UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________________ to_____________________
Commission File Number:0-12456
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AMERICAN SOFTWARE, INC.
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1098795
- ---------------------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
470 East Paces Ferry Road, N.E., Atlanta, Georgia 30305
- ------------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
(404) 261-4381
---------------------
(Registrant's telephone number, including area code)
None
---------
(Former name, former address and former fiscal year, if
changed since last report)
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 ______
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes Outstanding at March 12, 2002
- ----------------------------- -----------------------------
Class A Common Stock, $.10 par value 18,685,382 Shares
Class B Common Stock, $.10 par value 4,082,289 Shares
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Form 10-Q
Quarter ended January 31, 2002
Index
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Page
No.
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- Unaudited - January 31, 2002 and April 30, 2001 3
Condensed Consolidated Statements of Operations
- Unaudited - Three Months and Nine Months ended
January 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
- Unaudited - Nine Months ended January 31, 2002
and January 31, 2001 5
Notes to Condensed Consolidated Financial Statements -
Unaudited 6-13
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Part II - Other Information 26
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands except share and per share data)
(Unaudited)
January 31, April 30,
2002 2001
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 21,140 $ 10,057
Investments - current 13,362 15,118
Trade accounts receivable, less allowance for doubtful accounts
of $788 at January 31, 2002 and $1,656 at April 30, 2001:
Billed 9,919 12,303
Unbilled 2,702 3,321
Deferred income taxes 1,280 1,280
Prepaid expenses and other current assets 1,828 1,579
-------- --------
Total current assets 50,231 43,658
Investments - noncurrent 831 5,926
Property and equipment, less accumulated depreciation 12,920 16,842
Intangible assets, less accumulated amortization 12,975 13,913
Other assets 1,790 1,728
-------- --------
$ 78,747 $ 82,067
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 1,027 $ 1,587
Accounts payable 1,685 2,658
Accrued compensation and related costs 2,520 3,523
Income tax payable 834 1,126
Other current liabilities 4,782 5,530
Deferred revenue 10,905 13,633
-------- --------
Total current liabilities 21,753 28,057
Obligations under capital leases, net of current portion 374 1,045
Deferred income taxes 1,280 1,280
-------- --------
Total liabilities 23,407 30,382
-------- --------
Minority interest in subsidiaries 4,039 3,834
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 21,630,570 shares at January 31, 2002 and
21,622,290 shares at April 30, 2001 2,163 2,162
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,082,289 shares at January 31, 2002 and
April 30, 2001; convertible into Class A shares on a one-for-one
basis 409 409
Additional paid-in capital 66,041 65,956
Accumulated other comprehensive income 242 243
Accumulated deficit (50) (3,415)
Class A treasury stock, 2,925,188 shares at January 31, 2002
and April 30, 2001 (17,504) (17,504)
-------- --------
Total shareholders' equity 51,301 47,851
-------- --------
$ 78,747 $ 82,067
======== ========
See accompanying notes to condensed consolidated financial statements-unaudited.
3
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
License fees $ 2,242 $ 3,356 $ 8,229 $ 8,831
Services 7,541 8,071 23,598 25,523
Maintenance 5,210 5,763 16,513 18,092
------------- ------------- ------------- -------------
Total revenues 14,993 17,190 48,340 52,446
------------- ------------- ------------- -------------
Cost of revenues:
License fees 1,108 1,653 3,419 4,533
Services 4,189 5,357 13,538 17,317
Maintenance 1,090 963 2,793 4,395
------------- ------------- ------------- -------------
Total cost of revenues 6,387 7,973 19,750 26,245
------------- ------------- ------------- -------------
Gross Margin 8,606 9,217 28,590 26,201
------------- ------------- ------------- -------------
Operating expenses:
Research and development costs 2,372 3,516 8,037 11,881
Less: Capitalizable software (644) (619) (2,462) (2,875)
Marketing and sales expense 2,804 4,460 9,891 15,920
General and administrative expenses 2,846 3,754 8,834 9,711
Provision for (recovery of) doubtful accounts 124 846 427 1,208
Charge for asset impairment and
restructuring 0 242 0 10,416
------------- ------------- ------------- -------------
Total operating expense 7,502 12,199 24,727 46,261
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Operating income (loss) 1,104 (2,982) 3,863 (20,060)
Other income 358 861 1,628 1,694
Loss on investments 0 (1,110) 0 (1,110)
Minority interest (88) 487 (273) 1,009
Income (loss) from continuing operations before
------------- ------------- ------------- -------------
income taxes 1,374 (2,744) 5,218 (18,467)
------------- ------------- ------------- -------------
Income tax benefit 0 2,418 0 2,418
------------- ------------- ------------- -------------
Income (loss) from continuing operations 1,374 (326) 5,218 (16,049)
Discontinued Operations:
Loss from operations of discontinued subsidiary (249) (2,866) (1,851) (6,749)
------------- ------------- ------------- -------------
Net income (loss) 1,125 (3,192) 3,367 (22,798)
============= ============= ============= =============
Basic net income (loss) per common share from
continuing operations $ 0.06 $ (0.01) $ 0.23 $ (0.71)
------------- ------------- ------------- -------------
Diluted net income (loss) per common share from
continuing operations * $ 0.06 $ (0.01) $ 0.23 $ (0.71)
------------- ------------- ------------- -------------
Basic net income (loss) per common share from
discontinued operations $ (0.01) $ (0.13) $ (0.08) $ (0.30)
------------- ------------- ------------- -------------
Diluted net income (loss) per common share from
discontinued operations * $ (0.01) $ (0.13) $ (0.08) $ (0.30)
------------- ------------- ------------- -------------
Basic net income (loss) per common share $ 0.05 $ (0.14) $ 0.15 $ (1.00)
============= ============= ============= =============
Diluted net income (loss) per common share* $ 0.05 $ (0.14) $ 0.15 $ (1.00)
============= ============= ============= =============
Weighted average common shares outstanding:
Basic 22,787 22,771 22,784 22,715
============= ============= ============= =============
Diluted 22,918 22,771 22,799 22,715
============= ============= ============= =============
*Diluted weighted average common shares outstanding are not included in the
quarter ended and nine months ended January 31, 2001 calculations due to the
anti-dilution of the net loss per share.
See accompanying notes to condensed consolidated financial statements -
unaudited.
4
AMERICAN SOFTWARE, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended
January 31,
2002 2001
----------------------
Cash flows from operating activities:
Net income (loss) $ 3,367 $(22,798)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,268 9,028
Loss from discontinued operations 1,851 6,749
Minority interest in subsidiary income/(loss) 273 (1,009)
Allowance for doubtful accounts 427 1,208
Income tax benefit - non-cash portion 0 (1,713)
Net loss (gain) on investments (27) (142)
Charge for asset impairment and restructuring - non-cash portion 0 9,712
Write-off of minority investment in business 0 1,110
Change in operating assets and liabilities:
Purchases of trading securities (1,375) (1,491)
Proceeds from trading securities 668 5,696
Proceeds from sales and maturities of investments 2,667 273
Decrease/(increase) in accounts receivable 2,576 4,015
Decrease/(increase) in prepaid expenses and other assets (311) (241)
(Decrease)/increase in accounts payable and other accrued liabilities (3,016) (4,053)
(Decrease)/increase in deferred revenue (2,728) (2,133)
---------- ---------
Net cash provided by continuing operations 11,640 4,211
Loss from discontinued operations (1,851) (6,749)
---------- ---------
Net cash provided by (used in) operating activities 9,789 (2,538)
---------- ---------
Cash flows from investing activities:
Capitialized software development costs (2,462) (2,875)
Purchases of property and equipment (163) (1,267)
Purchased software costs (130) (616)
Purchase of majority interest in subsidiaries (557) (517)
Proceeds from sale of fixed assets 984 0
Repurchase of common stock by subsidiary (79) (105)
Sales of short term investments, net 4,919 5,500
---------- ---------
Net cash used in investing activities 2,512 120
---------- ---------
Cash flows from financing activities:
Payment of capital lease obligation (1,231) (1,721)
Ownership change in majority owned subsidiary (21) 0
Proceeds from exercise of stock options 18 382
Proceeds from dividend reinvestment plan 16 35
---------- ---------
Net cash used in financing activities (1,218) (1,304)
---------- ---------
Net increase (decrease) in cash and cash equivalents 11,083 (3,722)
Cash and cash equivalents at beginning of year $ 10,057 $ 12,910
---------- ---------
Cash and cash equivalents at end of year $ 21,140 $ 9,188
========== =========
Supplemental disclosures of cash paid during the year for: ========== =========
Interest $ 140 $ 130
========== =========
Supplemental disclosures of noncash operating, investing, and financing activities:
Assumption of capital lease obligations for property and equipment $ - $ 2,537
========== =========
See accompanying notes to condensed consolidated financial statements -
unaudited
5
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
January 31, 2002
A. Basis of Presentation
The accompanying condensed consolidated financial statements are
unaudited. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These financial statements should be used in
conjunction with the consolidated financial statements and related notes
contained in our 2001 Annual Report on Form 10-K. The financial
information presented in the condensed consolidated financial statements
reflects all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the period indicated but
not necessarily indicative of future results.
B. Comprehensive Income
We have adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting and presentation of comprehensive income and its components
in a full set of financial statements. We have not included statements of
comprehensive income (loss) in the accompanying unaudited condensed
consolidated financial statements since comprehensive income (loss) and
net income (loss) presented in the accompanying condensed consolidated
statements of operations would be materially the same.
C. Revenue Recognition
We recognize revenue in accordance with Statement of Position ("SOP")
97-2, Software Revenue Recognition, and SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions.
License. License revenues in connection with license agreements for
standard proprietary and tailored software are recognized upon delivery
of the software, provided collection is considered probable, the fee is
fixed or determinable, there is evidence of an arrangement, and vendor
specific objective evidence exists to defer any revenue related to
undelivered elements of the arrangement.
Services. Revenues derived from services primarily include consulting,
implementation, training, and managed services. We bill under both time
and materials and fixed fee arrangements and recognize services revenues
as we perform the services.
We utilize the percentage-of-completion method of accounting to recognize
revenue on service implementation projects for fixed amounts. We measure
progress under the percentage-of-completion method based on management's
best estimate of the cost of work completed in relation to the total cost
of work to be performed under the contract. Any estimated losses on
services or implementation projects for fixed amounts are immediately
recognized in the condensed consolidated financial statements.
Deferred Revenues. Deferred revenues represent advance payments or
billings for software licenses, services, and maintenance billed in
advance of the time revenues are recognized.
6
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2002
Indirect Channel Revenues. We recognize sales through indirect channels
only when the distributor makes a sale to an end-user. We recognize
revenues from indirect channels upon delivery of the software to the
end-user assuming we meet all other conditions of SOP 97-2 and SOP 98-9.
Maintenance. Revenues derived from maintenance contracts primarily
include telephone consulting, product updates and releases of new version
of products previously purchased by the customer, as well as error
reporting and correction services. Maintenance contracts are typically
sold for a separate fee with initial contractual periods ranging from one
to three years with renewal for additional periods thereafter.
Maintenance fees are generally billed annually in advance and the
resulting revenues are recognized ratably over the term of the
maintenance agreement. In situations where the maintenance fee is bundled
with the license fee, Vendor Specific Objective Evidence ("VSOE") for
maintenance is determined based on stated renewal rates in the contract,
which generally average 18% of the net license fee.
D. Major Customer
One customer accounted for 12% of our total revenues and 25% of services
revenues during the quarter ended January 31, 2002. The related accounts
receivable balance is $928,000 at January 31, 2002.
E. Sale of wholly owned subsidiary - subsequent event
On February 5, 2002, we sold our wholly owned subsidiary, AmQUEST, Inc.,
to Infocrossing, Inc. in an all cash transaction valued at $20,000,000,
subject to working capital adjustments. The results of operations of
AmQUEST, Inc. have been reclassified as discontinued operations in the
condensed consolidated statements of operations for all periods
presented. We expect to recognize a gain on the sale of AmQUEST of
approximately $11 - $12 million in the fourth quarter of fiscal year
2002.
F. Purchase of Majority Interest in New Generation Computing
On July 10, 1998, we purchased an 80% interest in New Generation
Computing, Inc., a leading software vendor that specializes in accounting
and manufacturing control software for the sewn goods industry (apparel,
handbags, shoes, hats, etc.). We accounted for this investment based on
the purchase accounting method, with the results of operations included
from the date of acquisition. In August 1999, we purchased an additional
6.6% interest and in July 2000 another 6.6% interest. In August 2001 we
purchased the remaining 6.6% for $557,000, bringing our ownership
interest in New Generation Computing to 100%.
7
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2002
G. Net Income (Loss) Per Common Share
Basic income (loss) per common share available to common shareholders is
based on the weighted-average number of Class A and B common shares
outstanding, since we consider the two classes of common stock as one
class for purposes of the per share computation. Diluted income (loss) per
common share available to common shareholders is based on the
weighted-average number of common shares outstanding and dilutive
potential common shares, such as dilutive stock options.
The numerator in calculating both basic and diluted income (loss) per
common share for each period is the same. The denominator is based on the
following number of common shares:
Three Months ended Nine Months ended
January 31, January 31,
2002 2001 2002 2001
---------------------------- ----------------------------
(in thousands, except per share data)
Common Shares:
Weighted average common shares outstanding
Class A Shares 18,705 18,689 18,702 18,633
Class B Shares 4,082 4,082 4,082 4,082
---------------------------- ----------------------------
Basic weighted average common shares outstanding: 22,787 22,771 22,784 22,715
---------------------------- ----------------------------
Dilutive effect of outstanding Class A common
stock options: 131 - 15 -
---------------------------- ----------------------------
Total 22,918 22,771 22,799 22,715
============================ ============================
Net income (loss) from continuing operations: $ 1,374 $ (326) $ 5,218 $ (16,049)
Net income (loss) per common share from
continuing operations:
Basic $ 0.06 $ (0.01) $ 0.23 $ (0.71)
============================ ============================
Diluted $ 0.06 $ (0.01) $ 0.23 $ (0.71)
============================ ============================
Net (loss) from discontinued operations: $ (249) $ (2,866) $ (1,851) $ (6,749)
Net income (loss) per common share from
discontinued operations:
Basic $ (0.01) $ (0.13) $ (0.08) $ (0.30)
============================ ============================
Diluted $ (0.01) $ (0.13) $ (0.08) $ (0.30)
============================ ============================
Net income (loss): $ 1,126 $ (3,192) $ 3,366 $ (22,798)
Net income (loss) per common share:
Basic $ 0.05 $ (0.14) $ 0.15 $ (1.00)
============================ ============================
Diluted $ 0.05 $ (0.14) $ 0.15 $ (1.00)
============================ ============================
For the three months and nine months ended January 31, 2002, options to
purchase 2,945,016 and 3,789,274 shares, respectively, of common stock
were excluded from the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of
the common stock. As of January 31, 2002 there was a total of 4,146,178
options outstanding.
Because of the antidilutive effect of net loss, all of the outstanding
stock options were excluded from the calculation of diluted earnings per
share for the three and nine months ended January 31, 2001. Options to
purchase 3,628,563 and 1,426,689 shares of common stock for the three and
nine months ended January 31, 2001 would have been taken into account were
it not for the antidilutive effect of the net loss. As of January 31, 2001
there was a total of 3,804,297 options outstanding.
8
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2002
H. Industry Segments
We operate and manage our business in three segments based on software
and services provided in three key product markets. First, the
Enterprise Resource Planning (ERP) segment automates customers'
internal financing, human resources, and manufacturing functions for
the entire enterprise. Second, the Business-to-Business Collaborative
Commerce (BBCC) segment (Logility, Inc.) provides advanced
business-to-business collaborative planning and integrated logistics
capabilities. Third, the remaining segment (Other) is comprised of our
subsidiaries that do not operate within the two segments as defined
and, individually, represented approximately 10% of our revenues during
the first three fiscal quarters of both fiscal years 2002 and 2001. We
base intersegment charges on marketing and general administration
services that the ERP segment provides to the BBCC segment. The
following table shows the breakdown of certain income statement items
among our three segments during the three-month and nine-month periods
ended January 31, 2002 and January 31, 2001.
9
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2002
Three Months Ended Nine Months Ended
January 31, January 31,
2002 2001 2002 2001
---------------------------- ---------------------------
Revenues:
Enterprise resource planning 4,889 6,641 16,735 20,495
Business-to-business collaborative commerce 7,236 6,485 22,256 20,018
Elimination of intersegment revenues 0 0 0 0
Other 2,868 4,064 9,349 11,933
----------- ----------- ----------- ----------
14,993 17,190 48,340 52,447
Operating income (loss) before intersegment eliminations:
Enterprise resource planning 392 422 2,143 (12,933)
Business-to-business collaborative commerce 412 (3,104) 792 (7,039)
Other 300 (300) 927 (87)
----------- ----------- ----------- ----------
1,104 (2,982) 3,862 (20,059)
Intersegment eliminations:
Enterprise resource planning (679) (667) (1,854) (2,161)
Business-to-business collaborative commerce 679 667 1,854 2,161
Other 0 0 0 0
----------- ----------- ----------- ----------
0 0 0 0
Operating income (loss) after intersegment eliminations:
Enterprise resource planning (287) (245) 289 (15,094)
Business-to-business collaborative commerce 1,091 (2,437) 2,646 (4,878)
Other 300 (300) 927 (87)
----------- ----------- ----------- ----------
1,104 (2,982) 3,862 (20,059)
Capital expenditures:
Enterprise resource planning (21) 240 78 1,015
Business-to-business collaborative commerce 41 20 83 241
Other 1 8 2 11
----------- ----------- ----------- ----------
21 268 163 1,267
Capitalized Software:
Enterprise resource planning 0 0 0 534
Business-to-business collaborative commerce 584 506 2,219 2,004
Other 60 113 243 337
----------- ----------- ----------- ----------
644 619 2,462 2,875
Depreciation and amortization:
Enterprise resource planning 1,094 1,135 3,684 6,138
Business-to-business collaborative commerce 1,061 847 3,333 2,603
Other 119 137 251 287
----------- ----------- ----------- ----------
2,274 2,119 7,268 9,028
January 31, April 30,
Identifiable assets: 2002 2001
----------- ----------
Enterprise resource planning 32,654 37,738
Business-to-business collaborative commerce 39,627 40,346
Other 6,466 3,983
----------- ----------
78,747 82,067
10
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2002
I. Certain Relationships and Related Transactions
Relationship and Certain Transactions with Logility, Inc.
In 1997, we completed an initial public offering of 2,200,000 shares of
common stock in our subsidiary, Logility, Inc. ("Logility"). Prior to that time,
Logility was a wholly-owned subsidiary, operating as the supply chain planning
software group, warehouse management software group and transportation
management group. In anticipation of such offering, American Software and
Logility entered into a number of agreements for the purpose of defining certain
relationships between the parties (the "Intercompany Agreements"). The more
significant of the Intercompany Agreements are summarized below. As a result of
our ownership interest in Logility, the terms of such agreements were not the
result of arms-length negotiation.
Services Agreement
In 1997, American Software and Logility entered into a Services Agreement
(the "Services Agreement") with respect to certain services we (or our
subsidiaries) provide to Logility. Under the Services Agreement we provide
services in exchange for fees, which management believes would not exceed fees
that would be paid if independent third parties provided such services. The
services we provide to Logility under the Services Agreement include, among
other things, certain accounting, audit, cash management, corporate development,
employee benefit plan administration, human resources and compensation, general
and administration services, and risk management and tax services. In addition
to these services, we have agreed to allow eligible employees of Logility to
participate in certain employee benefit plans. Logility has agreed to reimburse
us for costs (including any contributions and premium costs and including
third-party expenses and allocations of certain personnel expenses), generally
in accordance with past practice, relating to the participation by Logility's
employees in any of our benefit plans.
The Services Agreement had an initial term of three years and is renewed
automatically thereafter for successive one-year terms unless either American
Software or Logility elects not to renew its term. Logility will indemnify us
against any damages that we may incur in connection with our performance of
services under the Services Agreement (other than those arising from our gross
negligence or willful misconduct), and we will indemnify Logility against any
damages arising out of our gross negligence or willful misconduct in connection
with our rendering of services under the Services Agreement. For the nine months
ended January 31, 2002 the services related to this agreement were valued at
$1.4 and for the nine months ended January 31, 2001 they were $1.2 million.
Facilities Agreement
In 1997, American Software and Logility entered into a Facilities Agreement
(the "Facilities Agreement"), which provides that Logility may occupy space
located in certain facilities we own or lease. The Facilities Agreement had an
initial term of two years and is renewed automatically for successive one-year
terms unless either American Software or Logility elects not to renew its term.
Logility may terminate the Facilities Agreement for any reason with respect to
any particular facility upon thirty days' written notice. Logility's lease of
space at any facility under the Facilities Agreement is limited by the term of
the underlying lease between American Software and a landlord with respect to
any facility leased by American Software and by the disposition by American
Software of any facility owned by American Software. For the nine months ended
January 31, 2002 the services related to this agreement were valued at $463,000
and for the nine months ended January 31, 2001 they were $620,000. Included in
these costs are lease expense, utilities expense, telephone expense, and
security expense.
11
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2002
Tax Sharing Agreement
Logility is included in our federal consolidated income tax group, and
Logility's federal income tax liability will be included in the consolidated
federal income tax liability of American Software and its subsidiaries. In 1997,
Logility and American Software entered into a Tax Sharing Agreement (the "Tax
Sharing Agreement") pursuant to which American Software and Logility will make
payments between them such that the amount of taxes to be paid by Logility,
subject to certain adjustments, will be determined as though Logility were to
file separate federal, state, and local income tax returns, rather than as a
consolidated subsidiary of American Software. Pursuant to the Tax Sharing
Agreement, under certain circumstances, Logility will be reimbursed for tax
attributes that it generates after deconsolidation of Logility from the
consolidated tax group of American Software, such as net operating losses and
loss carryforwards. Such reimbursement, if any, will be made for utilization of
Logility's losses only after such losses are utilized by American Software. For
that purpose, all losses of American Software and its consolidated income tax
group will be deemed utilized in the order in which they are recognized.
Logility will pay American Software a fee intended to reimburse American
Software for all direct and indirect costs incurred with respect to our share of
the overall costs we incur with respect to tax related services.
Technology License Agreement
In 1997, American Software and Logility entered into a Technology License
Agreement (the "Technology License Agreement") pursuant to which Logility has
granted us a non-exclusive, worldwide license to use, execute, reproduce,
display, modify, and prepare derivatives of the Logility Voyager Solutions
product line, provided such license is limited to maintaining and supporting
users that have licensed Logility Voyager Solutions products from us. Pursuant
to the Technology License Agreement, American Software and Logility are required
to disclose to one another any and all enhancements and improvements which they
may make or acquire in relation to a Logility Voyager Solutions product, subject
to confidentiality requirements imposed by third parties. The term of the
Technology License Agreement is indefinite, although Logility may terminate the
Technology License Agreement for cause, and we may terminate the Technology
License Agreement at any time upon sixty (60) days' prior written notice to
Logility. Upon termination of the Technology License Agreement, all rights to
Logility Voyager Solutions products licensed by Logility to American Software
revert to Logility, while all rights to enhancements and improvements made by
American Software to Logility Value Chain Solutions products revert to us.
Marketing License Agreement
American Software USA, Inc. ("USA"), a wholly-owned subsidiary of American
Software, and Logility, in 1997, entered into a Marketing License Agreement (the
"Marketing License Agreement") pursuant to which USA has agreed to act as a
non-exclusive marketing representative of Logility for the solicitation of
license agreements relating to the Logility Voyager Solutions product line. The
Marketing License Agreement provides for the payment to USA of a commission
equal to 30% (or 50% for affiliates of USA located in the United Kingdom and
France if they carry out installation and provide first-line support services)
of the net license revenue collected by Logility under license agreements for
the Logility Voyager Solutions product line with certain end-users who are also
licensees of software products of American Software which are secured and
forwarded to Logility by USA and accepted by Logility. The Marketing License
Agreement has a five-year term, although Logility may terminate the Marketing
License Agreement for cause, and either party may terminate the Marketing
License Agreement at any time upon twelve (12) months' prior written notice to
the other party. For the nine months ended January 31, 2002, the services
12
related to this agreement were valued at $109,000. For the nine months ended
January 31, 2001, the services related to this agreement were valued at
$357,000.
Leases
We lease a two-story, 17,500 square foot building at 443 East Paces Ferry
Road, N.E., Atlanta, Georgia, which is used primarily for financial
administration and technical staffing. This building is owned by a limited
partnership of which Thomas L. Newberry and James C. Edenfield, principal
shareholders of American Software, are the sole partners. The term of the lease
expired December 31, 1996, and has been continued on a quarterly basis with a
current base annual rental rate of $17.00 per square foot, or $300,000 per year,
pending negotiation of a new lease.
13
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, which are subject
to substantial risks and uncertainties. There are a number of factors that could
cause actual results to differ materially from those anticipated by statements
made herein. The timing of releases of our software products can be affected by
customer needs, marketplace demands and technological advances. Development
plans frequently change, and it is difficult to predict with accuracy the
release dates for products in development. In addition, other factors, including
changes in general economic conditions, technology and the market for our
products and services, including economic conditions within the e-commerce
markets, the timely availability and market acceptance of these products and
services, the effect of competitive products and pricing, and the irregular
pattern of our revenues, as well as a number of other risk factors, could affect
our future performance.
OVERVIEW
American Software, Inc. ("American Software"), through its subsidiaries,
develops, markets and supports a portfolio of software and services that deliver
e-business (business over the Internet) and enterprise management solutions to
the global marketplace. We design our software and services to bring business
value to traditional businesses and e-businesses by supporting their operations
over intranets, extranets, client/servers and the Internet. We launched our
comprehensive suite of e-business solutions in December 1999, positioning
ourselves as a single source e-business solution provider.
We focus our e-business solutions in four major product and services groups: (i)
e-intelliprise, a fully web-based Enterprise Resource Planning (ERP) solution
which includes both traditional and Flow Manufacturing capabilities; (ii)
e-applications, which are e-business solutions that focus on web-enabling a
specific task for e-businesses; (iii) e-collaboration, provided by Logility
Voyager Solutions(TM), which is an Internet-based suite of business-to-business
collaborative commerce solutions, offered by Logility, Inc. ("Logility"), a
subsidiary of American Software; and (iv) e-services, which are comprehensive
services to support traditional and e-business solutions. We design our products
to support our customers' transition into e-business and make existing
e-businesses more effective. We also provide support for our software products,
such as software enhancements, documentation, updates, customer education,
consulting, systems integration services and maintenance.
14
The following table sets forth-certain revenue and expense items as a percentage
of total revenues and the percentage increases in those items for the three
months and the nine months ended January 31, 2002 and 2001:
Percentage of Percentage of
Total Revenues % Total Revenues %
-------------------------- ------------------------
Three months ended Change Nine months ended Change
-------------------------- ----------- ------------------------ ------------
2002 2001 02 v. 01 2002 2001 02 v. 01
----------- ----------- ----------- ---------- --------- ------------
Revenues:
License fees 15% 20% (33%) 17% 17% (7%)
Services 50 47 (7) 49 49 (8)
Maintenance 35 33 (10) 34 34 (9)
----------- ----------- ----------- ---------- --------- ------------
Total revenues 100 100 (13) 100 100 (8)
----------- ----------- ----------- ---------- --------- ------------
Cost of revenues:
License fees 7 10 (33) 7 9 (25)
Services 28 31 (22) 28 33 (22)
Maintenance 7 6 13 6 8 (36)
----------- ----------- ----------- ---------- --------- ------------
Total cost of revenues 43 46 (20) 41 50 (25)
----------- ----------- ----------- ---------- --------- ------------
Gross margin 57 54 (7) 59 50 9
----------- ----------- ----------- ---------- --------- ------------
Operating expenses:
Research and development 16 20 (33) 17 23 (32)
Less: Capitalized development (4) (4) (4) (5) (5) 14
Sales and marketing 19 26 (37) 20 30 (38)
General and administrative 17 23 (24) 18 20 (9)
Provision for doubtful accounts 1 5 (85) 1 2 (65)
Charge for asset impairment and
restructuring -- 1 nm -- 18 nm
----------- ----------- ----------- ---------- --------- ------------
Total operating expenses 50 71 (38) 51 88 (47)
----------- ----------- ----------- ---------- --------- ------------
Operating income (loss) 7 (17) nm 8 (38) nm
Other income, net 2 4 (50) 3 3 5
Loss on investments -- (6) nm -- (2) nm
Minority interest (1) 3 nm 1 2 nm
----------- ----------- ----------- ---------- --------- ------------
Income (loss) from continuting operations
before income taxes 9 (16) nm 11 (35) nm
Income taxes -- 14 nm nm 5 nm
----------- ----------- ----------- ---------- --------- ------------
Income (loss) from continuing operations 9 (2) nm 11 (31) nm
----------- ----------- ----------- ---------- --------- ------------
Discontinued Operations:
Loss from operations of
discontinued subsidiary (2) (17) 91 (4) (13) 73
----------- ----------- ----------- ---------- --------- ------------
Net income (loss) 8 (19) nm 7 (31) nm
=========== =========== =========== ========== ========= ============
nm - not meaningful
15
THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
--------------------------------------------
REVENUES
For the quarter ended January 31, 2002 revenues totaled $15.0 million, down 13%
from $17.2 million in the corresponding quarter of fiscal 2001. This decrease
was primarily due to a decrease in license fee revenues. International revenues
represented approximately 11% of total revenues in the quarter ended January 31,
2002, down from 20% the same quarter ended January 31, 2001. The decrease in
international revenues is largely due to the increase in domestic revenues,
decreasing the international proportion of the overall revenue mix.
LICENSES
Software license fee revenues decreased 33% to $2.2 million in the quarter ended
January 31, 2002 from $3.4 million in the corresponding quarter a year ago. We
believe the decrease in license fees is due to a further slow down in general
economic activities resulting in a decrease in new license sales. License fee
revenues from Logility decreased 43% to $1.7 million and constituted 75% of the
total license fee revenues for the three month period ended January 31, 2002,
compared to the same prior year period when they were $2.6 million and comprised
76% of license fee revenues.
SERVICES
Services revenues, which consist primarily of consulting, implementation,
training and managed services, were $7.5 million or 7% lower than $8.1 million
in revenues during the corresponding quarter a year ago. This decrease was
primarily a result of a reduction in new consulting and implementation projects
due to lower prior period ERP and BBCC sales. The decrease is also due to the
fact that the prior year services revenues included revenues of a minority owned
subsidiary that is no longer in operation. The lower license fees in prior
periods will continue to have an effect on services revenues in the near term.
Services revenues for Logility constituted 22% of total services revenues for
the quarter ended January 31, 2002 and constituted 37% of total services
revenues for the quarter ended January 31, 2001. Services revenues constituted
50% of total revenues for the period ending January 31, 2002. For the period
ended January 31, 2001, services revenues constituted 47% of total revenues.
MAINTENANCE
Maintenance revenues decreased 10% in the third quarter of fiscal year 2002 to
$5.2 million from $5.8 million for the same prior year period. The decrease for
the quarter is due to the slowdown in new license fees in the prior periods and
the ending of certain customer maintenance contracts, particularly in the ERP
area. Maintenance revenues have a direct relationship to current and historic
license fee revenues, since licenses are the source of potential new maintenance
customers. The lower license fees in prior quarters will continue to have an
effect on future maintenance revenues in the near term, which we are addressing
in part by implementing certain cost-control steps.
GROSS MARGIN
The total gross margin in the quarter ended January 31, 2002 was 57% compared to
54% a year ago. This increase is largely due to an increase in the services
gross margin to 44% this quarter compared to 34% in the same quarter a year ago.
This was attributable to cost control efforts that were begun in the prior
fiscal year. Maintenance gross margin decreased to 79% compared to 83% during
the same period one year ago. This decrease was primarily due to the
reallocation of resources to maintenance from research and development. The
license fees gross margin remained at 51% this quarter, the same as the prior
fiscal year quarter.
16
RESEARCH AND DEVELOPMENT
Gross product development costs include all non-capitalized and capitalized
software development costs. A breakdown of the research and development costs is
as follows:
Three Months Ended
-----------------------------------------
Jan. 31, Percent Jan. 31,
2002 Change 2001
---------- ----------- -----------
Gross product development costs $ 2,372 (33%) $ 3,516
Percentage of total revenues 16% 21%
Less: capitalized development (644) 4% (619)
Percentage of gross prods. dev. costs 27% 18%
---------- ----------- -----------
Product development expenses $ 1,728 (40%) $ 2,897
Percentage of total revenues 12% 17%
Gross product development costs decreased 33% in the quarter ended January 31,
2002, compared to the prior year. This is a result of cost containment and
restructuring efforts in response to lower license fees as well as the
reallocation of some R&D resources to services and support. Capitalized
development increased by 4% for the quarter ended January 31, 2002 compared to
the prior year, and the rate of capitalized development increased to 27% from
18% for the quarter ended January 31, 2002 compared to the prior year. These
changes are due to the reduction in product development expenses, as well as
completion of capitalizable projects. Product development expenses, as a
percentage of total revenues, decreased to 12% in this quarter compared to 17%
in the prior year. This was due to the cost containment and restructuring
efforts referred above.
SALES AND MARKETING
Sales and marketing expenses decreased 37% to $2.8 million for the quarter ended
January 31, 2002 compared to $4.5 million for the same period a year ago. This
decrease is due primarily to the restructuring we implemented in the prior
fiscal year. As a percentage of total revenues, sales and marketing expenses
were 19% for the quarter ended January 31, 2002 and 26% for the quarter ended
January 31, 2001. We anticipate that sales and marketing expenses will increase
as we pursue increased market share in the BBCC area.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 24% to $2.8 million for the
quarter ended January 31, 2002 compared to $3.8 million for the same period last
year. This decrease is due to a reduction in headcount and the related
administrative costs. As a percentage of total revenues, general and
administrative expenses were 17% for the quarter ended January 31, 2002 compared
to 23% for the quarter ended January 31, 2001.
PROVISION FOR DOUBTFUL ACCOUNTS
For the quarter ended January 31, 2002 we incurred a charge of $124,000. This
charge represented a significant decrease compared to the $846,000 charge taken
in the period ended January 31, 2001, which was related to difficult collections
from internet related customers.
CHARGE FOR ASSET IMPAIRMENT AND RESTRUCTURING
For the quarter ended January 31, 2002, we did not incur a charge against
earnings as compared to a charge against earnings of $242,000, as a result of
restructuring activities in the quarter ended January 31, 2001.
17
OTHER INCOME/MINORITY INTEREST
Other income is comprised predominantly of interest income, gains and losses
from sales of investments and changes in the market value of investments and
minority interest in subsidiary's earnings (loss). Other income decreased to
$358,000 in the quarter ended January 31, 2002 compared to $861,000 for the same
period a year ago. Minority interest is based on our subsidiary's earnings
(loss). Minority interest loss was $88,000 in the quarter ended January 31, 2002
compared to a minority interest benefit of $487,000 for the same period a year
ago. This change is primarily related to the purchase of the remaining shares of
New Generation Computing in August 2001 and Logility's earnings in the current
period, compared to Logility's losses in the prior year period.
LOSS ON IMPAIRMENT OF INVESTMENTS
For the quarter ended January 31, 2002, we did not incurred a charge against
earnings for impairment of investments, compared to a charge in the same quarter
last year of $1.1 million for losses in our cost-method investments in
internet-related companies, and a majority-owned subsidiary exiting the internet
consulting business.
INCOME TAXES
For the quarter ended January 31, 2002, we did not record any income taxes as a
result of our cumulative net operating losses incurred in prior periods. In the
prior three month period we recorded an income tax benefit of $2.4 million as a
result of an income tax refund in the amount of $705,000 and a reduction in
income tax liability in the amount of $1.7 million based on current estimates of
future tax liabilities.
DISCONTINUED OPERATIONS
For the quarter ended January 31, 2002 we incurred a loss from our subsidiary,
AmQUEST in the amount of $249,000, compared to a loss of $2.9 million for the
quarter ended January 31, 2001. This reduced loss in the most recent quarter was
due to cost containment efforts that were begun in the prior year.
NINE MONTHS ENDED JANUARY 31, 2001 AND 2000
-------------------------------------------
REVENUES
Revenues for the nine months ended January 31, 2002 totaled $48.3 million, down
8% from $52.4 million in the prior year period. International revenues
represented approximately 11% of total revenues for the nine months ended
January 31, 2002 compared to approximately 14% for the same period a year ago.
The decrease in international revenues is largely due to the increase in
domestic revenues, decreasing the international proportion of the overall
revenue mix.
LICENSES
For the nine months ended January 31, 2002, license fee revenues decreased 7%
from a year ago. We continued to experience lower license fee sales due to the
general slowing in the economic conditions. License fee revenues from Logility
decreased 31% to $6.0 million and constituted 72% of the total license fee
revenues for the nine month period, compared to the same prior year period when
they were $9.0 million and constituted 97% of the total license fee revenues.
18
SERVICES
Services revenues were $23.6 million or 8% lower than the corresponding
nine-month period. This decrease was primarily a result of a reduction in new
consulting and implementation projects due to lower prior period ERP sales.
Services revenues for Logility constituted 20% of total services revenues for
the nine months ended January 31, 2002 and constituted 36% of total services
revenues for the nine months ended January 31, 2001. Services revenues
constituted 49% of total revenues for the nine-month period ended January 31,
2002 and January 31, 2001.
MAINTENANCE
For the nine months ended January 31, 2002, maintenance revenues decreased 9%,
to $16.5 million compared to $18.1 million in the prior year period. The
decrease for the year-to-date is due to the slowdown in ERP license fees in the
prior periods as well as lower renewals from ERP customers. Maintenance revenues
have a direct relationship to current and historic license fee revenues, since
licenses are the source of potential new maintenance customers.
GROSS MARGIN:
For the nine months ended January 31, 2002, the gross margin was 59% compared to
50% for the same period a year ago. This increase was largely due to an increase
in the license fees gross margin to 58% compared to 49% in the prior nine month
period which was due to the decrease in cost of license fees resulting from a
substantial decrease in third party agent commissions in the current period
compared to the nine months ended January 31, 2001, partially offset by the
decrease in total license fees in the most recent nine month period. The gross
margin on services revenues increased to 43% compared to 32% in the same period
a year ago. This is due to the cost control efforts that were begun in the prior
fiscal year. Maintenance gross margin increased to 83% compared to 76% during
the same period one year ago. This increase was primarily due to the increased
maintenance revenues of Logility and the cost control efforts that were begun in
the prior fiscal year.
RESEARCH AND DEVELOPMENT
Gross product development costs include all non-capitalized and capitalized
software development costs. A breakdown of the research and development costs is
as follows:
Nine Months Ended
------------------------------------------
Jan. 31, Percent Jan. 31,
2002 Change 2001
----------- ----------- -----------
Gross product development costs $ 8,037 (32%) $ 11,881
Percentage of total revenues 17% 23%
Less: capitalized development (2,462) (14%) (2,875)
Percentage of gross prods. dev. Costs 31% 24%
----------- ----------- -----------
Product development expenses $ 5,575 (38%) $ 9,006
Percentage of total revenues 12% 17%
Gross product development costs decreased 32% for the nine months ended January
31, 2002 primarily as a result of cost reduction efforts in response to the
lower license fees and the reallocation of some R&D resources to services and
support. Capitalized development decreased 14% for the nine months ended January
31, 2002, while the rate of capitalized development increased to 31% from 24%
for the same period. The decrease in capitalized development was due the
completion of several capitalized projects during the last three quarters. The
increase in rate of capitalized development resulted from substantially lower
gross product development expenses. Product development expenses, as a
19
percentage of total revenues, decreased to 12% from 17% for the nine months
ended January 31, 2002 primarily as a result of the decrease in total revenues
and the reduction in capitalized development costs as noted above.
SALES AND MARKETING
Sales and marketing expenses decreased 38% to $9.9 million for the nine months
ended January 31, 2002. As a percentage of total revenues, sales and marketing
expenses were 20% for the nine months ended January 31, 2002 when compared to
30% for the comparable period last year. This decrease is due to the cost
containment efforts that occurred in the prior fiscal year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $8.8 million for nine months
ended January 31, 2002 compared to $9.7 million for the same prior year period.
This decrease is due to the reduction in headcount and the related costs. The
total number of employees at January 31, 2002 was 394, compared to 513 at
January 31, 2001.
PROVISION FOR DOUBTFUL ACCOUNTS
For the nine months ended January 31, 2002 we incurred a charge of $427,000
compared to a $1.2 million charge in the same period last year which was the
result of difficult customer collections of Internet related businesses.
OTHER INCOME/MINORITY INTEREST
Other income is comprised predominantly of interest income, gains and losses
from sales of investments and changes in the market value of investments. Other
income was $1.6 million for the nine months ended January 31, 2002,
substantially unchanged from the same period a year ago. This income is related
to the sale of real property, which resulted in a net gain of $682,000, and to
the interest earned on investments. Minority interest is based on our
subsidiaries earnings (loss). Minority interest resulted in a charge of $273,000
for the nine months ended January 31, 2002 compared to a benefit of $1.0 million
for the same period a year ago. This charge is primarily related to the purchase
of the remaining shares of New Generation Computing in August 2001 and to
Logility's earnings in the current period, compared to Logility's losses in the
prior year period.
LOSS ON IMPAIRMENT OF INVESTMENTS
For the nine months ended January 31, 2002, we did not incur a charge against
earnings compared to a charge in the same period last year of $1.1 million for
losses in our cost-method investments in internet-related companies, and a
majority-owned subsidiary exiting the internet consulting business.
INCOME TAXES
For the nine months ended January 31, 2002, we did not record any income taxes
as a result of our cumulative net operating losses in prior periods. In the
prior year nine-month period, we recorded an income tax benefit of $2.4 million
as a result of an income tax refund in the amount of $705,000 and a reduction in
income tax liability in the amount of $1.7 million based on current estimates of
future tax liabilities.
20
DISCONTINUED OPERATIONS
For the nine months ended January 31, 2002 we incurred a loss from our
subsidiary, AmQUEST in the amount of $1.9 million, compared to a loss of $6.7
million for the nine months ended January 31, 2001. This reduced loss in the
current nine month period was due to cost containment efforts that were begun in
the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
The following table shows information about our cash flows during the nine
months ended January 31, 2002 and January 31, 2001. You should read this table
and the discussion that follows in conjunction with our condensed consolidated
statements of cash flows contained in "Item 1. Financial Statements" in Part I
of this report and in our Annual Report on Form 10-K for the fiscal year ended
April 30, 2001.
Nine Months Ended
January 31,
----------------------------
2002 2001
------------- -------------
Net cash provided by continuing operations before
changes in operating assets and liabilities $ 13,158 $ 2,145
Increase in operating assets and liabilities (1,518) 2,066
------------- -------------
Net cash provided by (used in) continuing operations 11,640 4,211
------------- -------------
Net cash used in discontinued operations (1,851) (6,749)
------------- -------------
Net cash provided by (used in) operating activities 9,789 (2,538)
Net cash provided by investing activities 2,512 120
Net cash used in financing activities (1,218) (1,304)
------------- -------------
Net increase (decrease) in cash and cash equivalents $ 11,083 $ (3,722)
============= =============
We fund our operations and capital expenditures primarily with cash generated
from operating activities. The changes in net cash used for operating activities
generally reflect the changes in net income and non-cash operating items plus
the effect of changes in operating assets and liabilities, especially trading
securities, trade accounts receivable, trade accounts payable, accrued expenses
and deferred revenue.
Our continuing operations provided cash of approximately $11.7 million in the
nine months ended January 31, 2002, and $4.2 million in the nine months ended
January 31, 2001. Operating cash flows increased for the nine month period
primarily because of the $5.2 million in earnings from continuing operations
compared to a $22.8 million loss last year, the non-cash depreciation and
amortization of $7.3 million, a decrease of $2.6 million in accounts receivable
and a $2.7 million gain on the sale and maturities of investments also
contributed to the increase in cash from operations. This was partially offset
by a smaller decrease in accounts payable and other accrued liabilities of $3.0
million and a decrease of $2.7 million in deferred revenue and reduced proceeds
from trading securities.
Cash provided by investing activities was approximately $2.5 million for the
nine months ended January 31, 2002 and cash provided by investing activities was
approximately $120,000 in the same period of the prior year. Investing cash
flows increased for the period primarily because of the sale of short-term
investments of $4.9 million and the sale of real property of $1.0 million. This
was offset by the use of cash for capitalized software development cost of $2.5
million, the purchase of the balance of New Generation Computing shares for
$557,000 and the purchases of $163,000 in property and equipment, and $130,000
in software.
21
Cash used in financing activities was approximately $1.2 million and $1.3
million for the nine months ended January 31, 2002 and 2001, respectively. Cash
was primarily used for the payments of capital lease obligation of $1.2 million
for the nine months ended January 31, 2002.
Days Sales Outstanding in Accounts Receivable remained the same at 63 days for
January 31, 2002 and January 31, 2001.
Our current ratio was 2.3 to 1 and cash and investments totaled 45% of total
assets at January 31, 2002 compared to 1.6 to 1 and cash and investments
representing 38% of total assets at January 31, 2001. Our principal sources of
liquidity are our cash and investments, which totaled approximately $35.3
million at January 31, 2002. We believe that our sources of liquidity and
capital resources will be sufficient to satisfy our presently anticipated
requirements during at least the next twelve months for working capital, capital
expenditures and other corporate needs. However, due to the uncertainty in the
current economic environment it is conceivable that we may need to seek
additional sources of capital to meet our requirements. If such need arises, we
will be required to raise additional funds through equity or debt financing. We
have not sought to obtain a bank line of credit. No assurance can be given that
bank lines of credit or other financing will be available on terms acceptable to
us. If available, such financing may result in dilution to our shareholders and
higher interest expense.
On December 18, 1997, our Board of Directors approved a resolution authorizing
the Company to repurchase up to 1.5 million shares of the Company's Class A
common stock. On March 11, 1999, our Board of Directors approved a resolution
authorizing us to repurchase an additional 700,000 shares for a total of up to
2.2 million shares of our Class A common stock. These repurchases have been and
will be made through open market purchases at prevailing market prices. The
timing of any repurchases will depend upon market conditions, the market price
of our common stock and management's assessment of our liquidity and cash flow
needs. Since the adoption of these resolutions, we have repurchased
approximately 1.6 million shares of common stock at a cost of approximately $5.6
million as of March 1, 2002.
On December 15, 1997, Logility's Board of Directors approved a resolution
authorizing the repurchase of up to 350,000 shares of its common stock through
open market purchases at prevailing market prices. Logility completed this
repurchase plan in November 1998. In November 1998, Logility adopted an
additional repurchase plan for up to 800,000 shares. The timing of the
repurchases would depend on market conditions, the market price of Logility's
common stock and management's assessment of its liquidity and cash flow needs.
For both plans, through March 1, 2002 Logility has purchased a cumulative total
of 648,107 shares at a total cost of approximately $4.5 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement was amended in June 2000 by Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." Statement No. 138 was
effective for us on May 1, 2001. The new Statement requires all derivatives to
be recorded on the balance sheet at fair value and establishes accounting
treatment for three types of hedges: (1) hedges of changes in the fair value of
assets, liabilities, or firm commitments; (2) hedges of the variable cash flows
of forecasted transactions; and (3) hedges of foreign currency exposures of net
investments in foreign operations. We currently do not invest in derivative
instruments or participate in hedging activities and, therefore, there was no
material impact on our results of operations or financial condition.In December
1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") and
amended it in March and June 2000. In October 2000, the SEC issued further
guidance with respect to adoption of specific issues addressed by SAB 101. We
adopted SAB 101, as amended, during our fourth quarter of fiscal year 2001. The
adoption has had no material impact on our licensing practices, financial
condition or results of operations.
22
In July 2001, the FASB issued Statement No. 141, "Business Combinations," which
addressed financial accounting and reporting for business combinations.
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. We have adopted the
provisions of Statement 141. The adoption has had no material impact on our
licensing practices, financial condition or results of operations.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets," which addressed financial accounting and reporting for acquired
goodwill and other intangible assets. Upon adoption of Statement No. 142, we
will be required to discontinue the amortization of our goodwill and other
intangible assets with indefinate lives. Additionally, we will be required to
test our goodwill and other intangible assets for impairment during the first
year of adoption and then at least annually, or when it is deemed appropriate,
thereafter. If our goodwill or intangible assets are found to be impaired during
the transitional period, the resulting write-down will be reported as a change
in accounting principle. Any impairment loss recorded after the transitional
period will be recorded in earnings (loss) from operations. Because goodwill and
certain intangible assets will not be amortized over a specific period but
rather will be reviewed for impairment annually, there could be more volatility
in reported earnings (loss) than under previous accounting standards due to
impairment losses occurring irregularly and in varying amounts. Although we do
not currently expect that the adoption of Statement 142 will have a material
adverse impact on our financial condition or results of operations, we are
assessing the possible effects of this Statement. We are required to adopt
Statement 142 in the first quarter of our 2003 fiscal year.
In August 2001, the FASB issued Statement No. 143 (SFAS No. 143), "Accounting
for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No. 143
applies to all entities. SFAS No. 143 applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of leases. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002 and
thus will apply to our fiscal year ending April 30, 2003. Management does not
expect the adoption of SFAS No. 143 to have a material effect on our financial
condition or results of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (Statement 144), which supersedes
both FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" (Statement 121) and the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(Opinion 30), for the disposal of a segment of a business (as previously defined
in that Opinion). Statement 144 retains the fundamental provisions in Statement
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with Statement 121. For example,
Statement 144 provides guidance on how a long-lived asset that is used as part
of a group should be evaluated for impairment, establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. Statement 144
retains the basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike Statement
121, an impairment assessment under Statement 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under
Statement No. 142, Goodwill and Other Intangible Assets.
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We are required to adopt Statement 144 no later than May 1, 2002. We do not
expect the adoption of Statement 144 for long-lived assets held for use to have
a material impact on our financial statements because the impairment assessment
under Statement 144 is largely unchanged from Statement 121. The provisions of
the Statement for assets held for sale or other disposal generally are required
to be applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, we cannot determine the potential effects that adoption
of Statement 144 will have on our financial statements.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
In the quarter ended January 31, 2002, we generated 11% of our revenues outside
the United States. International sales usually are made by our foreign
subsidiaries and are denominated typically in U.S. Dollars or British Pounds
Sterling. However, the expense incurred by foreign subsidiaries is denominated
in the local currencies. The effect of foreign exchange rate fluctuations on us
during the quarter ended January 31, 2002 was not material. We have not engaged
in any hedging activities.
Interest rates
We manage our interest rate risk by maintaining an investment portfolio of
available-for-sale instruments with high credit quality and relatively short
average maturities. These instruments include, but are not limited to,
money-market instruments, bank time deposits, and taxable and tax-advantaged
variable rate and fixed rate obligations of corporations, municipalities, and
national, state, and local government agencies, in accordance with an investment
policy approved by our Board of Directors. These instruments are denominated in
U.S. Dollars. The fair market value of securities at January 31, 2002 was
approximately $14.2 million. Interest income on our investments is carried in
"Other income/(expense)."
We also hold cash balances in accounts with commercial banks in the United
States and foreign countries. These cash balances represent operating balances
only and are invested in short-term time deposits of the local bank. Such
operating cash balances held at banks outside the United States are denominated
in the local currency.
Many of our investments carry a degree of interest rate risk. When interest
rates fall, our income from investments in variable-rate securities declines.
When interest rates rise, the fair market value of our investments in fixed-rate
securities declines. In addition, our investments in equity securities are
subject to stock market volatility. Due in part to these factors, our future
investment income may fall short of expectations or we may suffer losses in
principal if forced to sell securities, which have seen a decline in market
value due to changes in interest rates. We attempt to mitigate risk by holding
fixed-rate securities to maturity, but, if our liquidity needs force us to sell
fixed-rate securities prior to maturity, we may experience a loss of principal.
We believe that a 10% fluctuation in interest rates would not have a material
effect on our accompanying statements of operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
We are not party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
Not applicable.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits. None.
---------
(b) No report on Form 8-K was filed during the quarter ended January
31, 2002.
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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.
AMERICAN SOFTWARE, INC.
DATE March 14, 2002 /s/ James C. Edenfield
----------------------- ----------------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE March 14, 2002 /s/ Vincent C. Klinges
----------------------- ----------------------------------
Vincent C. Klinges
Chief Financial Officer
DATE March 14, 2002 /s/ Deirdre J. Lavender
----------------------- ----------------------------------
Deirdre J. Lavender
Controller and Accounting Officer
27