentage, for each of the two years ended May 31, 2003 is presented.
Items as a percentage Percentage change of revenue year to year 2003 2002 2002 to 2003 -------------------------------------------- Revenue Products 31.7% 26.2% 47.3% Services 68.3 73.8 12.6 ----------------------------------------------------------------------- Total revenue 100.0 100.0 21.7 Cost of sales Products .6 .6 6.9 Services 7.8 4.2 129.5 ------------------------------------------------------------------------ Total cost of sales 8.4 4.8 112.7 Total gross margin 91.6 95.2 17.1 Research and development 19.8 17.9 34.4 S.G.& A. 59.3 64.3 12.4 Amortization of capital software and other intangible assets 19.1 18.2 27.4 Amortization of goodwill -- 10.6 (100.0) Interest expense 10.6 14.6 (11.5) ------------------------------------------------------------------------ Loss before income tax (17.2) (30.4) (31.0)
------ Critical Accounting Policies and Significant Judgements and Estimates The Securities and Exchange Commission ("SEC") issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require the application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note A to these financial statements. The Company believes that the following accounting policies require the application of management's most difficult, subjective or complex judgments: Estimating Allowances for Doubtful Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectibility of our accounts receivable and our future operating results. Valuation of Long-lived and Intangible Assets We assess the recoverability of long-lived assets and intangible assets whenever we determine that events or changes in circumstances indicate that their carrying amount may not be recoverable. Our assessment is primarily based upon our estimate of future cash flows associated with these assets. These valuations contain certain assumptions concerning estimated future revenues and future expenses for each of our two reporting units. We have determined that there is no indication of impairment of any of our assets. However, should our operating results deteriorate, we may determine that some portion of our long-lived assets or intangible assets are impaired. Such determination could result in non-cash charges to income that could materially affect our financial position or results of operations for that period. Valuation of Goodwill Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects the Company's treatment of goodwill and other intangible assets. This statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives ceased as of June 1, 2002. The Company completed the first step of the transitional goodwill impairment test during the three months ended November 30, 2002 based on the amount of goodwill as of the beginning of fiscal year 2003, as required by SFAS No. 142. Based on the results of the first step of the transitional goodwill impairment test, the Company has determined that the fair value of each of the reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of June 1, 2002. As a result, the second step of the transitional goodwill impairment test is not required to be completed. The Company will be required to continue to perform a goodwill impairment test on an annual basis. Valuation of Deferred Tax Assets We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. The Company's deferred tax assets are currently fully reserved. RESULTS OF OPERATIONS Total revenue for fiscal year 2003 was $10.7 million, an increase of $1.9 million or 22% from fiscal year 2002 revenue of $8.8 million. Product revenue increased $1.1 million or 47% during the current year as compared to the prior year and service revenue increased $.8 million or 13%. The increase in product revenue is due to the acquisition of WTC in December 2002 and the inclusion of that entity's results for approximately half of our fiscal year. Product revenue from our Cadra and AMT technology offerings was essentially unchanged from fiscal 2002 to 2003. The increase in service revenue from 2002 to 2003 was due to the inclusion of the WTC results for a portion of fiscal 2003 which was offset by a decline of approximately $1.4 million or 22% in service revenue from our Cadra and AMT technology offerings. The majority of this decrease in service revenue was from lower Cadra software maintenance renewals in North America. Product gross margin improved to 98.2% in fiscal 2003 from 97.5% in fiscal 2002. This small increase in margin is due to the addition of WTC product revenue and the relatively low amount of incremental cost from that additional product revenue. Service gross margin was 88.5% in fiscal 2003 as compared to 94.4% in fiscal 2002. This decrease in gross margin is a direct result of the inclusion of WTC's consulting revenue and the lower margin earned on that type of labor intensive effort as compared to software maintenance revenue. It is the Company's expectation that the consulting revenue will be an important element of its business plans in the future. Research and development expenditures totaled approximately $2.1 million in fiscal 2003 as compared to $1.6 million in fiscal 2002, an increase of about 34%. This increased R&D spending is due to the inclusion of the WTC development group for approximately half of our fiscal year. Selling, general and administrative expense for fiscal 2003 increased by $.7 million or about 12% from fiscal 2002 levels. The addition of WTC for approximately half of the current fiscal year increased this category of expenses by approximately $1.3 million which was partially offset by reduced spending of about 10% from the Company's SG&A spending from its existing business. The non-cash expenses related to amortization of capitalized software and other intangible assets increased by approximately $.4 million or 27% in fiscal 2003 as compared to fiscal 2002. This increase is primarily the result of amortizing WTC's identifiable intangible assets during fiscal 2003. Goodwill amortization was $934,000 in fiscal 2002. Beginning May 31, 2002, goodwill was no longer amortized in accordance with SFAS 142. Interest expense in fiscal 2003 declined by about $147,000 or 12% as compared to fiscal 2002. This reduced expense was the result of negotiated lower average borrowing costs on the Company's average outstanding debt partially offset by higher average borrowings in fiscal 2003 compared to 2002. In fiscal 2003 our average outstanding debt was $13.2 million as compared to about $11.5 million in 2002. This increase in average borrowing was the result of the debt financed acquisition of WTC in December 2002. The average interest rate for the current year was about 8.6% as compared to about 11.1% in fiscal 2002. In November 2002 we renegotiated our borrowing rate to prime plus 3%. As of May 31, 2003 our borrowing rate based on this agreement is 7.25%. The tax provision was essentially unchanged from fiscal 2002 to 2003 and relates to state and local taxes. The net loss for fiscal 2003 was approximately $1.9 million as compared to $2.7 million in fiscal 2002. The net loss per share was $(.15) in fiscal 2003 as compared to $(.24) in fiscal 2002. The weighted average shares increased to 12.2 million for fiscal 2003 as compared to about 11.0 million in fiscal 2002 due to a share issuance of 1.5 million related to a debt conversion in April 2002 as described in Note H. CAPITAL RESOURCES AND LIQUIDITY The Company's cash position as of May 31, 2003 was $719,000 including $65,000 that is restricted. This represents an increase of $11,000 from the fiscal 2002 year-end balance of $708,000. Subsequent to the fiscal year end, the restrictions on $65,000 were removed. Included in the Company's results of operations are significant non-cash expenses related to amortization of intangibles resulting from prior year acquisitions, which totaled approximately $2.0 million in fiscal 2003 and approximately $2.5 million in fiscal 2002. For fiscal 2003, operating activities generated cash of approximately $864,000. The net loss together with non-cash expenses related primarily to amortization of intangibles and depreciation generated cash of approximately $460,000. The reduction in accounts receivable and prepaid and other assets provided $174,000 and a net increase in liabilities provided additional cash of $230,000. Investing activities utilized cash of approximately $3.6 million primarily due to the cash required to acquire WTC in December 2002. Financing activities provided approximately $2.8 million with gross additional borrowings under our debt facilities totaling about $3.7 million offset by principal pay downs of $850,000. At May 31, 2003, long-term obligations totaled approximately $13.3 million, up about 20% from $11.1 million as of the end of fiscal 2002. This increase is the result of the aforementioned additional borrowings to complete the WTC acquisition partially reduced by a decrease in deferred revenue to be earned in more than one year's time. The Company is dependent on availability under its debt facilities and its cash flow from operations to meet its near term working capital needs and to make debt service payments. The monthly principal and interest payments are approximately $150,000 on these borrowings. The Company currently funds its operations through a combination of cash flow from operations and its debt facilities with Greenleaf Capital. The $3.0 million Line of Credit expires annually in June. As of May 31, 2003, approximately $2.2 million was available under this facility which has been extended an additional year through June 2004. In addition, the Company's $15.0 million debt facility with Greenleaf has additional borrowing capacity of approximately $1.3 million as of May 31, 2003. The Company currently believes that its cash flow from operations together with the availability of capital under its existing debt agreements is sufficient to meet its obligations for at least the next year. MARKET RISK DISCLOSURE The Company has assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates. The Company's primary exposure is related to local currency revenue and operating expenses in Europe. However, the Company does not engage in forward foreign exchange or similar contracts to reduce its economic exposure to changes in exchange rates as the associated risk is not considered significant. Because the Company markets, sells and licenses its products throughout the world, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products. The Company is exposed to changes in interest rates primarily as a result of its long-term debt requirements. The Company's interest rate risk management objectives are to limit the effect of interest rate changes on earnings and cash flows and to lower overall borrowing costs. However, due to the Company's relatively small size, its highly leveraged balance sheet and the difficulties in raising capital in the current economic environment, the Company is dependent on both long term and short term borrowing arrangements with Greenleaf Capital for its financing needs. Based on the debt balance at May 31, 2003, a hypothetical change in the interest rate of +2% or -2% would result in a hypothetical change to interest expense of about $283,000 and $(283,000), respectively. The Company does not enter into contracts for speculative or trading purposes, nor is it a party to any leveraged derivative instruments. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's business is subject to many uncertainties and risks. This Form 10-KSB also contains certain forward-looking statements within the meaning of the Private Securities Reform Act of 1995. The Company's future results may differ materially from its current results and actual results could differ materially from those projected in the forward looking statements as a result of certain risk factors, including but not limited to those set forth below, other one-time events and other important factors disclosed previously and from time to time in the Company's other filings with the SEC. Our quarterly results may fluctuate. The Company's quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. Our quarterly revenue may fluctuate significantly for several reasons, including: the timing and success of introductions of our new products or product enhancements or those of our competitors; uncertainty created by changes in the market; difficulty in predicting the size and timing of individual orders; competition and pricing; and customer order deferrals as a result of general economic decline. Furthermore, the Company has often recognized a substantial portion of its product revenues in the last month of a quarter, with these revenues frequently concentrated in the last weeks or days of a quarter. As a result, product revenues in any quarter are substantially dependent on orders booked and shipped in the latter part of that quarter and revenues from any future quarter are not predictable with any significant degree of accuracy. We typically do not experience order backlog. For these reasons, we believe that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. We may not generate positive cash flow in the future. During fiscal years 1998 through 2001 we generated significant cash losses from operations. The Company took aggressive cost cutting steps and reorganized its operations at the beginning of fiscal 2002. These actions have greatly reduced our fixed costs and resulted in positive cash flow from operations for the last two fiscal years. It is our expectation that we can continue to improve on our recent success, however, there can be no assurances that the Company will continue to generate positive cash in the future. Continued decline in business conditions and Information Technology (IT) spending could cause further decline in revenue. The level of future IT spending remains very uncertain as does the prognosis for an economic recovery in the manufacturing sector. If IT spending continues to decline and the manufacturing sector continues to experience economic difficulty, the Company's revenues could be adversely impacted. The Company is dependent on its lender for continued support. We have a very strong relationship with our sole lender, Greenleaf Capital. They currently represent our sole source of financing and it is our belief that it would be difficult to find alternative financing sources in the event whereby the relationship with Greenleaf changed. The continued integration of WTC may experience difficulty. Since acquiring WTC in December 2002, much progress has been made in integrating our operations, reducing redundant functions and facilities. The strategy includes more closely integrating our technologies and offering our combined customer base these solutions. The strategy also includes translating ProductCenter for users other than the U.S. English speaking market. There can be no assurance that this continued integration of our technologies or offering ProductCenter outside the U.S. will be successful. ITEM 7 - FINANCIAL STATEMENTS Financial statements are included herein. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with accountants on accounting or financial disclosure matters. PART III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Set forth below is certain information regarding the Directors and executive officers of SofTech, Inc. (the "Company") as of August 15, 2003, based on information furnished by them to the Company. DIRECTORS Ronald A. Elenbaas, 50, term expires in 2003; Mr. Elenbaas is currently retired. From 1975 to 2000, Mr. Elenbaas was employed by Stryker Corporation in various positions, most recently as President of Stryker Surgical Group, a division of Stryker Corporation. Mr. Elenbaas also serves on the Board of the American Red Cross (Kalamazoo and Cass County, Michigan) as well as director of Greenleaf Trust and a Special Consultant to Keystone Bank. Mr. Elenbaas was appointed a Director of the Company in September 1996. William D. Johnston, 56, term expires in 2004; Mr. Johnston serves as Chairman of the Company and has been a Director since 1996. Mr. Johnston is President, Chairman and CEO of the Greenleaf Companies. Included in the Greenleaf Companies are Greenleaf Trust, a Michigan chartered bank, Greenleaf Capital, Inc. a venture capital company and primary and secondary lender to SofTech, Greenleaf Ventures, Inc. a management company delivering management services to the host industry and Greenleaf Holdings L.L.C., a commercial real estate development company. Mr. Johnston has served as President, Chairman and CEO of the Greenleaf Companies since 1991. Timothy L. Tyler, 49, term expires in 2005; Mr. Tyler has served since 1995 as President of Borroughs Corporation, a privately held, Michigan-based business that designs, manufactures and markets industrial and library shelving units, metal office furniture and check out stands primarily in the United States. Mr. Tyler served as President and General Manager of Tyler Supply Company from 1979 to 1995. Mr. Tyler was appointed a Director of the Company in September 1996. Barry Bedford, 45, term expires in 2004; Mr. Bedford has served as Chief Financial Officer of the Greenleaf Companies since April 2000. Prior to joining Greenleaf, Mr. Bedford was the Chief Financial Officer of Johnson and Rauhofs, a Michigan advertising firm, since 1991. Mr. Bedford was appointed a Director of the Company in July 2000. Frederick A. Lake, 68, term expires in 2003; Mr. Lake is a partner in the law firm of Lake, Stover & Schau, PLC, a Michigan based law firm. Mr. Lake has been with Lake, Stover & Schau, PLC, and its predecessors for more than five years. Mr. Lake also serves as corporate counsel for Greenleaf Ventures. Mr. Lake was appointed a Director of the Company in July 2000. Each member of the Board of Directors also serves on the Audit Committee of the Board of Directors. The Audit Committee recommends the engagement of the Company's independent accountants. In addition, the Audit Committee reviews comments made by the independent accountants with respect to internal controls and considers any corrective action to be taken by management; reviews internal accounting procedures and controls within the Company's financial and accounting staff; and reviews the need for any non-audit services to be provided by the independent accountants. Each member of the Board of Directors also serves on the Compensation Committee of the Board of Directors. The Compensation Committee recommends salaries and bonuses for officers and general managers and establishes general policies and procedures for salary and performance reviews and the granting of bonuses to other employees. It also administers the Company's 1994 Stock Option Plan (the "Plan") and the SofTech Employee Stock Purchase Plan. EXECUTIVE OFFICERS The current executive officers of the Company are as follows:
Name Age Position -------------------------------------------------------------------------------- Joseph P. Mullaney 46 President and Chief Operating Officer Jean J. Croteau 48 Vice President, Operations Victor G. Bovey 46 Vice President, Engineering
Executive officers of the Company are elected at the first Board of Directors meeting following the Stockholders' meeting at which the Directors are elected. The following provides biographical information with respect to the Executive Officers not identified in Item 10 of this Annual Report on Form 10-KSB: Joseph P. Mullaney was appointed President and Chief Operating Officer in June 2001. Previously he served as Vice President, Treasurer, and Chief Financial Officer of the Company from November 1993 to June 2001. He joined the Company in May 1990 as Assistant Controller and was promoted to Corporate Controller in June 1990. Prior to his employment with SofTech he was employed for seven years at the Boston office of Coopers & Lybrand LLP (now PriceWaterhouseCoopers LLP) as an auditor in various staff and management positions. Jean Croteau was appointed Vice President, Operations in July 2001. He started with the Company in 1981 as Senior Contracts Administrator and was promoted to various positions of greater responsibilities until his departure in 1995. Mr. Croteau rejoined SofTech in 1998. From 1995 through 1998 he served as the Director of Business Operations for the Energy Services Division of XENERGY, Inc. Victor G. Bovey was appointed Vice President of Engineering of the Company in March 2000. He started with the Company in November 1997 as Director of Product Development. Prior to his employment with SofTech he was employed for thirteen years with CIMLINC Incorporated in various engineering and product development positions. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended ("Section 16(a)") requires the Company's Directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities (collectively, "Section 16 reporting persons"), to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Section 16 reporting persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and on written representations that no other reports were required, during the fiscal year ended May 31, 2003, the Section 16 reporting persons complied with all Section 16(a) filing requirements applicable to them. ITEM 10 - EXECUTIVE COMPENSATION COMPENSATION OF NON-EMPLOYEE DIRECTORS For fiscal 2003, non-employee Directors received options in lieu of cash remuneration for their services. Employee Directors were not paid any fees or additional compensation for service as members of the Board of Directors or any committee thereof. Pursuant to the Company's 1994 Stock Option Plan (the "1994 Stock Option Plan"), non-employee Directors may be granted non-qualified options to purchase shares of Common Stock of the Company. The Compensation Committee of the Board of Directors administers the 1994 Stock Option Plan and determines which Directors will receive stock options, the number of shares subject to each stock option, the vesting schedule of the options, and the other terms and provisions of the options granted. Stock options typically terminate upon a Director leaving his or her position for any reason other than death or disability. No option may be exercised after the expiration of ten years from its date of grant. Under the Plan, all non-employee Directors receive 10,000 options upon appointment to the Board and receive 3,000 options on the anniversary date of the initial award for as long as the Director serves as a Director of the Company. During the fiscal year ended May 31, 2003, there were 15,000 options granted to non-employee Directors. SUMMARY COMPENSATION TABLE The following table summarizes the compensation paid to the President and Chief Executive Officer of the Company and each of the Company's two other most highly compensated executive officers (the "Named Executives") during or with respect to fiscal 2001, 2002 and 2003 fiscal years for services in all capacities to the Company.
Annual Compensation Long Term Compensation Awards ------------------- ----------------------------- Other Annual Securities Name and Fiscal Salary($) Bonus Compensation Underlying All Other Principal Position Year (1) ($) ($) Options(#) Compensation ($)(2) -------------------------------------------------------------------------------- Joseph P. Mullaney - President and COO 2003 210,000 75,000 -- 100,000 (6) 16,005 2002 195,000 45,000 -- -- (6) 16,000 2001 160,000 -- -- -- (6) 13,920 Jean Croteau (3) - Vice President, Operations 2003 150,000 103,515 -- -- 1,805 2002 127,348 33,000 -- 50,000 1,573 2001 121,275 20,000 -- -- 2,820 Victor G. Bovey(4) - Vice President, Research & Development 2003 130,000 9,486 -- -- 2,840 2002 125,000 4,000 -- 15,000 2,604 2001 125,000 -- -- -- 2,500 Mark R. Sweetland (5) - Former President and CEO 2003 -- -- -- -- -- 2002 80,388 -- -- -- -- 2001 190,000 -- -- -- -- Timothy J. Weatherford(6) - Former Vice President, Sales 2003 -- -- -- -- -- 2002 25,960 -- -- -- -- 2001 167,231 -- -- -- 21,345 (1) Includes amounts deferred by Messrs. Sweetland, Mullaney, Weatherford, Bovey and Croteau under the Company's 401(k) plan. (2) Except as otherwise noted, amounts listed in this column reflect the Company's contributions to each of the Named Executive's accounts under the Company's 401(k) plan. (3) Mr. Bovey was appointed Vice President, Engineering March 2000. Prior to March 2000, Mr. Bovey served as Director of Product Development. (4) Mr. Sweetland was appointed as Director, President and Chief Executive Officer in September 1996. Prior to September 1996, Mr. Sweetland served as Vice President of the Company. In June 2001, Mr. Sweetland resigned his employment and his position as a director. (5) Mr. Weatherford was appointed as Director, Executive Vice President, Sales, in September 1996. In July 2001, Mr. Weatherford departed his employment with the Company and shortly thereafter was removed as a Director at the regularly scheduled meeting of the Board of Directors in July 2001. (6) Includes imputed compensation related to the non-interest bearing note receivable described in Note K to the financial statements.
OPTION GRANTS IN THE LAST FISCAL YEAR No stock appreciation rights ("SARs") have been granted to the Named Executive Officers of the Company during fiscal year 2003. During fiscal 2003, Mr. Mullaney received an option grant of 100,000 shares with an exercise price of $.09 per share and an expiration date of August 2012. This represented 87% of the options granted in fiscal 2003. Mr. Croteau received an option grant of 50,000 shares and Mr. Bovey received an option grant of 15,000 shares during fiscal 2002. AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND OPTION VALUE AT MAY 31, 2003. The following table sets forth certain information concerning the number and value of unexercised options held by the President and Chief Operating Officer and each Named Executive.
Value of Unexercised Number of Number of Unexercised In-the-Money Options Shares Acquired Value Options at May 31, 2003 At May 31, 2003 ($) Name On Exercise Realized ($) Excercisable/Unexercisable Exercisable/Unexercisable (1) Joseph P Mullaney -- -- --/100,000 --/4,000 Victor G. Bovey -- -- 6,000/9,000 120/360 Jean Croteau -- -- 20,000/30,000 800/1,200 (1) Market value of underlying securities at May 31, 2003 based on a per share value of $.13 less the aggregate exercise price.
EMPLOYMENT CONTRACTS The Company does not have employment contracts with its Named Executives. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Each of the members of the Board of Directors served as members of the Compensation Committee of the Company's Board of Directors during the fiscal year ended May 31, 2003. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS Information concerning beneficial ownership of the Company's Common Stock, as of August 15, 2003, for (i) each person named in the "Summary Compensation Table" below as a Named Executive of the Company during the fiscal year ended May 31, 2003, (ii) each Director and each of the Company's nominees to the Board of Directors and (iii) all Directors and executive officers of the Company as a group is set forth below.
Percentage of Outstanding Common Shares of Common Stock Stock Beneficially Beneficially Owned as Owned as of Name of Beneficial Owner of August 15, 2003 (1) August 15, 2003 (2) -------------------------------------------------------------------------------- Joseph P. Mullaney 114,319(3) * Jean Croteau 20,000(3) * Victor G. Bovey 26,350(3) * William Johnston 5,258,372(3)(4) 43.1% Timothy L. Tyler 24,000(3) * Ronald Elenbaas 61,700(3) * Frederick Lake 10,400(3) * Barry Bedford 8,400(3) * All Directors and executive officers as a group (8 persons) 5,523,541(5) 44.8% ---------- * Less than one percent (1%). (1) Based upon information furnished by the persons listed. Except as otherwise noted, all persons have sole voting and investment power over the shares listed. A person is deemed, as of any date, to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after such date. (2) There were 12,205,236 shares outstanding on August 15, 2003. In addition, 126,800 shares issuable upon exercise of stock options held by certain Directors and executive officers of the Company are deemed to be outstanding as of August 15, 2003 for purposes of certain calculations in this table. See notes 3, 4 and 5 below. (3) Includes shares issuable under stock options as follows: Mr. Mullaney - 20,000; Mr. Croteau - 20,000; Mr. Bovey - 6,000; Mr. Tyler - 24,000; Mr. Johnston - 19,000; Mr. Elenbaas - 19,000; Mr. Bedford - 8,400; and Mr. Lake - 10,400. (4) Mr. Johnston's business address is Greenleaf Capital, 3505 Greenleaf Boulevard, Kalamazoo, Michigan, 49008. (5) Includes 126,800 shares issuable upon exercise of stock options held by all Directors and executive officers as a group.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANACTIONS As disclosed in Note H and I to the Company's 2003 Annual Report on Form 10-KSB, the Company has entered into various financing arrangements with Greenleaf Capital over the last several years. Greenleaf Capital,a wholly-owned subsidiary of Greenleaf Companies is the Company's primary source of capital. William D. Johnston, a director of SofTech since September 1996, is the President and sole principal of Greenleaf Companies. The Company paid Greenleaf Capital approximately $1.6 million and $1.7 million in fiscal 2003 and 2002, respectively, in finance charges and management fees. Greenleaf Trust, a wholly-owned subsidiary of Greenleaf Companies, also serves as the trustee and investment advisor for the Company's 401-K Plan. ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K The following items are filed as part of this report: (a) Exhibits: (2)(i) Asset Purchase Agreement by and among SofTech, Inc., Information Decisions, Inc., System Constructs, Inc., and Data Systems Network Corporation filed as Exhibit 2.1 to Form 8-K, dated September 12, 1996, is incorporated by reference. (2)(ii) Stock Purchase Agreement dated as of December 31, 1996 by and among SofTech, Inc., Information Decisions, Inc., Computer Graphics Corporation, and the Stockholders of Computer Graphics Corporation, filed as Exhibit 2.1 to Form S-3, dated June 30, 1997, is incorporated by reference. (2)(iii) Stock Purchase Agreement dated as of February 27, 1997 by and among SofTech, Inc., Information Decisions, Inc., Ram Design and Graphics Corporation, and the Stockholders of Ram Design and Graphics Corp., filed as Exhibit 2.2 to Form S-3, dated June 30, 1997, is incorporated by reference. (2)(iv) Asset Purchase Agreement by and among SofTech, Inc., Information Decisions, Inc., CIMLINC Incorporated and CIMLINC GmbH, filed as Exhibit 2.1 to Form 8-K, dated November 10, 1997, is incorporated by reference. (2)(v) Asset Purchase Agreement by and among SofTech, Inc., Adra Systems, Inc., Adra Systems, GmbH, and MatrixOne, Inc., filed as Exhibit 2.1 for Form 8-K, dated May 7, 1998, is incorporated by reference. (2)(vi) Agreement and Plan of Merger by and among SofTech, Inc., SofTech Acquisition Corporation, and Workgroup Technology Corporation dated November 13, 2002, filed as Exhibit 6 to Form SC 13D/A, dated November 15, 2002, is incorporated by reference. (3)(i) Articles of Organization filed as Exhibit 3(a) to Registration Statement No. 2-73261 are incorporated by reference. Amendment to the Articles of Organization filed as Exhibit (19) to Form 10-Q for the fiscal quarter ended November 28, 1986 is incorporated by reference. (3)(ii) By-laws of the Company, filed as Exhibit (3)(b) to 1990 Form 10K are incorporated herein by reference. Reference is made to Exhibit (3)(a) above, which is incorporated by reference. Form of common stock certificate, filed as Exhibit 4(A), to Registration statement number 2-73261, is incorporated by reference. (10)(i) Greenleaf Capital $11.0 million Promissory Note, filed as Exhibit 10.2 to the Form 10-K for the fiscal year ended May 31, 2001, is incorporated by reference. (10)(ii)Greenleaf Capital $3.0 million Revolving Line of Credit, filed as Exhibit 10.3 to the Form 10-K for the fiscal year ended May 31, 2001, is incorporated by reference. (10)(iii) Amendment to Promissory Note dated November 8, 2002, filed as Exhibit 4 to Form SC 13D/A filed November 15, 2002, is incorporated by reference. (21) Subsidiaries of the Registrant, filed herewith. (23)(i) Consent of Grant Thornton LLP, filed herewith. (31) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. (32) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended May 31, 2003. ITEM 14 - CONTROLS AND PROCEDURES The Company's Chief Operating Officer is responsible for establishing and maintaining disclosure controls and procedures for the Company. Such officer has concluded (based upon their evaluation of these controls and procedures as of a date within 90 days of the filing of this report) that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company's management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure. The Certifying Officer also has indicated that there were no significant changes in the Company's internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders SofTech, Inc. We have audited the accompanying consolidated balance sheet of SofTech, Inc. and subsidiaries as of May 31, 2003 and the related consolidated statements of operations, changes in stockholders' deficit and comprehensive loss and cash flows for the fiscal years ended May 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SofTech, Inc. and subsidiaries as of May 31, 2003, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two year period ended May 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP ------------------------- Boston Massachusetts August 8, 2003
SOFTECH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For Fiscal Years Ended May 31, 2003 2002 ------ ------ (in thousands, except per share data) Revenue: Products $3,389 $2,300 Services 7,299 6,484 ------- ------- Total Revenue 10,688 8,784 Cost of sales: Cost of products sold 62 58 Cost of services provided 840 366 ------- ------- Total Cost of sales 902 424 Gross margin 9,786 8,360 Research and development expenses 2,113 1,572 Selling, general and administrative 6,345 5,645 Amortization of capitalized software and other intangible assets 2,040 1,601 Amortization of goodwill -- 934 ------- ------- Loss from operations (712) (1,392) Interest expense 1,130 1,277 ------- ------- Loss before income taxes (1,842) (2,669) Provision for income taxes 10 11 ------- ------- Net Loss $(1,852) $(2,680) ======== ======== Per Common Share Data: Net Loss - basic and diluted $(.15) $(.24) Weighted Average Shares Outstanding, basic and diluted 12,205 10,986 The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC. CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2003 (in thousands, except share data) Assets: Current assets: Cash and cash equivalents $ 654 Restricted cash 65 Accounts receivable (less allowance for uncollectible accounts of $93) 2,052 Prepaid expenses and other assets 235 ------ Total current assets 3,006 Property and equipment, at cost: Data processing equipment 3,099 Office furniture 551 Leasehold improvements 177 ------ Total property and equipment 3,827 Less accumulated depreciation and amortization (3,521) ------ Property and equipment, net 306 Other assets: Capitalized software costs, net of amortization of $5,666 9,114 Identifiable intangible purchased assets, net of amortization of $183 917 Goodwill, net of amortization of 7,229 4,598 Note receivable from officer 134 Other assets 160 ------ Total Assets $18,235 ====== Liabilities and Stockholders' Deficit: Current liabilities: Accounts payable $ 474 Accrued expenses 2,048 Deferred revenue 4,074 Capital lease obligations 30 Current portion of long term debt with related party 1,095 ------ Total current liabilities 7,721 Long-term liabilities: Long term debt with related party, less current portion 13,058 Deferred revenue 204 ------ Total long-term liabilities 13,262 Commitments and Contingencies Stockholders' deficit: Common stock, $.10 par value; authorized 20,000,000 shares; issued 12,743,536 1,274 Capital in excess of par value 19,544 Accumulated deficit (21,771) Cumulative translation adjustment (234) Treasury stock at cost, 538,300 shares (1,561) ------ Total stockholders' deficit (2,748) ------ Total Liabilities and Stockholders Deficit $18,235 ======= The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS For Fiscal Years Ended May 31, 2003 2002 -------- ------- (in thousands, except share data) Common Stock: Balance at beginning of year $ 1,274 $ 1,128 Shares issued in 2002 related to debt to equity conversion -- 146 -------- -------- Balance at end of year 1,274 1,274 -------- ------- Capital in Excess of Par Value: Balance at beginning of year 19,544 19,690 Shares issued in 2002 related to debt to equity conversion -- (146) -------- -------- Balance at end of year 19,544 19,544 -------- -------- Accumulated Deficit: Balance at beginning of year (19,919) (17,239) Net loss (1,852) (2,680) -------- -------- Balance at end of year (21,771) (19,919) -------- -------- Cumulative Translation Adjustment: Balance at beginning of year (166) (91) Foreign currency translation adjustments (68) (75) -------- -------- Balance at end of year (234) (166) -------- -------- Unrealized Loss on Marketable Securities: Balance at beginning of year (48) -- Change in market value of marketable Securities 48 (48) -------- -------- Balance at end of year -- (48) -------- -------- Treasury Stock: Balance at beginning of year (1,561) (1,561) Reacquired shares -- -- -------- -------- Balance at end of year (1,561) (1,561) -------- -------- Total stockholders' deficit at end of year $ (2,748) $ (876) ======== ======== Comprehensive Loss Net loss $ (1,852) $ (2,680) Foreign currency translation adjustments (68) (75) Gain (loss) on marketable equity securities 48 (48) -------- -------- Total comprehensive loss $ (1,872) $ (2,803) ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
SOFTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For Fiscal Years Ended May 31, 2003 2002 ------- ------- (in thousands) Cash flows from operating activities: Net loss $(1,852) $(2,680) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,323 2,927 Change in operating assets and liabilities, net of effects of business acquired: Accounts receivable (1) 432 Prepaid expenses and other assets 17 152 Accounts payable and accrued expenses 496 (692) Deferred revenue (266) 363 Other (20) (75) -------- -------- Total adjustments 2,549 3,107 -------- -------- Net cash provided by operating activities 697 427 Cash flows from investing activities: Payments for business acquisition, net of cash acquired (3,277) -- Capital expenditures (187) (25) Proceeds from sale of capital equipment -- 5 Purchase of marketable securities -- (154) --------- -------- Net cash used in investing activities (3,464) (174) Cash flows from financing activities: Borrowings under Greenleaf debt agreements 3,700 500 Repayments under Greenleaf debt agreements (850) (530) Principal payments on capital lease obligations (72) (63) --------- -------- Net cash provided (used) by financing activities 2,778 (93) --------- -------- Net increase in cash and cash equivalents 11 160 Cash and cash equivalents, beginning of year 708 548 --------- -------- Cash and cash equivalents, end of year $ 719 $ 708 ========= ======== Supplemental disclosures of cash flow information: Interest paid $1,145 $1,296 Income taxes paid $ 11 $ 11 The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements of the Company include the accounts of SofTech, Inc. and its wholly-owned subsidiaries, Information Decisions, Inc. ("IDI"), Workgroup Technology Corporation ("WTC") acquired in December 2002, SofTech Technologies Ltd., SofTech, GmbH, Adra Systems, Srl, Adra Systems, Sarl, Compass, Inc. ("COMPASS"), System Constructs, Inc. ("SCI"), SofTech Investments, Inc. ("SII"), RAM Design and Graphics Corp. ("RAM"),AMG Associates, Inc. ("AMG") and SofTech Acquisition Corporation. SCI, SII, RAM, AMG and SofTech Technologies Ltd. are all inactive subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CONCENTRATION OF RISK: The Company believes there is no concentration of risk with any single customer or small group of customers whose failure or nonperformance would materially affect the Company's results. No customer exceeds ten percent of net sales. The Company generally does not require collateral on credit sales. Management evaluates the creditworthiness of customers prior to delivery of products and services and provides allowances at levels estimated to be adequate to cover any potentially uncollectible accounts. The changes in the accounts receivable reserve are as follows:
Charged Balance, to Costs Balance, For the Years Beginning and End of Ended May 31, of Period Expenses Deductions Period 2002. . . . . $ 704,000 $ 80,000 $ 309,000 $ 475,000 2003. . . . . 475,000 75,000 457,000 93,000
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. The Company provides for depreciation and amortization on a straight-line basis over the following estimated useful lives: Data processing equipment 2-5 years Office furniture 5-10 years Leasehold improvements Lesser of useful life or life of lease Depreciation expense, including amortization of assets under capital lease, was approximately $283,000 and $397,000, for fiscal 2003 and 2002, respectively. Maintenance and repairs are charged to expense as incurred; betterments are capitalized. At the time property and equipment are retired, sold, or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts. Any resulting gain or loss on disposal is credited or charged to income. INCOME TAXES: The provision for income taxes is based on the earnings or losses reported in the consolidated financial statements. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company provides a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. REVENUE RECOGNITION: The Company has adopted the provisions of Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2) as amended by SOP No. 98-9, in recognizing revenue from software transactions. Revenue from software license sales are recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, and a fixed fee and collectibility has been determined. The Company does not provide for a right of return. For multiple element arrangements, total fees are allocated to each of the elements based on vendor specific objective evidence of fair value. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements. Revenue from engineering, consulting and training services is recognized as those services are rendered. CAPITALIZED SOFTWARE COSTS AND RESEARCH AND DEVELOPMENT: The Company capitalizes certain costs incurred to internally develop and/or purchase software that is licensed to customers. Capitalization of internally developed software begins upon the establishment of technological feasibility. Costs incurred prior to the establishment of technological feasibility are expensed as incurred. Purchased software is recorded at cost. The Company evaluates the realizability and the related periods of amortization on a regular basis. Such costs are amortized over estimated useful lives ranging from three to ten years. The Company did not capitalize any internally developed software in fiscal 2002 or 2003. Research and development expense for the years ended May 31, 2003 and 2002 was $2,113,000 and $1,572,000, respectively. GOODWILL: Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects the Company's treatment of goodwill and other intangible assets. This statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill ceased as of May 31, 2002. The following unaudited pro forma information for fiscal years 2003 and 2003 presented below is provided for comparative purposes only assuming goodwill had not been recorded in fiscal 2002 (in thousands):
Fiscal Years Ended May 31 (unaudited) ------------------------------- 2003 2002 ----- ------ Reported net loss $(1,852) $(2,680) Add back: Goodwill amortization -- 934 ----- ----- Adjusted net loss $(1,852) $(1,746) ======== ======== Basic and diluted loss per share, as reported $ (.15) $ (.24) ======== ======== Basic and diluted loss per share, as adjusted $ (.15) $ (.16) ======== ========
The Company completed the first step of the transitional goodwill impairment test during the three months ended November 30, 2002 based on the amount of goodwill as of the beginning of fiscal year 2003, as required by SFAS No. 142. Based on the results of the first step of the transitional goodwill impairment test, the Company has determined that the fair value of each of the reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of June 1, 2002. The Company has tested the goodwill for impairment as of May 31, 2003 and has concluded based on actual results for fiscal 2003 and projected cash flows from each of the reporting units that no impairment existed as of May 31, 2003. LONG-LIVED ASSETS: The Company periodically reviews the carrying value of all intangible (primarily capitalized software costs and other intangible assets) and other long-lived assets. If indicators of impairment exist, the Company compares the undiscounted cash flows estimated to be generated by those assets over their estimated economic life to the related carrying value of those assets to determine if the assets are impaired. If the carrying value of the asset is greater than the estimated undiscounted cash flows, the carrying value of the assets would be decreased to their fair value through a charge to operations. The Company does not have any long-lived assets it considers to be impaired. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of May 31, 2003, $215,000 of cash was restricted as follows: $100,000 held in escrow until December 2005 to be utilized by the former WTC Directors to reimburse them for legal representation in the event of a claim related to their service in that capacity; $50,000 restricted to secure a guarantee on an office lease which ends December 31, 2004; and $65,000 restricted in a WTC legal dispute with a vendor. The vendor dispute was settled during the fourth quarter and the restriction ended subsequent to the fiscal year end. This $65,000 was considered to be a cash equivalent as of May 31, 2003. The $100,000 cash escrow and the $50,000 security on the lease guarantee have been included in Other assets on the May 31, 2003 balance sheet. Cash held in foreign bank accounts at May 31, 2003 totaled $269,000. FINANCIAL INSTRUMENTS: The Company's financial instruments consist of cash, accounts receivable, notes receivable, accounts payable, and short and long term debt. The Company's estimate of the fair value of these financial instruments approximates their carrying amounts at May 31, 2003. The interest rate on the Company's debt facilities are variable and fluctuate with changes in the prime rate. In addition, the Company considers the premium in excess of the prime rate on the debt facilities to be reasonable based on the Company's revenue, current cash flow and near term prospects. For these reasons the Company considers the fair value of the debt to approximate the carrying value. The Company sells its products to a wide variety of customers in numerous industries. A large portion of the Company's revenue is derived from customers for which the Company has an existing relationship and established credit history. For new customers for which the Company does not have an established credit history, the Company performs evaluations of the customer's credit worthiness prior to accepting an order. The Company does not require collateral or other security to support customer receivables. The Company's provision for uncollectible accounts has been less that 1% of revenue for both fiscal year 2002 and 2003. FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's foreign operations (England, France, Germany and Italy) is the local currency. As a result, assets and liabilities are translated at period-end exchange rates and revenues and expenses are translated at the average exchange rates. Adjustments resulting from translation of such financial statements are classified in accumulated other comprehensive income (loss). Foreign currency gains and losses arising from transactions were included in operations in fiscal 2003 and 2002, but were not significant. COMPREHENSIVE INCOME: Financial Accounting standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. To date, the Company's comprehensive income items include foreign translation adjustments and unrealized gains and losses on marketable securities. Comprehensive income has been included in the consolidated Statement of Changes in Stockholder's Deficit for all periods. NET INCOME (LOSS) PER COMMON SHARE: The basic and diluted weighted average shares outstanding during fiscal years 2003 and 2002 used in the computation of basic and diluted earnings per share calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" were 12,205,000 and 10,986,000, respectively. After the application of assumed proceeds, options to purchase shares of common stock of 57,323 and 12,697, respectively, have been excluded from the denominator for the computation of diluted earnings per share in fiscal 2003 and 2002, respectively, because their inclusion would be antidilutive. In addition, the calculation of dilutive earnings per share also excludes the effect prior to the issuance of common stock in connection with the debt conversion as discussed in Note H. STOCK BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Because the number of shares is known and the exercise price of options granted has been equal to fair value at date of grant, no compensation expense has been recognized in the statements of operations. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS 123, the Company's net loss and loss per share at May 31 would have approximated the pro forma amounts indicated below:
(in thousands, except per share data) 2003 2002 ------------------------------------------------------------------- Net income (loss) - as reported $(1,852) $(2,680) Net income (loss) - pro forma (1,875) (2,728) Loss per share - diluted - as reported (.15) (.24) Loss per share - diluted - pro forma (.15) (.25)
The weighted-average fair value of each option granted in fiscal 2003 and 2002 is estimated as $.03 and $.09, respectively on the date of grant using the Black-Scholes model with the following weighted average assumptions: Expected life 5 years Assumed annual dividend growth rate 0% Expected volatility 1.12 Risk free interest rate (the month-end yields on 4 year treasury strips equivalent zero coupon) 2.68% - 3.35% The effects of applying SFAS 123 in this pro forma disclosure may not be indicative of future amounts. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the financial statements are the valuation of long term assets including intangibles (goodwill, capitalized software costs and other intangible assets) and deferred tax assets. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS: On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 148 (SFAS 148), Accounting for Stock-Based Compensation -- Transition and Disclosure, amending FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. This Statement amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition provisions are effective for fiscal years ending after December 15, 2002. The Company is currently evaluating this FASB and has not yet made an election as to which alternative it will adopt. The Company has complied with the disclosure provisions in these financial statements. On November 25, 2002, the FASB issued FASB Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies (SFAS 5), relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics: (a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party (e.g., financial and market value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guarantee contracts from its scope. Additionally, certain guarantees are not subject to FIN 45's provisions for initial recognition and measurement but are subject to its disclosure requirements. The initial recognition and measurement provisions were effective for guarantees issued or modified after December 31, 2002. The Company does not act as a guarantor in any material manner. In January 2003 the FASB issued FIN 46, an Interpretation of Accounting Research Bulletin No. 51, Consolidating Financial statements. FIN 46 addresses consolidating by business enterprises of variable interest entities. Under current practice, consolidation occurs when one enterprise controls the other through voting interests. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiary if the entities do not effectively disperse risks among the parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively negates such risk dispersion. FIN 46 applies immediately for variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that is acquired before February 1, 2003. The Company does not have a variable interest in an entity that is not consolidated in its financial position or its results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, an entity capitalizes a cost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. Management believes the adoption of SFAS No. 143 will not have a material effect on the financial position or results of operations of the Company. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. It replaces SFAS No. 121. The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS No. 144 did not have a material effect on the financial position or results of operations of the Company. In July 2002, FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". The provisions of this Statement are effective for such activities that are initiated after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment. The Company has adopted the provisions of this Statement and will comply in the event whereby it is faced with such an event. In April 2002, FASB issued Statement No. 145, "Rescission of FASB Statements No 4, 44, and 64, Amendment of FASB 13, and Technical Corrections", which is effective for fiscal years beginning after May 15, 2002. Upon adoption of SFAS 145, companies will be required to apply the criteria in APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions" in determining the classification of gains/losses resulting from the extinguishment of debt. Upon adoption, extinguishments of debt shall be classified under the criteria in APB Opinion No. 30. The adoption of SFAS No. 145 did not have a material effect on the financial position or results of operations or retained earnings. In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which is effective for contracts entered into or modified after June 30, 2003. This Statement amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities for the purpose of improving financial reporting by requiring contracts with comparable characteristics to be accounted for similarly. The adoption of SFAS No. 149 is not expected to have a material impact on the Company's financial position or results of operations. In May 2003, FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which is effective for financial instruments entered into or modified after May 31, 2003. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS No. 150 is not expected to have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the previously reported results of operations or retained earnings. B. LIQUIDITY The Company generated positive cash flow from operations of $697,000 in fiscal 2003 and $427,000 in fiscal 2002 after restructuring its operation at the beginning of fiscal 2002. The fiscal 2002 restructuring noted above was necessitated by significant cash losses from operations for four consecutive fiscal years from 1998 through 2001 which totaled approximately $4.4 million. During fiscal year 2003 the Company also made an important acquisition of a complementary technology offering that had a beneficial impact on fiscal 2003 results. However, the Company remains a highly leveraged operation that is dependent on its debt facilities with Greenleaf Capital to fund operations. Although the Company believes its current cost structure together with reasonable revenue run rates based on historical performance will continue to generate positive cash flow in fiscal 2004, the current economic environment especially in the manufacturing sector makes forecasting revenue based on historical models difficult and somewhat unreliable. The Company is continuing to seek out market opportunities both through new products and acquisitions to grow its revenue base and its product offerings to its customers. C. INCOME TAXES:
The provision (benefit) for income taxes includes the following: For Years ended May 31, (in thousands) 2003 2002 --------------------------------------------------------------- Federal $ -- $ -- Foreign -- -- State and Local 10 11 ------ ------- 10 11 Deferred -- -- ------ ------ $ 10 $ 11 ======= ======= The domestic and foreign components of loss from operations before income taxes of the consolidated companies were as follows (in thousands): 2003 2002 ------ ----- Domestic $(1,960) $(2,407) Foreign 108 (273) ------- ------- $(1,852) $(2,680) ======= =======
At May 31, 2003, the Company had net operating loss carryforwards of $14.2 million that begin expiring in 2013, and are available to reduce future taxable income. The Company also has tax credit carryforwards generated from research and development activities of approximately $575,000 that are available to offset income taxes payable in the future and expire from 2004 to 2006. In addition, an alternative minimum tax credit of approximately $200,000 that has no expiration date was available as of May 31, 2003.
The Company's effective income tax rates can be reconciled to the federal statutory income tax rate as follows: For the Years ended May 31, 2003 2002 ---------------------------------------------------------- Statutory rate (34)% (34)% Expenses not deductible for tax purposes 1 6 Other -- -- Valuation reserve 33 28 ---- ---- Effective tax rate 0% 0% ==== ====
Deferred tax assets (liabilities) were comprised of the following at May 31: (in thousands) 2003 2002 ------------------------------------------------------------------- Deferred tax assets (liabilities): Net operating loss carryforwards $ 4,907 $ 4,234 Tax credit carryforwards 775 846 Receivable allowances 31 160 Vacation pay accrual 16 18 Other accruals 70 66 Unrealized loss on investments -- 16 Depreciation 6 6 Differences in book and tax bases of assets of acquired businesses 1,766 1,609 ------ ------- Deferred tax assets 7,571 6,955 Less: valuation allowance (7,571) (6,955) ------- ------- Net deferred tax assets recognized $ 0 $ 0 ======= =======
Due to the uncertainties regarding the realization of certain favorable tax attributes in future tax returns, the Company has established a valuation reserve against the otherwise recognizable net deferred tax assets. Changes in the valuation reserve impacted deferred tax expense as follows: fiscal 2003 $(616,000) and fiscal 2002 $(344,000). The Company acquired approximately 89% of the common shares of WTC in December 19, 2002. As a result, WTC must file a short period tax return for the period from April 1, 2002 through December 18, 2002. Thereafter, the Company will include WTC's results in its consolidated tax return. The Company expects to make a Section 338 election in the WTC short period tax return which will allow this stock purchase to be treated as an asset purchase for tax purposes. The Company estimates that this election will provide the consolidated entity with a tax deduction totaling approximately $4.5 million to be realized in equal increments over the next 15 years. This deferred tax asset is not included in the table above because it does not get created until such time as the election is made. WTC had substantial net operating loss carryforwards. As a result of the election, the Company will not be able to utilize such losses and they have not been included in the table above. As the losses are not expected to carryfoward, no limitation calculation has been made. D. EMPLOYEE RETIREMENT PLANS: The Company maintains two Internal Revenue Code Section 401(k) plans covering substantially all U.S. based employees. One Plan offers an employer match of a portion of an employee's voluntary contributions. The aggregate expense related to this employer match for fiscal 2003 and 2002 was $43,000 and $50,000, respectively. The second Plan which covers substantially all WTC employees provides for a discretionary employer match as determined by the Board of Directors annually. There was no discretionary employer match in fiscal 2003 or 2002 under this Plan. E. EMPLOYEE STOCK PLANS: The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the granting of both incentive and non-qualified options. Incentive stock options granted under the Plan have an exercise price not less than fair market value of the stock at the grant date and have vesting schedules as determined by the Company's Board of Directors. The Plan permits the granting of non-qualified options at exercise prices and vesting schedules as determined by the Board of Directors. The 1994 Plan calls for the adjustment of option exercise prices to reflect equity transactions such as stock issuances, dividend distributions and stock splits. Information for fiscal 2002 through 2003 with respect to this plan is as follows:
Weighted Average Stock Options Number of Shares Option Price -------------------------------------------------------------------------------- Outstanding at May 31, 2001 264,500 $ 1.53 Options granted 134,000 .10 Options terminated (80,500) .79 Options lapsed (5,000) 1.07 Options exercised - -------- Outstanding at May 31, 2002 313,000 $ 1.03 Options granted 115,000 .10 Options terminated (25,000) 1.22 Options lapsed -- -- Options exercised -- -- -------- Outstanding at May 31, 2003 403,000 $ .70
The following table summarizes information about stock options outstanding at May 31, 2003 under the 1994 Plan:
Options Options Outstanding Exercisable -------------- --------------- Weighted Options Average Weighted Options Weighted Exercise Outstanding Contractual Average Exercisable at Average Price Range at May 31, 2003 Remaining Life Exercise Price May 31, 2003 Exercise Price --------------------------------------------------------------------------------------------------- $.09 to $.19 246,000 8.39 years $ 0.10 47,600 $ 0.10 $.781 to $1.688 102,000 3.37 years 1.21 81,000 1.25 $1.878 to $2.063 44,000 4.29 years 1.92 42,200 1.91 $3.375 to $4.625 11,000 4.07 years 4.40 11,000 4.40 -------- ------- Total 403,000 $ 0.70 181,800 $ 1.29 ======== =======
There were 15,335 shares available for future grants under the 1994 Plan at May 31, 2003. In addition, during fiscal 2001, 100,000 options to purchase shares at $1.00 were extended to a third party to settle a dispute. These options expire in January 2006 if not exercised. In 1998, the Company adopted an Employee Stock Purchase Plan, under which all employees of the Company and certain of its subsidiaries who meet certain minimum requirements will be able to purchase shares of SofTech common stock through payroll deductions. The purchase price per share is 85% of the fair market value of the common stock on the Offering Date or the Exercise Date, whichever is less. As of May 31, 2003, 150,000 shares of SofTech common stock were available for sale to employees under the plan. No shares have been issued under this Employee Stock Purchase Plan. F. SEGMENT INFORMATION: The Company operates in one reportable segment and is engaged in the development, marketing, distribution and support of CAD/CAM and Product Data Management ("PDM") computer solutions. The Company's operations are organized geographically with foreign offices in England, France, Germany and Italy. Components of revenue and long-lived assets (consisting primarily of intangible assets, capitalized software and property, plant and equipment) by geographic location, are as follows (in thousands):
2003 2002 Revenue: --------- -------- North America $ 7,734 $ 5,479 Asia 1,115 1,303 Europe 2,558 2,474 Eliminations (719) (472) -------- -------- Consolidated Total $10,688 $ 8,784 ======== ========
Long-Lived Assets: North America $15,017 Europe 212 -------- Consolidated Total $15,229 ========
Foreign revenue is based on the country in which the sale originates. Revenues from Germany and Japan were 13% and 10%, respectively, of total consolidated revenue in fiscal year 2003 and 17% and 15%, respectively, of total consolidated revenue in fiscal year 2002. No other customer or foreign country accounted for 10% or more of total revenue in fiscal 2003 or 2002. H. DEBT OBLIGATION WITH RELATED PARTY: Debt obligations of the Company consist of the following obligations at May 31, 2003(in thousands):
15,000,000 Promissory Note $13,309 3,000,000 Revolving Line of Credit 844 -------- 14,153 Less current portion (1,095) -------- $13,058
During fiscal 2000, the Company entered into a $11 million borrowing arrangement ("Promissory Note") with Greenleaf Capital ("Greenleaf"). On November 8, 2002, the Company amended the Promissory Note. Under the amended agreement the Company increased its borrowing from $11.0 million to $15.0 million. In addition, the interest rate was reduced from 9.75% to Prime Rate plus 3.0% (currently 7.25%). Principal and interest is payable monthly and the Promissory Note has a 15-year loan amortization with the remaining principal of approximately $9,388,000 due in a single payment in June 2007. This amendment was entered into in order to provide the Company sufficient capital to complete the acquisition of Workgroup Technology Corporation (see Note M). The Promissory Note expires on June 12, 2007. In addition, the Company has a $3.0 million Revolving Line of Credit with Greenleaf. This facility is used to supplement cash flows from operations to meet the Companies short term capital needs. Amounts borrowed under this facility are due in June 2004 unless otherwise extended. The Company has agreed to take all necessary actions to provide Greenleaf with a first security position for its existing debt and for any further increases in the debt. Effective May 26, 2000, the Company entered into a debt conversion agreement with Greenleaf. Under the terms of this second Agreement the Company had the right to convert up to $3.5 million of subordinated debt to equity at the lower of the average closing price for the five business days prior to conversion or $1.0781. The number of shares to be issued under this conversion agreement was limited to 19.9% of the number of outstanding shares prior to conversion. On May 31, 2000, the Company converted the remaining $3.5 million of subordinated debt under the terms of this Agreement at a conversion price of $1.0781. A total of 3,246,452 shares were due Greenleaf related to this conversion but the Company was only allowed to issue 1,783,000 shares at the time of the conversion. The Company agreed to take all appropriate action required to issue the additional 1,463,452 shares. These additional shares were issued to Greenleaf Capital on April 1, 2002. In fiscal 2000, the Company entered into agreements with Greenleaf Capital whereby a total of $5.0 million of then existing debt was converted into equity through the issuance of a total of 3,246,452 shares of Company common stock. This common stock was issued between February 2000 and April 2002 at stock prices between $1.07 and $1.86 per share. The Company has the right, at its sole discretion, to repurchase these shares at the conversion prices. William D. Johnston, a director of SofTech since September 1996, is the sole principal and the President of Greenleaf. Management recommended and the Board of Directors, other than Mr. Johnston who abstained from such vote, unanimously approved all transactions with Greenleaf. Annual maturities of debt obligations subsequent to May 31, 2003, are as follows: 2004 - $ 1,095,000; 2005 - $1,170,000; 2006 - $1,008,000; 2007 - $10,880,000. I. RELATED PARTY TRANSATIONS: The Company is dependent upon Greenleaf for all of its funding needs. The Company does not believe that it could obtain similar debt facilities from other third party lenders. The Company currently funds its operations through a $3.0 million Line of Credit facility as described in Note H above that expires annually in June. In addition, the Company has a senior credit facility with Grrenleaf as described in Note H above. Greenleaf's President serves as the Chairman of the Board for the Company. In addition, Greenleaf provides advisory services and its President and its CFO serve as Board members to the Company. Greenleaf is the Company's largest shareholder owning approximately 43% of its outstanding shares. The Company paid Greenleaf a management fee of approximately $420,000 in fiscal 2003 and $500,000 in fiscal 2002 in exchange for these services. The Greenleaf management and advisory fee has been included in SG&A expense. J. LEASE COMMITMENTS: OPERATING LEASES The Company conducts its operations in office facilities leased through November 2007. Rental expense for fiscal years 2003 and 2002 was approximately $443,000 and $621,000, respectively. At May 31, 2003, minimum annual rental commitments under noncancellable leases and non-cancellable sub-lease arrangements were as follows:
Gross Sub-lease Fiscal Year Commitment Commitment Net ----------- ----------- ----------- ---------- 2004 $ 918,000 $ (313,000) $ 605,000 2005 728,000 (175,000) 553,000 2006 414,000 -- 414,000 2007 407,000 -- 407,000 2008 205,000 -- 205,000
In the fourth quarter of fiscal 2002, the Company negotiated a termination of its lease for office space in Bloomfield Hills, Michigan. Under this arrangement, the Company agreed to forfeit its $50,000 security deposit and to pay $4,500 per month for 24 months and to exit the space. The Company relocated its operations to smaller office space nearby and recorded a Q4 charge of $158,000 to reflect the full cost of this settlement. In December 2002 the Company extended its lease for office space at its headquarters in Massachusetts through 2008. As part of that extension, the Company provided the lessor with a letter of credit for $390,000 which reduces amounts available under the Company's $15 million Promissory Note. In addition, the lessor assumed the Company's financial obligations for an abandoned office lease in Massachusetts that had previously been utilized by WTC prior to the Company's acquisition of that company. These monies are included above under the column labeled "Sub-lease Commitment". The benefits derived from the lessor's assumption of this obligation have been treated as a lease concession and will reduce rent expense over the life of the lease extension. CAPITAL LEASES The Company has equipment-leasing arrangements with commercial lending institutions. These leases are secured by the computer equipment and office furniture being leased. For financial reporting purposes, the leases have been classified as capital leases; accordingly, assets with a gross value of $357,000 have been included in data processing equipment and office furniture in the accompanying balance sheet at May 31, 2003. At May 31, 2003, the accumulated depreciation on these leased assets was $325,000. The net book value of these leased assets at May 31, 2003 was approximately $32,000. The approximate minimum annual lease payments under all capitalized leases as of May 31, 2003 is $30,000 which is due in fiscal year 2004. K. NOTE RECEIVEABLE FROM OFFICER: The President of the Company has been extended a non-interest bearing note in the amount of $134,000 related to a stock transaction in May 1998. The note is partially secured by all Company shares and stock options held by that officer. L. LITIGATION The Company is a party to various legal proceedings and claims that arise in the ordinary course of business. Management believes that amounts accrued at May 31, 2003 are sufficient to cover any resulting settlements and costs and does not anticipate a material adverse impact on the financial position or results of operations of the Company beyond such amounts accrued. M. ACQUISITION On December 18, 2002, the Company closed its all cash tender offer ("Offer") for all of the outstanding shares of common stock of Workgroup Technology Corporation, a Delaware corporation ("WTC"), at a price of $2.00 per share. WTC was a publicly traded company listed on the Over the Counter Bulletin Board. WTC develops, supports and markets a software product to mechanical CAD ("Computer Aided Design") users that allows them to manage their design models. Its product offerings are compatible with SofTech's. A total of 1,505,958 shares of WTC's common stock were tendered in the Offer, which, together with shares beneficially owned by SofTech prior to commencement of the Offer, represented approximately 88.8% of WTC's outstanding common stock. The source of the funds used to purchase the tendered shares under the Offer were borrowed from Greenleaf Capital, Inc., SofTech's principal stockholder, under an amended Promissory Note arrangement which increased the Company's available borrowings. The aggregate purchase price for WTC was approximately $4.0 million including costs associated with completing the Offer. SofTech assumed net liabilities in the transaction of approximately $1.1 million bringing the total consideration paid to approximately $5.1 million. Based on the Company's estimates, $2.7 million of identifiable intangible assets were specified. These identifiable intangible assets will be amortized over their estimated useful lives of three (3) years. The remaining $2.4 million of the purchase price has been allocated to goodwill. Included in the purchase price is an accrual of approximately $461,000 related to the costs associated with purchasing the 205,000 shares not tendered in the Offering and payments due certain stock option holders with "in-the-money" vested stock options at acquisition date. The operating results of WTC have been included in the Company's results since the acquisition date. The unaudited pro forma results of operations set forth below for the fiscal years ended May 31, 2003 and 2002 assume that the WTC acquisition had occurred as of the beginning of each of these periods. The following unaudited pro forma comparative information for fiscal year 2003 and 2002 presented below is provided for illustrative purposes only and is not necessarily indicative of the consolidated results of operations for future periods or that actually would have been realized had the Company and WTC been a consolidated entity during the periods presented (in thousands, except per share data):
(Unaudited) 2003 2002 ------------ -------- Revenue $ 14,192 $16,182 ------------ -------- Net loss $ (4,098) $(7,282) ------------ -------- Net loss per share as reported: Basic and diluted $ (.15) $ (.24) ------------ -------- Pro Forma net loss per share: Basic and diluted $ (.34) $ (.66) ------------ --------
COMBINED PRO FORMA RESULTS The unaudited pro forma results of operations set forth below for the fiscal years ended May 31, 2003 and 2002 combine the pro forma adjustments related to the WTC acquisition detailed above with the pro forma adjustments related to the cessation in goodwill amortization detailed in Note A:
For the Fiscal Years Ended May 31 (unaudited) 2003 2002 ---- ---- Revenue $ 14,192 $ 16,182 -------- -------- Net loss $(4,098) $(7,282) Add back: Goodwill amortization -- 934 -------- -------- Adjusted net loss $(4,098) $(6,348) -------- -------- Net loss per share as reported: Basic and diluted $ (.15) $ (.24) -------- -------- Pro Forma net loss per share: Basic and diluted $ (.34) $ (.58) -------- --------
Subsequent to the fiscal year end, the Company exercised an option to purchase an additional 220,000 shares of WTC thereby bringing its ownership of WTC to 90.02%. On June 18, 2003, the Company filed a short-form merger with the State of Delaware thereby acquiring the 205,662 WTC shares that had not been tendered in the Offering. This action provides the beneficial owners of those 205,662 shares to present them to the Company and to receive $2.00 per share in cash. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SofTech, Inc. By /s/ Joseph P. Mullaney ----------------------- Joseph P. Mullaney, President and COO Date: August 29, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date ---------------------------------------------------------------------------- /S/ Joseph P. Mullaney President and Chief Operating Officer 8/29/03 --------------------------- (Principal executive officer and Joseph P. Mullaney Principal financial officer) /S/ Ronald A. Elenbaas Director 8/29/03 ------------------------------- Ronald A. Elenbaas /S/ William Johnston Director 8/29/03 ------------------------------- William Johnston /S/ Timothy Tyler Director 8/29/03 ------------------------------- Timothy Tyler /S/ Barry Bedford Director 8/29/03 ------------------------------- Barry Bedford /S/ Frederick A. Lake Director 8/29/03 ------------------------------- Frederick A. Lake CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of SofTech, Inc. on Form S-8 (File Nos. 33-5782, 333-61427 and 333-61417) and on Form S-3 (File Nos. 33-63831, 333-30399 and 333-55759) and in the related Prospectuses of our report dated August 8, 2003, with respect to the fiscal 2003 consolidated financial statements of SofTech, Inc. included in this Annual Report on Form 10-KSB for the fiscal year ended May 31, 2003. /s/ Grant Thornton LLP Boston, Massachusetts August 8, 2003