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 October 31, 1998
-----------------------------
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.
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(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
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(Registrant's telephone number, including area code)
None
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(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 December 4 , 1998
- ---------------------------------- --------------------------------
Class A Common Stock, $.10 par value 17,332,828 Shares
Class B Common Stock, $.10 par value 4,798,289 Shares
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Form 10-Q
Quarter ended October 31,1998
Index
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Page
No.
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PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- Unaudited - October 31, 1998 and April 30, 1998 3-4
Condensed Consolidated Statements of Operations
- Unaudited - Three Months and Six Months ended October 31, 1998 5
and October 31, 1997
Condensed Consolidated Statements of Cash Flows
- Unaudited - Six Months ended October 31, 1998 and October 31, 1997 6
Notes to Condensed Consolidated Financial Statements - Unaudited 8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 10-17
Part II - Other Information 17
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
October 31, 1998 April 30, 1998
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,001 $ 2,161
Investments 43,866 58,062
Trade accounts receivable, less allowance for doubtful accounts
of $2,013 at October 31, 1998 and $1,222 at April 30, 1998
Billed 18,238 20,309
Unbilled 4,177 7,091
Deferred income taxes 1,881 823
Refundable income taxes 1,117 1,117
Prepaid expenses and other current assets 2,339 2,577
------------- -------------
Total current assets 74,619 92,140
------------- -------------
Property and equipment, net 17,284 17,189
------------- -------------
Capitalized computer software development costs, net 7,037 30,338
Purchased computer software costs, net 703 888
------------- -------------
Total computer software costs 7,740 31,226
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Other assets, net 4,025 2,101
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$ 103,668 $ 142,656
============= =============
See accompanying notes to condensed consolidated financial statements.
3
(continued)
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued
(in thousands except share data)
(Unaudited)
October 31, 1998 April 30, 1998
---------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,815 $ 2,972
Accrued compensation and related costs 4,183 3,798
Accrued royalties 528 574
Other current liabilities 5,844 4,523
Deferred revenue 16,996 17,283
------------ ------------
Total current liabilities 31,366 29,150
Deferred income taxes 6,260 6,260
Long term debt 950 ---
------------ ------------
Total liabilities 38,576 35,410
------------ ------------
Minority interest in subsidiaries 4,749 6,709
------------ ------------
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 19,435,162 shares at October 31, 1998 and
19,369,756 shares at April 30, 1998 1,935 1,937
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,798,289 shares at October 31, 1998 480 480
and 4,798,289 shares at April 30, 1480; convertible
into Class A shares on a one-for-one basis
Additional paid-in capital 58,213 57,656
Retained earnings 14,501 53,225
------------ ------------
75,129 113,298
Less Class A treasury stock, 2,099,360 shares at October 31, 1998
And 1,428,427 shares at April 30, 1998, at cost 14,786 12,761
------------ ------------
Total shareholders' equity 60,343 100,537
------------ ------------
$ 103,668 $ 142,656
============ ============
See accompanying notes to condensed consolidated financial statements.
4
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
----------------------------- ------------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
Revenues:
License fees $ 2,785 $ 8,172 $ 7,943 $ 16,720
Services 15,757 11,890 31,259 22,694
Maintenance 6,513 5,814 13,220 11,578
----------- ----------- ----------- -----------
Total revenues 25,055 25,876 52,422 50,992
----------- ----------- ----------- -----------
Cost of revenues:
License fees 3,140 1,929 6,356 3,962
Services 11,902 7,828 21,593 15,913
Maintenance 2,714 1,939 5,050 3,932
----------- ----------- ----------- -----------
Total cost of revenues 17,756 11,696 32,999 23,807
----------- ----------- ----------- -----------
Gross margin 7,299 14,180 19,423 27,185
----------- ----------- ----------- -----------
Operating expenses:
Research and development 5,819 4,966 11,931 10,256
Less: Capitalized development (3,222) (2,295) (5,521) (4,373)
Sales and marketing 7,898 5,982 16,291 11,962
General and administrative 4,593 2,811 9,018 5,562
Charge for Asset Impairment/Purchased 26,205 28,005
R&D/Restructure Costs
----------- ----------- ----------- -----------
Total operating expense 41,293 11,464 59,724 23,407
Operating income (loss) (33,994) 2,716 (40,301) 3,778
Other income, net (300) 551 272 1,533
Minority interest 976 (232) 1,505 (232)
----------- ----------- ----------- -----------
Income (loss) before income taxes (33,318) 3,035 (38,524) 5,079
Income taxes - 1,032 200 1,727
----------- ----------- ----------- -----------
Net income (loss) $(33,318) $ 2,003 $ (38,724) $ 3,352
=========== =========== =========== ===========
Basic net income (loss) per common share $ (1.48) $ 0.09 $ (1.71) $ 0.15
=========== =========== =========== ===========
Diluted net income (loss) per common share* $ (1.48) $ 0.08 $ (1.71) $ 0.14
=========== =========== =========== ===========
Weighted average common shares
Outstanding: Basic 22,530 22,642 22,619 22,584
=========== =========== =========== ===========
Diluted 22,700 24,791 23,701 24,574
=========== =========== =========== ===========
*Diluted weighted average common shares outstanding are not included in the
quarter ended and six months ended October 31, 1998 calculations due to the
anti-dilution of the net loss per share.
See accompanying notes to condensed consolidated financial statements.
5
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands except share data)
(Unaudited)
Six Months Ended
October 31,
------------------------------
1998 1997
----------- ------------
Cash flows from operating activities:
Net earnings (loss) $ (38,724) $ 3,352
Adjustments to reconcile net earnings (loss) to net cash provided
Operating activities:
Depreciation and amortization 6,523 4,860
Provision for accounts receivable, net 791 ---
Loss on disposal of fixed assets --- 208
Minority interest in subsidiary loss (1,377) (232)
Net (gain) loss on investments 862 (1,041)
Grants of compensatory stock options --- 11
Deferred income taxes (1,058) 1,727
Charge for Asset Impairment 27,835 ---
Change in operating assets and liabilities:
Net (increase) decrease in money market funds 3,242 (4,458)
Purchases of trading securities (740) (1,815)
Proceeds from trading securities 4,169 ---
Proceeds from sales and maturities of investments 452 2,597
Decrease/(increase) in Accounts receivable 4,411 (3,010)
Prepaid expenses and other assets 656 (301)
Accounts payable and other accrued liabilities 1,739 (406)
Income taxes --- (67)
Deferred revenue (942) 630
---------- ----------
Net cash provided by operating activities 7,839 2,055
---------- ----------
Cash flows from investing activities:
Additions to capitalized software development costs (5,746) (4,373)
Additions to purchased computer software costs (112) ---
Purchase of majority interest in subsidiaries (1,929) ---
Minority investment and additional funding in business (858) ---
Purchases of property and equipment (1,358) (1,144)
Sale of short term investments, net 6,212 ---
---------- ----------
Net cash used in investing activities (3,791) (5,517)
---------- ----------
Cash flows from financing activities:
Repurchase of common stock (2,025) ---
Repurchase of common stock by subsidiary (1,404) ---
Proceeds, net, from initial public offering of Logility, Inc. --- 28,829
Proceeds from exercise of stock options 221 685
Proceeds from dividend reinvestment and stock purchase plan --- 5
---------- ----------
Net cash provided by (used in) financing activities (3,208) 29,519
---------- ----------
Net increase in cash 840 26,057
Cash at beginning of period 2,161 3,442
---------- ----------
Cash at end of period $ 3,001 $ 29,499
========== ==========
Supplemental disclosure of cash paid during the period for income taxes $ 324 $ 56
========== ===========
6
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands except share data)
(Unaudited)
Six Months Ended
October 31, 1998
----------------------
Supplemental disclosures of non-cash operating,
investing and financing activities:
Acquisition of business:
Fair value of assets acquired $ 2,472
Acquired in-process research and development costs 1,800
Fair value of liabilities assumed (1,693)
-------------
Total cash paid for acquisition 2,579
-------------
Cash acquired (703)
Net cash paid for acquisitions $ 1,876
-------------
Dividend payment during quarter ended October 31,
1998 $ 53
-------------
Total $ 1,929
See accompanying notes to condensed consolidated financial statements.
7
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
October 31, 1998
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 generally accepted
accounting principles 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 the 1998 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.
B. NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
On January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"), which
prescribes the calculation methodology and financial reporting
requirements for basic and diluted earnings per share. Basic earnings
(loss) per common share available to common shareholders are based on the
weighted average number of common shares outstanding. Diluted earnings
(loss) per common share available to common shareholders are based on the
weighted average number of common shares outstanding and dilutive
potential common shares, such as dilutive stock options. All prior period
net earnings (loss) data presented in these condensed consolidated
financial statements have been restated to conform to the provisions of
SFAS No. 128.
C. COMPLETION OF INITIAL PUBLIC OFFERING
On October 10, 1997, Logility, Inc., a subsidiary of the Company,
successfully completed its initial public offering of common stock.
Logility, Inc. sold 2.2 million shares of Common Stock in the initial
public offering for $31.9 million less issuance costs of $3.1 million.
On November 6, 1997, Logility, Inc. sold 330,000 shares of Common Stock
as part of the underwriters' over-allotment from the initial public
offering for $4.8 million less issuance costs of approximately $400,000.
D. PURCHASE OF MAJORITY INTEREST IN NEW GENERATION COMPUTING, INC.
On July 10, 1998, the Company purchased a majority interest in New
Generation Computing, Inc., a leading software vendor which specializes
in accounting and manufacturing control software for the sewn goods
industry (apparel, handbags, shoes, hats, etc.) This investment was
accounted for based on the purchase accounting method with the results of
operations included from the date of acquisition. The acquisition
resulted in purchased research and development of approximately $1.8
million, purchased computer software products of approximately $460,000,
and goodwill of approximately $1.4 million.
8
E. NON-RECURRING WRITE-OFF OF CAPITALIZED SOFTWARE AND IMPAIRED ASSETS
For the quarter ended October 31, 1998, the Company had a non-recurring
write-off of capitalized software ($24.2 million), asset impairment ($1.8
million) and restructuring charges ($0.2 million) in the amount of $26.2
million. These charges were mainly attributable to the uncertainty of the
world economy and a general reallocation of the market's IT budgets to fix
year 2000 problems which management believes have stalled the adoption of
the Company's products. The restructuring charges are related to management
actions taken to address the current slowdown in license fee revenue and
better position the Company for future growth.
F. CONTINGENCIES
The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse affect on the financial position
or results of operations of the Company.
9
AMERICAN SOFTWARE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
American Software Inc. ("American Software" or the "Company") develops, markets,
and supports enterprise resource planning ("ERP") and integrated supply chain
management solutions. The product line encompasses integrated business
applications such as demand forecasting, logistics planning, warehouse
management, order management, financials, manufacturing, and transportation
solutions. The Company offers professional services to its customers in support
of its products and third party products. These services include training,
system implementation, consulting, custom programming, network management,
millennium conversion, and telephonic support services.
The Company's revenues are derived primarily from three sources: software
licenses, services and maintenance. Software licenses generally are based upon
the number of modules, servers, users and/or sites licensed. License fee
revenues are recognized at the time of product delivery and fulfillment of
acceptance terms, provided persuasive evidence of an arrangement exists, the fee
is fixed and determinable and collection is deemed probable. Services revenues
consist primarily of fees from software implementation, training, consulting and
customization services and are recognized as the services are rendered.
Maintenance agreements typically are for a one to three year term and usually
are entered into at the time of the initial product license. Maintenance
revenues are recognized ratably over the term of the maintenance agreement.
10
ITEM 2. MANAGEMENT'S DISCUSSION (CONTINUED)
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 six months ended October 31, 1998 and 1997:
Percentage of Percentage of
Total Revenues % Total Revenues %
------------------------ ------------------------
3 months ended Change 6 months ended Change
------------------------ ----------- ------------------------ -----------
1998 1997 98 v. 97 1998 1997 98 v. 97
--------- --------- ----------- ---------- ---------- -----------
Revenues:
License fees 11% 32% (66%) 15% 33% (52%)
Services 63 46 33 60 44 38
Maintenance 26 22 12 25 23 14
--------- --------- ----------- ---------- ---------- -----------
Total revenues 100 100 (3) 100 100 3
--------- --------- ----------- ---------- ---------- -----------
Cost of revenues:
License fees 13 8 63 12 8 60
Services 47 30 52 41 31 36
Maintenance 11 7 40 10 8 28
--------- --------- ----------- ---------- ---------- -----------
Total cost of revenues 71 45 52 63 47 39
--------- --------- ----------- ---------- ---------- -----------
Gross margin 29 55 (49) 37 53 (29)
--------- --------- ----------- ---------- ---------- -----------
Operating expenses:
Research and development 23 19 17 23 20 16
Less: Capitalizable software (13) (9) 40 (10) (9) 26
Sales and marketing 32 23 32 31 24 36
General and administrative 18 11 63 17 11 62
Charge for asset impairment 105 0 nm 53 0 nm
--------- --------- ----------- ---------- ---------- -----------
Total operating expenses 165 44 260 114 46 155
--------- --------- ----------- ---------- ---------- -----------
Operating earnings (loss) (136) 11 nm (77) 7 nm
Other income, net (1) 1 nm 1 3 nm
Minority interest in loss of
subsidiary, net 4 0 nm 2 0 nm
--------- --------- ----------- ---------- ---------- -----------
Earnings (loss) before income
Tax expense (133) 12 nm (74) 10 nm
Income tax expense 0 4 nm 0 3 nm
--------- --------- ----------- ---------- ---------- -----------
Net earnings (loss) (133) 8 nm (74) 7 nm
========= ========= =========== ========== ========== ===========
nm - not meaningful
11
ITEM 2. MANAGEMENT'S DISCUSSION (CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1998 AND 1997
- -----------------------------------------------------------
REVENUES
For the quarter ended October 31, 1998 revenues totaled $25.1 million, down 3%
from $25.9 million in the corresponding quarter of fiscal 1998. Revenues for
the six months ended October 31, 1998 totaled $52.4 million, up 3% from $51.0
million in the prior year period. International revenues represented
approximately 6% of total revenues in the quarter ended October 31, 1998, which
remains the same as the quarter ended October 31, 1997. International revenues
represented approximately 9% for the six months ended October 31, 1998 compared
to approximately 4% for the same period a year ago.
LICENSES. Software license fee revenues were 66% lower than the corresponding
quarter a year ago and 52% lower for the six months ended October 31, 1998. The
Company believes the lower license fees were a result of lower than expected
sales by the Company's direct sales force, coupled with an increasingly
competitive market for the Company's products. In addition, the Company believes
that several of the Company's potential customers delayed purchase decisions due
to a variety of factors, including concern over global economic conditions and
limited resources due to the allocation of resources to Year 2000 system
projects. License fee revenues from the Company's subsidiary Logility Inc.,
constituted 64% of the total license fee revenues for the three month period
ended October 31, 1998 compared to the prior year comparable period, when they
comprised 66% of those revenues. Logility's license fees for the six months
ended October 31, 1998 constituted 55% of the total license fee revenues
compared to 58% in the prior year period.
SERVICES. Services revenues were $15.8 million or 33% higher than the
corresponding quarter a year ago and 38% higher for the six months ended October
31, 1998 compared to the same period a year ago. The Company believes this was
caused by 1) an increase in the demand for professional services in assisting
customers to prepare their software systems for the year 2000, 2) an improvement
in the Company's ability to offer a more comprehensive package of services for
its client server offerings and 3) an increase in demand for professional
services.
MAINTENANCE. Maintenance revenues increased 12% from the second quarter of
fiscal year 1998 to $6.5 million from $5.8 million. For the six months ended
October 31, 1998, maintenance revenues increased 14%, to $13.2 million compared
to the same period a year ago. The increase for the quarter is due to increased
license fees realized in prior quarters, as new licenses are the source of new
maintenance customers and therefore future maintenance income streams.
GROSS MARGIN:
The total gross margin was 29% in the second quarter ended October 31, 1998
compared to 55% during the same period a year ago. For the six months ended
October 3, 1998, the gross margin was 37% compared to 53% for the same period a
year ago. This decrease was largely due to a decrease in the license fees gross
margin to (13%) this quarter compared to 76% in the same quarter a year ago.
This is primarily due to a significant decrease in license fees during the three
months ended October 31, 1998 combined with the commencement of amortization
expense of the Company's new Enterprise Resource Planning product that became
generally available this year. The gross margin on services revenues decreased
to 24% compared to 34% the same quarter a year ago and increased to 31% for the
six months ended October 31, 1999 when compared to 30% for the same period a
year ago. The decrease during the quarter is due mainly to increased headcount
in the services area in anticipation of future demands for services.
Maintenance gross margin decreased to 58% for the three months ended October 31,
1998 when compared to 67% in the same quarter a year ago and decreased to 62%
for the six months ended October 31, 1998 when compared to 66% during the
comparable period. This reduction was due to slower than anticipated growth in
maintenance revenue.
12
ITEM 2. MANAGEMENT'S DISCUSSION (CONTINUED)
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 Six Months Ended
--------------------------------------------- ---------------------------------
Oct. 31, Percent Oct. 31, Oct. 31, Percent Oct. 31,
1998 Change 1997 1998 Change 1997
---------- ----------- --------- --------- --------- ---------
Gross product development costs $ 5,819 17% $ 4,966 $11,931 16% $10,256
Percentage of total revenues 23% 19% 23% 20%
Less: capitalized development (3,222) 40% (2,295) (5,521) 26% (4,373)
Percentage of gross prod. dev. costs 55% 46% 46% 43%
--------- ----------- --------- --------- --------- ---------
Product development expenses $ 2,597 3% $ 2,671 $ 6,411 9% $ 5,883
Percentage of total revenues 10% 10% 12% 12%
Gross product development costs increased 17% in the quarter, and 16% for the
six months ended October 31, 1998 as a result of the Company's continued
investment in new product development. Capitalized development increased as well
by 40% for the quarter and 26% for the six months ended, while the rate of
capitalized development increased to 55% from 46% for the quarter ended and
increased to 46% from 43% for the six months ended. Product development
expenses, as a percentage of total revenues, did not change substantially from
10% for the quarter and 12% for the six months ended October 31, 1998.
SALES & MARKETING. Sales and marketing expenses increased 32% to $7.9 million
for the quarter and 36% to $16.3 million for the six months ended October 31,
1998. As a percentage of total revenues, sales and marketing expenses were 32%
for the three months ended October 31, 1998 when compared to 23% for the quarter
ended October 31, 1997 and they were 31% for the six months ended October 31,
1998 when compared to 24% for the comparable period last year. These increases
were due to increased sales and marketing expenditures, as well as a decrease in
the growth rate of revenues.
GENERAL & ADMINISTRATIVE. General and administrative expenses increased 63% to
$4.6 million for the quarter and increased 62% to $9.0 million for six months
ended October 31, 1998. These expenses increased primarily as a result of the
Company's growth in employees and the resulting growth in administrative costs.
During the quarter the average number of employees was 739 compared to 631
during the same period a year ago.
NON-RECURRING CHARGE FOR IMPAIRED ASSETS. For the quarter ended October 31,
1998, the Company incurred a non-recurring charge against earnings of $26.2
million. This charge resulted from the write-off of certain capitalized
software development costs in the amount of $24.2 million, impaired asset write-
off of $1.8 million and restructuring charge of $221,000 which were mainly
attributable to the uncertainty of the world economy and a general reallocation
of the market's IT budgets to fix year 2000 problems which management believes
have stalled the adoption of the Company's products. An additional one-time cost
of $1.8 million is related to the in-process research and development expense
related to the acquisition of New Generation Computing during the quarter ended
July 31, 1998.
OTHER INCOME. Other income is comprised predominantly of interest income, gains
and losses from sales of investments, changes in the market value of
investments, and minority interest in subsidiary's earnings (loss). Other income
increased 112% to $676,000 in the second quarter ended October 31, 1998 compared
to $319,000 for the same period a year ago. For the six month period ended
October 31, 1998 Other Income increased 37% to $1.8 million from $1.3 million
for the six month comparable period last year, due primarily to the effect on
the minority interest calculation as a result of the losses incurred at the
Company's majority owned subsidiary Logility, Inc.
13
ITEM 2. MANAGEMENT'S DISCUSSION (CONTINUED)
INCOME TAXES
The Company recorded no income tax expense in the quarter compared to $1 million
in the prior year quarter and $200,000 for the current six months ended compared
to $1.7 million for the six months ended October 31, 1997. This expense was
based on the Company's estimate of tax liability for the fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company's operating activities provided cash of approximately $7.8 million
in the six months ended October 31, 1998, and provided cash of approximately
$2.1 million in the same period last year. The cash provided by operations
during the six months ended October 31, 1998, was primarily attributable to a
non cash charge of $27.8 million for in-process research and development, charge
for asset impairment and restructuring expenses, an increase in non-cash
depreciation and amortization expense of $6.5 million, a decrease in accounts
receivable of $4.4 million, an increase in proceeds from trading securities of
$4.2 million, a decrease in money market funds of $3.2 million and an increase
in accounts payable and other liabilities of $1.7 million,. This is partially
offset by a net loss of $38.7 million, a decrease in minority interest in
subsidiary loss of $1.4 million, a decrease in deferred income tax benefit of
$1.1 and an decrease to deferred revenue of $942,000. The cash provided by
operations during the same period of the prior year was attributed to net income
of $3.4 million, increase in non-cash depreciation and amortization expense of
$4.9 million, an increase in the proceeds from the sales and maturities of
investments of $2.6 million, an increase in deferred income taxes of $1.7 and an
increase in deferred revenue of $630,000. This was partially offset by an
increase in money market funds of $4.5 million, a decrease in accounts
receivable of $3.0 million and purchases of trading securities of $1.8 million.
Cash used for investing activities was approximately $3.8 million for the six
months ended October 31, 1998 and approximately $5.5 million in the same period
in the prior year. The substantial use of cash was used for capitalized software
development costs of $5.7 million, purchase of majority interest in companies
for $2.0 million, the purchase of property and equipment of $1.4 million and
minority interest in business of $763,000. This was substantially offset by the
sale of investments of $6.2 million. Cash used for the same period in the prior
year was primarily for capitalized software of $4.4 million and property and
equipment of $1.1 million.
Cash used in financing activities was approximately $3.2 million for the six
months ended October 31, 1998 and cash provided by financing activities in the
amount of $29.5 million in the same period of the prior year. Cash was used to
purchase common stock of the Company in the amount of $2.0 million and the
Company's subsidiary in the amount of $1.4 million during the six months ended
October 31, 1998. Net cash provided by financing activities of $28.8 million in
the six months ended October 31, 1997 was due to the proceeds from the public
offering of Logility,Inc.
Days Sales Outstanding in accounts receivable were 88 days as of October 31,
1998, compared to 89 days as of October 31, 1997.
The Company's current ratio was 2.4 to 1 and cash and investments totaled 45% of
total assets at October 31, 1998 compared to 3.2 to 1 and cash and investments
totaled 42% of total assets at April 30, 1998. The Company expects existing cash
and investments, combined with cash generated from operations, to be sufficient
to meet its cash requirements for at least the next twelve months. To the extent
that such amounts are insufficient to finance the Company's capital
requirements, the Company will be required to raise additional funds through
equity or debt financing. The Company does not currently have 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 the Company. If available, such
financing may result in further dilution to the Company's shareholders and
higher interest expense.
14
ITEM 2. MANAGEMENT'S DISCUSSION (CONTINUED)
On December 18, 1997, American Software Inc.'s 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 through open market purchases. The timing of any
repurchases will depend on market conditions, the market price of the Company's
common stock and management's assessment of the Company's liquidity and cash
flow needs. Since this resolution was adopted, the Company has repurchased
769,833 shares of common stock at a cost of approximately $2,836,989 as of
October 31, 1998.
YEAR 2000 READINESS DISCLOSURE
Based on management's assessment, the Company believes that the current versions
of its software products are Year 2000 compliant. However, the Company believes
some of its customers may be running earlier versions of the Company's products
that are not Year 2000 compliant, and the Company has been encouraging such
customers to migrate to current product versions. The Company offers its
customers the alternatives of implementing a modification to non-compliant
legacy versions of its software or migrating to a later version of the software
which is Year 2000 Ready. Moreover, the Company's products are generally
integrated into other systems involving complex software products developed by
other vendors. Year 2000 problems inherent in a customer's other software
programs might significantly limit that customer's ability to utilize the
Company's products.
In addition, the Company is working to identify all internal systems, which may
impact the operations of the Company. The cost of converting the Company's
internal systems is not expected to be material since the Company is utilizing
internal resources to meet their Year 2000 readiness needs.
Software products as complex as those offered by the Company might contain
undetected errors or failures when first introduced or when new versions are
released, including products believed to be Year 2000 compliant. While the
Company believes that it has assessed, corrected and tested its products to
address the Year 2000 issue, there can be no assurances that the Company's
software products contain or will contain all necessary date code changes or
that errors will not be found in new products or product enhancements after
commercial release, resulting in loss of or delay in market acceptance. In
addition, the Company might experience difficulties that could delay or prevent
the continued successful development and release of products that are Year 2000
compliant or that meet the Year 2000 requirements of customers. If the Company
is unable or is delayed in its efforts to make the necessary date code changes,
there could be a material adverse effect upon the Company's business, operating
results, financial condition and cash flows.
The Company may in the future be subject to claims based on Year 2000 problems
in its own, as well as in others' products, and issues arising from the
integration of multiple products within an overall system. Although the Company
has not been a party to any litigation involving its products or services
related to Year 2000 compliance issues, there can be no assurance that the
Company will not in the future be required to defend its products or services in
such proceedings, or otherwise address claims based on Year 2000 issues. The
costs of defending and resolving Year 2000-related disputes, and any liability
of the Company for Year 2000-related damages, including consequential damages,
could have a material adverse effect on the Company's business, operating
results, and financial condition.
The Company utilizes third-party vendor equipment, telecommunication products
and software products that may or may not be Year 2000 compliant. Although the
Company is currently taking steps to address the impact, if any, of the Year
2000 compliance issue surrounding such third-party products, failure of any
critical technology components to be Year 2000 compliant may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
15
ITEM 2. MANAGEMENT'S DISCUSSION (CONTINUED)
The Company believes that Year 2000 issues may affect the purchasing decisions
of customers and potential customers of the Company's products. Many businesses
are expending significant resources on projects to make their current hardware
and software systems Year 2000 compliant. Such expenditures may result in
reduced funding for projects to purchase software products such as those offered
by the Company. Potential customers may also choose to defer purchasing Year
2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Any of the
foregoing could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's evaluation of its Year 2000 issue includes the development of
contingency plans for business functions that are susceptible to a substantive
risk of disruption resulting from a Year 2000 related event. Because the
Company has not yet identified any business function that is materially at risk
of the Year 2000 related disruption, it has not yet developed detailed
contingency plans specific to Year 2000 events for any business function. The
Company is prepared for the possibility, however, that certain business
functions may be hereafter identified as at risk and will develop contingency
plans for such business functions when and if such determinations are made.
Forward-looking statements contained in this Year 2000 Compliance discussion
should be read in conjunction with the Company's disclosure under the heading of
Forward Looking Statements for the purposes of the Safe Harbor provisions of the
Private Securities Litigation Act of 1995
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
Reporting Comprehensive Income. SFAS 130 requires companies to display, with
the same prominence as other financial statements, the components of other
comprehensive income. SFAS 130 requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes are required. The Company's financial statements will
include the disclosure of other comprehensive income in accordance with the
provisions of SFAS 130 beginning in the first quarter of fiscal year ended April
30, 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS 131
requires that an enterprise disclose certain information about operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997 with the first disclosure required in the annual
financial statement thereafter. The Company will evaluate the need for such
disclosures at that time.
In October 1997, the Accounting Standards Executive Committee issued Statement
of Position 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 is
effective for financial statements for fiscal years beginning after December 15,
1997 (commencing May 1, 1998 for the Company). The Company does not expect that
adoption of SOP 97-2 will significantly affect its results of operations.
16
ITEM 2. MANAGEMENT'S DISCUSSION (CONTINUED)
FORWARD-LOOKING STATEMENTS
It should be noted that this discussion 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 the Company's
software products can be affected by client 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 include changes in general economic
conditions, the growth rate of the market for the Company's products and
services, the timely availability and market acceptance of these products and
services, the effect of competitive products and pricing, and the irregular
pattern of revenues, as well as a number of other risk factors which could
affect the future performance of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The Registrant's Annual Meeting was held on August 27/th/, 1998. At
that meeting, in additional to re-election of directors, the
shareholders voted upon a proposed amendment to the 1991 Employee
Stock Option Plan to increase the base number of option shares
authorized under that Plan from 2,700,000 to 3,600,000. On a weighted
basis, 5,193,133 shares were voted in favor of the amendment, 377,618
shares were voted against the amendment and 5,650 shares abstained
from voting on the amendment. The shareholders also voted upon a
proposed amendment to the Director and Officers Stock Option Plan to
increase the number of option shares authorized under the Plan from
1,000,000 to 1,200,000. On a weighted basis, 5,280,219 shares were
voted in favor of the amendment, 307,818 shares were voted against
the amendment and 6,100 shares abstained from voting on the
amendment.
Item 5. Other Information
- ------- -----------------
Not applicable.
17
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
10.1 1991 Employee Stock Option Plan, Amended and Restated as of
August 27, 1998, included as Exhibit 4.1 to the Company's Form S-
8 Registration Statement No.333-62529 and incorporated herein by
this reference.
10.2 Directors and Officers Stock Option Plan, Amended and Restated as
of August 27, 1998, included as Exhibit 4.2 to the Company's Form
S-8 Registration Statement No.333-62529 and incorporated herein
by this reference.
11 Statement re: Computation of Per Share Earnings (Loss).
27 Financial Data Schedule (for SEC used only).
(b) No report on Form 8-K was filed during the quarter ended October 31, 1998.
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 December 10, 1998 /s/James C. Edenfield
------------------------------ -----------------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE December 10, 1998 /s/Vincent C. Klinges
-------------------------- -----------------------------------
Vincent C. Klinges
Chief Accounting Officer
18
EXHIBIT INDEX
-------------
Exhibit Page
------- ----
11 Statement re: Computation of Per Share Earnings
(Loss) (Unaudited) 20
27 Financial Data Schedule (for SEC use only)
19