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
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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.
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INDEX
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PART I. Financial Information Page Number
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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
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ASSETS
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Cash and cash equivalents $ 234 $ 399
Accounts receivable, net 1,813 1,618
Prepaid and other assets 298 346
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Total current assets 2,345 2,363
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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
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TOTAL ASSETS $ 11,781 $ 12,416
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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
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Total current liabilities 6,407 6,706
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Long-term debt, net of current portion 11,779 11,785
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Stockholders' deficit (6,405) (6,075)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,781 $ 12,416
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See accompanying notes to consolidated condensed financial statements.
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SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Three Months Ended
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August 31, August 31,
2005 2004
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Revenue
Products $ 839 $ 418
Services 2,229 2,359
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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
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Gross margin 2,000 1,768
Research and development expenses 678 677
Selling, general and administrative 1,413 1,300
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Loss from operations before interest expense (91) (209)
Interest expense 243 250
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Net loss $ (334) $ (459)
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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
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Cash flows from operating activities:
Net loss $ (334) $ (459)
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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)
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Total adjustments 179 595
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Net cash (used) provided by operating activities (155) 136
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Cash flows used by investing activities:
Capital expenditures (4) (7)
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Net cash used by investing activities (4) (7)
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Cash flows from financing activities:
Repayments under line of credit agreements, net (6) (41)
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Net cash used by financing activities (6) (41)
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Increase (decrease) in cash and cash equivalents (165) 88
Cash and cash equivalents, beginning of period 399 275
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Cash and cash equivalents, end of period $ 234 $ 363
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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.
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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)
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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
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Property and equipment $ 3,938 $ 3,934
Accumulated depreciation
and amortization (3,781) (3,769)
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Property and equipment, net $ 157 $ 165
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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)
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Stockholders' deficit $ (6,405) $ (6,075)
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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
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Basic weighted average shares
outstanding 12,205 12,205
Effect of employee stock options
outstanding -- --
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12,205 12,205
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(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
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Net loss $ (334) $ (459)
Changes in:
Foreign currency translation
adjustment 4 (10)
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Comprehensive loss $ (330) $ (469)
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(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
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Revenue:
North America $ 2,377 $ 2,095
Asia 227 218
Europe 510 483
Eliminations (46) (19)
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Consolidated Total $ 3,068 $ 2,777
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SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, May 31,
2005 2005
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Long Lived Assets:
North America $ 9,277 $ 9,901
Europe 159 152
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Consolidated Total $ 9,436 $ 10,053
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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.
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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
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Joseph P. Mullaney
President
Chief Operating Officer