-----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, K1QeubHmSnH55mnaZb1WYYBi9UzEEUAmV7th72+qydgR6O++GVf/plKsnx9E7+OD MoomT+3ndupiY647dFOxsw== 0001188112-05-001792.txt : 20051017 0001188112-05-001792.hdr.sgml : 20051017 20051017134041 ACCESSION NUMBER: 0001188112-05-001792 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050831 FILED AS OF DATE: 20051017 DATE AS OF CHANGE: 20051017 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: 051140588 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-7950.txt 10QSB 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 August 31, 2005 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 September 30, 2005 was 12,205,236 shares. Page 2 SOFTECH, INC. ------------- INDEX ----- PART I. Financial Information Page Number ----------- Item 1. Financial Statements Consolidated Condensed Balance Sheets - August 31, 2005 and May 31, 2005 3 Consolidated Condensed Statements of Operations - Three Months Ended August 31, 2005 and 2004 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended August 31, 2005 and 2004 5 Notes to Consolidated Condensed Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Operations 10-14 Item 3. Controls and Procedures 15 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 15 Page 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands) August 31, May 31, 2005 2005 ----------- ----------- ASSETS - ------ Cash and cash equivalents $ 234 $ 399 Accounts receivable, net 1,813 1,618 Prepaid and other assets 298 346 ----------- ----------- Total current assets 2,345 2,363 ----------- ----------- Property and equipment, net 157 165 Capitalized software costs, net 4,450 4,968 Other intangible assets, net 92 183 Goodwill, net 4,598 4,598 Notes receivable 134 134 Other assets 5 5 ----------- ----------- TOTAL ASSETS $ 11,781 $ 12,416 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Accounts payable $ 306 $ 213 Accrued expenses 1,013 1,058 Deferred maintenance revenue 3,672 4,019 Current portion of long term debt 1,416 1,416 ----------- ----------- Total current liabilities 6,407 6,706 ----------- ----------- Long-term debt, net of current portion 11,779 11,785 ----------- ----------- Stockholders' deficit (6,405) (6,075) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,781 $ 12,416 =========== =========== See accompanying notes to consolidated condensed financial statements.
Page 4 SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands, except for per share data) Three Months Ended ------------------------------------------ August 31, August 31, 2005 2004 ------------------- ------------------- Revenue Products $ 839 $ 418 Services 2,229 2,359 ------------------- ------------------- Total revenue 3,068 2,777 Cost of products sold: materials 58 9 Cost of product sold: amortization of capitalized software costs and other intangible assets 610 611 Cost of services provided 400 389 ------------------- ------------------- Gross margin 2,000 1,768 Research and development expenses 678 677 Selling, general and administrative 1,413 1,300 ------------------- ------------------- Loss from operations before interest expense (91) (209) Interest expense 243 250 ------------------- ------------------- Net loss $ (334) $ (459) =================== =================== Basic and diluted net loss per common share $ (0.03) $ (0.04) Weighted average common shares outstanding 12,205 12,205
See accompanying notes to consolidated condensed financial statements.
Page 5 SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (dollars in thousands) Three Months Ended ------------------------------- August 31, August 31, 2005 2004 ----------- ----------- Cash flows from operating activities: Net loss $ (334) $ (459) ----------- ----------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 625 632 Change in current assets and liabilities: Accounts receivable (195) 560 Prepaid expenses and other assets 48 17 Accounts payable and accrued expenses 48 (177) Deferred maintenance revenue (347) (432) Other - (5) ----------- ----------- Total adjustments 179 595 ----------- ----------- Net cash (used) provided by operating activities (155) 136 ----------- ----------- Cash flows used by investing activities: Capital expenditures (4) (7) ----------- ----------- Net cash used by investing activities (4) (7) ----------- ----------- Cash flows from financing activities: Repayments under line of credit agreements, net (6) (41) ----------- ----------- Net cash used by financing activities (6) (41) ----------- ----------- Increase (decrease) in cash and cash equivalents (165) 88 Cash and cash equivalents, beginning of period 399 275 ----------- ----------- Cash and cash equivalents, end of period $ 234 $ 363 =========== ===========
See accompanying notes to consolidated condensed financial statements. Page 6 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 2005 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, "Modification 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 set forth in SOP 98-9. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements, typically one year. 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 month periods ended August 31, 2004 or 2005. Substantially all of the recorded balance represents software acquired from third parties. Amortization expense related to capitalized software costs for the three month periods ended August 31, 2004 and 2005 were $523,000 and $518,000, respectively. ACCOUNTING FOR GOODWILL Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142, 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. As of May 31, 2005, the Company conducted its annual impairment test of goodwill by comparing fair value to the carrying amount of its underlying assets and liabilities. The Company determined that the fair value exceeded the carrying amount of the assets and liabilities, therefore no impairment existed as of the testing date. Page 7 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. 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 August 31, (in thousands, except per share data) 2005 2004 ------------------------------------------------------------------------ Net loss - as reported $ (334) $ (459) Stock-based compensation expense determined under fair value based method (1) (3) ------- ------- Net loss - pro forma (335) (462) ======= ======= Loss per share - diluted - as reported (.03) (.04) Loss per share - diluted - pro forma (.03) (.04) 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 that file as small business issuers for interim or annual periods beginning after December 15, 2005. The Company is currently evaluating the impact that this statement will have on its financial condition or results of operations. 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. Page 8 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. RECLASSIFACATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. Specifically, amortization of capitalized software and other intangible assets totaling $611,000 in the first quarter of fiscal 2005 was classified on the face of the income statement as a separate line item under operating expenses. This non-cash expense resulting from acquisitions was reclassified to cost of products sold in these financial statements. This reclassification had no impact on the net loss or cash flow reported. (C) LIQUIDITY The Company ended the first three months of fiscal 2006 with cash of approximately $234,000. Operating activities used cash of approximately $155,000 of cash during the first three months of the fiscal year. The net loss adjusted for non-cash expenditures related to amortization and depreciation together with an increase in accounts payable and accrued expenses and a decrease in prepaid and other assets generated cash of $387,000. An increase in accounts receivable directly related to the increase in revenue used cash of $195,000 and the cyclical reduction in deferred revenue utilized an additional $347,000 during the first quarter. The Company believes its current cost structure together with reasonable revenue run rates based on historical performance will generate positive cash flow in fiscal 2006. 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 August 31, 2005, the Company had available borrowings on its debt facilities of approximately $3.5 million. (D) BALANCE SHEET COMPONENTS Details of certain balance sheet captions are as follows (000's): August 31, May 31, 2005 2005 ------------- ------------- Property and equipment $ 3,938 $ 3,934 Accumulated depreciation and amortization (3,781) (3,769) ------------- ------------- Property and equipment, net $ 157 $ 165 ------------- ------------- Common stock, $.10 par value $ 1,274 $ 1,274 Capital in excess of par value 19,544 19,544 Accumulated deficit (25,383) (25,049) Cumulative translation adjustment (279) (283) Less treasury stock (1,561) (1,561) ------------- ------------- Stockholders' deficit $ (6,405) $ (6,075) ------------- ------------- Page 9 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 2006 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 Periods Ended August 31, 2005 2004 ------------- ------------- 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 month periods ended August 31, 2005 and 2004, the comprehensive loss was as follows (000's): Three Month Periods Ended August 31, 2005 2004 ------------- ------------- Net loss $ (334) $ (459) Changes in: Foreign currency translation adjustment 4 (10) ------------- ------------- Comprehensive loss $ (330) $ (469) ============= ============= (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): Three Months Ended August 31, 2005 2004 ------------- ------------- Revenue: North America $ 2,377 $ 2,095 Asia 227 218 Europe 510 483 Eliminations (46) (19) ------------- ------------- Consolidated Total $ 3,068 $ 2,777 ------------- ------------- Page 10 SOFTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS August 31, May 31, 2005 2005 ------------- ------------- Long Lived Assets: North America $ 9,277 $ 9,901 Europe 159 152 ------------- ------------- Consolidated Total $ 9,436 $ 10,053 ------------- ------------- Page 11 SOFTECH, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS The statements made below with respect to SofTech's outlook for fiscal 2006 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, "Modification 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 set forth in SOP 98-9. Revenue from customer maintenance support agreements is deferred and recognized ratably over the term of the agreements, typically one year. Revenue from engineering, consulting and training services is recognized as those services are rendered. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS The Company periodically reviews the carrying value of all intangible assets (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. VALUATION OF GOODWILL Effective June 1, 2002, the Company adopted the provisions of SFAS No. 142, "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. Page 12 SOFTECH, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS As of May 31, 2005, the Company conducted its annual impairment test of goodwill by comparing fair value to the carrying amount of its underlying assets and liabilities. The Company determined that the fair value exceeded the carrying value of the assets and liabilities, therefore no impairment existed as of the testing date. 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 month period ended August 31, 2005 was about $3.07 million as compared to $2.78 million for the same period in the prior fiscal year, an increase of $291,000 or about 10%. Product revenue for the quarter ended August 31, 2005 was $839,000 as compared to $418,000 for the same period in the prior fiscal year, an increase of $421,000 or 101%. Service revenue for the quarter ended August 31, 2005 was about $2.23 million as compared to about $2.36 million for the same period in fiscal 2005, a decrease of about $130,000 or 6 %. The product revenue increase of $421,000 in the current quarter as compared to the same period in fiscal 2005 was generated from all three of our product lines. Our ProductCenter technology offering was responsible for the majority of the increase generating 65% of the increase over the prior year performance. The service revenue decline of about 6% in the current quarter as compared to the same period in fiscal 2005 was due to a 4% decline in maintenance revenue and a 19% decline in our consulting revenue. The small decline in maintenance revenue is related to erosion in our renewal rates for some of our older technology offerings. The decrease in our consulting revenue is due to diverting normally billable consultants to pre-sale activity in our ProductCenter technology offering in order to support the significant increase in product revenue. Gross margin as a percentage of revenue was 65.2% for the quarter ended August 31, 2005 as compared to 63.7% for the quarter ended August 31, 2004. Product gross margin was 20.4% for the current quarter as compared to (48.3)% for the same period in fiscal 2005. The fixed non-cash quarterly expense of a little more than $600,000 related to amortization of intangible assets that are a component of product cost of sales combined with the significant increase in product revenue in the current quarter are the two major reasons for the increase in product gross margin in Q1 fiscal 2006 compared to the prior year. Gross margin on service revenue was 82.1% in Q1 fiscal 2006 as compared to 83.5% in the same period in fiscal 2005. Research and development expenses ("R&D") were just slightly below $700,000 for the three month periods ended August 31, 2005 and 2004. R&D as a percentage of revenue was 22.1% in the current quarter as compared to 24.4% for the same period in the prior fiscal year as our spending remained constant but we enjoyed increased revenue of about 10%. It is our expectation that this level of expenditure related to R&D activities will remain stable for the foreseeable future. Page 13 SOFTECH, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS Selling, general and administrative ("SG&A") expense was $1.4 million for the three month period ended August 31, 2005 as compared to $1.3 million for the same period in fiscal 2005, an increase of approximately 9%. The increase is related primarily to increased variable expenses associated with the 10% increase in revenue. The non-cash expenses related to the amortization of capitalized software and other intangible assets was $610,000 for the quarter ended August 31, 2005 as compared to $611,000 for the same period in fiscal 2005. Interest expense for the three month period ended August 31, 2005 was approximately $243,000 as compared to $250,000 for the same period in fiscal 2005. The average borrowings decreased to approximately $13.2 million during the current quarter as compared to $14.2 million for the same period in fiscal 2005, however, the interest rate on those borrowings increased to about 7.4% in the current quarter from 7.0% for the same period in fiscal 2005. The net loss for the three month period ended August 31, 2005 was $334,000 as compared to a net loss of $459,000 for the same period in the prior fiscal year. The loss per share for the three month periods ended August 31, 2005 was $(.03) and for the quarter ended August 31, 2004 was $(.04). CAPITAL RESOURCES AND LIQUIDITY The Company ended the first three months of fiscal 2006 with cash of approximately $234,000. Operating activities used cash of approximately $155,000 of cash during the first three months of the fiscal year. The net loss adjusted for non-cash expenditures related to amortization and depreciation together with an increase in accounts payable and accrued expenses and a decrease in prepaid and other assets generated cash of $387,000. An increase in accounts receivable directly related to the increase in revenue used cash of $195,000 and the cyclical reduction in deferred revenue utilized an additional $347,000 during the first quarter. The Company believes its current cost structure together with reasonable revenue run rates based on historical performance will generate positive cash flow in fiscal 2006. 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 August 31, 2005, the Company had available borrowings on its debt facilities of approximately $3.5 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. Page 14 SOFTECH, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS 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 four 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 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. Page 15 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 during the quarter ended August 31, 2005. The Form 8-K dated August 29, 2005 related to the Company's announcement of fourth 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: October 17, 2005 /s/ Joseph P. Mullaney ----------------------- ---------------------- Joseph P. Mullaney President Chief Operating Officer EX-31 2 tex31-7950.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: October 17, 2005 /s/ Joseph P. Mullaney ---------------------- Joseph P. Mullaney President and Chief Operating Officer EX-32 3 tex32-7950.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 August 31, 2005 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: October 17, 2005 /s/ Joseph P. Mullaney ---------------------- Joseph P. Mullaney President and Chief Operating Officer -----END PRIVACY-ENHANCED MESSAGE-----