SEC Company Response from SOFTECH INC (CIK 0000354260) — Jun 20, 2005
SOFTECH INC (CIK 0000354260)
Date: June 20, 2005 · CIK: 0000354260 · Accession: 0001188112-05-001237
AI Filing Summary & Sentiment
Referenced dates: May 31, 2005
Letter
[LOGO] Softech June 14, 2005 Craig Wilson Senior Assistant Chief Accountant United States Securities and Exchange Commission Room 4561 Washington, D.C. 20549
Re: SEC Letter Dated May 31, 2005 of Comments on SofTech, Inc. Filings between May 31, 2004 and April 12, 2005
Dear Mr. Wilson:
Thank you for your comments that resulted from the review of SofTech's filings with the Securities and Exchange Commission ("SEC") over the last year. Please find our responses to your inquiries below. These responses are keyed in such a manner to correspond to the Staff's questions.
Please note that our responses are in no way meant to be interpreted as confrontational or intransigent but instead to provide the Staff with our thinking on these matters. It is absolutely our intent to cooperate fully in resolving these matters to the Staff's satisfaction in a timely manner.
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 24
1. The capitalized software balance sheet account is composed almost entirely of acquired technology from the acquisitions of the Advanced Manufacturing Technology division ("AMT") in 1997, Adra Systems, Inc. ("Adra") in 1998 and Workgroup Technology Corporation ("WTC") in 2002. Accordingly, such amounts were recorded as a part of our purchase price allocation in accordance with APB No 16 or SFAS No. 141, as applicable, rather than internal costs capitalized pursuant to Statement of Financial Accounting Standards ("SFAS") No. 86. The net balance of the capitalized software balance sheet account at May 31, 2004 related to each of these product lines is as follows (000's):
Adra Systems $ 3,978 AMT 1,691 Workgroup Technology Corporation 751 -------- Total $ 6,420
<PAGE>
As of our current fiscal year ended May 31, 2005, the total net balance related to the above technologies was $4.452 million.
Given that the capitalized software costs summarized above arose from the acquisitions, the Company has followed the impairment rules provided by SFAS No. 121 and SFAS No. 144, as applicable.
In classifying the amortization related to acquired technology and other intangible assets, we note the following guidance from SFAS 142, paragraph 42: "The amortization expense and impairment losses for intangible assets shall be presented in income statement line items within continuing operations as deemed appropriate for each entity".
In our judgment, the amortization of these intangible assets is properly classified as part of operating expenses. Such classification is consistent with our disclosure as to what is included in cost of products sold and cost of services provided. The inclusion of all of these non-cash costs on one line in the income statement also provides the reader with a clear understanding of the components of our costs and our operating performance. Lastly, it is our understanding that our classification of these costs is consistent with the classification of similar costs by other public companies in our market space.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CAPITALIZED SOFTWARE COSTS AND RESEARCH AND DEVELOPMENT, PAGE 30
2. You properly note that upon purchasing AMT in 1997 and Adra in 1998 we estimated the life of those technologies to be ten (10) years. Capitalized software costs related to those purchases were amortized on a straight-line basis over that estimated life. The straight-line method of amortization resulted in a greater amortization amount than the method of calculating the ratio of current gross revenues compared to current and anticipated future gross revenues.
Each of the AMT and Adra technologies are mature technologies that continue to be viable product offerings in their respective market niches. While it is quite true that the product revenues have declined for each of these offerings over the last eight years, the costs of marketing and supporting these technologies have also declined. As a result the cash flow from these technologies remains positive and relatively stable and supports the estimate of the assigned useful lives.
At each balance sheet date, we compare the unamortized capitalized intangible costs related to the product lines to the net realizable value in order to determine if any capitalized costs need to be written off. At each of May 31, 2004, August 31, 2004, November 30, 2004 and February 28, 2005 the net realizable value of these products exceeded the unamortized capitalized intangible costs therefore no additional charges were warranted in accordance with SFAS 144.
<PAGE>
The table below summarizes the pertinent information used in this evaluation for each of the periods noted for the AMT product line:
<TABLE> <CAPTION> <S> <C> <C> <C> <C> ----------------------- --------------------- -------------------- --------------------- -------------------- FISCAL YEAR ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED (000's) MAY 31, 2004 AUGUST 31, 2004 NOVEMBER 30, 2004 FEBRUARY 28, 2005 ----------------------- --------------------- -------------------- --------------------- -------------------- Product revenue $ 334 $ 88 $ 86 $ 119 ----------------------- --------------------- -------------------- --------------------- -------------------- Service revenue 1,069 245 232 234 ----- --- --- --- ----------------------- --------------------- -------------------- --------------------- -------------------- Total revenue 1,403 333 318 353 ----------------------- --------------------- -------------------- --------------------- --------------------
----------------------- --------------------- -------------------- --------------------- -------------------- Cost of sales 196 33 32 30 --- -- -- -- ----------------------- --------------------- -------------------- --------------------- -------------------- Gross margin 1,207 300 286 323 ----------------------- --------------------- -------------------- --------------------- --------------------
----------------------- --------------------- -------------------- --------------------- -------------------- Operating expenses 1,135 252 252 272 ----- --- --- --- ----------------------- --------------------- -------------------- --------------------- --------------------
----------------------- --------------------- -------------------- --------------------- -------------------- Operating income 72 48 34 51 ----------------------- --------------------- -------------------- --------------------- -------------------- Non-cash expenses 424 111 111 111 --- --- --- --- ----------------------- --------------------- -------------------- --------------------- -------------------- Cash flow 496 159 145 162 ----------------------- --------------------- -------------------- --------------------- -------------------- Unamortized capitalized software costs 1,691 1,585 1,479 1,373 ----------------------- --------------------- -------------------- --------------------- -------------------- Net realizable value over remaining economic life * 2,721 2,602 2,483 2,364 ----------------------- --------------------- -------------------- --------------------- -------------------- </TABLE>
Note: * The net realizable value over the remaining economic life is equal to the future cash flow expected from this product line over its useful life
The Adra product line was expanded with an acquisition of a related product line in December 2002 called ProductCenter. ProductCenter, acquired in the WTC transaction, is a technology that allows for the control and sharing of engineering data created in design technologies like that of Adra.
While the revenue can be identified separately, the costs associated with selling and supporting the technologies are not as clearly distinguishable. For example, R&D resources are shared between the two product lines, and sales and marketing personnel and expenditures are aimed at the same audience for both technologies.
<PAGE>
The table below summarizes the pertinent information used in this evaluation for each of the periods noted for the Adra and ProductCenter technologies:
<TABLE> <CAPTION> <S> <C> <C> <C> <C> -------------------------- -------------------- -------------------- -------------------- ------------------- QUARTER ENDED QUARTER ENDED FISCAL YEAR ENDED QUARTER ENDED NOVEMBER 30, 2004 FEBRUARY 28, 2005 (000's) MAY 31, 2004 AUGUST 31, 2004 -------------------------- -------------------- -------------------- -------------------- ------------------- Product revenue - Adra $ 1,308 $ 208 $ 326 $ 402 - ProductCenter 1,417 122 275 249 ----- --- --- --- Subtotal 2,725 330 601 651 -------------------------- -------------------- -------------------- -------------------- ------------------- Service revenue - Adra 4,137 978 1,155 925 - ProductCenter 4,065 1,136 1,147 1,081 ----- ----- ----- ----- Subtotal 8,202 2,114 2,302 2,006 -------------------------- -------------------- -------------------- -------------------- ------------------- Total revenue - Adra 5,445 1,186 1,481 1,327 - ProductCenter 5,482 1,258 1,422 1,330 ----- ----- ----- ----- Total revenue 10,927 2,444 2,903 2,657 -------------------------- -------------------- -------------------- -------------------- -------------------
-------------------------- -------------------- -------------------- -------------------- ------------------- Cost of sales 1,917 365 395 430 ----- --- --- --- -------------------------- -------------------- -------------------- -------------------- ------------------- Gross margin 9,010 2,079 2,508 2,227 -------------------------- -------------------- -------------------- -------------------- -------------------
-------------------------- -------------------- -------------------- -------------------- ------------------- Operating expenses 9,322 2,188 2,268 2,308 ----- ----- ----- ----- -------------------------- -------------------- -------------------- -------------------- -------------------
-------------------------- -------------------- -------------------- -------------------- ------------------- Operating income (312) (109) 240 (81) -------------------------- -------------------- -------------------- -------------------- ------------------- Non-cash expenses 2,146 521 519 514 ----- --- --- --- -------------------------- -------------------- -------------------- -------------------- ------------------- Cash flow 1,834 412 759 433 -------------------------- -------------------- -------------------- -------------------- ------------------- Unamortized capitalized software costs 5,348 4,936 4,524 4,112 -------------------------- -------------------- -------------------- -------------------- ------------------- Net realizable value over remaining economic life * 18,462 17,815 17,168 16,521 -------------------------- -------------------- -------------------- -------------------- ------------------- </TABLE>
Note: * The net realizable value over the remaining economic life is equal to the future cash flow expected from this product line over its useful life
It is clear from the above that the ten-year estimated economic life used for amortizing the software costs for the AMT and Adra technology purchases was a reasonable method based on the actual results over the seven-plus years we have owned those technologies and our estimates of ongoing cash flows over the remaining useful lives.
<PAGE>
NOTE J. RELATED PARTY TRANSACTIONS, PAGE 38
3. It is our firm belief that the borrowing arrangement between the Company and Greenleaf Capital represents an arms length agreement between the parties and that the interest rate charged on those borrowings has always represented the market rate based on our credit profile.
The relationship with Greenleaf Capital extends back to 1996 when Mr. Johnston, Greenleaf's President and sole owner, became a Director of SofTech. In 1998, Greenleaf extended a $5.0 million debt facility that was subordinate to a $9 million loan from a third party bank. The interest rate on the $9.0 million loan from the third party bank and the Greenleaf subordinated debt was prime plus 2.25%. These funds were used to acquire Adra Systems.
In 1999, the Company defaulted on its $9 million bank debt and Greenleaf provided an additional debt facility that allowed the Company to avoid the collection and possible foreclosure process that was threatened. The interest rate established at the inception of this arrangement with Greenleaf was prime plus 3% reflecting the increased credit risk.
When the strategy pursued by the former CEO and VP of Sales between the time Greenleaf provided that additional debt facility and the end of fiscal 2001 was deemed a fail
Show Raw Text
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<PAGE>
[LOGO] Softech
June 14, 2005
Craig Wilson
Senior Assistant Chief Accountant
United States
Securities and Exchange Commission
Room 4561
Washington, D.C. 20549
Re: SEC Letter Dated May 31, 2005 of Comments on SofTech, Inc. Filings between
May 31, 2004 and April 12, 2005
Dear Mr. Wilson:
Thank you for your comments that resulted from the review of SofTech's filings
with the Securities and Exchange Commission ("SEC") over the last year. Please
find our responses to your inquiries below. These responses are keyed in such a
manner to correspond to the Staff's questions.
Please note that our responses are in no way meant to be interpreted as
confrontational or intransigent but instead to provide the Staff with our
thinking on these matters. It is absolutely our intent to cooperate fully in
resolving these matters to the Staff's satisfaction in a timely manner.
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 24
1. The capitalized software balance sheet account is composed almost
entirely of acquired technology from the acquisitions of the Advanced
Manufacturing Technology division ("AMT") in 1997, Adra Systems, Inc. ("Adra")
in 1998 and Workgroup Technology Corporation ("WTC") in 2002. Accordingly, such
amounts were recorded as a part of our purchase price allocation in accordance
with APB No 16 or SFAS No. 141, as applicable, rather than internal costs
capitalized pursuant to Statement of Financial Accounting Standards ("SFAS") No.
86. The net balance of the capitalized software balance sheet account at May 31,
2004 related to each of these product lines is as follows (000's):
Adra Systems $ 3,978
AMT 1,691
Workgroup Technology Corporation 751
--------
Total $ 6,420
<PAGE>
As of our current fiscal year ended May 31, 2005, the total net balance related
to the above technologies was $4.452 million.
Given that the capitalized software costs summarized above arose from the
acquisitions, the Company has followed the impairment rules provided by SFAS No.
121 and SFAS No. 144, as applicable.
In classifying the amortization related to acquired technology and other
intangible assets, we note the following guidance from SFAS 142, paragraph 42:
"The amortization expense and impairment losses for intangible assets shall be
presented in income statement line items within continuing operations as deemed
appropriate for each entity".
In our judgment, the amortization of these intangible assets is properly
classified as part of operating expenses. Such classification is consistent with
our disclosure as to what is included in cost of products sold and cost of
services provided. The inclusion of all of these non-cash costs on one line in
the income statement also provides the reader with a clear understanding of the
components of our costs and our operating performance. Lastly, it is our
understanding that our classification of these costs is consistent with the
classification of similar costs by other public companies in our market space.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CAPITALIZED SOFTWARE COSTS AND RESEARCH AND DEVELOPMENT, PAGE 30
2. You properly note that upon purchasing AMT in 1997 and Adra in 1998 we
estimated the life of those technologies to be ten (10) years. Capitalized
software costs related to those purchases were amortized on a straight-line
basis over that estimated life. The straight-line method of amortization
resulted in a greater amortization amount than the method of calculating the
ratio of current gross revenues compared to current and anticipated future gross
revenues.
Each of the AMT and Adra technologies are mature technologies that continue to
be viable product offerings in their respective market niches. While it is quite
true that the product revenues have declined for each of these offerings over
the last eight years, the costs of marketing and supporting these technologies
have also declined. As a result the cash flow from these technologies remains
positive and relatively stable and supports the estimate of the assigned useful
lives.
At each balance sheet date, we compare the unamortized capitalized intangible
costs related to the product lines to the net realizable value in order to
determine if any capitalized costs need to be written off. At each of May 31,
2004, August 31, 2004, November 30, 2004 and February 28, 2005 the net
realizable value of these products exceeded the unamortized capitalized
intangible costs therefore no additional charges were warranted in accordance
with SFAS 144.
<PAGE>
The table below summarizes the pertinent information used in this evaluation for
each of the periods noted for the AMT product line:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
----------------------- --------------------- -------------------- --------------------- --------------------
FISCAL YEAR ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
(000's) MAY 31, 2004 AUGUST 31, 2004 NOVEMBER 30, 2004 FEBRUARY 28, 2005
----------------------- --------------------- -------------------- --------------------- --------------------
Product revenue $ 334 $ 88 $ 86 $ 119
----------------------- --------------------- -------------------- --------------------- --------------------
Service revenue 1,069 245 232 234
----- --- --- ---
----------------------- --------------------- -------------------- --------------------- --------------------
Total revenue 1,403 333 318 353
----------------------- --------------------- -------------------- --------------------- --------------------
----------------------- --------------------- -------------------- --------------------- --------------------
Cost of sales 196 33 32 30
--- -- -- --
----------------------- --------------------- -------------------- --------------------- --------------------
Gross margin 1,207 300 286 323
----------------------- --------------------- -------------------- --------------------- --------------------
----------------------- --------------------- -------------------- --------------------- --------------------
Operating expenses 1,135 252 252 272
----- --- --- ---
----------------------- --------------------- -------------------- --------------------- --------------------
----------------------- --------------------- -------------------- --------------------- --------------------
Operating income 72 48 34 51
----------------------- --------------------- -------------------- --------------------- --------------------
Non-cash expenses 424 111 111 111
--- --- --- ---
----------------------- --------------------- -------------------- --------------------- --------------------
Cash flow 496 159 145 162
----------------------- --------------------- -------------------- --------------------- --------------------
Unamortized
capitalized software
costs 1,691 1,585 1,479 1,373
----------------------- --------------------- -------------------- --------------------- --------------------
Net realizable value
over remaining
economic life * 2,721 2,602 2,483 2,364
----------------------- --------------------- -------------------- --------------------- --------------------
</TABLE>
Note: * The net realizable value over the remaining economic life is equal to
the future cash flow expected from this product line over its useful
life
The Adra product line was expanded with an acquisition of a related product line
in December 2002 called ProductCenter. ProductCenter, acquired in the WTC
transaction, is a technology that allows for the control and sharing of
engineering data created in design technologies like that of Adra.
While the revenue can be identified separately, the costs associated with
selling and supporting the technologies are not as clearly distinguishable. For
example, R&D resources are shared between the two product lines, and sales and
marketing personnel and expenditures are aimed at the same audience for both
technologies.
<PAGE>
The table below summarizes the pertinent information used in this evaluation for
each of the periods noted for the Adra and ProductCenter technologies:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
-------------------------- -------------------- -------------------- -------------------- -------------------
QUARTER ENDED QUARTER ENDED
FISCAL YEAR ENDED QUARTER ENDED NOVEMBER 30, 2004 FEBRUARY 28, 2005
(000's) MAY 31, 2004 AUGUST 31, 2004
-------------------------- -------------------- -------------------- -------------------- -------------------
Product revenue
- Adra $ 1,308 $ 208 $ 326 $ 402
- ProductCenter 1,417 122 275 249
----- --- --- ---
Subtotal 2,725 330 601 651
-------------------------- -------------------- -------------------- -------------------- -------------------
Service revenue
- Adra 4,137 978 1,155 925
- ProductCenter 4,065 1,136 1,147 1,081
----- ----- ----- -----
Subtotal 8,202 2,114 2,302 2,006
-------------------------- -------------------- -------------------- -------------------- -------------------
Total revenue
- Adra 5,445 1,186 1,481 1,327
- ProductCenter 5,482 1,258 1,422 1,330
----- ----- ----- -----
Total revenue 10,927 2,444 2,903 2,657
-------------------------- -------------------- -------------------- -------------------- -------------------
-------------------------- -------------------- -------------------- -------------------- -------------------
Cost of sales 1,917 365 395 430
----- --- --- ---
-------------------------- -------------------- -------------------- -------------------- -------------------
Gross margin 9,010 2,079 2,508 2,227
-------------------------- -------------------- -------------------- -------------------- -------------------
-------------------------- -------------------- -------------------- -------------------- -------------------
Operating expenses 9,322 2,188 2,268 2,308
----- ----- ----- -----
-------------------------- -------------------- -------------------- -------------------- -------------------
-------------------------- -------------------- -------------------- -------------------- -------------------
Operating income (312) (109) 240 (81)
-------------------------- -------------------- -------------------- -------------------- -------------------
Non-cash expenses 2,146 521 519 514
----- --- --- ---
-------------------------- -------------------- -------------------- -------------------- -------------------
Cash flow 1,834 412 759 433
-------------------------- -------------------- -------------------- -------------------- -------------------
Unamortized capitalized
software costs 5,348 4,936 4,524 4,112
-------------------------- -------------------- -------------------- -------------------- -------------------
Net realizable value
over remaining economic
life * 18,462 17,815 17,168 16,521
-------------------------- -------------------- -------------------- -------------------- -------------------
</TABLE>
Note:
* The net realizable value over the remaining economic life is equal to the
future cash flow expected from this product line over its useful life
It is clear from the above that the ten-year estimated economic life used for
amortizing the software costs for the AMT and Adra technology purchases was a
reasonable method based on the actual results over the seven-plus years we have
owned those technologies and our estimates of ongoing cash flows over the
remaining useful lives.
<PAGE>
NOTE J. RELATED PARTY TRANSACTIONS, PAGE 38
3. It is our firm belief that the borrowing arrangement between the Company
and Greenleaf Capital represents an arms length agreement between the parties
and that the interest rate charged on those borrowings has always represented
the market rate based on our credit profile.
The relationship with Greenleaf Capital extends back to 1996 when Mr. Johnston,
Greenleaf's President and sole owner, became a Director of SofTech. In 1998,
Greenleaf extended a $5.0 million debt facility that was subordinate to a $9
million loan from a third party bank. The interest rate on the $9.0 million loan
from the third party bank and the Greenleaf subordinated debt was prime plus
2.25%. These funds were used to acquire Adra Systems.
In 1999, the Company defaulted on its $9 million bank debt and Greenleaf
provided an additional debt facility that allowed the Company to avoid the
collection and possible foreclosure process that was threatened. The interest
rate established at the inception of this arrangement with Greenleaf was prime
plus 3% reflecting the increased credit risk.
When the strategy pursued by the former CEO and VP of Sales between the time
Greenleaf provided that additional debt facility and the end of fiscal 2001 was
deemed a fail