<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 October 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 Number)
incorporation or organization)
470 East Paces Ferry Road, N.E., Atlanta, Georgia 30305
------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(404) 261-4381
--------------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _______
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes Outstanding at December 6, 2000
-------------------------------- -------------------------------
Class A Common Stock, $.10 par value 18,685,374 Shares
Class B Common Stock, $.10 par value 4,082,289 Shares
1
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AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Form 10-Q
Quarter ended October 31,2000
Index
-----
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- Unaudited - October 31, 2000 and April 30, 2000 3
Condensed Consolidated Statements of Operations
- Unaudited - Three Months and Six Months ended October 31, 2000 4
and October 31, 1999
Condensed Consolidated Statements of Cash Flows
- Unaudited - Six Months ended October 31, 2000 and October 31, 1999 5
Notes to Condensed Consolidated Financial Statements - Unaudited 6-10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II - Other Information 20
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
------
Item 1. Financial Statements
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
October 31, April 30,
2000 2000
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,521 $ 12,910
Investments - current 15,753 21,457
Trade accounts receivable, less allowance for doubtful accounts
of $1,656 at October 31, 2000 and $1,739 at April 30, 2000:
Billed 13,416 15,233
Unbilled 4,243 5,143
Deferred income taxes 1,975 1,975
Prepaid expenses and other current assets 2,509 2,099
--------------- ---------------
Total current assets 49,417 58,817
Investments - noncurrent 6,129 9,878
Property and equipment, less accumulated depreciation 19,242 18,614
Intangible assets, less accumulated amortization 14,289 23,391
Other assets 2,299 2,347
--------------- ---------------
$ 91,376 $ 113,047
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 2,109 $ 1,493
Accounts payable 5,678 3,505
Accrued compensation and related costs 3,701 4,545
Income tax payable 2,410 3,122
Other current liabilities 4,535 7,012
Deferred revenue 14,168 15,936
--------------- ---------------
Total current liabilities 32,601 35,613
Obligations under capital leases, net of current portion 1,718 907
Deferred income taxes 1,975 1,975
--------------- ---------------
Total liabilities 36,294 38,495
--------------- ---------------
Minority interest in subsidiaries 4,238 4,846
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 21,608,243 shares at October 31, 2000 and
21,476,284 shares at April 30, 2000 2,161 2,148
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,082,289 shares at October 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 65,977 65,241
Other comprehensive income 243 247
Retained earnings (441) 19,165
Class A treasury stock, 2,920,854 shares at October 31, 2000
and 2,920,854 shares at April 30, 2000, respectively (17,504) (17,504)
--------------- ---------------
Total shareholders' equity 50,844 69,706
--------------- ---------------
$ 91,376 $ 113,047
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements -
unaudited.
3
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 2,978 $ 6,343 $ 5,475 $ 12,620
Services 12,492 15,543 25,769 31,290
Maintenance 6,059 6,296 12,329 12,507
------------- ------------ ------------- ------------
Total revenues 21,529 28,182 43,573 56,417
------------- ------------ ------------- ------------
Cost of revenues:
License fees 1,459 1,398 2,880 2,726
Services 11,908 11,335 22,474 22,918
Maintenance 1,597 2,345 3,430 5,030
------------- ------------ ------------- ------------
Total cost of revenues 14,964 15,078 28,784 30,674
------------- ------------ ------------- ------------
Gross margin 6,565 13,104 14,789 25,743
------------- ------------ ------------- ------------
Operating expenses:
Research and development 4,148 5,085 8,650 10,206
Less: Capitalized development (812) 2,594 (2,256) (5,558)
Sales and marketing 6,791 6,408 12,623 12,900
General and administrative 3,160 3,685 6,473 7,090
Charge for asset impairment and restructuring 10,174 --- 10,174 ---
------------- ------------ ------------- ------------
Total operating expense 23,461 12,584 35,664 24,638
Operating income (loss) (16,896) 520 (20,875) 1,105
Other income, net 469 695 747 1,121
Minority interest 513 (62) 522 (169)
------------- ------------ ------------- ------------
Income (loss) before income taxes (15,914) 1,153 (19,606) 2,057
Income taxes --- 150 --- 150
------------- ------------ ------------- ------------
Net income (loss) $ (15,914) $ 1,003 $ (19,606) $ 1,907
============= ============ ============= ============
Basic net income (loss) per common share $ (.70) $ .05 $ (.86) $ .09
============= ============ ============= ============
Diluted net income (loss) per common share* $ (.70) $ .05 $ (.86) $ .09
============= ============ ============= ============
Weighted average common shares
Outstanding: Basic 22,724 21,440 22,687 21,519
============= ============ ============= ============
Diluted 22,724 21,913 22,687 22,097
============= ============ ============= ============
</TABLE>
*Diluted weighted average common shares outstanding are not included in the
quarter ended and six months ended October 31, 2000 calculations due to the
anti-dilution of the net loss per share.
See accompanying notes to condensed consolidated financial statements -
unaudited.
4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN SOFTWARE, INC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands) Six Months Ended
October 31,
-------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (19,606) $ 1,907
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 5,921 5,089
Minority interest in subsidiary (loss) income (522) 169
Net (gain) loss on investments (220) 528
Charge for asset impairment and restructuring - non-cash portion 9,727 -----
Write-off of minority investment in business 300 -----
Change in operating assets and liabilities:
Purchases of trading securities (1,322) (3,876)
Proceeds from trading securities 5,638 4,397
Proceeds from sales and maturities of investments 120 2,250
Decrease/(increase) in Accounts receivable 2,717 (81)
(Increase)/decrease in Prepaid expenses and other assets (532) (731)
(Decrease)/increase in Accounts payable and other accrued liabilities (1,860) 1,325
(Decrease)/increase in Deferred revenue (1,768) (1,863)
Currency translation adjustment ----- 2
-------------- -------------
Net cash (used in) provided by operating activities (1,407) 9,116
-------------- -------------
Cash flows from investing activities:
Additions to capitalized software development costs (2,256) (5,558)
Additions to purchased computer software costs (547) (65)
Purchase of majority interest in subsidiaries (517) (658)
Minority investment and additional funding in business (130) (330)
Repurchase of common stock by subsidiary ----- (635)
Purchases of property and equipment (998) (897)
Sales (purchases) of short term investments, net 5,238 2,356
-------------- -------------
Net cash provided by (used in) investing activities 788 (5,787)
-------------- -------------
Cash flows from financing activities:
Repayment of long-term debt ----- (950)
Payment of capital lease obligation (1,168) (1,150)
Repurchase of common stock ----- (974)
Proceeds from exercise of stock options 374 77
Proceeds from dividend reinvestment and stock purchase plan 24 3
-------------- -------------
Net cash used in financing activities (770) (2,994)
-------------- -------------
Net (decrease) increase in cash and cash equivalents (1,389) 335
Cash and cash equivalents at beginning of period $ 12,910 $ 12,647
-------------- -------------
Cash and cash equivalents at end of period $ 11,521 $ 12,982
============== =============
Cash paid for income taxes $ ----- $ -----
============== =============
Cash paid for interest $ 130 $ 47
============== =============
Supplemental disclosure of noncash investing, and financing activities:
Assumption of capital lease obligations for property and equipment $ 2,595 $ 1,145
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements -
unaudited.
5
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
October 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 of America have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be used in conjunction with
the consolidated financial statements and related notes contained in 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 but not necessarily indicative of
future results.
B. Comprehensive Income
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 unaudited condensed
consolidated financial statements since comprehensive income (loss) and net
income (loss) presented in the accompanying condensed consolidated
statements of operations would be materially the same.
C. Revenue Recognition
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, provided collection is considered probable, the fee is fixed and
determinable, there is evidence of an arrangement, and vendor specific
objective 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 services. Fees are billed under both
time and materials and fixed fee arrangements and are recognized as the
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 condensed
consolidated financial statements.
Deferred Revenues. Deferred revenues represent advance payments or billings
for software licenses, services, and maintenance billed in advance of the
time revenues are recognized.
6
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
October 31, 2000
D. Charge for Asset Impairment and Restructuring
For the six months ended October 31, 2000, the Company had a write-off of
capitalized software ($9.5 million) and restructuring charges ($0.7 million)
in the aggregate amount of $10.2 million. These charges were a result of
lower than anticipated sales of our ERP products in recent periods and
reduced expectations of future sales of those products. The restructuring
charges were related to management actions taken to address the slowdown in
ERP license fee revenue.
E. Major Customer
One customer accounted for 10% of the Company's total revenues and 20% of
services revenues during the quarter ended October 31, 2000. The related
accounts receivable balance is $1.7 million at October 31, 2000.
F. Purchase of Majority Interest in New Generation Computing
On July 10, 1998, the Company purchased an 80% interest in New Generation
Computing, Inc., a leading software vendor that specializes in accounting
and manufacturing control software for the sewn goods industry (apparel,
handbags, shoes, hats, etc.). 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 October 31, 2000.
7
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
October 31, 2000
G. Net Income (Loss) Per Common Share
Basic income (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 purposes of the per share computation. Diluted income
(loss) per common share available to common shareholders is based on the
weighted-average number of common shares outstanding and dilutive
potential common shares, such as dilutive stock options.
The numerator in calculating both basic and diluted income (loss) per
common share for each year is the same. The denominator is based on the
following number of common shares:
<TABLE>
<CAPTION>
Three Months ended Six Months ended
October 31, October 31,
2000 1999 2000 1999
--------------------- ----------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Common Shares:
Weighted average common shares outstanding
Class A Shares 18,642 16,672 18,605 16,751
Class B Shares 4,082 4,768 4,082 4,768
--------------------- ----------------------
Basic weighted average common shares outstanding: 22,724 21,440 22,687 21,519
--------------------- ----------------------
Dilutive effect of outstanding Class A common
stock options: - 473 - 578
--------------------- ----------------------
Total 22,724 21,913 22,687 22,097
===================== ======================
Net (loss) income: $ (15,914) $ 1,003 $ (19,607) $ 1,907
Net (loss) income per common share:
Basic $ (0.70) $ 0.05 $ (0.86) $ 0.09
===================== ======================
Diluted $ (0.70) $ 0.05 $ (0.86) $ 0.09
--------------------- ----------------------
</TABLE>
For the three and six months ended October 31, 2000, approximately
672,114 and 456,610 stock options were excluded from the computation of
diluted loss per share because they were antidilutive. For the three and
six months ended October 31, 1999, options to purchase approximately
537,370 and 560,469 shares were outstanding, 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
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AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
October 31, 2000
H. Industry Segments
The Company operates and manages its business in four segments based on
software and services provided in four 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 Services Provider (MSP) segment
provides data center infrastructure, network outsourcing services, e-
commerce solution hosting and monitoring, and professional services
staffing. Fourth, the remaining segment (Other) is comprised of the
subsidiaries of the Company that do not operate within the three segments
as defined and, individually, represented less than 10% of the Company's
revenues during fiscal year 2000. Intersegment charges are based on
marketing and general administration services provided to the BBCC and MSP
segments by the ERP segment. Intersegment charges are also based on managed
services provided to the ERP and BBCC segments by the MSP segment.
9
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
October 31, 2000
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
2000 1999 2000 1999
Revenues: ---------------------- -----------------------
<S> <C> <C> <C> <C>
Enterprise resource planning 6,557 12,023 13,852 22,454
Business-to-business collaborative commerce 6,612 8,555 13,533 16,923
Managed service provider
External customers 4,514 5,210 8,318 9,732
Intersegment revenues 1,084 883 2,116 1,929
Elimination of intersegment revenues (1,084) (883) (2,116) (1,929)
Other 3,846 2,394 7,870 7,308
--------- --------- ----------- ---------
21,529 28,182 43,573 56,417
Operating income before intersegment eliminations:
Enterprise resource planning (12,393) (1,058) (14,793) (903)
Business-to-business collaborative commerce (2,853) 668 (3,935) 1,169
Managed service provider (1,366) 592 (2,360) 299
Other (284) 318 213 540
--------- --------- ----------- ---------
(16,896) 520 (20,875) 1,105
Intersegment eliminations:
Enterprise resource planning (18) 81 (62) 313
Business-to-business collaborative commerce 753 528 1,494 1,104
Managed service provider (735) (609) (1,432) (1,417)
Other 0 0 0 0
--------- --------- ----------- ---------
0 0 0 0
Operating income after intersegment eliminations:
Enterprise resource planning (12,411) (977) (14,855) (590)
Business-to-business collaborative commerce (2,100) 1,196 (2,441) 2,273
Managed service provider (2,101) (17) (3,792) (1,118)
Other (284) 318 213 540
--------- --------- ----------- ---------
(16,896) 520 (20,875) 1,105
Capital expenditures:
Enterprise resource planning 18 (70) 442 24
Business-to-business collaborative commerce 204 76 320 226
Managed service provider 104 515 217 642
Other 1 2 3 5
--------- --------- ----------- ---------
327 523 982 897
Capitalized Software:
Enterprise resource planning 0 2,058 534 3,585
Business-to-business collaborative commerce 700 792 1,498 1,646
Managed service provider 0 0 0 0
Other 112 113 224 327
--------- --------- ----------- ---------
812 2,963 2,256 5,558
Depreciation and amortization:
Enterprise resource planning 1,514 859 2,537 1,810
Business-to-business collaborative commerce 926 889 1,756 1,584
Managed service provider 783 667 1,332 1,334
Other 150 198 296 361
--------- --------- ----------- ---------
3,373 2,613 5,921 5,089
October 31, April 30,
Identifiable assets: 2000 2000
----------- ---------
Enterprise resource planning 37,435 54,240
Business-to-business collaborative commerce 37,649 44,534
Managed service provider 8,758 7,016
Other 7,534 7,257
----------- ---------
91,376 113,047
</TABLE>
10
<PAGE>
AMERICAN SOFTWARE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Result
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 customer needs, marketplace demands and technological advances.
Development plans frequently change, and it is difficult to predict with
accuracy the release dates for products in development. In addition, other
factors, including but not limited to, changes in general economic conditions,
technology and the market for the Company's products and services including
economic conditions within the e-commerce markets, the timely availability and
market acceptance of these products and services, the effect of competitive
products and pricing, and the irregular pattern of the Company's 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"), 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. Our software and services are
designed to bring business value to traditional businesses and e-businesses by
supporting their operations over intranets, extranets, client/servers and the
Internet. We launched our comprehensive suite of e-business solutions in
December 1999, positioning ourself as a single source e-business solution.
We focus our 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 consists of Managed Service Provider (MSP) services provided by AmQUEST,
Inc. ("AmQUEST"), a subsidiary of the Company. Our products are designed to
bring rapid business value to customers and to support their transition into
e-business and make existing e-businesses more effective. We also provide
support for our software products, such as software enhancements, documentation,
updates, customer education, consulting, systems integration services,
maintenance and IT hosting.
11
<PAGE>
Item 2. Management's Discussion and Analysis (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, 2000 and 1999:
<TABLE>
<CAPTION>
Percentage of Percentage of
Total Revenues % Total Revenues %
------------------------ -------------------------
Three months ended Change Six months ended Change
------------------------ ------------ ------------------------- ------------
2000 1999 00 v. 99 2000 1999 00 v. 99
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees 14% 23% (53%) 13% 23% (57%)
Services 58 55 (20) 59 55 (18)
Maintenance 28 22 (4) 28 22 (1)
---------- ---------- ------------ ---------- ---------- ------------
Total revenues 100 100 (24) 100 100 (23)
---------- ---------- ------------ ---------- ---------- ------------
Cost of revenues:
License fees 7 5 4 7 5 6
Services 55 40 5 51 41 (2)
Maintenance 8 8 (32) 8 9 (32)
---------- ---------- ------------ ---------- ---------- ------------
Total cost of revenues 70 54 (1) 66 54 (6)
---------- ---------- ------------ ---------- ---------- ------------
Gross margin 30 46 (50) 34 46 (43)
---------- ---------- ------------ ---------- ---------- ------------
Operating expenses:
Research and development 19 18 (18%) 20 18 (15%)
Less: Capitalized development (4) (9) (69) (5) (10) (59)
Sales and marketing 32 23 6 29 23 (2)
General and administrative 15 13 (14) 15 13 (9)
Charge for asset impairment and
restructuring 47 -- nm 23 -- nm
---------- ---------- ------------ ---------- ---------- ------------
Total operating expenses 109 45 86 82 44 45
---------- ---------- ------------ ---------- ---------- ------------
Operating income (loss) (78) 2 nm (48) 2 nm
Other income, net (2) 2 nm (2) 2 nm
Minority interest
(2) -- nm (1) -- nm
---------- ---------- ------------ ---------- ---------- ------------
Income (loss) before income
taxes (74) 4 nm (45) 4 nm
Income taxes -- 1 -- -- -- nm
---------- ---------- ------------ ---------- ---------- ------------
Net income (loss) (74) 4 nm (45) 3 nm
========== ========== ============ ========== ========== ============
</TABLE>
nm - not meaningful
12
<PAGE>
Item 2. Management's Discussion and Analysis (continued)
THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
--------------------------------------------
REVENUES
For the quarter ended October 31, 2000 revenues totaled $21.5 million, down 24%
from $28.2 million in the corresponding quarter of fiscal 2000. This decrease
was primarily due to a decrease in license fee revenues and, to a lesser extent,
a decrease in services revenues. International revenues represented
approximately 9% of total revenues in the quarter ended October 31, 2000, up
from 8% the same quarter ended October 31, 1999.
LICENSES. Software license fee revenues decreased 53% to $3.0 million in the
quarter ended October 31, 2000 from $6.3 million in the corresponding quarter a
year ago. 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. License fee revenues
from Logility decreased 44% to $2.3 million and constituted 76% of the total
license fee revenues for the three month period ended October 31, 2000, compared
to the same prior year period when they were $4.0 million and comprised 63% of
license fee revenues. We expect license fee revenues in the ERP area to remain
depressed during the near term.
SERVICES. Services revenues, which consist primarily of consulting,
implementation, training and managed services, were $12.5 million or 20% 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 and SCP sales. Due to the decrease in new projects for the ERP area,
a reduction in services personnel occurred during the current quarter as part of
our restructuring efforts. Services revenues for Logility and AmQuest
constituted 15% and 36% of total services revenues, respectively, for the
quarter ended October 31, 2000 and constituted 14% and 34% of total services
revenues, respectively, for the quarter ended October 31, 1999. Services
revenues constituted 58% and 55% of total revenues for the period ending October
31, 2000 and October 31, 1999, respectively.
MAINTENANCE. Maintenance revenues decreased 4% in the second quarter of fiscal
year 2001 to $6.1 million from $6.3 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. The lower license fees in prior quarters will continue to have an
effect on future maintenance revenues in the near term.
GROSS MARGIN:
The total gross margin in the quarter ended October 31, 2000 was 30% compared to
46% a year ago. This decrease was largely due to a decrease in the license fees
gross margin to 51% this quarter compared to 78% in the same quarter a year ago,
which was due to the combination of reduced total license fees in the most
recent quarter and the relatively fixed amount of amortization expense on
capitalized software, which makes up the primary component of cost of license
fees. The gross margin on services revenues decreased to 5% compared to 27% the
same quarter a year ago. This was due to the higher margin services work related
to the "Year 2000" remediation being performed in the second quarter of fiscal
year 2000 compared to the lower margin services work that is currently being
performed. Maintenance gross margin increased to 74% when compared to 63% 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, which began in the prior fiscal year.
13
<PAGE>
Item 2. Management's Discussion and Analysis (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>
Three Months Ended
-----------------------------------------
Oct. 31, Percent Oct. 31,
2000 Change 1999
---------- ----------- -----------
<S> <C> <C> <C>
Gross product development costs $ 4,148 (18%) $ 5,085
Percentage of total revenues 19% 18%
Less: capitalized development (812) (69%) (2,594)
Percentage of gross prod. dev. costs 20% 51%
---------- ----------- -----------
Product development expenses $ 3,336 34% $ 2,491
Percentage of total revenues 15% 9%
</TABLE>
Gross product development costs decreased 18% in the quarter ended October 31,
2000 compared to the prior year. This is a result of cost containment and
restructuring efforts in response to lower license fees. We expect gross product
development costs to decrease slightly due to the restructuring that occurred
during the current quarter. Capitalized development decreased as well by 69% for
the quarter ended October 31, 2000 compared to the prior year, while the rate of
capitalized development decreased to 20% from 51% for the quarter ended October
31, 2000 compared to the prior year. These reductions are also due to the cost
containment and restructuring efforts, as well as a reduction in capitalizable
projects. Product development expenses, as a percentage of total revenues,
increased to 15% in this quarter compared to 9% in the prior year due to the
decrease in total revenues and the decrease in capitalized development costs as
noted above.
SALES & MARKETING. Sales and marketing expenses increased 6% to $6.8 million for
the quarter ended October 31, 2000 compared to $6.4 million for the same period
a year ago. This increase is due primarily to the increased expenditures related
to trade shows and the hiring of sales and marketing personnel by Logility. As a
percentage of total revenues, sales and marketing expenses were 32% for the
quarter ended October 31, 2000 compared to 23% for the quarter ended October 31,
1999. We anticipate that sales and marketing expenses will increase as we pursue
increased market share in the e-business arena.
GENERAL & ADMINISTRATIVE. General and administrative expenses decreased 14% to
$3.2 million for the quarter ended October 31, 2000 compared to $3.7 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 621 compared to 698 during the same period a
year ago. As a percentage of total revenues, general and administrative expenses
were 15% for the quarter ended October 31, 2000 compared to 13% for the quarter
ended October 31, 1999.
CHARGE FOR ASSET IMPAIRMENT AND RESTRUCTURING. For the quarter ended October 31,
2000, the Company incurred a charge against earnings of $10.2 million. This
charge was a result of the write-off of certain capitalized software development
costs in the amount of $9.5 million, and restructuring charge of $728,000. These
charges were a result of lower than anticipated sales of our ERP products in
recent periods and reduced expectations of future sales of those products. We
believe the charge for the asset impairment will bring the amount of capitalized
software in line with the revised forecasts of future ERP sales. The
restructuring charge is the result of severence expenses for approximately 70
employees in Sales, Marketing, Services and Research and Development. A non-cash
charge of approximately $261,000 was included in the $728,000 restructuring
expense. We believe a future reduction in expenses related to the restructure
charge, will be offset by decreased revenues in ERP.
14
<PAGE>
Item 2. Management's Discussion and Analysis (continued)
OTHER INCOME. Other income is comprised predominantly of interest income, gains
and losses from sales of investments, changes in the market value of
investments, and minority interest in subsidiary's earnings (loss). Other income
increased to $982,000 in the quarter ended October 31, 2000 compared to $633,000
for the same period a year ago. This increase is primarily related to Logility's
losses in the current period, which resulted in a minority interest benefit of
$513,000, compared to a minority interest charge of $62,000 in the same prior
year period.
INCOME TAXES. For the quarter ended October 31, 2000, we did not record any
income taxes as a result of operating losses incurred in prior periods. For the
quarter ended October 31, 1999 an income tax expense of $150,000 was recorded
based on an estimated tax liability.
SIX MONTHS ENDED OCTOBER 31, 2000 AND 1999
------------------------------------------
REVENUES
Revenues for the six months ended October 31, 2000 totaled $43.6 million, down
23% from $56.4 million in the prior year period. International revenues
represented approximately 9% for the six months ended October 31, 2000 compared
to approximately 8% for the same period a year ago.
LICENSES. For the six months ended October 31, 2000, license fee revenues
decreased 57% from a year ago. We continued to experience lower license fee
sales due to reduced sales effectiveness by our direct and indirect sales
channels, as well as Logility's. We expect license fee revenues in the ERP area
to remain depressed during the near term. License fee revenues from Logility
decreased 50% to $4.1 million and constituted 75% of the total license fee
revenues for the six month period, compared to the same prior year period when
they were $8.3 million and constituted 66% of the total license fee revenues.
SERVICES. Services revenues were $25.8 million or 18% lower than the
corresponding six month period. This decrease was primarily a result of a
reduction in new consulting and implementation projects due to lower prior
period ERP sales. Services revenues for Logility and AmQuest, constituted 17%
and 32% of total services revenues, respectively, for the six months ended
October 31, 2000 and constituted 13% and 31% of total services revenues,
respectively, for the six months ended October 31, 1999. Services revenues
constituted 59% and 55% of total revenues for the six month period ending
October 31, 2000 and October 31, 1999, respectively.
MAINTENANCE. For the six months ended October 31, 2000, maintenance revenues
decreased 1%, to $12.3 million compared to $12.5 million in the prior year
period. 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.
15
<PAGE>
Item 2. Management's Discussion and Analysis (continued)
GROSS MARGIN:
For the six months ended October 31, 2000, the gross margin was 34% compared to
46% for the same period a year ago. This decrease was largely due to a decrease
in the license fees gross margin to 47% compared to 78% in the prior six month
period which was due to the combination of reduced total license fees in the
most recent six month period and the relatively fixed amount of amortization
expense on capitalized software, which makes up the primary component of cost of
license fees. The gross margin on services revenues decreased to 13% compared to
27% in the same period a year ago. This is due to the higher margin services
work related to the "Year 2000" remediation being performed in the first and
second quarters of fiscal year 2000 compared to the lower margin services work
that is currently being performed. Maintenance gross margin increased to 72%
when compared to 60% 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.
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>
Six Months Ended
------------------------------------------
Oct. 31, Percent Oct. 31,
2000 Change 1999
----------- ----------- -----------
<S> <C> <C> <C>
Gross product development costs $ 8,650 (15%) $ 10,206
Percentage of total revenues 20% 18%
Less: capitalized development (2,257) (59%) (5,558)
Percentage of gross prod. dev. Costs 26% 55%
----------- ----------- -----------
Product development expenses $ 6,393 38% $ 4,648
Percentage of total revenues 15% 8%
</TABLE>
Gross product development costs decreased 15% for the six months ended October
31, 2000 primarily as a result of cost reduction efforts in response to the
lower license fees. Capitalized development decreased 59% for the six months
ended, while the rate of capitalized development decreased to 26% from 55% for
the six months ended due to the cost reduction efforts, as well as the reduction
in capitalized projects. Product development expenses, as a percentage of total
revenues, increased to 15% from 8% for the six months ended October 31, 2000
primarily as a result of the decrease in total revenues and the reduction in
capitalized development costs as noted above.
SALES & MARKETING. Sales and marketing expenses decreased 2% to $12.6 million
for the six months ended October 31, 2000. As a percentage of total revenues,
sales and marketing expenses were 29% for the six months ended October 31, 2000
when compared to 23% for the comparable period last year. This increase is due
to the decrease in revenues.
GENERAL & ADMINISTRATIVE. General and administrative expenses decreased 9% to
$6.5 million for six months ended October 31, 2000 compared to $7.1 million for
the same prior year period. This decrease was due to the continued management of
these expenses as well as the reduction in the number of employees. For the six
months ended October 31, 2000, the average number of employees was approximately
645, compared to approximately 688 for the six months ended October 31, 1999.
16
<PAGE>
Item 2. Management's Discussion and Analysis(continued)
CHARGE FOR ASSET IMPAIRMENT AND RESTRUCTURING. For the six months ended October
31, 2000, the Company incurred a charge against earnings of $10.2 million. This
charge was a result of the write-off of certain capitalized software development
costs in the amount of $9.5 million, and restructuring charge of $728,000. These
charges were a result of lower than anticipated sales of our ERP products in
recent periods and reduced expectations of future sales of those products. We
believe the charge for the asset impairment will bring the amount of capitalized
software in line with the revised forecasts of future ERP sales. The
restructuring charge is the result of severence expenses for approximately 70
employees in Sales, Marketing, Services and Research and Development. We believe
a future reduction in expenses related to the restructure charge, will be offset
by decreased revenues in ERP.
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, 2000, Other Income increased 33% to $1.3 million
from $952,000 for the comparable six month period last year. This increase is
primarily related to the Logility's losses in the current six month period,
which resulted in a minority interest benefit of $522,000, compared to a
minority interest charge of $169,000 in the same prior year period.
INCOME TAXES. For the six months ended October 31, 2000, we did not record any
income taxes as a result of operating losses incurred in prior periods. In the
prior year six month period income tax expense in the amount of $150,000 was
recorded based on an estimate for our tax liability for the fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
Our operating activities used cash of approximately $1.4 million in the six
months ended October 31, 2000, and provided cash of approximately $9.1 million
in the same period last year. The cash used by operations during the six months
ended October 31, 2000, is primarily attributable to a net loss of $19.6
million, a decrease in accounts payable and other accrued liabilities of $1.9
million, a decrease in deferred revenue of $1.8 million, the purchase of trading
securities in the amount of $1.3 million, an increase in prepaid expenses and
other assets of $532,000 and a decrease in minority interest in subsidiary loss
of $522,000. This was partially offset by a non-cash charge of $9.7 million for
asset impairment, non-cash depreciation and amortization expense of $5.9
million, proceeds from trading securities of $5.6 million, and a decrease in
accounts receivable of $2.7 million. The cash provided by operations during the
same period in the prior year was primarily attributable to non-cash
depreciation and amortization expense of $5.1 million, proceeds from trading
securities of $4.4 million, proceeds from sales and maturities from investments
of $2.3 million, net income of $1.9 million, an increase in accounts payable of
$1.3 million and a net loss on investments of $528,000. This was partially
offset by the purchase of trading securities in the amount of $3.9 million, a
decrease in deferred revenue of $1.9 million, and an increase in prepaid
expenses and other assets of $731,000.
Cash provided by investing activities was approximately $788,000 for the six
months ended October 31, 2000 and cash used in investing activities was
approximately $5.8 million in the same period of the prior year. For the period
ending October 31, 2000 cash was provided by the sale of short-term investments
in the amount of $5.2 million. This was substantially offset by capitalized
software development costs of $2.3 million, the purchase of property and
equipment of approximately $1.0 million, purchased software in the amount of
$547,000 and the purchase of majority interest in subsidiary of $517,000. Cash
used for the same period of the prior year was primarily for capitalized
software of approximately $5.6 million, the purchase of property and equipment
of $897,000, purchase of majority interest in New Generation
17
<PAGE>
Computing for $658,000, the repurchase of Logility common stock for $635,000 and
minority investment in business for $330,000. This was primarily offset by
purchase of short-term investments of $2.4 million.
Item 2. Management's Discussion and Analysis (continued)
Cash used in financing activities was approximately $770,000 and $3.0 million
for the six months ended October 31, 2000 and 1999, respectively. Cash used
during the six months ended October 31, 2000 was for the payment of capital
lease obligation in the amount of approximately $1.2 million. This was partially
offset by the proceeds from the exercise of stock options in the amount of
$374,000. Cash used during the six months ended October 31, 1999 was used for
the payment of capital lease obligation in the amount of $1.2 million, the
purchase of common stock of the Company in the amount of $974,000 and the
repayment of long-term debt in the amount of $950,000.
Days Sales Outstanding in accounts receivable was 74 days as of October 31,
2000, compared to 66 days as of October 31, 1999.
Our current ratio was 1.5 to 1 and cash and investments totaled 37% of total
assets at October 31, 2000 compared to 1.65 to 1 and cash and investments
representing 39% of total assets at October 31, 1999. Our principal sources of
liquidity are our cash and investments, which totaled approximately $33.4
million at October 31, 2000. We believe that our sources of liquidity and
capital resources will be sufficient to satisfy our presently anticipated
requirements during at least the next twelve months for working capital, capital
expenditures and other corporate needs. Management is not aware of any condition
that would materially alter this trend.
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
October 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. In October 2000, the SEC issued further guidance with respect to
adoption of specific issues addressed by SAB 101. Management does not believe
the adoption of SAB 101 will have a material effect on the Company's
consolidated financial position of results of operations.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency. In the quarter ended October 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 October 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 October 31, 2000 was approximately $21.9 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.
19
<PAGE>
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
------- ---------------------------------------------------
(a) The Company held its 2000 Annual Meeting of Shareholders on
August 24, 2000.
(b) Not applicable
(c) At the Company's 2000 Annual Meeting of Shareholders, the only
Shareholder votes taken were on the election of directors and the
adoption of the new 2001 Stock Option Plan. The following are the
results of the elections, in which there was no opposition, for
each nominee for election:
David H. Gambrell: Votes for: 13,972,986; votes withholding
authority to vote for: 3,061,116.
Thomas R. Williams: Votes for: 15,303,691; votes withholding
authority to vote for: 1,730,411
James C. Edenfield: Votes for: 4,431,137; votes against: 0
Thomas L. Newberry: Votes for: 4,431,137; votes against: 0
2001 Stock Option Plan: Votes for: 4,431,137; votes against:
670,813; votes abstaining: 5,870.
(d) Not applicable.
Item 5. Other Information
------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits:
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter ended
October 31, 2000.
20
<PAGE>
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, 2000 /s/ James C. Edenfield
----------------------------- ---------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE December 14, 2000 /s/ Vincent C. Klinges
----------------------------- ---------------------------
Vincent C. Klinges
Chief Financial Officer
DATE December 14, 2000 /s/ Deirdre J. Lavender
------------------------------ ---------------------------
Deirdre J. Lavender
Controller and Accounting Officer
21
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
-------
27.1 Financial Data Schedule
22
