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 July 31, 1999
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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
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
470 East Paces Ferry Road, N.E., Atlanta, Georgia 30305
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(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 September 7 , 1999
- ------------------------------------ ---------------------------------
Class A Common Stock, $.10 par value 16,721,556 Shares
Class B Common Stock, $.10 par value 4,768,289 Shares
AMERICAN SOFTWARE, INC
Form 10-Q
Quarter ended July 31,1999
Index
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Page
No.
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- Unaudited - July 31, 1999 and April 30, 1999 3
Condensed Consolidated Statements of Operations
- Unaudited - Three Months ended July 31, 1999 and July 31, 1998 4
Condensed Consolidated Statements of Cash Flows
- Unaudited - Three Months ended July 31, 1999 and July 31, 1998 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 6-14
Part II - Other Information 14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN SOFTWARE, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands except share data)
July 31, April 30,
1999 1999
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 22,815 $ 21,567
Investments 26,749 27,297
Trade accounts receivable, less allowance for doubtful accounts
of $1,802 at July 31, 1999 and $1,718 at April 30, 1999:
Billed 16,650 17,534
Unbilled 3,706 3,539
Deferred income taxes 1,294 1,294
Prepaid expenses and other current assets 1,898 1,759
-------- ---------
Total current assets 73,112 72,990
Property and equipment, less accumulated depreciation 16,421 16,542
Intangible assets, less accumulated amortization 18,152 16,248
Other assets 1,349 1,578
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$109,034 $ 107,358
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,389 $ 3,442
Accrued compensation and related costs 5,414 4,995
Other current liabilities 8,888 8,230
Deferred revenue 16,804 16,298
-------- ---------
Total current liabilities 34,495 32,965
Long term debt 700 950
Deferred income taxes 1,294 1,294
-------- ---------
Total liabilities 36,489 35,209
-------- ---------
Minority interest in subsidiaries 5,058 4,952
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 19,470,224 shares at July 31, 1999 and
19,469,405 shares at April 30, 1999 1,947 1,947
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,768,289 shares at July 31, 1999 and 477 477
4,768,289 shares at April 30, 1999; convertible into Class A
shares on a one-for-one basis
Additional paid-in capital 60,376 60,368
Other comprehensive income 244 244
Retained earnings 21,312 20,408
Class A treasury stock, 2,756,292 shares at July 31, 1999
and 2,603,823 shares at April 30, 1999, respectively (16,868) (16,247)
-------- ---------
Total shareholders' equity 67,488 67,197
-------- ---------
$109,034 $ 107,358
======== =========
See accompanying notes to condensed consolidated financial statements.
3
AMERICAN SOFTWARE, INC.
Condensed Consolidated Statements of Operations
(in thousands except share and per share data)
(Unaudited)
Three Months Ended
July 31,
---------------------------------
1999 1998
-------------- --------------
Revenues:
License fees $ 6,277 $ 5,158
Services 15,747 15,502
Maintenance 6,211 6,707
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Total revenues 28,235 27,367
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Cost of revenues:
License fees 1,328 3,216
Services 11,583 9,691
Maintenance 2,685 2,336
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Total cost of revenues 15,596 15,243
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Gross margin 12,639 12,124
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Operating expenses:
Research and development, net 2,157 3,813
Sales and marketing 6,492 8,393
General and administrative 3,405 4,425
Charge for in-process research & development --- 1,800
-------------- --------------
Total operating expense 12,054 18,431
Operating income (loss) 585 (6,307)
Other income, net 426 572
Minority interest (107) 529
-------------- --------------
Income (loss) before income taxes 904 (5,206)
Income taxes --- 200
-------------- --------------
Net income (loss) $ 904 $ (5,406)
============== ==============
Basic net income (loss) per common share $ 0.04 $ (0.24)
============== ==============
Diluted net income (loss) per common share* $ 0.04 $ (0.24)
============== ==============
Weighted average common shares
Outstanding: Basic 21,597 22,739
============== ==============
Diluted 22,280 23,912
============== ==============
* See accompanying notes to condensed consolidated financial statements.
4
AMERICAN SOFTWARE, INC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands except share data)
Three Months Ended
July 31,
------------------------------
1999 1998
------------- -------------
Cash flows from operating activities:
Net earnings (loss) $ 904 $(5,406)
Adjustments to reconcile net earnings (loss) to net cash provided
Operating activities:
Depreciation and amortization 1,926 3,190
Minority interest in subsidiary income/(loss) 107 (529)
Net (gain) loss on investments 125 78
Deferred income taxes ----- (957)
Charge for In-process research and development ----- 1,800
Change in operating assets and liabilities:
Net (increase) decrease in money market funds ----- 4,185
Purchases of trading securities (1,260) (529)
Proceeds from trading securities 2,524 590
Proceeds from sales and maturities of investments 1,169 348
Decrease/(increase) in Accounts receivable 717 (1,076)
Decrease/(increase) in Prepaid expenses and other assets 240 361
Increase/(decrease) in Accounts payable and other accrued liabilities 1,024 1,633
Increase/(decrease) in Deferred revenue 506 1,783
Currency translation adjustment ----- 23
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Net cash provided by operating activities 7,982 5,494
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Cash flows from investing activities:
Additions to capitalized software development costs (2,963) (2,298)
Additions to purchased computer software costs ----- (36)
Purchase of majority interest in subsidiaries ----- (1,971)
Minority investment and additional funding in business (150) (763)
Repurchase of common stock by subsidiary (224) (1,373)
Purchases of property and equipment (523) (859)
Purchases of short term investments, net (2,011) (442)
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Net cash used in investing activities (5,871) (7,742)
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Cash flows from financing activities:
Repayment of long-term debt (250) -----
Repurchase of common stock (621) (601)
Proceeds from exercise of stock options 5 159
Proceeds from dividend reinvestment and stock purchase plan 3 -----
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Net cash used in financing activities (863) (442)
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Net increase in cash 1,248 (2,690)
Cash at beginning of period 21,567 13,396
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Cash at end of period $22,815 $10,706
============= =============
Supplemental disclosure of cash paid during the period for income taxes $ ------ $ 324
============= =============
See accompanying notes to condensed consolidated financial statements.
Item 1. Financial Statements (continued)
AMERICAN SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements - Unaudited
July 31, 1999
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 1999 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. Industry Segments
On February 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of
an Enterprise and Related Information". The Company operates and manages
its business in two segment based on software and services provided in
two key product markets, Enterprise Resource Planning (ERP), which
automates customers' internal financial, human resources, and
manufacturing functions, and Supply Chain Planning (SCP), which provides
planning and execution software to streamline customers' interactions
with suppliers. Intersegment charges are based on marketing and general
administration services provides to the SCP segment by the ERP segment.
C. Comprehensive Income
On May 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("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. No statements of comprehensive income (loss) have been
included in the accompanying combined financial statements since
comprehensive income (loss) and net income (loss) presented in the
accompanying combined statements of operations would be the same.
D. Revenue Recognition
In December 1998, the AICPA issued SOP No. 98-9, Modification of SOP No.
97-2, Software Revenue Recognition, with Respect to Certain Transactions.
This SOP amends SOP No. 97-2 to, among other matters, require recognition
of revenue using the "residual method" in circumstances outlined in the
SOP. Under the residual method, revenue is recognized as follows: (1) the
total fair value of undelivered elements, as indicated by vendor-specific
objective evidence, is deferred and subsequently recognized in accordance
with the relevant sections of SOP No. 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. On
May 1, 1999 the Company adopted SOP No. 98-9 and it did not have a
material effect on its revenue recognition.
E. Major Customer
One customer accounted for more than 10% of the Company's revenues during
the quarter ended July 31, 1999, totaling 11% of total revenues. No
accounts receivable were outstanding from this customer at July 31, 1999.
6
AMERICAN SOFTWARE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
F. Purchase of Majority Interest in New Generation Computing
On July 10, 1998, the Company purchased a majority interest in New
Generation Computing, 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.
FORWARD-LOOKING STATEMENTS
It should be noted that 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 demand for the companies
software products and services as well as 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, including 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.
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, maintenance and services. Software licenses generally are based upon
the number of modules, servers, users and/or sites licensed. License fee
revenues 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 evidence exists to allocate the total fee to
all elements of the arrangement. 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. Services revenues consist primarily of fees from
software implementation, training, consulting and customization services and are
recognized as the services are rendered.
7
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 ended July 31, 1999 and 1998:
Percentage of Pct. Change
Total Revenues in Dollars
------------------------------------ ------------------
1999 1998 1999 vs 1998
---------------- ---------------- ------------------
Revenues:
License fees 22 % 19 % 22%
Services 56 57 2
Maintenance 22 24 ( 7)
---------------- ---------------- ------------------
Total revenues 100 100 3
---------------- ---------------- ------------------
Cost of revenues:
License fees 5 12 (59)
Services 41 35 20
Maintenance 9 9 15
---------------- ---------------- ------------------
Total cost of revenues 55 56 2
---------------- ---------------- ------------------
Gross margin 45 44 4
---------------- ---------------- ------------------
Operating expenses:
Research and development expenses,net 8 14 (43)
Sales and marketing 23 31 (23)
General and administrative expenses 12 15 (23)
Purchased research & development --- 7 nm
---------------- ---------------- ------------------
Total operating expenses 43 67 (35)
---------------- ---------------- ------------------
Operating income (loss) 2 (23) nm
Other income, net 1 2 nm
Minority interest nm 2 nm
---------------- ---------------- ------------------
Income (loss) before income taxes 3 (19) nm
Income taxes --- 1 nm
---------------- ---------------- ------------------
Net income (loss) 3% (20)% nm
================ ================ ==================
nm - not meaningful
8
Item 2. Management's Discussion (continued)
THREE MONTHS ENDED JULY 31, 1999 AND 1998
REVENUES
For the quarter ended July 31, 1999 revenues totaled $28.2 million, up 3% from
$27.4 million in the corresponding quarter of fiscal 1999. This increase was
primarily due to an increase in license fees from increased product sales,
partially offset by a decrease in maintenance revenue caused by the delayed
effect from lower product sales in recent prior quarters. International revenues
represented approximately 7% of total revenues in the quarter ended July 31,
1999 compared to approximately 12% a year ago.
LICENSES. Software license fee revenues were 22% higher than the first quarter
of fiscal 1999. License fee revenues from the Company's subsidiary, Logility,
Inc., constituted 69% of the total license fee revenues for the three month
period ended July 31, 1999 compared to the prior year comparable period, when
they comprised 49% of those revenues. The Company believes the increased license
fees were a result of improved sales execution by the Company's sales force. In
the quarter ended July 31, 1999, the Company's 84% owned subsidiary, Logility
closed the sale of the largest software licensing transaction in its history,
with license fee revenue totaling over $3.0 million.
SERVICES. Services revenues were $15.7 million or 2% higher than the
corresponding quarter a year ago. This increase was primarily a result of
revenue increases from the Company's subsidiary AmQUEST which operates as an
Application Service Provider (ASP) and internet related services.
MAINTENANCE. Maintenance revenues decreased 7% from the first quarter of fiscal
year 1999 to $6.2 million from $6.7 million due to the slowdown in license fees
in the prior periods. Maintenance revenues have a direct relationship to current
and historic license fee revenues, since licenses are the potential source of
new maintenance customers.
GROSS MARGIN:
The total gross margin in the quarter ended July 31, 1999 was 45% compared to
44% a year ago. This slight increase was largely due to an increase in the
license fees gross margin to 79% this quarter compared to 38% in the same
quarter a year ago. This increase is primarily due to the increase in license
fee revenue and the decrease in capitalized software amortization expenses in
the current quarter when compared to the same quarter last year. The gross
margin on services revenues decreased to 26% compared to 37% the same quarter a
year ago due to lower margin implementation services work replacing higher
margin "Year 2000" remediation work. Maintenance gross margin decreased to 57%
compared to the same quarter a year ago at 65% due to lower maintenance revenue
and higher support expenses related to new products.
9
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:
July 31, Percent July 31,
1999 Change 1998
----------- ---------- -----------
Gross product development costs $ 5,120 (16)% $ 6,111
Percentage of total revenues 18% 22%
Less: capitalized development (2,963) 29% (2,298)
Percentage of gross prod. dev. costs 58% 38%
----------- ---------- -----------
Product development expenses $ 2,157 (43)% $ 3,813
Percentage of total revenues 8% 14%
Gross product development costs decreased 16% in the quarter ended July 31, 1999
compared to the same period a year ago as a result of the Company's
restructuring efforts in response to lower license fees. Capitalized development
increased by 29% from a year ago, as well as the rate of capitalized development
increased to 58% from 38% a year ago, due to the timing of development projects
that are significant in the current quarter when compared to the same quarter a
year ago. Product development expenses, as a percentage of total revenues,
decreased to 8% compared to 14% a year ago due to the increase in total revenues
and the decrease in gross product development expense and increase in
capitalized development as noted above.
SALES & MARKETING. Sales and marketing expenses decreased 23% to $6.5 million
for the quarter ended July 31, 1999 compared to the same period a year ago. As a
percentage of total revenues, sales and marketing expenses were 23% for the
quarter ended July 31, 1999 compared to 31% for the quarter ended July 31, 1998.
This decrease was due to the overall increase in revenues, as well as more
control of sales and marketing expenditures.
GENERAL & ADMINISTRATIVE. General and administrative expenses decreased 23% to
$3.4 million for the quarter ended July 31, 1999 compared to the same period
last year as a result of the improved management of these expenses such as
reduction in employees, with the resulting drop in administrative costs. During
the quarter the average number of employees was 726 compared to 735 during the
same period a year ago.
PURCHASED RESEARCH & DEVELOPMENT. Purchased Research & Development expense was
$1.8 million for the quarter ended July 31, 1998. This one-time cost 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
decreased to $319,000 in the quarter ended July 31, 1999 from $1.1 million in
the same period one year ago primarily due to the change in minority interest
from a gain of $529,000 in the quarter ended July 31,1998 to a loss of $107,000
in the current quarter ended July 31,1999.
INCOME TAXES
For the quarter ended July 31, 1999, the Company did not record any income
taxes as a result of the operating losses incurred in prior periods.
10
Item 2. Management's Discussion (continued)
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company's operating activities provided cash of approximately $1.2 million
in the three months ended July 31, 1999, and provided cash of approximately $1.5
million in the same period last year. The cash provided by operations during the
three months ended July 31,1999, was primarily attributable to proceeds from
trading securities of $2.5 million, proceeds from sales and maturities of
investments of $1.2 million, non-cash depreciation and amortization expense of
$1.1 million, net income of $904,000, a decrease in accounts receivable of
$717,000, an increase in accounts payable and other liabilities of $771,000 and
an increase to deferred revenue of $507,000. This was offset by purchases of
trading securities of $1.3 million. The cash provided by operations during the
three months ended July 31, 1998, was primarily attributable to a decrease in
money market funds of $4.2 million, non-cash depreciation and amortization
expense of $3.2 million, an increase to deferred revenue of $1.8 million, an
increase in accounts payable and other liabilities of $1.6 million, an increase
of $1.8 million for in-process research and development and an increase in
proceeds from trading securities of $590,000. This is partially offset by a net
loss of $5.4 million, an increase in accounts receivable of $1.1 million, an
increase in deferred income taxes of $957,000 and a decrease in minority
interest in subsidiary loss of $529,000.
Cash used for investing activities was approximately $4.8 million for the three
months ended July 31, 1999. The major use of cash was for capitalized software
development costs of $2.7 million, the purchase of short term investments, net
of $2.0 million and investment in internet business of $150,000. Cash used for
investing activities was approximately $3.6 million for the three months ended
July 31, 1998. The major use of cash was to acquire a majority interest in a
company for $2.0 million, capitalized software development costs of $2.3
million, purchase of the Company's subsidiary common stock of $1.4 million,
purchase of minority interest in business of $763,000 and the purchase of
property and equipment of $859,000. This was substantially offset by the sale of
short term investments of $3.7 million.
Cash used in financing activities was approximately $614,000 for the three
months ended July 31, 1999 and was primarily used to purchase common stock of
the Company of $621,000. Cash used in financing activities was approximately
$442,000 for the three months ended July 31,1998 and was primarily used to
purchase common stock of the Company of $601,000, offset partially by proceeds
from exercise of stock options.
Days Sales Outstanding (DSO) in accounts receivable were 65 days as of July 31,
1999 compared to 94 days as of July 31, 1998 and 80 days as of April 30, 1999.
This reduction was due primarily to improved collection efforts by the Company,
as well as the significant impact of the billing and collecting of one large
customer transaction within the quarter ended July 31, 1999. The Company expects
its future DSO level to be approximately 85-90 days.
The Company's current ratio was 2.1 to 1 and cash and investments totaled 45% of
total assets at July 31, 1999 compared to a current ratio of 2.6 to 1 and cash
and investments totaling 38% of total assets at July 31, 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.
11
Item 2. Management's Discussion (continued)
American Software Inc.'s board of directors approved a resolution authorizing
the Company to repurchase up to 2.2 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 approximately 1.4
million shares of common stock at a cost of approximately $4.9 million as of
July 31, 1999.
YEAR 2000 READINESS DISCLOSURE
Products:
- --------
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 compliant. 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.
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 believes that Year 2000 issues have affected and may
continue to 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.
12
Internal Systems:
- ----------------
The Company is working to identify and remediate 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 its Year 2000 readiness needs. The Company
has completed 100% of its system evaluation and 95% of its remediation. The
Company estimates the completion of its remediation and testing by September 30,
1999.
The Company utilizes third-party vendor equipment, telecommunication
products and software products that may or may not be Year 2000 compliant. The
Company has been communicating with such third party vendors about their plans
and progress in addressing the Year 2000 problem, and the Company has requested
assurances that such equipment, product and services will be Year 2000
compliant. The Company has received such assurances from most of the third party
vendors and is waiting to receive such assurances from the remaining vendors. In
the event that such additional assurances are not timely received, the Company
will switch to another vendor or take such other action as the Company shall
deem appropriate. Although the Company is currently taking steps to address the
impact 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.
The Company's evaluation of Year 2000 issues 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement will be effective for the Company beginning June 15,
2000. 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: hedges of changes in the fair value of assets, liabilities, or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
The Company has not invested in derivative instruments nor participated in
hedging activities and therefore does not anticipate there will be a material
impact on the results of operations or financial position from Statement No.
133.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency. In the year ended July 31, 1999, the Company generated 7%
of its revenues outside the United States. International sales usually are made
by the Company's 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 the Company during the quarter ended July 31, 1999
was not material.
Interest rates. The Company manages its 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. These instruments are denominated in U.S.
dollars. The fair value of securities at July 31, 1999 was approximately $26.7
million. Interest income on the Company's investments is carried in "Other
income/(expense)."
The Company also holds 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 the Company's investments carry a degree of interest rate risk.
When interest rates fall, the Company's income from investments in variable-rate
securities declines. When interest rates rise, the fair market value of the
Company's investments in fixed-rate securities. In addition, the Company's
equity securities are subject to stock market volatility. Due in part to these
factors, the Company's future investment income may fall short of expectations
or the Company may suffer losses in principal if forced to sell securities which
have seen a decline in market value due to changes in interest rates. The
Company attempts to mitigate risk by holding fixed-rate securities to maturity,
but should its liquidity needs force it to sell fixed-rate securities prior to
maturity, the Company may experience a loss of principal.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The registrant is not currently involved in legal proceedings
requiring disclosure under this item.
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
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
14
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits:
Exhibit No. Description
---------- -----------
11.1 Statement re: Computation of Per Share
Earnings (Loss).
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter ended
July 31, 1999.
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 September 10, 1999 /s/James C. Edenfield
------------------------- ---------------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE September 10, 1999 /s/James M. Modak__
------------------------- ----------------------------------
James M. Modak
Chief Financial Officer and Sr. Vice
President
DATE September 10, 1999 /s/Vincent C. Klinges
------------------------- ----------------------------------
Vincent C. Klinges
Chief Accounting Officer
15
EXHIBIT INDEX
-------------
Exhibit Page
-------
11.1 Statement re: computation of Per Share Earnings (loss) 17
27 Financial Data Schedule
16