-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S1cIpziQwm89HfbpJ3588w8k48O+nTb8pOaIa43WEqnk789h28RsaCUmUQyWfjYM LoqkXLRpBUoK9ydWp8O3Bw== 0001188112-05-000100.txt : 20050114 0001188112-05-000100.hdr.sgml : 20050114 20050114144629 ACCESSION NUMBER: 0001188112-05-000100 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20041130 FILED AS OF DATE: 20050114 DATE AS OF CHANGE: 20050114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOFTECH INC CENTRAL INDEX KEY: 0000354260 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 042453033 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10665 FILM NUMBER: 05530389 BUSINESS ADDRESS: STREET 1: 2 HIGHWOOD DRIVE CITY: TEWKSBURY STATE: MA ZIP: 01876 BUSINESS PHONE: 9786406222 MAIL ADDRESS: STREET 1: 2 HIGHWOOD DRIVE STREET 2: - CITY: TEWKSBURY STATE: MA ZIP: 01876 10QSB 1 t10qsb-4602.txt 10QSB Form 10-QSB Page 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------ For the Quarter Ended Commission File Number November 30, 2004 0-10665 SOFTECH, INC. State of Incorporation IRS Employer Identification Massachusetts 04-2453033 2 Highwood Drive, Tewksbury, MA 01876 Telephone (978) 640-6222 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 _____ The number of shares outstanding of registrant's common stock at December 31, 2004 was 12,205,236 shares. Form 10-QSB Page 2 SOFTECH, INC. INDEX PART I. Financial Information Page Number ----------- Item 1. Financial Statements Consolidated Condensed Balance Sheets - November 30, 2004 and May 31, 2004 3 Consolidated Condensed Statements of Operations - Three Months Ended November 30, 2004 and 2003 4 Consolidated Condensed Statements of Operations - Six Months Ended November 30, 2004 and 2003 5 Consolidated Condensed Statements of Cash Flows - Six Months Ended November 30, 2004 and 2003 6 Notes to Consolidated Condensed Financial Statements 7-12 Item 2. Management's Discussion and Analysis of Operations 13-17 Item 3. Controls and Procedures 18 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 18 Form 10-QSB Page 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOFTECH, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED CONDENSED BALANCE SHEETS ------------------------------------- (dollars in thousands) November 30, May 31, 2004 2004 ------------ ------------ ASSETS - ------ Cash and cash equivalents $ 435 $ 275 Accounts receivable, net 1,710 2,175 Prepaid expenses and other assets 243 244 ------------ ------------ Total current assets 2,388 2,694 ------------ ------------ Property and equipment, net 172 199 Capitalized software costs, net 6,005 7,043 Identifiable intangible assets, net 367 550 Goodwill, net 4,606 4,598 Notes receivable 134 134 Other assets 111 115 ------------ ------------ TOTAL ASSETS $ 13,783 $ 15,333 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Accounts payable $ 253 $ 205 Accrued expenses 1,276 1,575 Deferred maintenance revenue 3,136 3,941 Current portion of long term debt 1,293 1,293 ------------ ------------ Total current liabilities 5,958 7,014 ------------ ------------ Long-term debt, net of current portion 12,982 12,917 ------------ ------------ Stockholders' deficit (5,157) (4,598) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 13,783 $ 15,333 ============ ============ See accompanying notes to consolidated condensed financial statements. Form 10-QSB Page 4 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS -----------------------------------------------
(in thousands, except for per share data) Three Months Ended ---------------------------- November 30, November 30, 2004 2003 ------------ ------------ Revenue Products $ 687 $ 868 Services 2,534 2,442 ------------ ------------ Total revenue 3,221 3,310 Cost of products sold 18 11 Cost of services provided 409 491 ------------ ------------ Gross margin 2,794 2,808 Research and development expenses 674 741 Selling, general and administrative 1,384 1,454 Amortization of capitalized software and other intangible assets 610 610 ------------ ------------ Income from operations before interest expense 126 3 Interest expense 216 249 ------------ ------------ Net loss $ (90) $ (246) ============ ============ Basic and diluted net loss per common share $ (0.01) $ (0.02) Weighted average common shares outstanding 12,205 12,205
See accompanying notes to consolidated condensed financial statements. Form 10-QSB Page 5 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS -----------------------------------------------
(in thousands, except for per share data) Six Months Ended ---------------------------- November 30, November 30, 2004 2003 ------------ ------------ Revenue Products $ 1,105 $ 1,451 Services 4,893 4,802 ------------ ------------ Total revenue 5,998 6,253 Cost of products sold 27 19 Cost of services provided 798 913 ------------ ------------ Gross margin 5,173 5,321 Research and development expenses 1,351 1,413 Selling, general and administrative 2,684 2,905 Amortization of capitalized software and other intangible assets 1,221 1,225 ------------ ------------ Loss from operations before interest expense (83) (222) Interest expense 466 502 ------------ ------------ Net loss $ (549) $ (724) ============ ============ Basic and diluted net loss per common share $ (0.04) $ (0.06) Weighted average common shares outstanding 12,205 12,205
See accompanying notes to consolidated condensed financial statements. Form 10-QSB Page 6 SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands) Six Months Ended ---------------------------- November 30, November 30, 2004 2003 ------------ ------------ Cash flows from operating activities: Net loss $ (549) $ (724) ------------ ------------ Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 1,262 1,311 Change in current assets and liabilities: Accounts receivable 465 321 Prepaid expenses and other assets (16) 77 Accounts payable and accrued expenses (165) (680) Deferred maintenance revenue (805) (845) ------------ ------------ Total adjustments 741 184 ------------ ------------ Net cash provided (used) by operating activities 192 (540) ------------ ------------ Cash flows used by investing activities: Payments for business acquisition, net of cash acquired (86) - Capital expenditures (11) (24) ------------ ------------ Net cash used by investing activities (97) (24) ------------ ------------ Cash flows from financing activities: Principal payments under capital lease obligations - (13) Proceeds from line of credit agreements, net 65 229 ------------ ------------ Net cash provided by financing activities 65 216 ------------ ------------ Increase (decrease) in cash and cash equivalents 160 (348) Cash and cash equivalents, beginning of period 275 654 ------------ ------------ Cash and cash equivalents, end of period $ 435 $ 306 ============ ============
See accompanying notes to consolidated condensed financial statements. Form 10-QSB Page 7 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- (A) The consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission from the accounts of SofTech, Inc. and its wholly owned subsidiaries (the "Company") without audit; however, in the opinion of management, the information presented reflects all adjustments which are of a normal recurring nature and elimination of intercompany transactions which are necessary to present fairly the Company's financial position and results of operations. It is recommended that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's fiscal year 2004 Annual Report on Form 10-KSB. (B) SIGNIFICANT ACCOUNTING POLICIES 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, "Modifiaction of SOP 97-2 Software Revenue Recognition with Respect to Certain Transactions" (SOP 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 using the residual method. 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 during the three and six month periods ended November 30, 2004 or 2003. Amortization expense related to capitalized software costs for the six month periods ended November 30, 2003 and 2004 were $1,225,000 and $1,221,000, respectively. ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS 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 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 exceeded the carrying amounts and, therefore, no goodwill impairment existed as of June 1, 2002. The Company tested the goodwill for impairment as of May 31, 2004 and concluded, based on actual results for fiscal 2004 and projected cash flows, that no impairment existed as of May 31, 2004. Form 10-QSB Page 8 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- LONG-LIVED ASSETS: The Company periodically reviews the carrying value of all intangible assets with a finite life (primarily capitalized software costs) and other long-lived assets. If indicators of impairment exist, the Company compares the undiscounted cash flows estimated to be generated by those assets over their estimated economic life to the related carrying value of those assets to determine if the assets are impaired. If the carrying value of the asset is greater than the estimated undiscounted cash flows, the carrying value of the assets would be decreased to their fair value through a charge to operations. The Company does not have any long-lived assets it considers to be impaired. The Company has determined that all of its intangible assets (other than goodwill) have finite lives and, therefore, the Company has continued to amortize its intangible assets. 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" and SFAS No. 148 "Accounting for Stock-Based Compensation - An Amendment of SfAS No. 123." 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 would have approximated the pro forma amounts indicated below:
Three Month Periods Ended November 30, (in thousands, except per share data) 2004 2003 ----------------------------------------------------------------------------------- Net loss - as reported $ (90) $ (246) Stock based compensation determined under fair value based method (3) (8) ------ ------- Net loss - pro forma (93) (254) Loss per share - diluted - as reported (.01) (.02) Loss per share - diluted - pro forma (.01) (.02) Six Month Periods Ended November 30, (in thousands, except per share data) 2004 2003 ----------------------------------------------------------------------------------- Net loss - as reported $ (549) $ (724) Stock based compensation determined under fair value based method (5) (16) ------ ------- Net loss - pro forma (554) (740) Loss per share - diluted - as reported (.04) (.06) Loss per share - diluted - pro forma (.04) (.06)
FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's foreign operations (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 are included in the statement of operations. Form 10-QSB Page 9 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- 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 and other intangible assets), deferred tax assets and the allowance for doubtful accounts. Actual results could differ from those estimates. RECLASSIFIACTIONS: Certain amounts in fiscal 2004 have been reclassified to conform with the presentation in fiscal 2005. (C) LIQUIDITY The Company ended the first half of fiscal 2005 with cash of $435,000, an increase of $160,000 from May 31, 2004. Operating activities provided $192,000 of cash during the first six months of the fiscal year. The net loss adjusted for non-cash expenditures related to amortization and depreciation together with a decrease in accounts receivable generated cash of about $1,178,000. The reduction in accounts payable and accrued expenses used cash of $165,000 and the cyclical reduction in deferred revenue utilized cash of $805,000 during the first half of the fiscal year. In addition, during the first half of fiscal 2005 the Company borrowed $65,000 in excess of its debt repayments from its line of credit and paid former WTC shareholders that tendered their shares a total of $86,000. Lastly, the Company purchased approximately $11,000 of capital equipment. Although the Company believes its current cost structure together with reasonable revenue run rates based on historical performance will generate positive cash flow for the full fiscal year 2005, the current economic environment, although showing signs of improvement, makes forecasting revenue based on historical models difficult and somewhat unreliable. The Company believes that the cash on hand together with cash flow from operations and its available borrowings under its credit facility will be sufficient for meeting its liquidity and capital resource needs for the next year. At November 30, 2004, the Company had available borrowings on its debt facilities of approximately $3.4 million. (D) BLANACE SHEET COMPONENTS Details of certain balance sheet captions are as follows (000's): November 30, May 31, 2004 2004 --------------- --------------- Property and equipment $ 3,912 $ 3,867 Accumulated depreciation and amortization (3,740) (3,668) --------------- --------------- Property and equipment, net $ 172 $ 199 --------------- --------------- Common stock, $.10 par value $ 1,274 $ 1,274 Capital in excess of par value 19,544 19,544 Accumulated deficit (24,173) (23,624) Cumulative translation adjustment (241) (231) Less treasury stock (1,561) (1,561) --------------- --------------- Stockholders' deficit $ (5,157) $ (4,598) --------------- --------------- Form 10-QSB Page 10 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- (E) LOSS PER SHARE Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common and equivalent dilutive common shares outstanding. Options to purchase shares of common stock have been excluded from the denominator for the computation of diluted earnings per share for all periods presented in fiscal 2005 and 2004 because their inclusion would be antidilutive. The weighted average shares outstanding for each of the income statements included in this filing are presented below (000's):
Three Month and Six Month Periods Ended November 30, 2004 2003 ------------ ------------ Basic weighted average shares outstanding 12,205 12,205 Effect of employee stock options outstanding -- -- ------------ ------------ 12,205 12,205 ============ ============
(F) COMPREHENSIVE LOSS The Company's comprehensive loss includes accumulated foreign currency translation adjustments and unrealized gain (loss) on marketable securities. For the three and six month periods ended November 30, 2004 and 2003, the comprehensive loss was as follows (000's):
Three Month Periods Ended November 30, 2004 2003 ------------ ------------ Net loss $ (90) $ (246) Changes in: Foreign currency translation adjustment -- (45) ------------ ------------ Comprehensive loss $ (90) $ (291) ============ ============ Six Month Periods Ended November 30, 2004 2003 ------------ ------------ Net loss $ (549) $ (724) Changes in: Foreign currency translation adjustment (10) (79) ------------ ------------ Comprehensive loss $ (559) $ (803) ============ ============
(G) 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 computer solutions. The Company's operations are organized geographically with foreign 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 as follows (000's): Form 10-QSB Page 11 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ----------------------------------------------------
Three Months Ended Three Months Ended November 30, November 30, Revenue: 2004 2003 ----------------------------------------------------- North America $ 2,195 $ 2,595 Asia 325 260 Europe 750 698 Eliminations (49) (243) --------- --------- Consolidated Total $ 3,221 $ 3,310 --------- --------- Six Months Ended Six Months Ended November 30, November 30, Revenue: 2004 2003 ----------------------------------------------------- North America $ 4,275 $ 4,906 Asia 543 449 Europe 1,248 1,170 Eliminations (68) (272) --------- --------- Consolidated Total $ 5,998 $ 6,253 --------- --------- November 30, May 31, Long Lived Assets: 2004 2004 ----------------------------------------------------- North America $11,212 $12,445 Europe 183 194 --------- --------- Consolidated Total $11,395 $12,639 --------- ---------
(H) NEW ACCOUNTING PRONOUNCEMENTS: In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) is effective for public companies for interim or annual periods beginning after June 15, 2005. The Company is currently evaluating the impact that this statement will have on its financial condition or results of operations. On December 31, 2002, the FASB issued 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. The Company has complied with the disclosure provisions in these financial statements. 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 Form 10-QSB Page 12 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- 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. The Adoption of SFAS No. 143 effective June 1, 2003 did not have a material effect on the financial position or results of operations of the Company. 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 effective July 1, 2003 did not 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 and otherwise is effective at the beginning of the first interim period beginning after June 15, 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 did not have a material impact on the Company's financial position or results of operations. Form 10-QSB Page 13 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS -------------------------------------------------- The statements made below with respect to SofTech's outlook for fiscal 2005 and beyond represent "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and are subject to a number of risks and uncertainties. These include, among other risks and uncertainties, general business and economic conditions, generating sufficient cash flow from operations to fund working capital needs, continued integration of acquired entities, potential obsolescence of the Company's technologies, maintaining existing relationships with the Company's lenders, successful introduction and market acceptance of planned new products and the ability of the Company to attract and retain qualified personnel both in our existing markets and in new territories in an extremely competitive environment. CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS 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 B to these financial statements. The Company believes that the following accounting policies require the application of management's most difficult, subjective or complex judgments: 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, "Modifiaction of SOP 97-2 Software Revenue Recognition with Respect to Certain Transactions" (SOP 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 using the residual method. 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. 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. Form 10-QSB Page 14 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS ---------------------------------------------------------- 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 exceeded the carrying amount and, therefore, no goodwill impairment existed as of June 1, 2002. As a result, the second step of the transitional goodwill impairment test was not required to be completed. The Company tested the goodwill for impairment at May 31, 2004 and concluded based on actual results for fiscal 2004 and projected cash flows that no impairment existed as of May 31, 2004. The Company will be required to continue to perform a goodwill impairment test on an annual basis. This valuation contains certain assumptions concerning estimated future revenues and expenses. Should our operating results deteriorate, we may determine that some portion of our goodwill or all of our goodwill is impaired. Such determination could result in non-cash charges to income that could materially affect our results of operations for that period. 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 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 Revenue for the three and six month periods ended November 30, 2004 was $3.2 million and $6.0 million, respectively, as compared to $3.3 million and $6.3 million for the same periods in the prior fiscal year. This represents a decrease of 2.7% for fiscal 2005 Q2 and 4.1% for the first half of fiscal 2005 as compared to the same periods in fiscal 2004. Reduced product revenue was responsible for the decrease in both periods which were partially offset by increased services revenue. Product revenue for the three and six month periods ended November 30, 2004 was approximately $687,000 and $1.1 million, respectively, as compared to $868,000 and $1.5 million for the same periods in the prior fiscal year. This represents a decrease of 20.9% for fiscal 2005 Q2 and 23.8% for the first half of fiscal 2005 as compared to the same periods in fiscal 2004. The primary reason for the reduced product revenue for both the three and six month periods ended November 30, 2004 was related to our ProductCenter technology offering. We continue to experience increased interest from customers for this technology, however, the sales cycle continues to extend. While this increased pre-sale activity signals increased licensing activity for this product line in the future, it continues to be difficult to predict the timing of order receipt. Service revenue for the three and six month periods ended November 30, 2004 was $2.5 million and $4.9 million, respectively, as compared to $2.4 million and $4.8 million for the same period in fiscal 2004. This represents an increase of 3.8% for fiscal 2005 Q2 as compared to the same period in fiscal 2004 and an increase of 1.9% for the first half of fiscal 2005 compared to the same period in fiscal 2004. Our consulting and training revenue increased 59.9% and 54.1% for the three and six month periods ended November 30, 2004, respectively, as compared to the same periods in the prior year. This increase more than offset a small decrease in maintenance revenue for the same periods. Form 10-QSB Page 15 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS -------------------------------------------------- Revenue generated in the U.S. accounted for 67% and 70% of total revenue for the three and six month periods ended November 30, 2004, respectively, as compared to 71% and 74% of total revenue for the same periods in the previous year. Revenue generated in Europe for the three and six month periods ended November 30, 2004 was 23% and 21% of total revenue, respectively, as compared to 21% and 19% of total revenue for the same period in fiscal 2004. Revenue generated in Asia for the three and six month periods ended November 30, 2004 was 10% and 9% of total revenue, respectively, as compared to 8% and 7% of total revenue for the same period in fiscal 2004. Revenue generated in the U.S. decreased by about 9% for both the three and six month periods ended November 30, 2004 as compared to the same periods in the prior fiscal year. Revenue generated in Europe increased by about 7% in each of the three and six month periods ended November 30, 2004 and revenue generated in Asia increased about 25% and 21%, respectively, for the same periods. It is our expectation that revenue from Asia and Europe will continue to make up a significant portion of our total revenue. Gross margin as a percentage of revenue was 86.7% and 86.3 % for the three and six month periods ended November 30, 2004, respectively, as compared to 84.8% and 85.1% for the same periods in fiscal 2004. This increase in gross margin as a percent of revenue in fiscal 2005 as compared to the same period in fiscal 2004 is due to reductions in headcount over the last year in our customer support functions. Research and development expenses ("R&D") were $674,000 and $1.35 million for the three and six month periods ended November 30, 2004, respectively, as compared to $741,000 and $1.41 million for the same periods in the prior fiscal year. These small decreases are the result of a slight reduction in headcount resulting from efficiencies garnered from combining the development resources of our product lines. Selling, general and administrative ("SG&A") expenses were $1.38 million and $2.68 million, respectively, for the three and six month periods ended November 30, 2004 as compared to $1.45 million and $2.91 million for the same period in fiscal 2004. This represents a decrease of approximately 4.8% and 7.6% for the three and six month periods ended November 30, 2004, respectively, as compared to the same periods in the prior fiscal year. The decreases are related to the reduction in headcount over the last year as efficiencies were realized from the combination of our SG&A organization subsequent to the acquisition of WTC in fiscal 2002. The non-cash expenses related to the amortization of capitalized software and other intangible assets were $.6 million and $1.2 million for the three and six month periods ended November 30, 2004 and 2003. Interest expense for the three and six month periods ended November 30, 2004 were approximately $216,000 and $466,000, respectively, as compared to $249,000 and $502,000 for the same periods in fiscal 2004. This represents a decrease of 13.3% for the second quarter of fiscal 2005 compared to the same period in the previous fiscal year and a decrease of 7.2% for the six month period ended November 30, 2004 compared to the same period in the prior fiscal year. The average borrowings decreased to approximately $14.2 million during the current quarter as compared to $14.3 million for the same period in fiscal 2004, however, the interest rate on those borrowings decreased to about 6.1% in the current quarter from 7.0% for the same period in fiscal 2004. The average borrowings decreased to approximately $14.2 million during the first half of fiscal 2005 as compared to $14.3 million for the same period in fiscal 2004, however, the interest rate on those borrowings decreased to about 6.6% during the first half of fiscal 2005 as compared to 7.0% for the same period in fiscal 2004. The interest rate on our debt was reduced to approximately 6.0% from 7.0% at the beginning of the second quarter of fiscal 2005. The net loss for the three and six month periods ended November 30, 2004 was $(90,000) and $(549,000), respectively, as compared to a net loss of $(246,000) and $(724,000) for the same period in the prior fiscal year. The loss per share for each of the three month periods ended November 30, 2004 was $(.01) and $(.04), respectively, as compared to $(.02) and $(.06) for the same periods in the prior fiscal year. Form 10-QSB Page 16 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS -------------------------------------------------- CAPITAL RESOURCES AND LIQUIDITY The Company ended the first half of fiscal 2005 with cash of $435,000, an increase of $160,000 from May 31, 2004. Operating activities provided $192,000 of cash during the first six months of the fiscal year. The net loss adjusted for non-cash expenditures related to amortization and depreciation together with a decrease in accounts receivable generated cash of about $1,178,000. The reduction in accounts payable and accrued expenses used cash of $165,000 and the cyclical reduction in deferred revenue utilized cash of $805,000 during the first half of the fiscal year. In addition, during the first half of fiscal 2005 the Company borrowed $65,000 in excess of its debt repayments from its line of credit and paid former WTC shareholders that tendered their shares a total of $86,000. Lastly, the Company purchased approximately $11,000 of capital equipment. Although the Company believes its current cost structure together with reasonable revenue run rates based on historical performance will generate positive cash flow in fiscal 2005, the current economic environment especially in the manufacturing sector makes forecasting revenue based on historical models difficult and somewhat unreliable. The Company believes that the cash on hand together with cash flow from operations and its available borrowings under its credit facility will be sufficient for meeting its liquidity and capital resource needs for the next year. At November 30, 2004, the Company had available borrowings on its debt facilities of approximately $3.4 million. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's business is subject to many uncertainties and risks. This Form 10-QSB 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 three full fiscal years and for the first half of fiscal 2005. 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. Form 10-QSB Page 17 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS -------------------------------------------------- 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 consolidating our 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. Form 10-QSB Page18 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ ITEM 3. 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 his 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K The Company filed a Form 8-K on October 15, 2004 related to its press release announcing first quarter results for fiscal 2005. SIGNATURES Pursuant to the requirements 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. Date: January 14, 2004 /s/ Joseph P. Mullaney ----------------------- ----------------------------- Joseph P. Mullaney President Chief Operating Officer EX-31 2 tex31_4602.txt EX-31 EXHIBIT 31 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph P. Mullaney, President and Chief Operating Officer of SofTech, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of SofTech, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure the material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly through the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations, and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the Audit Committee of the registrant's Board of Directors: a) All significant deficiencies and material weaknesses in the design or operations of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 14, 2005 /s/ Joseph P. Mullaney ---------------------- Joseph P. Mullaney President and Chief Operating Officer EX-32 3 tex32_4602.txt EX-32 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of SofTech, Inc. (the "Company") on Form 10-QSB for the quarter ended November 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph P. Mullaney, President and Chief Operating Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: January 14, 2005 /s/ Joseph P. Mullaney ---------------------- Joseph P. Mullaney President and Chief Operating Office -----END PRIVACY-ENHANCED MESSAGE-----