<PAGE>
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, 2000
--------------------------------------------------
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
--------------------------------------------------
AMERICAN SOFTWARE, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1098795
--------------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
470 East Paces Ferry Road, N.E., Atlanta, Georgia 30305
------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(404) 261-4381
---------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes Outstanding at September 12, 2000
-------------------------------- ---------------------------------
Class A Common Stock, $.10 par value 18,624,046 Shares
Class B Common Stock, $.10 par value 4,082,289 Shares
<PAGE>
AMERICAN SOFTWARE, INC
Form 10-Q
Quarter ended July 31,2000
Index
-----
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- Unaudited - July 31, 2000 and April 30, 2000 3
Condensed Consolidated Statements of Operations
- Unaudited - Three Months ended July 31, 2000 and July 31, 1999 4
Condensed Consolidated Statements of Cash Flows
- Unaudited - Three Months ended July 31, 2000 and July 31, 1999 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II - Other Information 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN SOFTWARE, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands except share and per share data)
<TABLE>
<CAPTION>
July 31, April 30,
2000 2000
------------------ -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,439 $ 12,910
Investments - current 21,458 21,457
Trade accounts receivable, less allowance for doubtful accounts
of $1,645 at July 31, 2000 and $1,739 at April 30, 2000:
Billed 14,303 15,233
Unbilled 4,233 5,143
Deferred income taxes 1,975 1,975
Prepaid expenses and other current assets 2,257 2,099
------------------ -------------------
Total current assets 52,665 58,817
Investments - noncurrent 8,074 9,878
Property and equipment, less accumulated depreciation 18,242 18,614
Intangible assets, less accumulated amortization 24,201 23,391
Other assets 2,494 2,347
------------------ -------------------
$ 105,676 $ 113,047
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 1,524 $ 1,493
Accounts payable 3,475 3,505
Accrued compensation and related costs 4,074 4,545
Income tax payable 2,922 3,122
Other current liabilities 4,720 7,012
Deferred revenue 15,504 15,936
------------------ -------------------
Total current liabilities 31,861 35,613
Obligations under capital leases, net of current portion 548 907
Deferred income taxes 1,975 1,975
------------------ -------------------
Total liabilities 34,743 38,495
================== ===================
Minority interest in subsidiaries 4,846
4,743
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 21,508,243 shares at July 31, 2000 and
21,476,284 shares at April 30, 2000 2,151 2,148
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,082,289 shares at July 31, 2000 and
4,086,289 shares at April 30, 2000; convertible into Class A
shares on a one-for-one basis 408 409
Additional paid-in capital 65,420 65,241
Other comprehensive income 243 247
Retained earnings 15,472 19,165
Class A treasury stock, 2,920,854 shares at July 31, 2000
and 2,920,854 shares at April 30, 2000, respectively (17,504) (17,504)
------------------ -------------------
Total shareholders' equity 66,190 69,706
------------------ -------------------
$ 105,676 $ 113,047
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AMERICAN SOFTWARE, INC.
Condensed Consolidated Statements of Operations
(in thousands except share and per share data)
(Unaudited)
Three Months Ended
July 31,
---------------------------
2000 1999
----------- ---------
Revenues:
License fees $ 2,497 $ 6,277
Services 13,277 15,747
Maintenance 6,270 6,211
----------- ---------
Total revenues 22,044 28,235
----------- ---------
Cost of revenues:
License fees 1,421 1,328
Services 10,566 11,583
Maintenance 1,833 2,685
----------- ---------
Total cost of revenues 13,820 15,596
----------- ---------
Gross margin 8,224 12,639
----------- ---------
Operating expenses:
Research and development 4,502 5,120
Less: capitalized development (1,444) (2,963)
Marketing and sales 5,832 6,492
General and administrative 3,313 3,405
----------- ---------
Total operating expense 12,203 12,054
Operating earnings (loss) (3,979) 585
Other income, net 278 426
Minority interest 9 (107)
----------- ---------
Earnings (loss) before income taxes (3,692) 904
Income taxes --- ---
----------- ---------
Net earnings (loss) $ (3,692) $ 904
=========== =========
Basic net earnings (loss) per common share $ (0.16) $ 0.04
=========== =========
Diluted net earnings (loss) per common share* $ (0.16) $ 0.04
=========== =========
Shares used in per share calculation
Outstanding: Basic 22,604 21,597
=========== =========
Diluted 22,604 22,280
=========== =========
* Diluted weighted average common shares outstanding are not included in the
quarter ended July 31, 2000 calculation due to the anti-dilution of the net
loss.
See accompanying notes to condensed financial statements.
4
<PAGE>
AMERICAN SOFTWARE, INC
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
-------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $ (3,692) $ 904
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 2,548 2,516
Minority interest in subsidiary income/(loss) (9) 107
Net (gain) loss on investments 9 125
Change in operating assets and liabilities:
Purchases of trading securities (1,035) (1,260)
Proceeds from trading securities 1,678 2,524
Proceeds from sales and maturities of investments 120 1,169
Decrease/(increase) in Accounts receivable 1,840 717
Decrease/(increase) in Prepaid expenses and other assets (238) 240
Increase/(decrease) in Accounts payable and other accrued liabilities (2,994) 1,024
Increase/(decrease) in Deferred revenue (432) 506
-------------- -------------
Net cash (used in) provided by operating activities (2,205) 8,572
-------------- -------------
Cash flows from investing activities:
Additions to capitalized software development costs (1,444) (2,963)
Additions to purchased computer software costs (280) ----
Purchase of majority interest in subsidiaries (517) ----
Minority investment and additional funding in business (68) (150)
Repurchase of common stock by subsidiary ---- (224)
Purchases of property and equipment (655) (523)
Sales (purchases) of short term investments, net 1,031 (2,011)
-------------- -------------
Net cash used in investing activities (1,933) (5,871)
-------------- -------------
Cash flows from financing activities:
Repayment of long-term debt ---- (250)
Payment of capital lease obligation (420) (590)
Repurchase of common stock ---- (621)
Proceeds from exercise of stock options 72 5
Proceeds from dividend reinvestment and stock purchase plan 15 3
-------------- -------------
Net cash provided by (used in) financing activities (333) (1453)
-------------- -------------
Net (decrease) increase in cash and cash equivalents (4,471) 1,248
Cash and cash equivalents at beginning of period $ 12,910 $ 12,647
-------------- -------------
Cash and cash equivalents at end of period $ 8,439 $ 13,895
============== =============
Cash paid for income taxes $ ----- $ -----
============== =============
Cash paid for interest $ 16 $ 26
============== =============
Supplemental disclosure of non cash, investing, and financing activities:
Assumption of capital lease obligations for property and equipment $ 93 $ 572
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AMERICAN SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements - Unaudited
July 31, 2000
A. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States 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 2000 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 (Loss)
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards
for reporting and presentation of comprehensive income and its components in
a full set of financial statements. 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 materially the same.
C. Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions.
License. License revenues in connection with license agreements for
standard proprietary and tailored software are recognized upon delivery of
the software, providing collection is considered probable, the fee is
fixed or determinable, there is evidence of an arrangement, and vendor
specific evidence exists to defer any revenue related to undelivered
elements of the arrangement.
Maintenance. Maintenance fees are generally billed annually in advance and
the resulting revenues are recognized ratably over the term of the
maintenance agreement.
Services. Revenues derived from services primarily include consulting,
implementation, training, and managed hosting. Fees are billed under both
time and materials and fixed fee arrangements and are recognized as
services are performed.
The percentage-of-completion method of accounting is utilized to recognize
revenue on products under development for fixed amounts. Progress under
the percentage-of-completion method is measured based on management's best
estimate of the cost of work completed in relation to the total cost of
work to be performed under the contract. Any estimated losses on products
under development for fixed amounts are immediately recognized in the
consolidated financial statements.
Deferred Revenues. Deferred revenues represent advance payments or
billings for software licenses, services, and maintenance billed in
advance of the time revenues are recognized.
6
<PAGE>
AMERICAN SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
July 31, 2000
D. Major Customer
One customer accounted for 10% of the Company's total revenues and 16% of
services revenues during the quarter ended July 31, 2000.
E. Purchase of Majority Interest in New Generation Computing
On July 10, 1998, the Company purchased an 80% interest in New Generation
Computing, a leading software vendor that 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. In August 1999, the Company purchased an additional 6.6%
interest and in July 2000 another 6.6% interest, bringing the ownership
interest in New Generation Computing to 93% at July 31, 2000.
7
<PAGE>
AMERICAN SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
July 31, 2000
F. Net Earnings (Loss) Per Common Share
Basic earnings (loss) per common share available to common shareholders are
based on the weighted-average number of Class A and B common shares
outstanding, since the Company considers the two classes of common stock as
one class for the purposes of the per share computation. Diluted earnings
(loss) per common share available to common shareholders is based on the
weighted-average number of common shares outstanding and dilutive potential
common shares, such as dilutive stock options.
The numerator in calculating both basic and diluted earnings (loss) per
common share for each year is the same as net earnings (loss). The
denominator is based on the following number of common shares:
<TABLE>
<CAPTION>
Quarter ended July 31,
---------------------------
2000 1999
---------- -----------
(in thousands)
<S> <C> <C>
Common Shares:
Weighted average common shares outstanding:
Class A Shares 18,522 16,829
Class B Shares 4,082 4,768
---------- -----------
Basic weighted average common shares outstanding: 22,604 21,597
---------- -----------
Dilutive effect of outstanding Class A common Stock
Options outstanding: - 683
---------- -----------
Total 22,604 22,280
========== ===========
Net (loss) earnings: $ (3,692) $ 904
Net (loss) earnings per common share:
Basic $ (0.16) $ 0.04
========== ===========
Diluted $ (0.16) $ 0.04
---------- -----------
</TABLE>
For the quarter ended July 31, 2000 approximately 3,796,508 stock
options were excluded from the computation of diluted loss per share
because they were antidilutive. Options to purchase 2,715,362 shares
were outstanding during the 3 month period ending July 31, 1999 but were
not included in the computation of diluted earnings per common share
because the options exercise price was greater than the average market
price of the common shares.
8
<PAGE>
AMERICAN SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
July 31, 2000
G. Industry Segments
The Company operates and manages its business in three segments based on
software and services provided in three key product markets. First, the
Enterprise Resource Planning (ERP) segment automates customers' internal
financing, human resources, and manufacturing functions. Second, the
Business-to-Business Collaborative Commerce (BBCC) segment provides advanced
business-to-business collaborative planning and integrated logistics
capabilities. Third, the Managed Hosting Provider (MHP) segment provides data
center infrastructure, network outsourcing services, e-commerce solution
hosting and monitoring, and professional services staffing. Intersegment
charges are based on marketing and general administration services provided
to the BBCC and MHP segments by the ERP segment. Intersegment charges are
also based on managed hosting services provided to the ERP and BBCC segments
by the MHP segment.
9
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited (continued)
Three Months Ended
July 31,
---------------------------
2000 1999
-------- -------------
Revenues:
Enterprise resource planning $ 11,092 15,345
B-to-B Collaborative Commerce 6,922 8,368
Managed hosting provider
External customers 4,024 4,522
Intersegment revenues 1,031 1,046
Elimination of intersegment revenues (1,031) (1,046)
--------- -------------
Total 22,044 28,235
========= =============
Operating income before intersegment
Eliminations:
Enterprise resource planning $ (1,903) 464
B-to-B Collaborative Commerce (1,082) 501
Managed hosting provider (994) (380)
--------- -------------
Total (3,979) 585
========= =============
Intersegment eliminations:
Enterprise resource planning $ (44) 232
B-to-B Collaborative Commerce 741 576
Managed hosting provider (697) (808)
--------- -------------
Total -- --
========= =============
Operating income after intersegment
eliminations:
Enterprise resource planning $ (1,947) 696
B-to-B Collaborative Commerce (341) 1,077
Managed hosting provider (1,691) (1,188)
--------- -------------
Total (3,979) 585
========= =============
Capital expenditures:
Enterprise resource planning 309 246
B-to-B Collaborative Commerce 116 150
Managed hosting provider 137 127
--------- -------------
Total $ 655 523
========= =============
Capitalized Software:
Enterprise resource planning 646 2,171
B-to-B Collaborative Commerce 798 792
Managed hosting provider -- --
--------- -------------
Total $ 1,444 2,963
========= =============
Depreciation and amortization:
Enterprise resource planning 1,169 1,109
B-to-B Collaborative Commerce 830 740
Managed hosting provider 549 667
--------- -------------
Total $ 2,548 2,516
========= =============
July 31, April 30,
2000 2000
----------- -------------
Identifiable assets:
Enterprise resource planning $ 56,667 61,497
B-to-B Collaborative Commerce 42,418 44,53
Managed hosting provider 6,591 7,016
----------- -------------
Total 105,676 113,047
=========== =============
10
<PAGE>
AMERICAN SOFTWARE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, which are subject
to substantial risks and uncertainties. There are a number of factors that could
cause actual results to differ materially from those anticipated by statements
made herein. The timing of releases of 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, the performance of direct and indirect sales channels 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"), through its
subsidiaries, develops, markets and supports a portfolio of software and
services that deliver e-business (business over the Internet) and enterprise
management solutions to the global marketplace. The Company's software and
services are designed to bring business value to traditional and e-businesses by
supporting their operations over intranets, extranets, client/servers and the
Internet. The Company launched its comprehensive suite of e-business solutions
in December 1999, positioning itself as a single source e-business solution.
The Company focuses its e-business solutions in five major product and services
groups: (i) e-intelliprise, a fully web-based Enterprise Resource Planning (ERP)
solution which includes both traditional and Flow Manufacturing capabilities;
(ii) e-applications, which are e-business solutions that focus on web-enabling a
specific task for e-businesses; (iii) e-collaboration, provided by Logility
Voyager Solutions(TM) which is an Internet-based suite of business-to-business
collaborative commerce solutions, offered by Logility, Inc., ("Logility") a
subsidiary of American Software; (iv) e-services, which are comprehensive
services to support traditional and e-business solutions; and (v) e-hosting,
which are Managed Hosting Provider (MHP) services provided by AmQUEST, Inc.,
("AmQUEST") a subsidiary of the Company. American Software's products are
designed to bring rapid business value to clients and to support their
transition into e-business. The Company also provides support for its software
products, such as software enhancements, documentation, updates, customer
education, consulting, systems integration services, maintenance and IT hosting.
11
<PAGE>
Item 2. Management's Discussion (continued)
The Company's revenues are derived primarily from three sources: software
licenses, maintenance and services. Software license fee revenues 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
managed hosting, and are recognized as the services are rendered.
RESULTS OF OPERATIONS
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, 2000 and 1999:
<TABLE>
<CAPTION>
Percentage of Pct. Change
Total Revenues in Dollars
------------------------------------ ------------------
2000 1999 2000 vs 1999
---------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues:
License fees 11% 22% (60%)
Services 60 56 (16)
Maintenance 29 22 1
---------------- ---------------- ------------------
Total revenues 100 100 (22)
---------------- ---------------- ------------------
Cost of revenues:
License fees 6 5 7
Services 48 41 (9)
Maintenance 8 9 (32)
---------------- ---------------- ------------------
Total cost of revenues 63 55 (11)
---------------- ---------------- ------------------
Gross margin 37 45 (34)
Operating expenses:
Research and development expenses 20 18 (12)
Less: capitalized development (7) (10) (51)
Sales and marketing 26 23 (10)
General and administrative expenses 15 12 (3)
---------------- ---------------- ------------------
Total operating expenses 55 43 1
---------------- ---------------- ------------------
Operating earnings (loss) (18) 2 nm
Other income, net (1) 2 (34)
Minority interest nm nm nm
---------------- ---------------- ------------------
Earnings (loss) before income taxes (17) 3 nm
Income taxes --- --- nm
---------------- ---------------- ------------------
Net earnings (loss) (17%) 3% nm
================ ================ ==================
</TABLE>
nm - not meaningful
12
<PAGE>
Item 2. Management's Discussion (continued)
THREE MONTHS ENDED JULY 31, 2000 AND 1999
-----------------------------------------
REVENUES
For the quarter ended July 31, 2000 revenues totaled $22.0 million, down 22%
from $28.2 million in the corresponding quarter of fiscal year 2000. This
decrease was primarily due to a decrease in license fee revenues and, and to a
lesser extent, a decrease in services revenues. International revenues
represented approximately 9% of total revenues in the quarter ended July 31,
2000 compared to approximately 7% in the quarter ended July 31, 1999, due
primarily to the decrease in total revenues.
LICENSES. Software license fee revenues decreased 60% to $2.5 million in the
quarter ended July 31, 2000 from $6.3 million in the quarter ended July 31,
1999. The decrease in license fees was a result of lower than expected post-year
2000 sales recovery due to limited distribution channels and reduced sales
effectiveness of direct and indirect sales channels of both the Company and the
Company's subsidiary, Logility. License fee revenues from Logility, decreased
57% to $1.9 million and constituted 74% of the total license fee revenues for
the three month period ended July 31, 2000 compared to the same prior year
period, when they were $4.3 million and comprised 69% of license fee revenues.
SERVICES. Services revenues, which consist primarily of consulting,
implementation, training and managed hosting services, were $13.3 million or 16%
lower than the corresponding quarter a year ago. This decrease was primarily a
result of a reduction in new consulting and implementation projects due to lower
prior period ERP sales. Services revenues for Logility and AmQuest, constituted
18% and 30% of total services revenues, respectively, for the quarter ended July
31, 2000 and constituted 12% and 29% of total services revenues, respectively,
for the quarter ended July 31, 1999. Services revenues constituted 60% and 56%
of total revenues for the period ending July 31, 2000 and July 31, 1999,
respectively.
MAINTENANCE. Maintenance revenues, which consist of product support activities
and on-going product enhancements provided to customers who license the
Company's products and purchase maintenance agreements, increased 1% for the
first quarter of fiscal year 2001 to $6.3 million from $6.2 million in the first
quarter of fiscal year 2000. This was due primarily to increases in Logility's
new license fees in the latter portion of fiscal year 2000. Maintenance revenues
for Logility increased 20% to $2.7 million and constituted 42% of the total
maintenance revenues for the quarter ended July 31, 2000 compared to the prior
year period, when they were $2.2 million and constituted 36% of maintenance
revenues. Maintenance revenues constituted 29% of total revenues for the quarter
ended July 31, 2000 and 22% of total revenues for the quarter ended July 31,
1999.
GROSS MARGIN:
The total gross margin in the quarter ended July 31, 2000 was 37% compared to
45% a year ago. This decrease was largely due to a decrease in the license fees
gross margin to 43% this quarter compared to 79% in the same quarter a year ago,
which was due primarily to the reduced total license fees in the most recent
quarter. The Company anticipates a further reduction in license fees gross
margin due to increased amortization of capitalized software costs as additional
products are released in future quarters. The gross margin on services revenues
decreased to 20% compared to 26% the same quarter a year ago. This is due to the
higher margin services work related to the "Year 2000" remediation being
performed in the first quarter of fiscal year 2000 compared to the lower margin
services work that is currently being performed. Maintenance gross margin
increased to 71% when compared to 57% during the same period one year ago. This
increase was primarily due to the increased maintenance revenues of Logility and
the cost management efforts by the ERP area that were begun in the prior fiscal
year.
13
<PAGE>
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:
<TABLE>
<CAPTION>
July 31, Percent July 31,
2000 Change 1999
----------- ---------- -----------
<S> <C> <C> <C>
Gross product development costs $ 4,502 (12)% $ 5,120
Percentage of total revenues 20% 18%
Less: capitalized development (1,444) (51)% (2,963)
Percentage of gross prod. dev. costs 32% 58%
----------- ---------- -----------
Product development expenses $ 3,058 42% $ 2,157
Percentage of total revenues 14% 8%
</TABLE>
Gross product development costs decreased 12% in the quarter ended July 31, 2000
compared to the same period a year ago primarily as a result of the Company's
cost containment and restructuring efforts in response to lower license fees.
Capitalized development decreased by 51% from a year ago, as well as the rate of
capitalized development, which decreased to 32% from 58% a year ago. These
reductions were also primarily due to the restructuring and cost containment
efforts as well as a reduction in capitalizable projects. Product development
expenses, as a percentage of total revenues, increased to 14% compared to 8% a
year ago due to the decrease in total revenues and the decrease in capitalized
development costs as noted above.
SALES & MARKETING. Sales and marketing expenses decreased 10% to $5.8 million
for the quarter ended July 31, 2000 compared to $6.5 million for the same period
a year ago. This decrease was due to the decrease in sales commissions due to
lower sales, as well as controls of sales and marketing expenditures. As a
percentage of total revenues, sales and marketing expenses were 26% for the
quarter ended July 31, 2000 compared to 23% for the quarter ended July 31, 1999.
It is anticipated that sales and marketing expenses will increase as increased
market share in the e-business arena is pursued.
GENERAL & ADMINISTRATIVE. General and administrative expenses decreased 3% to
$3.3 million for the quarter ended July 31, 2000 compared to $3.4 million for
the same period last year as a result of the continued management of these
expenses, such as a reduction in the number of employees. During the quarter the
average number of employees was 673 compared to 726 during the same period a
year ago. As percentage of total revenues, general and administrative expenses
were 15% for the quarter ended July 31, 2000 compared to 12% for the quarter
ended July 31, 1999. It is anticipated
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 $287,000 in the quarter ended July 31, 2000 from $319,000 in the
same period one year ago.
INCOME TAXES. For the quarter ended July 31, 2000, the Company did not record
any income taxes as a result of operating losses incurred in prior periods.
14
<PAGE>
Item 2. Management's Discussion (continued)
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company's operating activities used cash of approximately $2.2 million in
the three months ended July 31, 2000, and provided cash of approximately $8.6
million in the same period last year. The cash used in operations during the
three months ended July 31, 2000, was primarily attributable to a net loss of
$3.7 million, a decrease in accounts payable and other accrued liabilities of
$3.0 million, purchase of trading securities of $1.0 million and a decrease of
$432,000 in deferred revenue. This was partially offset by non-cash depreciation
and amortization expense of $2.5 million, proceeds from trading securities of
$1.7 million, and a decrease in accounts receivable of $1.8 million. 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 $2.5 million, net income of $904,000, a
decrease in accounts receivable of $717,000, an increase in accounts payable and
other liabilities of $1.0 million and an increase to deferred revenue of
$506,000. This was offset by purchases of trading securities of $1.3 million.
Cash used in investing activities was approximately $1.9 million for the three
months ended July 31, 2000. The major use of cash was for capitalized software
development costs of $1.4 million, purchase of property and equipment of
$655,000, purchase of majority interest in subsidiary of $517,000 and purchase
of computer software of $280,000. This was partially offset by the sale of
short-term investments, net of $1.0 million. Cash used for investing activities
was approximately $5.9 million for the three months ended July 31, 1999. The
major use of cash was for capitalized software development costs of $3.0
million, the purchase of short-term investments, net of $2.0 million, purchase
of the Company's subsidiary common stock of $224,000, purchase of property and
equipment of $523,000 and the purchase of minority interest in business of
$150,000.
Cash used in financing activities was approximately $333,000 for the three
months ended July 31, 2000 and was primarily for payments to capital lease
obligations of $420,000. This was partially offset by proceeds from exercise of
stock options of $72,000, and proceeds from dividend reinvestment of $15,000.
Cash used in financing activities was approximately $1.5 million for the three
months ended July 31,1999 and was primarily used for payments to capital lease
obligations of $590,000, to purchase common stock of the Company of $621,000,
and repayment of long-term debt of $250,000.
Days Sales Outstanding (DSO) in accounts receivable were 76 days as of July 31,
2000 compared to 65 days as of July 31, 1999 and 70 days as of April 30, 2000.
The Company's current ratio was 1.65 to 1 and cash and investments totaled 36%
of total assets at July 31, 2000 compared to a current ratio of 1.65 to 1 and
cash and investments totaling 39% of total assets at July 31, 1999. 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
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Item 2. Management's Discussion (continued)
On December 18, 1997, the Company'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. On March 11, 1999, the Company's Board of Directors
approved a resolution authorizing the Company to repurchase an additional
700,000 shares for a total of up to 2.2 million shares of the Company's Class A
common stock. These repurchases have been and will be made through open market
purchases at prevailing market prices. The timing of any repurchases will depend
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
the adoption of these resolutions, the Company has repurchased approximately 1.6
million shares of common stock at a cost of approximately $5.6 million as of
July 31, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board "(FASB)" issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement was amended in June 2000 by Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." Statement No. 138 will
be effective for the Company beginning May 1, 2001. The new Statement requires
all derivatives to be recorded on the balance sheet at fair value and
establishes accounting treatment for three types of hedges: (1) hedges of
changes in the fair value of assets, liabilities, or firm commitments; (2)
hedges of the variable cash flows of forecasted transactions; and (3) hedges of
foreign currency exposures of net investments in foreign operations. The Company
has not invested in derivative instruments or participated in hedging activities
and, therefore, does not anticipate there will be a material impact on its
results of operations or financial position from Statement No. 133 or No. 138.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March and June 2000. We are required to adopt the
provisions of SAB 101 in our fourth quarter of fiscal 2001. We are currently
reviewing the provisions of SAB 101 and have not fully assessed the impact of
its adoption. While SAB 101 does not supercede the software industry-specific
revenue recognition guidance, with which we believe we comply, the SEC Staff has
recently informally indicated its views related to SAB 101 that may change
current interpretations of software revenue recognition requirements. Such SEC
interpretations could result in many software companies, including us, recording
a cumulative effect of a change in accounting principles retroactive to May 1,
2000.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency. In the year ended July 31, 2000, the Company generated 9% 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, 2000
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 market
value of securities at July 31, 2000 was approximately $29.5 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 investments in 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
------- -----------------
The Company is not party to any material legal proceedings
Item 2. Changes in Securities and Use of Proceeds
------- -----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
There were no matters submitted to a vote of shareholders during the
quarter ended July 31, 2000.
Item 5. Other Information
------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter ended July 31,
2000.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN SOFTWARE, INC.
DATE September 10, 2000 /s/ James C. Edenfield
------------------------------ -----------------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE September 10, 2000 /s/ Vincent C. Klinges
------------------------------- -----------------------------------
Vincent C. Klinges
Chief Financial Officer
DATE September 10, 2000 /s/ Deirdre J. Lavender
------------------------------- -----------------------------------
Deirdre J. Lavender
Accounting Officer
19
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EXHIBIT INDEX
-------------
Exhibit
-------
27.1 Financial Data Schedule
20
