-----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, DvC9WtNffb0npQMVyU34xyViwZAOC+Ejawm0O8TH4U0tRdQdpj4qY94jV0V48TM+ e51xF0IWTqV/rjquqgPVHQ== 0001188112-06-003074.txt : 20061016 0001188112-06-003074.hdr.sgml : 20061016 20061016165519 ACCESSION NUMBER: 0001188112-06-003074 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060831 FILED AS OF DATE: 20061016 DATE AS OF CHANGE: 20061016 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: 061146845 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 t11854.txt FORM 10-QSB 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 August 31, 2006 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, 2006 was 12,213,236 shares. Form 10-QSB Page 2 SOFTECH, INC. ------------- INDEX ----- PART I. Financial Information PAGE NUMBER ----------- Item 1. Financial Statements Consolidated Condensed Balance Sheets - August 31, 2006 and May 31, 2006 3 Consolidated Condensed Statements of Operations - Three Months Ended August 31, 2006 and 2005 4 Consolidated Condensed Statements of Cash Flows - Three Months Ended August 31, 2006 and 2005 5 Notes to Consolidated Condensed Financial Statements 6-12 Item 2. Management's Discussion and Analysis of Operations 13-15 Item 3. Controls and Procedures 16 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 Form 10-QSB 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, 2006 2006 -------- -------- ASSETS - ------ Cash and cash equivalents $ 404 $ 680 Accounts receivable, net 1,315 1,657 Prepaid and other assets 353 317 -------- -------- Total current assets 2,072 2,654 -------- -------- Property and equipment, net 140 143 Capitalized software costs, net 2,925 3,279 Goodwill, net 4,600 4,600 Notes receivable 134 134 Other assets 2 3 -------- -------- TOTAL ASSETS $ 9,873 $ 10,813 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Accounts payable $ 286 $ 339 Accrued expenses 842 913 Deferred maintenance revenue 3,022 3,423 Current portion of long term debt 623 608 -------- -------- Total current liabilities 4,773 5,283 -------- -------- Long-term debt, net of current portion 13,257 12,947 -------- -------- Stockholders' deficit (8,157) (7,417) -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,873 $ 10,813 ======== ======== 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 --------------------------- August 31, August 31, 2006 2005 Revenue ---------- --------- Products $ 388 $ 839 Services 2,108 2,229 ---------- --------- Total revenue 2,496 3,068 Cost of products sold: materials 6 58 Cost of product sold: amortization of capitalized software costs and other intangible assets 354 610 Cost of services provided 394 400 ---------- --------- Gross margin 1,742 2,000 Research and development expenses 705 678 Selling, general and administrative 1,435 1,413 ---------- --------- Loss from operations before interest expense (398) (91) Interest expense 340 243 ---------- --------- Net loss $ (738) $ (334) ========== ========= Basic and diluted net loss per common share $ (0.06) $ (0.03) Weighted average common shares outstanding 12,213 12,205
See accompanying notes to consolidated condensed financial statements.
Form 10-QSB Page 5 SOFTECH, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (dollars in thousands) Three Months Ended ------------------------ August 31, August 31, 2006 2005 Cash flows from operating activities: -------- -------- Net loss $(738) $(334) -------- -------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 367 625 Change in current assets and liabilities: Accounts receivable 342 (195) Prepaid expenses and other assets (35) 48 Accounts payable and accrued expenses (126) 48 Deferred maintenance revenue (401) (347) -------- -------- Total adjustments 147 179 -------- -------- Net cash used by operating activities (591) (155) -------- -------- Cash flows used by investing activities: Capital expenditures (10) (4) -------- -------- Net cash used by investing activities (10) (4) -------- -------- Cash flows from financing activities: Borrowings (repayments) under line of credit agreements, net 325 (6) -------- -------- Net cash provided (used) by financing activities 325 (6) -------- -------- Decrease in cash and cash equivalents (276) (165) Cash and cash equivalents, beginning of period 680 399 -------- -------- Cash and cash equivalents, end of period $ 404 $ 234 ======== ========
See accompanying notes to consolidated condensed financial statements. Form 10-QSB 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 2006 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 is 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, primarily performed on a time and material basis, 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, 2006 or 2005. Substantially all of the recorded balance represents software acquired from third parties. Amortization expenses related to capitalized software costs for the three month periods ended August 31, 2006 and 2005 were $354,000 and $610,000, 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, 2006, 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. Form 10-QSB 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 Effective June 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), Share-Based Payment, ("SFAS 123R") which requires all share-base payments to employees, including grants of employee stock options, to be recorded as expense in the statement of operations based on their fair value. To adopt SFAS 123(R), we selected the modified prospective transition method. This method requires recording compensation expense prospectively over the remaining vesting period of the stock options on a straight-line basis using the fair value of the options on the date of the grant. It does not require restatement of financial results for the prior period expense related to stock option awards that were outstanding prior to adoption. The expense recorded from adoption of SFAS 123R in the current quarter was nominal. We calculated the fair value of the options using the Black-Scholes model. The assumptions used to value the previous grants were as follows: Expected Life 5 Years Assumed annual dividend growth rate 0% Expected volatility 1.12 Risk free interest rate 2.68% - 3.35% Prior to adoption, the Company followed SFAS 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment to SFAS Statement No. 123, which required entities to recognize as expense over the vesting period the fair value of stock-based awards on the date of grant or measurement date. For employee stock-based awards, however, SFAS Nos. 123 and 148 allowed entities to continue to apply the intrinsic value method under the provisions of Accounting Principles Board ("APB") Opinion No. 25 and provide pro forma net earnings disclosures as if the fair-value based method defined in SFAS No. 123 had been applied. The Company elected to apply the provisions of APB No. 25 and provide the pro forma disclosures of SFAS Nos. 123 and 148 for periods as required prior to June 1, 2006. For the first quarter of fiscal 2005, 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 (in thousands, except per share data) Ended August 31, 2005 ----------------------------------------------------------------------- Net loss - as reported $(334) Stock-based compensation expense determined under fair value based method (1) ----- Net loss - pro forma (335) ===== Loss per share - diluted - as reported (.03) Loss per share - diluted - pro forma (.03) Form 10-QSB Page 8 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- The Company's 1994 Stock Option Plan provided for the granting of stock options at an exercise price not less than fair market value of the stock on the date of the grant and with vesting schedules as determined by the Board of Directors. No new options could be granted under the Plan after fiscal 2004 but options granted prior to that time continue to vest. The following table summarizes information for stock options outstanding and exercisable at August 31, 2006:
WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING EXERCISE PRICE CONTRACTUAL AGGREGATE NUMBER OF OPTIONS PER SHARE LIFE IN YEARS INTRINSIC VALUE ----------------- --------- ------------- --------------- Outstanding at May 31, 2006 323,000 $ .58 Granted - - Exercised - - Forfeited or expired (15,000) $ .16 ------- Outstanding at August 31, 2006 308,000 $ .60 4.67 $150,165 ------- Exercisable at August 31, 2006 271,200 $ .88 4.45 $148,892
The following table summarizes the information related to non-vested stock option awards outstanding as of August 31, 2006: WEIGHTED AVERAGE GRANT DATE NUMBER OF OPTIONS FAIR VALUE PER SHARE ----------------- -------------------- Non-vested at May 31, 2006 59,800 $ .03 Granted - - Vested (23,000) $ .04 Forfeited - - ------- Non-vested at August 31, 2006 36,800 $ .03 As of August 31, 2006, the remaining prospective pre-tax cost of non-vested stock option employee compensation was $1,255 which will be expensed on a pro rata basis going forward. FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's foreign operations (France, Germany and Italy) is the Euro. 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. 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 Form 10-QSB Page 9 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- intangibles (goodwill, capitalized software and other intangible assets), deferred tax assets and the allowance for doubtful accounts. Actual results could differ from those estimates. (C) LIQUIDITY As of August 31, 2006, the Company had cash of $404,000, a decrease of $276,000 from May 31, 2006. Operating activities used $591,000 of cash during the first three months of the fiscal year and the Company borrowed $325,000 in excess of its debt repayments from its line of credit. At August 31, 2006, the Company had available borrowings on its debt facilities of approximately $2.8 million. In September 2006 the Company implemented a cost reduction program to reduce its quarterly cash expenses to approximately $2.5 million. These reductions were focused primarily in the European sales offices and the legacy technology offerings. We expect to incur an expense of approximately $300,000 related to these actions in September. The Company believes its cost structure subsequent to these cost reduction actions together with reasonable revenue run rates based on historical performance will generate positive cash flow during the remainder of fiscal 2007. 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. (D) BALANCE SHEET COMPONENTS Details of certain balance sheet captions are as follows (000's): August 31, May 31, 2006 2006 -------- -------- Property and equipment $ 3,995 $ 3,985 Accumulated depreciation and amortization (3,855) (3,842) -------- -------- Property and equipment, net $ 140 $ 143 -------- -------- Common stock, $.10 par value $ 1,221 $ 1,221 Capital in excess of par value 18,037 18,037 Accumulated deficit (27,119) (26,381) Accumulated other comprehensive income (296) (294) -------- -------- Stockholders' deficit $ (8,157) $ (7,417) -------- -------- 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 2007 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, 2006 2005 ------ ------ Basic weighted average shares outstanding 12,213 12,205 Effect of employee stock options outstanding --- --- ------ ------ 12,213 12,205 ====== ====== (F) COMPREHENSIVE LOSS The Company's comprehensive loss includes accumulated foreign currency translation adjustments and unrealized gain (loss) on marketable securities the comprehensive loss was as follows (000's): Three Month Periods Ended August 31, 2006 2005 ----- ----- Net loss $(738) $(334) Changes in: Foreign currency translation adjustment (2) 4 ----- ----- Comprehensive loss $(740) $(330) ===== ===== Form 10-QSB Page 11 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- (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 and Collaboration 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 Three Months Ended August 31, August 31, Revenue: 2006 2005 ----------------------------------------------- North America $ 1,734 $ 2,340 Asia 314 264 Europe 493 510 Eliminations (45) (46) ------- ------- Consolidated Total $ 2,496 $ 3,068 ------- ------- August 31, May 31, 2006 2006 Long Lived Assets: ----------------------------------------------- North America $7,555 $8,004 Europe 106 155 ------ ------ Consolidated Total $7,661 $8,159 ------ ------
Form 10-QSB Page 12 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS -------------------------------------------------- The statements made below with respect to SofTech's outlook for fiscal 2007 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 is 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, primarily performed on a time and material basis, 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 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 13 SOFTECH, INC. AND SUBSIDIARIES ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS ---------------------------------------------------------- As of May 31, 2006, 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. 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, 2006 was about $2.5 million as compared to $3.1 million for the same period in the prior fiscal year, a decrease of $572,000 or about 19%. Product revenue for the quarter ended August 31, 2006 was $388,000 as compared to $839,000 for the same period in the prior fiscal year, a decrease of $451,000 or 54%. Service revenue for the quarter ended August 31, 2006 was about $2.1 million as compared to about $2.2 million for the same period in fiscal 2006, a decrease of about $121,000 or 5%. The product revenue decrease of $451,000 in the current quarter as compared to the same period in fiscal 2006 was primarily due to a decrease of 84% in our ProductCenter technology offering. The sales cycle for this product line is often in excess of a year and the final decision prior to the issuance of a purchase order is often extended beyond the expected date. It is our opinion based on pre-sale activity and identified qualified sales leads, that this quarter's product revenue for our ProductCenter technology offering is the result of delays in the decision making rather than an indication of future performance. The service revenue decline of about 5% in the current quarter as compared to the same period in fiscal 2006 was due to a decline of about 10% in our maintenance revenue that was partially offset by a 29% increase in our consulting revenue. The decrease in our maintenance revenue was the result of our lower than normal product revenue performance for ProductCenter and continued weakness in renewal rates for our legacy technologies. The increase in our consulting revenue was due to the availability of consultants to be deployed on billable projects given the lower than normal pre-sale activity. Gross margin as a percentage of revenue was 69.8% for the quarter ended August 31, 2006 as compared to 65.2% for the quarter ended August 31, 2005. Product gross margin was 7.2% for the current quarter as compared to 20.4% for the same period in fiscal 2006. The reduced product gross margin is due to a 54% decrease in product revenue offset by a reduction in amortization expense of 42%. Gross margin on service revenue was 81.3% in Q1 fiscal 2007 as compared to 82.1% in the same period in fiscal 2006. Research and development expenses ("R&D") increased by about 4% for Q1 fiscal 2007 as compared to the same period in fiscal 2006. The increased spending in fiscal 2007 is due primarily to additional resources aimed at increasing the applicability of our ProductCenter technology to new markets. Our R&D spending as a percentage of revenue was 28.2% in Q1 FY2007 as compared to 22.1% for the same period last year primarily as a result of the decrease in revenue. Form 10-QSB Page 14 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, 2006 and 2005. The majority of the Company's SG&A expenses are fixed costs and therefore do not fluctuate materially with the decrease in revenue. SG&A as a percentage of revenue increased to 57.5% in the current quarter as compared to 46.1% in the same period last year due to the reduced revenue. The non-cash expenses related to the amortization of capitalized software and other intangible assets was $354,000 for the quarter ended August 31, 2006 as compared to $610,000 for the same period in fiscal 2006. This decrease was the result of the intangible assets relating to the acquisition of WTC in fiscal 2002 being fully amortized in the second quarter of the prior year. Interest expense for the three month period ended August 31, 2006 was approximately $340,000 as compared to $243,000 for the same period in fiscal 2006. The average borrowings increased to approximately $13.7 million during the current quarter as compared to $13.2 million for the same period in fiscal 2005 and the interest rate on those borrowings increased to about 10% in the current quarter from 7.4% for the same period in fiscal 2006. The net loss for the three month period ended August 31, 2006 was $738,000 as compared to a net loss of $334,000 for the same period in the prior fiscal year. The loss per share for the three month periods ended August 31, 2006 and 2005 was $(.06) and $(.03), respectively. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- As of August 31, 2006, the Company had cash of $404,000, a decrease of $276,000 from May 31, 2006. Operating activities used $591,000 of cash during the first three months of the fiscal year and the Company borrowed $325,000 in excess of its debt repayments from its line of credit. At August 31, 2006, the Company had available borrowings on its debt facilities of approximately $2.8 million. In September 2006 the Company implemented a cost reduction program to reduce its quarterly cash expenses to approximately $2.5 million. These reductions were focused primarily in the European sales offices and the legacy technology offerings. We expect to incur an expense of approximately $300,000 related to these actions in September. The Company believes its cost structure subsequent to these cost reduction actions together with reasonable revenue run rates based on historical performance will generate positive cash flow during the remainder of fiscal 2007. 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. 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. Form 10-QSB Page 15 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 full fiscal years. Over the five fiscal quarters beginning in June 2005 and extending through the end of the current quarter, we have generated a cash loss from operations of nearly $600,000 as our maintenance renewal rates on our legacy product lines have declined. It is our expectation that we can correct the most recent problems of cash losses from operations and return to generating positive cash flows similar to the performance during fiscal years 2002 to 2005, however, there can be no assurances that the Company will continue to generate positive cash in the future. DECLINE IN BUSINESS CONDITIONS AND INFORMATION TECHNOLOGY (IT) SPENDING COULD CAUSE A DECLINE IN REVENUE. Business conditions and the level of IT spending have improved in the recent past as evidenced by our revenue growth in fiscal 2006. However, there can be no assurance that this recent improvement will continue given the difficult to forecast economic environment. If IT spending declines the Company's revenues and profitability could be adversely impacted. DECLINE IN BUSINESS CONDITIONS AND INFORMATION TECHNOLOGY (IT) SPENDING COULD CAUSE FURTHER DECLINE IN REVENUE. The level of future IT spending remains uncertain as does the prognosis for the continued economic recovery in the manufacturing sector. If IT spending declines and/or the manufacturing sector experiences economic difficulty, the Company's revenues could be adversely impacted. THE COMPANY IS DEPENDENT ON ITS LENDER FOR CONTINUED SUPPORT. We have a strong relationship with our sole lender, Greenleaf Capital. They currently represent our sole source of financing. (See Note I to the Consolidated Financial Statements.) THE CONTINUED INTEGRATION OF WTC MAY EXPERIENCE DIFFICULTY. Since acquiring WTC in December 2002, much progress has been made in integrating our operations and reducing redundant functions and facilities. The strategy includes more closely integrating our technologies and offering our combined customer base these solutions. The strategy also includes translating ProductCenter for users other than the U.S. English speaking market. This translation for our European customers was completed during fiscal 2006. In addition, during 2006 interfaces were created to proprietary CAD tools that have higher use in our European customer base. Our plans for 2007 include leveraging that technology investment by offering Product Center to our European customers based on the recent improvements. However, there can be no assurance that this continued integration of our technologies or offering ProductCenter outside the U.S. will be successful. REVENUE DECLINE FOR CERTAIN PRODUCT LINES. We experienced revenue declines from 2005 to 2006 of 11% for our Cadra product line and 4% for our AMT product line. The declines for the same period for software maintenance revenue was about 11% for each of those product lines. While we understand that as these technologies age the revenue will decline as a normal part of the technology life cycle, double digit declines from year to year were not expected. Should this unexpected fiscal 2006 revenue decline for these product lines continue it will negatively impact the Company's overall financial performance. Form 10-QSB Page 16 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 August 30, 2006 related to its press release announcing fourth quarter results for fiscal 2006 and a Form 8-K on August 15, 2006 announcing the resignation of a member of its Board of Directors. 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 16, 2006 /S/ JOSEPH P. MULLANEY ---------------- ----------------------- Joseph P. Mullaney President and Chief Operating Officer EX-31 2 ex31.txt EXHIBIT 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 annual 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 16, 2006 /S/ JOSEPH P. MULLANEY ----------------- ---------------------- Joseph P. Mullaney President and Chief Operating Officer EX-32 3 ex32.txt EXHIBIT 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, 2006 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 16, 2006 /s/ JOSEPH P. MULLANEY ---------------- ------------------ Joseph P. Mullaney President and Chief Operating Officer -----END PRIVACY-ENHANCED MESSAGE-----