Soft-Kat Now Ranks Among Top Distributors : Software Firm Grows Out of the Garage
The Katz brothers, Modie and Ozzie, aren’t exactly computer nerds.
Neither owns a computer. The only personal computer they use at their company, Van Nuys-based Soft-Kat, is an Apple IIc they share with employees.
But the Katz brothers, together with friend Alan Gleicher, have built a company that is hardly indifferent toward computers. Over the last 2 1/2 years it has become one of the nation’s largest computer- software distributors.
Soft-Kat, which is privately held, does not reveal financial results. But company officials said projected revenue this year would reach $25 million and profits would equal 3% to 5% of that--which would mean earnings of $750,000 to $1.25 million.
Last year, when it had revenue of $15 million, it ranked eighth in revenue among software distributors nationally, according to the trade magazine Computer Retail News. Company executives expect the company to move up two notches to sixth this year.
That rapid growth attracted the attention of W. R. Grace & Co., the giant New York-based conglomerate. Last month, Grace paid $4.2 million for a 39% stake in Soft-Kat. Grace executives say they will buy Soft-Kat outright in 1988 under an option they acquired in the deal.
Soft-Kat specializes in distributing educational software used in personal computers at homes and schools. Educational software programs--which tell the computer what to do--are typically priced from $29 to $39 each.
Some provide simple “drill-and-practice” sessions that help children learn such subjects as math, foreign languages and spelling. Other programs offer lessons in computer programming or simulate tasks as complex as flying an airplane. The 10-year-old educational software industry has been one of the fastest-growing segments of the software business. Although most analysts believe that the field will continue to grow, projections of the rates of increase vary.
Some market researchers estimate that, even though the computer industry is in the doldrums, educational software could generate as much as $2 billion in annual revenue by the end of the decade, up from about $270 million last year.
Other experts, however, note that the growth is slowing because many schools already have spent heavily to stock their libraries with software.
Talmis, a New York-based market research firm, estimates that elementary and secondary schools will spend up to $160 million this year on educational software. Although that is a 23% increase from 1984, it is well below last year’s 44% rate of growth.
Talmis also predicts a slower growth in sales to home computer users, with retail spending this year projected at $177 million, a 25% increase from a year earlier but also considerably below the 87% increase in spending in 1984.
Soft-Kat executives, however, still are counting on a growth market and plan to expand the company to meet that growth.
Grace’s investment, they said, provides Soft-Kat with the capital to fund the expansion. The relationship also gives Soft-Kat access to Grace’s marketing muscle and nationwide distribution network.
For its part, Grace will have a voice in future operations of the Van Nuys company. Grace executives hold three of the seven seats on Soft-Kat’s board of directors. “We’ll be there when we’re needed, but we’re not going to force ourselves on them,” said Gerald Garbacz, the Grace senior vice president who oversees the Baker & Taylor unit.
That should leave most of the decision making to an informal process that the Katz brothers and Gleicher have refined since starting the company. They huddle in a room, argue the issues and vote by holding thumbs up or down.
Modie Katz, 35, is chairman. His brother, Ozzie, 25, is vice president. Ozzie said his entrepreneurial bent first surfaced while he was still in high school, when he founded a service to restring tennis rackets.
Soft-Kat President Gleicher, 32, is a former electronics equipment executive and the only one of the three who worked with computers before starting Soft-Kat.
Gleicher and Modie Katz met in 1982, while Katz was a national sales manager for an educational publisher. Gleicher was intrigued by the possibilities of distributing educational software and thought Katz’s connections in education would help. They agreed to set up the business in the garage of Katz’s Hidden Hills home.
Pictures on the wall at Soft-Kat show the early days. A card table was used as a desk, telephone lines were hopelessly tangled and boxes were stacked to the roof.
Fearful of being perceived as a fly-by-night operation, the three often detoured software publishers away from the operations by scheduling business meeting at hotels near Los Angeles International Airport.
But the sparse headquarters didn’t seem to be too much of a disadvantage. In a field bare of other educational software distributors, Soft-Kat’s revenue soared, reaching $4 million in its first year. In the three years, the company’s staff has increased to 57 employees from the three original partners.
Part of the company’s success, competitors say, has been its concentration on educational software instead of diversifying.
“You have to admire someone who focuses on a niche and does it well,” said Linwood Lacy, chairman of Micro D, a Santa Ana-based software distributor.
Dropped Stock Offering
Soft-Kat dropped plans for a public stock offering last year when the the stock market soured for high-technology offerings, and the company then began its search for a major investor. Grace had been looking for two years for an educational software distribution arm for its Baker & Taylor unit, the nation’s largest book distributor.
The Grace deal gives the Katz brothers and Gleicher three years to ponder what they will do if, as expected, Grace buys their interests in the company. Ozzie Katz said he will probably try to start another business, while Gleicher likes the idea of remaining with the company.
Modie Katz is uncertain of what he will do but realizes that the company he helped start in a garage may well grow into a large operation that loses the entrepreneurial spirit that drove it in the beginning.
“When you get to the point where you are doing $50 million to $100 million in business a year, the entrepreneur goes out and they let the Harvard MBA in,” he said.
