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, 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
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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
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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 , 1999
- ------------------------------------- --------------------------------
Class A Common Stock, $.10 par value 16,682,914 Shares
Class B Common Stock, $.10 par value 4,798,289 Shares
1
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Form 10-Q
Quarter ended October 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 - October 31, 1999 and April 30, 1999 3
Condensed Consolidated Statements of Operations -
Unaudited - Three Months and Six Months ended October 31, 1999
and October 31, 1998 4
Condensed Consolidated Statements of Cash Flows -
Unaudited - Six Months ended October 31, 1999
and October 31, 1998 5
Notes to Condensed Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II - Other Information 19
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, 1999 April 30, 1999
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,905 $21,567
Investments 21,642 27,297
Trade accounts receivable, less allowance for doubtful accounts
of $1,594 at October 31, 1999 and $1,718 at April 30, 1999
Billed 15,644 17,534
Unbilled 5,510 3,539
Deferred income taxes 1,294 1,294
Refundable income taxes 135 138
Prepaid expenses and other current assets 2,346 1,621
-------- -------
Total current assets 68,476 72,990
-------- -------
Property and equipment, less accumulated amortization 16,216 16,542
Intangible assets, less accumulated amortization 20,447 16,248
Other assets 1,917 1,578
-------- --------
$107,056 $107,358
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,376 $ 3,442
Accrued compensation and related costs 4,941 4,995
Other current liabilities 9,679 8,230
Deferred revenue 14,434 16,298
-------- --------
Total current liabilities 32,430 32,965
Long term debt -- 950
Deferred income taxes 1,294 1,294
-------- --------
Total liabilities 33,724 35,209
-------- --------
Minority interest in subsidiaries 4,846 4,952
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 19,547,906 shares at October 31, 1999 and
19,469,405 shares at April 30, 1999 1,954 1,947
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,798,289 shares at October 31, 1999 and 4,768,289 477 477
shares at April 30, 1999; convertible into Class A shares on a
one-for-one basis
Additional paid-in capital 60,718 60,368
Other comprehensive income 244 244
Retained earnings 22,314 20,408
Less Class A treasury stock, 2,864,992 shares at October 31, 1999
and 2,603,823 shares at April 30, 1999, at cost (17,221) (16,247)
-------- --------
Total shareholders' equity 68,486 67,197
-------- --------
$107,056 $107,358
======== ========
See accompanying notes to condensed consolidated financial statements.
3
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,
----------------------- -----------------------
1999 1998 1999 1998
-------- ------- -------- -------
Revenues:
License fees $ 6,343 $ 2,785 $ 12,620 $ 7,943
Services 15,543 15,757 31,290 31,259
Maintenance 6,296 6,513 12,507 13,220
-------- -------- -------- --------
Total revenues 28,182 25,055 56,417 52,422
-------- -------- -------- --------
Cost of revenues:
License fees 1,398 3,140 2,726 6,356
Services 11,335 11,902 22,918 21,593
Maintenance 2,345 2,714 5,030 5,050
-------- -------- -------- --------
Total cost of revenues 15,078 17,756 30,674 32,999
-------- -------- -------- --------
-------- -------- -------- --------
Gross margin 13,104 7,299 25,743 19,423
-------- -------- -------- --------
Operating expenses:
Research and development 5,085 5,819 10,206 11,931
Less: Capitalized Development (2,594) (3,222) (5,558) (5,521)
Sales and marketing 6,408 7,898 12,900 16,291
General and administrative 3,685 4,593 7,090 9,018
Charge for asset impairment and in process
research & development -- 26,205 -- 28,005
-------- -------- -------- --------
Total operating expense 12,584 41,293 24,638 59,724
Operating income (loss) 520 (33,994) 1,105 (40,301)
Other income, net 695 (300) 1,121 272
Minority interest (62) 976 (169) 1,505
-------- -------- -------- --------
Income (loss) before income taxes 1,153 (33,318) 2,057 (38,524)
Income taxes 150 -- 150 200
-------- -------- -------- --------
Net income (loss) $ 1,003 $(33,318) $ 1,907 $(38,724)
======== ======== ======== ========
Basic net income (loss) per common share $ .05 $ (1.48) $ .09 $ (1.71)
======== ======== ======== ========
Diluted net income (loss) per common share* $ .05 $ (1.48) $ .09 $ (1.71)
======== ======== ======== ========
Weighted average common shares
Outstanding: Basic 21,440 22,530 21,519 22,619
======== ======== ======== ========
Diluted 21,913 22,700 22,097 23,701
======== ======== ======== ========
*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.
4
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands except share data)
(Unaudited)
Six Months Ended
October 31,
------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net earnings (loss) $ 1,907 $(38,724)
Adjustments to reconcile net earnings (loss) to net cash provided
Operating activities:
Depreciation and amortization 3,939 6,298
Minority interest in subsidiary income/(loss) 169 (1,377)
Net (gain) loss on investments 528 862
Deferred income taxes -- (1,058)
Charge for asset impairment and in process R&D -- 27,835
Change in operating assets and liabilities:
Net (increase) decrease in money market funds -- 3,242
Purchases of trading securities (3,876) (740)
Proceeds from trading securities 4,397 4,169
Proceeds from sales and maturities of investments 2,250 452
Decrease/(increase) in Accounts receivable (81) 5,202
Decrease/(increase) in Prepaid expenses and other assets (731) 656
Increase/(decrease) in Accounts payable and other accrued liabilities 1,325 1,739
Increase/(decrease) in Deferred revenue (1,863) (942)
Currency translation adjustment 2 --
-------- --------
Net cash provided by operating activities 7,966 7,614
-------- --------
Cash flows from investing activities:
Additions to capitalized software development costs (5,558) (5,521)
Additions to purchased computer software costs (65) (112)
Purchase of majority interest in subsidiaries (658) (1,929)
Minority investment and additional funding in business (330) (858)
Repurchase of common stock by subsidiary (635) (1,404)
Purchases of property and equipment (897) (1,358)
Purchases/ (sale) of short term investments, net 2,356 6,212
-------- --------
Net cash used in investing activities (5,787) (4,970)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (950) --
Repurchase of common stock (974) (2,025)
Proceeds from exercise of stock options 77 221
Proceeds from dividend reinvestment and stock purchase plan 3 --
-------- --------
Net cash used in financing activities (1,844) (1,804)
-------- --------
Net increase in cash 335 840
Cash and equivalents at beginning of period $ 21,567 $ 13,396
-------- --------
Cash and equivalents at end of period $ 21,903 $ 14,236
======== ========
Supplemental disclosure of cash paid during the period for income taxes $ 64 $ 324
======== ========
5
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
October 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. 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.
C. 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, it has not had a material
effect on its revenue recognition policies.
D. Write-off of Capitalized Software and Impaired Assets
For the six months ended October 31, 1998, the Company had a write-off of
capitalized software ($24.2 million); asset impairment ($1.8 million) and
restructuring charges ($0.2 million) in the aggregate 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 were related to management actions taken to
address the current slowdown in license fee revenue and better position
the Company for future growth.
6
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
October 31, 1999
E. 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. In August 1999, the Company
purchased an additional 6.6% of New Generation Computing.
F. 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 segments 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 provided to the SCP segment by the ERP segment.
7
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited (continued)
Six Months Ended
October 31,
----------------------
1999 1998
--------- ---------
Revenues:
Enterprise resource planning $ 39,494 40,568
Supply chain planning 16,923 11,854
--------- ---------
Total $ 56,417 52,422
========= =========
Operating income before intersegment eliminations:
Enterprise resource planning $ (64) (30,797)
Supply chain planning 1,169 (9,504)
--------- ---------
Total $ 1,105 (40,301)
========= =========
Intersegment eliminations:
Enterprise resource planning $ (1,031) (1,223)
Supply chain planning 1,031 1,223
--------- ---------
Total $ -- --
========= =========
Operating income after intersegment eliminations:
Enterprise resource planning $ (1,095) (32,020)
Supply chain planning 2,200 (8,281)
--------- ---------
Total $ 1,105 (40,301)
========= =========
Identifiable assets:
Enterprise resource planning $ 65,251 62,058
Supply chain planning 41,805 41,610
--------- ---------
Total $ 107,056 103,668
========= =========
Capital expenditures:
Enterprise resource planning $ 736 829
Supply chain planning 226 641
--------- ---------
Total $ 962 1,470
========= =========
Capitalized Software:
Enterprise resource planning $ 3,912 3,479
Supply chain planning 1,646 2,042
--------- ---------
Total $ 5,558 5,521
Depreciation and amortization:
Enterprise resource planning $ 2,355 3,761
Supply chain planning 1,584 2,537
--------- ---------
Total $ 3,939 6,298
========= =========
8
AMERICAN SOFTWARE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 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 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.
9
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, 1999 and 1998:
Percentage of Percentage of
Total Revenues Total Revenues
------------------ % ------------------- %
Three months ended Change Six months ended Change
------------------ -------- ------------------- --------
1999 1998 99 v. 98 1999 1998 99 v. 98
----- ---- -------- ----- ---- --------
Revenues:
License fees 23% 11% 128% 23% 15% 59%
Services 55 63 (1) 55 60 --
Maintenance 22 26 (3) 22 25 (5)
---- ---- ---- ---- ---- ----
Total revenues 100 100 12 100 100 8
---- ---- ---- ---- ---- ----
Cost of revenues:
License fees 5 13 (55) 5 12 (57)
Services 40 47 (5) 41 41 6
Maintenance 8 11 (14) 9 10 --
---- ---- ---- ---- ---- ----
Total cost of revenues 54 71 (15) 54 63 7
---- ---- ---- ---- ---- ----
Gross margin 46 29 80 46 37 33
---- ---- ---- ---- ---- ----
Operating expenses:
Research and development 18 23 (13%) 18 23 (14%)
Less: Capitalizable software (9) (13) (20) (10) (10) (1)
Sales and marketing 23 32 (19) 23 31 (21)
General and administrative 13 18 (20) 13 17 (21)
Charge for asset impairment -- 105 -- -- 53 --
---- ---- ---- ---- ---- ----
Total operating expenses 45 165 (70) 44 114 (59)
---- ---- ---- ---- ---- ----
Operating earnings (loss) 2 (136) nm 2 (77) nm
Other income, net 2 (1) nm 2 1 nm
Minority interest in loss of
subsidiary, net nm 4 nm nm 2 nm
---- ---- ---- ---- ---- ----
Earnings (loss) before income
tax expense 4 (133) nm 4 (74) nm
Income tax expense 1 0 nm nm 0 nm
---- ---- ---- ---- ---- ----
Net earnings (loss) 4 (133) nm 3 (74) nm
==== ==== ==== ==== ==== ====
nm - not meaningful
10
Item 2. Management's Discussion (continued)
THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
- --------------------------------------------
REVENUES
For the quarter ended October 31, 1999 revenues totaled $28.2 million, up 12%
from $25.1 million in the corresponding quarter of fiscal 1999. International
revenues represented approximately 8% of total revenues in the quarter ended
October 31, 1999, up from 6% the same quarter ended October 31, 1998.
LICENSES. Software license fee revenues were 128% higher than the corresponding
quarter a year ago. License fee revenues from the Company's subsidiary Logility
Inc., constituted 63% of the total license fee revenues for the three month
period ended October 31, 1999, which is the same percentage as the prior year
period. The Company believes the increased license fees were a result of
improved sales execution by the Company's sales force.
SERVICES. Services revenues were $15.5 million or 1% lower than the
corresponding quarter a year ago. In the near term, the Company anticipates a
reduction in Services revenues as the demand for Services related to "Year 2000"
system compliance decreases.
MAINTENANCE. Maintenance revenues decreased 3% from the second quarter of fiscal
year 1999 to $6.3 million from $6.5 million for the same prior year period. The
decrease for the quarter is 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 source of potential new maintenance
customers.
GROSS MARGIN:
The total gross margin was 46% in the quarter ended October 31, 1999 compared to
29% during the same period a year ago. This increase was largely due to an
increase in the license fees gross margin to 78% this quarter compared to (13%)
in the same quarter a year ago. This increase in license fee margins is
primarily due to a significant increase in license fees and a reduction in the
amount of amortization expense on capitalized software, which is the primary
component of cost of license fees. The expense reduction is related to the
write-off of capitalized software development costs taken in the quarter ended
October 31, 1998. The gross margin on services revenues increased to 27%
compared to 24% the same quarter a year ago. Maintenance gross margin increased
to 63% for the three months ended October 31, 1999 when compared to 58% in the
same quarter a year ago as a result of management's cost reduction efforts.
11
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
-----------------------------------------
Oct. 31, Percent Oct. 31,
1999 Change 1998
---------- ----------- -----------
Gross product development costs $ 5,085 (13%) $ 5,819
Percentage of total revenues 18% 23%
Less: capitalized development (2,594) (20%) (3,222)
Percentage of gross prod. dev. costs 51% 55%
------- --- -------
Product development expenses $ 2,491 (4%) $ 2,597
Percentage of total revenues 9% 10%
Gross product development costs decreased 13% in the quarter. This is a result
of the steps the Company took in the prior year to manage development expenses
downward as part of its overall cost containment. Capitalized development
decreased as well by 20% for the quarter ended, while the rate of capitalized
development decreased to 51% from 55% for the quarter ended. Early in the
period, several projects were completed causing the rate of capitalization to
decrease. Product development expenses, as a percentage of total revenues, did
not change substantially from a year ago.
SALES & MARKETING. Sales and marketing expenses decreased 19% to $6.4 million
for the quarter ended October 31, 1999. As a percentage of total revenues, sales
and marketing expenses were 23% for the three months ended October 31, 1999 when
compared to 32% for the quarter ended October 31, 1998. This decrease was due to
the overall increase in revenues, as well as continued control of sales and
marketing expenditures.
GENERAL & ADMINISTRATIVE. General and administrative expenses decreased 20% to
$3.7 million for the quarter ended October 31, 1999. These expenses decreased
due to a reserve being taken for non-collectable accounts in the three months
ended October 31, 1998 and as a result of the Company's reduction in employee
base and the resulting decrease in administrative costs. For the three months
ended October 31, 1999, the average number of employees was approximately 728,
compared to approximately 739 for the three months ended October 31, 1998.
CHARGE FOR IMPAIRED ASSETS AND IN PROCESS RESEARCH & DEVELOPMENT. 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 management believes were attributable primarily to the uncertainty of the
world economy and a general reallocation of the market's IT budgets to fix year
2000 problems and which 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
decreased 7% to $633,000 in the quarter ended October 31, 1999 compared to
$676,000 for the same period a year ago. This decrease is primarily related to
the subsidiary's positives earnings in the current period, which resulted in a
minority interest charge, compared to a minority interest benefit in the same
prior year period.
12
Item 2. Management's Discussion (continued)
INCOME TAXES
For the quarter ended October 31, 1999, the Company recorded $150,000 for income
taxes. This expense was based on the Company's estimate of tax liability for the
fiscal year 2000.
SIX MONTHS ENDED OCTOBER 31, 1999 AND 1998
- ------------------------------------------
REVENUES
Revenues for the six months ended October 31, 1999 totaled $56.4 million, up 8%
from $52.4 million in the prior year period. International revenues represented
approximately 8% for the six months ended October 31, 1999 compared to
approximately 9% for the same period a year ago.
LICENSES. For the six months ended October 31, 1999, license fee revenues
increased 59% from a year ago. License fee revenues from the Company's
subsidiary Logility Inc., constituted 66% of the total license fee revenues for
the six month period compared to 55% in the prior year period.
SERVICES. Services revenues were $31.2 million for the six months ended
October 31, 1999, which is the same amount as for the six months ended
October 31, 1998.
MAINTENANCE. For the six months ended October 31, 1999, maintenance revenues
decreased 5%, to $12.5 million compared to the same period a year ago. The
decrease for the year to date is 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 source of potential new
maintenance customers.
GROSS MARGIN:
For the six months ended October 31, 1999, the gross margin was 46% compared to
37% for the same period a year ago. The gross margin on services revenues
decreased to 27% compared to 31% for the same period a year ago due to a
slowdown on high margin "Y2K" remediation work. Maintenance gross margin
decreased slightly to 60% for the six months ended October 31, 1999 when
compared to 62% during the comparable period last year. This reduction was due
to slower than anticipated growth in maintenance revenue.
13
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:
Six Months Ended
------------------------------------------
Oct. 31, Percent Oct. 31,
1999 Change 1998
----------- ----------- -----------
Gross product development costs $10,206 (14%) $11,931
Percentage of total revenues 18% 23%
Less: capitalized development (5,558) (1%) (5,521)
Percentage of gross prod. dev. Costs 55% 46%
------- --- -------
Product development expenses $ 4,648 (28%) $ 6,411
Percentage of total revenues 8% 12%
Gross product development costs decreased 14% for the six months ended October
31, 1999 primarily as a result of the Company's cost reduction efforts in the
prior year. Capitalized development decreased slightly by 1% for the six months
ended, while the rate of capitalized development increased to 55% from 46% for
the six months ended due to the timing of completing software projects. Product
development expenses, as a percentage of total revenues, decreased from 12% to
8% for the six months ended October 31, 1999.
SALES & MARKETING. Sales and marketing expenses decreased 21% to $12.9 million
for the six months ended October 31, 1999. As a percentage of total revenues,
sales and marketing expenses were 23% for the six months ended October 31, 1999
when compared to 31% for the comparable period last year. This decrease is due
in part to the increase in revenues, as well as the decrease in sales and
marketing expenditures.
GENERAL & ADMINISTRATIVE. General and administrative expenses decreased 21% to
$7.1 million for six months ended October 31, 1999. These expenses decreased due
to reserve being taken for non-collectable accounts and as a result of the
Company's reduction in the employee base and the resulting decrease in
administrative costs. For the six months ended October 31, 1999, the average
number of employees was approximately 688, compared to approximately 724 for the
six months ended October 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). For the six
month period ended October 31, 1999, Other Income decreased 47% to $952,000 from
$1.8 million for the comparable six month period last year. This is due
primarily to the effect on the minority interest calculation as a result of the
positive earnings incurred at the Company's majority owned subsidiary Logility,
Inc.
INCOME TAXES
The Company recorded income tax expense in the amount of $150,000 for the
current six months ended compared to $200,000 for the six months ended October
31, 1998. This expense was based on the Company's estimate of tax liability for
the fiscal year 2000.
14
Item 2. Management's Discussion (continued)
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company's operating activities provided cash of approximately $8.0 million
in the six months ended October 31, 1999, and provided cash of approximately
$7.6 million in the same period last year. The cash provided by operations
during the six months ended October 31, 1999, is attributable primarily to net
income of $1.9 million, an increase in non-cash depreciation and amortization
expense of $3.9 million, an increase in proceeds from trading securities of $4.4
million, an increase in proceeds from sales and maturities of investments of
$2.3 million, and an increase in accounts payable and other liabilities of $1.3
million. This is partially offset by a decrease in purchases of trading
securities of $3.9 million, a decrease to deferred revenue of $1.9 million, and
an increase in prepaid expenses of $731,000. The cash provided by operations
during the same period of the prior year was primarily attributable to a non
cash charge of $27.8 million for in-process research and development, a 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 $5.2 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 was 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 a decrease to deferred revenue of $942,000.
Cash used for investing activities was approximately $5.8 million for the six
months ended October 31, 1999 and approximately $5.0 million in the same period
of the prior year. The substantial use of cash for the period ending October 31,
1999 was used for capitalized software development costs of $5.6 million,
purchase of majority interest in companies for $658,000, and the purchase of
property and equipment of $897,000. This was substantially offset by the sale of
investments of $2.4 million. Cash used for the same period of the prior year was
primarily for capitalized software of $5.5 million, purchase common stock of the
Company's subsidiary in the amount of $1.4 million, property and equipment of
$1.4 million, and purchase of majority interest in companies for $1.9 million.
This was primarily offset by sale of investments of $6.3 million.
Cash used in financing activities was approximately $1.8 million for the six
months ended October 31, 1999 and cash used in financing activities in the
amount of $1.8 million in the same period of the prior year. Cash was used to
purchase common stock of the Company in the amount of $974,000 and for the
repayment of long-term debt in the amount of $950,000 during the six months
ended October 31, 1999. Cash was used to purchase common stock of the Company in
the amount of $2.0 million in the six months ended October 31, 1998.
Days Sales Outstanding in accounts receivable was 68 days as of October 31,
1999, compared to 88 days as of October 31, 1998.
The Company's current ratio was 2.1 to 1 and cash and investments totaled 41% of
total assets at October 31, 1999 compared to 2.4 to 1 and cash and investments
representing 45% of total assets at October 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.
15
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 1,543,033 shares of
common stock at a cost of approximately $5,253,270 as of October 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.
16
Item 2. Management's Discussion (continued)
Internal Systems:
- -----------------
The Company has completed 100% of its system evaluation and 100% of its
remediation. The cost of converting the Company's internal systems has not been
material since the Company is utilizing internal resources to meet its Year 2000
readiness needs.
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.
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.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency. In the year ended October 31, 1999, the Company generated
8% 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 October 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 approved by the Company's Board of
Directors. These instruments are denominated in U.S. dollars. The fair value of
securities at October 31, 1999 was approximately $21.6 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 declines. 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 these risks 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.
18
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
- ------- ---------------------------------------------------
The Registrant's Annual Meeting was held on August 26th, 1999. At that
meeting, in addition to the 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 3,600,000 to 4,600,000. On a weighted basis, 4,967,637 shares were
voted in favor of the amendment, 631,054 shares were voted against the
amendment and 33,745 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 1,200,000 to 1,600,000. On a weighted
basis, 5,052,162 shares were voted in favor of the amendment, 547,413
shares were voted against the amendment and 33,745 shares abstained
from voting on the amendment.
Item 5. Other Information
- ------- -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- ------- ---------------------------------
(a) Exhibits
--------
11.1 Statement re: Computation of Per Share Earnings (Loss).
27.1 Financial Data Schedule.
(b) No report on Form 8-K was filed during the quarter ended October 31, 1999.
19
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 14, 1999 /s/James C. Edenfield
--------------------- ----------------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE December 14, 1999 /s/Vincent C. Klinges
--------------------- ----------------------------------
Vincent C. Klinges
Chief Financial Officer
20
EXHIBIT INDEX
-------------
Exhibit Page
- ------- ----
11.1 Statement re: Computation of Per Share Earnings (Loss) (Unaudited) 21
21