Room 4561
July 19, 2005
Mr. Joseph P. Mullaney
President and Chief Operating Officer
SofTech, Inc.
2 Highwood Drive
Tewksbury, MA 01876
Re: SofTech, Inc.
Form 10-KSB for the fiscal year ended May 31, 2004
Forms 10-QSB for the fiscal quarters ended August 31, 2004,
November 30, 2004 and February 28, 2005
Forms 8-K filed August 31, 2004, October 15, 2004, and January
6,
2005 and April 12, 2005
File No. 000-10665
Dear Mr. Mullaney:
We have reviewed your response to our letter dated May 31,
2005
in connection with our review of the above referenced filings and
have the following comments. Where indicated, we think you should
revise your document in response to these comments. If you
disagree,
we will consider your explanation as to why our comment is
inapplicable or a revision is unnecessary. Please be as detailed
as
necessary in your explanation. In some of our comments, we may
ask
you to provide us with supplemental information so we may better
understand your disclosure. After reviewing this information, we
may
raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-KSB
Consolidated Statements of Operations, page 24
1. We note your response to our previous comment no. 1 where you
indicate that the Company`s capitalized software is composed
almost
entirely of acquired technology and that amortization of such
software is classified within continuing operations pursuant to
paragraph 42 of SFAS 142. SFAS 142 does not preclude you from
classifying the amortization of capitalized software in cost of
revenues as that is still within continuing operations. Also,
pursuant to paragraph 2 of SFAS 86, regardless of whether the
software was acquired through a business combination or developed
internally, SFAS 86 would still be the applicable accounting
literature for the Company`s capitalized software. Therefore,
please revise to reclassify amounts related to amortization of
capitalized software costs as a cost of revenue. Additionally,
revise your discussion in MD&A to address any changes in gross
margin
from year to year as a result of this reclassification.
Form 8-K Filed August 31, 2004, October 15, 2004, January 6, 2005
and
April 12, 2005
2. We note your response to our previous comment no. 4 where you
indicate that the Company believes the information highlighted in
Question 8 of the Frequently Asked Questions Regarding the Use of
Non-GAAP Financial Measures was self evident in your press
releases.
We disagree with your conclusions. We continue to believe that
you
have not adequately explained (a) the manner in which management
uses
the non-GAAP measure to conduct or evaluate its business, (b) the
economic substance behind management`s decision to use such a
measure
or (c) the substantive reasons why management believes the non-
GAAP
financial measure provides useful information to investors.
Please
revise accordingly.
3. We note your response to our previous comment no. 5. Your Form
8-K
states "it is management`s view that these non-GAAP financial
measures of cash flow provide important information in
understanding
the Company`s performance." It is unclear whether your "free cash
flows" are a measure of performance or a measure of liquidity. As
indicated in Question 13 the term "free cash flow" typically
refers
to a measure of liquidity and accordingly should be reconciled to
cash flows from operations rather than net income. Please explain
or
revise accordingly.
4. We note your response to our previous comment no. 6 where you
state that your use of the term "pro forma net income" is not
directly or indirectly prohibited. However, as noted in footnote
12
to the Final Rule: Conditions for Use of Non-GAAP Financial
Measures,
the Commission adopted the term "non-GAAP financial measures"
versus
"pro forma financial information" to identify the types of
information targeted by Section 401(b) of the Sarbanes-Oxley Act.
As
a result, the use of "pro forma" to describe you non-GAAP
financial
measure related to net income is not appropriate. Please revise
your
future disclosures accordingly.
* * * * *
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. You may wish to provide us with marked copies of
the amendment to expedite our review. Please furnish a cover
letter
with your amendment that keys your responses to our comments and
provides any requested supplemental information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
You may contact Patrick Gilmore at (202) 551-3406, Kathleen
Collins, Accounting Branch Chief, at (202) 551-3499 or me at (202)
551-3226 if you have questions regarding comments on the financial
statements and related matters.
Sincerely,
Craig Wilson
Senior Assistant Chief
Accountant
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Mr. Joseph P. Mullaney
SofTech, Inc.
July 19, 2005
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