<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 January 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 March 10,2000
---------- ----------------------------
Class A Common Stock, $.10 par value 17,589,731 Shares
Class B Common Stock, $.10 par value 4,634,289 Shares
1
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Form 10-Q
Quarter ended January 31, 2000
Index
-----
Page
No.
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
- Unaudited - January 31, 2000 and April 30, 1999 3
Condensed Consolidated Statements of Operations
- Unaudited - Three Months and Nine Months ended January 31, 2000 4
and January 31, 1999
Condensed Consolidated Statements of Cash Flows
- Unaudited - Nine Months ended January 31, 2000 and January 31, 1999 5
Notes to Condensed Consolidated Financial Statements - Unaudited 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II - Other Information 19
2
<PAGE>
PART I FINANCIAL INFORMATION
------
Item 1. Financial Statements
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
January 31, 2000 April 30, 1999
----------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,197 $ 21,567
Investments 27,734 27,297
Trade accounts receivable, less allowance for doubtful accounts
of $1,674 at January 31, 2000 and $1,718 at April 30, 1999
Billed 15,080 17,534
Unbilled 5,600 3,539
Deferred income taxes 1,294 1,294
Refundable income taxes 135 138
Prepaid expenses and other current assets 1,995 1,621
---------- ---------
Total current assets 69,035 72,990
---------- ---------
Property and equipment, less accumulated amortization 16,151 16,542
Intangible assets, less accumulated amortization 21,872 16,248
Other assets 2,190 1,578
---------- ---------
$ 109,248 107,358
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,197 $ 3,442
Accrued compensation and related costs 5,721 4,995
Other current liabilities 10,014 8,230
Deferred revenue 14,947 16,298
---------- ---------
Total current liabilities 33,879 32,965
Long term debt -- 950
Deferred income taxes 1,294 1,294
---------- ---------
Total liabilities 35,173 35,209
---------- ---------
Minority interest in subsidiaries 5,031 4,952
Shareholders' equity:
Common stock:
Class A, $.10 par value. Authorized 50,000,000 shares;
Issued 19,988,467 shares at January 31, 2000 and
19,469,405 shares at April 30, 1999 1,999 1,947
Class B, $.10 par value. Authorized 10,000,000 shares;
Issued and outstanding 4,649,290 shares at January 31, 2000 and 4,768,289 shares
at April 30, 1999; convertible into Class A shares on a one-for-one basis 465 477
Additional paid-in capital 61,942 60,368
Other comprehensive income 244 244
Retained earnings 21,897 20,408
Less Class A treasury stock, 2,920,797 shares at January 31, 2000
and 2,603,823 shares at April 30, 1999, at cost (17,503) (16,247)
--------- ----------
Total shareholders' equity 69,044 67,197
--------- ---------
$ 109,248 $ 107,358
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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 Nine Months Ended
January 31, January 31,
----------------- -------------------
2000 1999 2000 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 5,537 $ 5,650 $18,157 $ 13,593
Services 13,884 15,757 45,174 47,016
Maintenance 6,382 6,598 18,889 19,818
------- ------- ------- --------
Total revenues 25,803 28,005 82,220 80,427
------- ------- ------- --------
Cost of revenues:
License fees 1,394 863 4,120 7,219
Services 11,203 11,630 34,121 33,223
Maintenance 2,436 2,583 7,466 7,633
------- ------- ------- --------
Total cost of revenues 15,033 15,076 45,707 48,075
------- ------- ------- --------
------- ------- ------- --------
Gross margin 10,770 12,929 36,513 32,352
------- ------- ------- --------
Operating expenses:
Research and development 4,773 5,140 14,979 17,071
Less: Capitalized development (2,594) (2,768) (8,152) (8,289)
Sales and marketing 5,949 6,618 18,849 22,909
General and administrative 3,513 3,525 10,603 12,543
Charge for asset impairment and in process
research & development - - - 28,005
------- ------- ------- --------
Total operating expense 11,641 12,515 36,279 72,239
Operating income (loss) (871) 414 234 (39,887)
Other income, net 625 926 1,746 1,198
Minority interest (172) (154) (341) 1,351
------- ------- ------- --------
Income (loss) before income tax expense (418) 1,186 1,639 (37,338)
Income tax expense - 173 150 373
------- ------- ------- --------
Net income (loss) $ (418) $ 1,013 $ 1,489 $(37,711)
======= ======= ======= ========
Basic net income (loss) per common share $( .02) $.05 $.07 $(1.68)
======= ======= ======= ========
Diluted net income (loss) per common share* $( .02) $.05 $.07 $(1.68)
======= ======= ======= ========
Weighted average common shares
Outstanding: Basic 21,476 22,006 21,559 22,389
======= ======= ======= ========
Diluted 23,419 22,019 22,764 23,309
======= ======= ======= ========
</TABLE>
* Diluted weighted average common shares outstanding are not included in the
quarter ended January 31, 2000 and nine months ended January 31, 1999
calculations due to the anti-dilution of the net loss per share.
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,489 $(37,711)
Adjustments to reconcile net earnings (loss) to net cash provided
Operating activities:
Depreciation and amortization 5,874 8,097
Minority interest in subsidiary income/(loss) 341 (1,201)
Net loss on investments --- 528
Deferred income taxes --- (864)
Charge for asset impairment and in process R&D --- 27,835
Change in operating assets and liabilities:
Purchases of trading securities (8,550) (6,272)
Proceeds from trading securities 5,464 8,952
Proceeds from sales and maturities of investments 5,954 6,219
Decrease in accounts receivable, net 393 390
(Increase)/decrease in prepaid expenses and other assets (560) 1,257
Increase in accounts payable and other accrued liabilities 2,264 2,543
(Decrease)/increase in deferred revenue (1,351) 825
-------- --------
Net cash provided by operating activities 11,318 10,598
-------- --------
Cash flows from investing activities:
Additions to capitalized software development costs (8,152) (8,742)
Additions to purchased computer software costs (98) (86)
Purchase of majority interest in subsidiaries (658) (1,929)
Minority investment and additional funding in business (423) (858)
Repurchase of common stock by subsidiary (736) (1,502)
Purchases of property and equipment (1,462) (1,400)
(Purchases)/ sale of short term investments, net (3,305) 7,092
-------- --------
Net cash used in investing activities (14,834) (7,425)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (950) ---
Repurchase of common stock (1,256) (2,560)
Proceeds from exercise of stock options 1,352 228
-------- --------
Net cash used in financing activities (854) (2,332)
-------- --------
Net (decrease)/increase in cash (4,370) 841
Cash and equivalents at beginning of period $ 21,567 $ 13,396
-------- --------
Cash and equivalents at end of period $ 17,197 $ 14,237
======== ========
Supplemental disclosure of cash paid during the period for income taxes $ 11 $ 373
======== ========
</TABLE>
5
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
January 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 generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be used in conjunction with the consolidated financial
statements and related notes contained in the 1999 Annual Report on Form
10-K. The financial information presented in the condensed consolidated
financial statements reflects all normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the
period indicated. The interim results reflected in the condensed financial
statements are not necessarily indicative of the results to be expected for
the full year.
B. Comprehensive Income
No statements of comprehensive income (loss) have been included in the
accompanying combined financial statements since comprehensive income
(loss) and net income (loss) presented in the accompanying combined
statements of operations would be the same.
C. Revenue Recognition
In December 1998, the AICPA issued SOP No. 98-9, Modification of SOP No.
97-2, Software Revenue Recognition, with Respect to Certain Transactions.
This SOP amends SOP No. 97-2 to, among other matters, require recognition
of revenue using the "residual method" in circumstances outlined in the
SOP. Under the residual method, revenue is recognized as follows: (1) the
total fair value of undelivered elements, as indicated by vendor-specific
objective evidence, is deferred and subsequently recognized in accordance
with the relevant sections of SOP No. 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. On May
1, 1999 the Company adopted SOP No. 98-9, which has not had a material
effect on the Company's revenue recognition policies.
D. Charge for Asset Impairment and In Process Research and Development
For the nine months ended January 31, 1999, the Company had a write-off of
capitalized software ($24.2 million); asset impairment ($1.8 million); in
process research and development and restructuring charges ($0.2 million)
in the aggregate amount of $28.0 million. These charges were mainly
attributable to the uncertainty of the world economy and a general
reallocation of the market's IT budgets to fix year 2000 problems, which
management believes stalled the adoption of the Company's products. The
restructuring charges were related to management actions taken to address
the current slowdown in license fee revenue and better position the Company
for future growth.
6
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited (continued)
January 31, 2000
E. Purchase of Majority Interest in New Generation Computing
On July 10, 1998, the Company purchased a majority interest in New
Generation Computing, a leading software vendor which specializes in
accounting and manufacturing control software for the sewn goods industry
(apparel, handbags, shoes, hats, etc.). This investment was accounted for
based on the purchase accounting method with the results of operations
included from the date of acquisition. The acquisition resulted in
purchased research and development of approximately $1.8 million, purchased
computer software products of approximately $460,000, and goodwill of
approximately $1.4 million. In August 1999, the Company purchased an
additional 6.6% of New Generation Computing.
F. Industry Segments
The Company operates and manages its business in three segments based on
software and services provided in three key product markets. First,
Enterprise Resource Planning (ERP) automates customers' internal financial,
human resources, and manufacturing functions. Second, Business-to- Business
Collaborative Commerce (BBCC) provides advanced business-to-business
collaborative planning and integrated logistics capabilities. Third,
Application Infrastructure Provider (AIP) 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
SCP and AIP segments by the ERP segment. Intersegment charges are also
based on application hosting services provided to the ERP and SCP segment
by the AIP segment.
7
<PAGE>
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited (continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ -----------------
2000 1999 2000 1999
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Enterprise resource planning $12,657 16,861 42,383 50,743
B-to-B Collaborative Commerce 8,513 7,327 25,436 19,181
Application infrastructure provider 4,633 3,817 14,401 10,503
------ ------ ------ ------
Total 25,803 28,005 82,220 80,427
====== ====== ====== ======
Operating income before intersegment
Eliminations:
Enterprise resource planning $(1,740) (355) (2,264) (31,579)
B-to-B Collaborative Commerce 944 26 2,112 (9,479)
Application infrastructure provider (75) 743 386 1,171
------ ------ ------ ------
Total (871) 414 234 (39,887)
====== ====== ====== ======
Intersegment eliminations:
Enterprise resource planning $ 100 561 986 964
B-to-B Collaborative Commerce 632 523 1,730 1,707
Application infrastructure provider (732) (1,084) (2,716) (2,671)
------ ------ ------ ------
Total -- -- -- --
====== ====== ====== ======
Operating income after intersegment
eliminations:
Enterprise resource planning $(1,640) 206 (1,278) (30,615)
B-to-B Collaborative Commerce 1,576 549 3,842 (7,772)
Application infrastructure provider (807) (341) (2,330) (1,500)
------ ------ ------ ------
Total (871) 414 234 (39,887)
====== ====== ====== ======
Capital expenditures:
Enterprise resource planning $ 728 531
B-to-B Collaborative Commerce 354 698
Application infrastructure provider 380 171
------ ------
Total 1,462 1,400
====== ======
Capitalized Software:
Enterprise resource planning $ 5,634 5,658
B-to-B Collaborative Commerce 2,518 3,084
Application infrastructure provider -- --
------ ------
Total 8,152 8,742
====== ======
Depreciation and amortization:
Enterprise resource planning $ 2,959 4,595
B-to-B Collaborative Commerce 2,558 3,198
Application infrastructure provider 191 304
------ ------
Total 5,708 8,097
====== ======
January 31, April 30,
2000 1999
----------- ---------
Identifiable assets:
Enterprise resource planning $ 35,088 54,213
B-to-B Collaborative Commerce 43,191 40,678
Application infrastructure provider 30,969 12,467
-------- --------
Total 109,248 107,358
======== ========
</TABLE>
8
<PAGE>
AMERICAN SOFTWARE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
It should be noted that this report on Form 10-Q contains forward-looking
statements, which are subject to substantial risks and uncertainties. There are
a number of factors that could cause actual results to differ materially from
those anticipated by statements made herein. The timing of releases of the
Company's software products can be affected by client needs, marketplace demands
and technological advances. Development plans frequently change, and it is
difficult to predict with accuracy the release dates for products in
development. In addition, other factors, including changes in general economic
conditions, the growth rate of the market for the Company's products and
services, the timely availability and market acceptance of these products and
services, the effect of competitive products and pricing, and the irregular
pattern of revenues, as well as a number of other risk factors could affect the
future performance of the Company.
OVERVIEW
American Software, Inc. ("American Software" or the "Company") through its
subsidiaries develops, markets, and supports enterprise resource planning and
integrated supply chain planning solutions. The product line encompasses
integrated business applications such as demand forecasting, logistics planning,
warehouse management, order management, financials, manufacturing, and
transportation solutions. The Company offers professional services to its
customers in support of its products and third party products. These services
include training, system implementation, consulting, custom programming, network
outsourcing management, e-commerce solution hosting and monitoring and
telephonic support services.
The Company's revenues are derived primarily from three sources: software
licenses, maintenance, and services. Software licenses generally are based upon
the number of modules, servers, users and/or sites licensed. License fee
revenues are recognized upon delivery of the software, provided collection is
considered probable, the fee is fixed or determinable, there is evidence of an
arrangement, and vendor specific evidence exists to allocate the total fee to
all elements of the arrangement. Maintenance agreements typically are for a one-
to three-year term and usually are entered into at the time of the initial
product license. Maintenance revenues are recognized ratably over the term of
the maintenance agreement. Services revenues consist primarily of fees from
software implementation, training, consulting, customization services and system
hosting and monitoring. Services revenues are recognized as the services are
rendered.
9
<PAGE>
Item 2. Management's Discussion (continued)
The following table sets forth certain revenue and expense items as a percentage
of total revenues and the percentage increases in those items for the three
months and the nine months ended January 31, 2000 and 1999:
<TABLE>
<CAPTION>
Percentage of Percentage of
Total Revenues % Total Revenues %
Three months ended Change Nine months ended Change
2000 1999 00 v. 99 2000 1999 00 v. 99
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees 21% 20% (2)% 22% 17% 34%
Services 54 56 (12) 55 58 (4)
Maintenance 25 24 (3) 23 25 (5)
------- ------- ------- ------ ------ -------
Total revenues 100 100 (8) 100 100 2
------- ------- ------- ------ ------ -------
Cost of revenues:
License fees 5 3 62 5 9 (43)
Services 43 42 (4) 42 41 3
Maintenance 9 9 (6) 9 9 (2)
------- ------- ------- ------ ------ -------
Total cost of revenues 58 54 -- 56 60 (5)
------- ------- ------- ------ ------ -------
Gross margin 42 46 (17) 44 40 13
------- ------- ------- ------ ------ -------
Operating expenses:
Research and development 18 18 (7) 18 21 (12)
Less: Capitalizable software (10) (10) (6) (10) (10) (2)
Sales and marketing 23 24 (10) 23 28 (18)
General and administrative 14 13 -- 13 16 (15)
Charge for asset impairment -- -- -- -- 35 --
------- ------- ------- ------ ------ -------
Total operating expenses 45 45 (7) 44 90 (50)
------- ------- ------- ------ ------ -------
Operating earnings (loss) (3) 1 nm 0 (50) nm
Other income, net 2 3 (32) 2 1 46
Minority interest (1) (1) 12 nm 2 nm
------- ------- ------- ------ ------ -------
Income (loss) before income
tax expense (2) 3 nm 2 (46) nm
Income tax expense 0 1 nm 0 0 (60)
Net income (loss) (2) 4 nm 2 (47) nm
======= ======= ======= ====== ====== =======
</TABLE>
nm - not meaningful
10
<PAGE>
Item 2. Management's Discussion (continued)
THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------
REVENUES
For the quarter ended January 31, 2000 revenues totaled $25.8 million, down 8%
from $28 million in the corresponding quarter of fiscal year 1999. International
revenues represented approximately 7% of total revenues in the quarter ended
January 31, 2000 down from 13% the same quarter ended January 31, 1999. This
decrease is due primarily to timing of closing international sales.
LICENSES. Software license fee revenues totaled $5.5 million, which is 2% lower
than the corresponding quarter a year ago. This decrease was due primarily to
the continued slowdown in new technology acquisitions due to concerns about
"Year 2000" issues ("Y2K effect"). License fee revenues from the Company's
subsidiary, Logility, Inc., constituted 71% of the total license fee revenues
for the three month period compared to 59% in the prior year period.
SERVICES. Services revenues were $13.9 million or 12% lower than the
corresponding quarter a year ago. The decrease was due primarily to the
slowdown from the "Y2K effect" leading up to and including the January period,
which put several projects on hold, as well as reduced backlog from lower ERP
sales in the prior quarters.
MAINTENANCE. Maintenance revenues decreased 3% from the third quarter of fiscal
year 1999 to $6.4 million from $6.6 million for the same prior year period. The
decrease for the quarter is due to the slowdown in license fees in the prior
periods. Maintenance revenues have a direct relationship to current and
historic license fee revenues, since licenses are the source of potential new
maintenance customers.
GROSS MARGIN:
The total gross margin was 42% in the quarter ended January 31, 2000 compared to
46% during the same period a year ago. The decrease is due in part to a decrease
in both license fees gross margins and service revenue margins. The license
fees gross margin decreased to 75% this quarter compared to 85% in the same
quarter a year ago. This decrease in license fee margins is primarily due to
additional software amortization expense, the primary component of the cost of
license fees, from product rollouts, and a slight decrease in license fees. The
Company expects software amortization expense to continue to increase as
additional product rollouts occur. The gross margin on services revenues
decreased to 19% compared to 26% the same quarter a year ago. The decrease in
service revenue margins is mainly due to projects being delayed due to the "Y2K
effect" resulting in lower utilization of personnel. Maintenance gross margin
increased to 62% for the three months ended January 31, 2000 when compared to
61% in the same quarter a year ago as a result of cost management efforts.
11
<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>
Three Months Ended
--------------------------------
Jan. 31, Percent Jan. 31,
2000 Change 1999
-------- -------- ----------
<S> <C> <C> <C>
Gross product development costs $ 4,773 (7%) $ 5,140
Percentage of total revenues 18% 18%
Less: capitalized development (2,594) (6%) (2,768)
Percentage of gross prod. dev. costs 54% 54%
-------- -------- ----------
Product development expenses $ 2,179 (8%) $ 2,372
Percentage of total revenues 8% 9%
</TABLE>
Gross product development costs decreased 7% in the quarter. This is a result of
the steps the Company took in the prior year to manage development expenses
downward as part of its overall cost containment efforts. Capitalized
development decreased as well by 6% for the quarter ended, while the rate of
capitalized development remained the same at 54% for the quarter ended. Product
development expenses, as a percentage of total revenues, did not change
substantially from a year ago.
SALES AND MARKETING. Sales and marketing expenses decreased 10% to $5.9 million
for the quarter ended January 31, 2000. As a percentage of total revenues,
sales and marketing expenses were 23% for the three months ended January 31,
2000 compared to 24% for the quarter ended January 31, 1999. This decrease was
due in part to a reduction in employee headcount, as well as management's
continuing efforts to control sales and marketing expenditures.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
slightly to $3.5 million for the quarter ended January 31, 2000. These expenses
decreased as a result of the Company's reduction in employee base and the
resulting decrease in administrative costs. For the three months ended January
31, 2000, the average number of employees was approximately 690, compared to
approximately 713 for the three months ended January 31, 1999.
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 42% to $453,000 in the quarter ended January 31, 2000 compared to
$772,000 for the same period a year ago. This decrease is due to an unrealized
loss on investments in the current period when compared to an unrealized gain in
the quarter ended January 31, 1999.
12
<PAGE>
Item 2. Management's Discussion (continued)
NINE MONTHS ENDED JANUARY 31, 2000 AND 1999
- -------------------------------------------
REVENUES
Revenues for the nine months ended January 31, 2000 totaled $82.2 million, up 2%
from $80.4 million in the prior year period. International revenues represented
approximately 7% for the nine months ended January 31, 2000 compared to
approximately 10% for the same period a year ago. The decline in international
revenues is largely due to the increase in domestic revenues, decreasing the
international proportion of the overall revenue mix.
LICENSES. For the nine months ended January 31, 2000, license fee revenues
increased 34% from a year ago due to greater customer acceptance of the
company's products however this was offset by the "Y2K effect". License fee
revenues from the Company's subsidiary, Logility, Inc., constituted 67% of the
total license fee revenues for the nine month period compared to 57% in the
prior year period.
SERVICES. Services revenues were $45.2 million for the nine months ended January
31, 2000, which is a decrease of 4% from $47 million in the prior year period.
The decrease is due to the "Y2K effect" in the quarter ended January 31, 2000.
MAINTENANCE. For the nine months ended January 31, 2000, maintenance revenues
decreased 5%, to $18.9 million from $19.8 million in the same period a year ago.
The decrease for the year to date is due to the slowdown in license fees in the
prior periods. Maintenance revenues have a direct relationship to current and
historic license fee revenues, since licenses are the source of potential new
maintenance customers.
GROSS MARGIN:
For the nine months ended January 31, 2000, the gross margin was 44% compared to
40% for the same period a year ago. The increase is due mainly to the increase
in license fees margin, which increased to 77% from 47% in the same period a
year ago. This is due to an increase in license fee revenue as well as lower
capitalized software amortization costs which has occurred as a result of the
write-off of capitalized software during the nine months ended January 31, 1999.
The gross margin on services revenues decreased to 24% compared to 29% for the
same period a year ago due to a slowdown on services projects due to the "Y2K
effect" which resulted in lower utilization of personnel. Maintenance gross
margin remained substantially unchanged from the corresponding period a year
ago.
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>
Nine Months Ended
--------------------------------
Jan. 31, Percent Jan. 31,
2000 Change 1999
-------- --------- ---------
<S> <C> <C> <C>
Gross product development costs $14,979 (12%) $17,071
Percentage of total revenues 18% 21%
Less: capitalized development (8,152) (2%) (8,289)
Percentage of gross prod. dev. Costs 54% 48%
-------- --------- ---------
Product development expenses $ 6,827 (22%) $ 8,782
Percentage of total revenues 8% 11%
</TABLE>
Gross product development costs decreased 12% for the nine months ended January
31, 2000 primarily as a result of the Company's cost reduction efforts in the
prior year. Capitalized development decreased slightly by 2% for the nine months
ended, while the rate of capitalized development increased to 54% from 48% for
the nine months ended due to the timing of completing software projects.
SALES AND MARKETING. Sales and marketing expenses decreased 18% to $18.8
million for the nine months ended January 31, 2000. As a percentage of total
revenues, sales and marketing expenses were 23% for the nine months ended
January 31, 2000 when compared to 28% for the comparable period last year. This
decrease is due in part to the increase in revenues, as well as the decrease in
sales and marketing expenditures.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 15% to
$10.6 million for the nine months ended January 31, 2000. These expenses
decreased as a result of the Company's reduction in the employee base and the
resulting decrease in administrative costs. For the nine months ended January
31, 2000, the average number of employees was approximately 654, compared to
approximately 691 for the nine months ended January 31, 1999.
CHARGE FOR IMPAIRED ASSETS AND IN PROCESS RESEARCH & DEVELOPMENT. For the nine
months ended January 31, 1999, the Company incurred a charge against earnings of
$26.2 million. This charge resulted from the write-off of certain capitalized
software development costs in the amount of $24.2 million, impaired asset write-
off of $1.8 million and restructuring charge of $221,000, which management
believes were attributable primarily to the uncertainty of the world economy and
a general reallocation of the market's IT budgets to fix year 2000 problems and
which, in turn, stalled the adoption of the Company's products. An additional
cost of $1.8 million is related to the in-process research and development
expense related to the acquisition of New Generation Computing during the
quarter ended July 31, 1998.
OTHER INCOME. Other income is comprised predominantly of interest income, gains
and losses from sales of investments, changes in the market value of
investments, and minority interest in subsidiary's earnings (loss). For the nine
month period ended January 31, 2000, Other Income decreased 45% to $1.4 million
from $2.5 million for the comparable nine month period last year. This is due
primarily to the minority interest calculation as a result of the positive
earnings incurred at the Company's majority owned subsidiary Logility, Inc.
This resulted in a $341,000 charge to the Company in the current period,
compared to the prior period when the subsidiary incurred a loss, which resulted
in a $1.4 benefit.
14
<PAGE>
Item 2. Management's Discussion (continued)
INCOME TAXES
The Company recorded income tax expense in the amount of $150,000 for the
current nine months ended January 31, 2000 compared to $373,000 for the nine
months ended January 31, 1999. This expense was based on the Company's estimate
of income tax liability for fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company's operating activities provided cash of approximately $11.3 million
in the nine months ended January 31, 2000, and provided cash of approximately
$10.6 million in the same period last year. The cash provided by operations
during the nine months ended January 31, 2000, is attributable primarily to
proceeds from sales and maturities of investments of $6.0 million, non-cash
depreciation and amortization expense of $5.9 million, proceeds from trading
securities of $5.5 million, an increase in accounts payable and other
liabilities of $2.3 million, and net income of $1.5 million. This is partially
offset by purchases of trading securities of $8.6 million, a decrease to
deferred revenue of $1.4 million, a decrease in accounts receivable of $393,000,
and decrease in prepaid expenses of $560,000. The cash provided by operations
during the same period of the prior year was primarily attributable to a non
cash charge of $27.8 million for in-process research and development, a charge
for asset impairment and restructuring expenses, proceeds from trading
securities of $9.0 million, non-cash depreciation and amortization expense of
$8.1 million, and an increase in accounts payable and other liabilities of $2.5
million. This was partially offset by a net loss of $37.7 million, purchases of
trading securities of $6.3 million, a decrease in prepaid expenses and other
assets of $1.3 million, minority interest in subsidiary loss of $1.2 million,
deferred income tax benefit of $864,000, and an increase to deferred revenue of
$825,000.
Cash used for investing activities was approximately $14.8 million for the nine
months ended January 31, 2000 and approximately $7.4 million in the same period
of the prior year. The substantial uses of cash for the period ending January
31, 2000 were for capitalized software development costs of $8.2 million, the
purchase of property and equipment of $1.5 million, the purchase of majority
interest in companies for $658,000 and the purchase of investments of $3.3
million. Cash used for the same period of the prior year was primarily for
capitalized software of $8.7 million, purchase of majority interest in companies
for $1.9 million, purchase of common stock of the Company's subsidiary in the
amount of $1.5 million, and property and equipment of $1.4 million. This was
partially offset by sale of investments of $7.1 million.
Cash used in financing activities was approximately $854,000 for the nine months
ended January 31, 2000 compared to $2.3 million in the same period of the prior
year. Cash was used to purchase common stock of the Company in the amount of
$1.3 million and for the repayment of long-term debt in the amount of $950,000
during the nine months ended January 31, 2000. This was partially offset by the
proceeds from the exercising of stock options in the amount of $1.3 million.
Cash was used to purchase common stock of the Company in the amount of $2.6
million in the nine months ended January 31, 1999.
Days Sales Outstanding in accounts receivable, as currently defined by the
Company, was 72 days as of January 31, 2000, compared to 76 days as of January
31, 1999.
15
<PAGE>
Item 2. Management's Discussion (continued)
The Company's current ratio was 2.0 to 1 and cash and investments totaled 41% of
total assets at January 31, 2000 compared to 2.2 to 1 and cash and investments
representing 46% of total assets at January 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.
American Software, Inc.'s board of directors approved on December 17, 1997 a
resolution authorizing the Company to repurchase up to 1.5 million shares of the
Company's Class A common stock through open market purchases, which was
increased to 2.2 million on March 11, 1999. 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
these resolutions were adopted, the Company has repurchased 1,598,838 shares of
common stock at a cost of approximately $5,535,120 as of January 31, 2000.
YEAR 2000 READINESS DISCLOSURE
Products:
- ---------
The Company believes that its compliance and remediation efforts leading up to
the Year 2000 were effective in preventing any material Year 2000 related
problems. This belief is based on the fact that the Company has not received to
date any report of Year 2000 related erroneous results or system failures in the
software products it markets or in the software and hardware it utilizes
internally. There may, however, still be residual problems related to the Year
2000 issue that could result in a decrease in the sales of software and services
the Company provides, or an increase in litigation costs relating to losses
suffered by the Company or its clients due to such problems.
The Company may in the future be subject to claims based on Year 2000 problems
in its own, as well as in others' products, and issues arising from the
integration of multiple products within an overall system. Although the Company
has not been a party to any litigation involving its products or services
related to Year 2000 compliance issues, there can be no assurance that the
Company will not in the future be required to defend its products or services in
such proceedings, or otherwise address claims based on Year 2000 issues. The
costs of defending and resolving Year 2000 related disputes, and any liability
of the Company for Year 2000 related damages, including consequential damages,
could have a material adverse effect on the Company's business, operating
results, and financial condition.
The Company believes that Year 2000 issues have affected and may continue to
affect the purchasing decisions of customers and potential customers of the
Company's products. Many businesses expended significant resources on projects
to make their current hardware and software systems Year 2000 ready. Such
expenditures may result in reduced funding for projects to purchase software
products such as those offered by the Company. Any of the foregoing could have
a material adverse effect on the Company's business, operating results and
financial condition.
16
<PAGE>
Item 2. Management's Discussion (continued)
Internal Systems:
- -----------------
The Company has completed 100% of its system evaluation and 100% of its
remediation. It appears that all internal systems are Year 2000 compliant.
There is still the possibility of residual internal system problems related to
the Year 2000 issue. The cost of correcting any residual problems on internal
systems would not be material due to the fact that the Company is able to
utilize internal resources to meet these needs.
The Company utilizes third-party vendor equipment, telecommunication products
and software products that all appear to be Year 2000 compliant. There may,
however, still be residual problems related to the Year 2000 issue. The failure
of any third party products may have a material adverse effect on business
operations and could possibly cause the Company expend resources to correct any
problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement will be effective for the Company beginning June 15, 2000. The new
Statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes accounting treatment for three types of hedges: hedges of
changes in the fair value of assets, liabilities, or firm commitments; hedges of
the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. The Company has not
invested in derivative instruments nor participated in hedging activities and
therefore does not anticipate there will be a material impact on the results of
operations or financial position from Statement No. 133.
17
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency. For the nine months ended January 31, 2000, the Company
generated 7% of its revenues outside the United States. International sales
usually are made by the Company's foreign subsidiaries and are denominated
typically in U.S. Dollars or British Pounds Sterling. However, the expense
incurred by foreign subsidiaries is denominated in the local currencies. The
effect of foreign exchange rate fluctuations on the Company during the nine
months ended January 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 value of
securities at January 31, 2000 was approximately $27.7 million of which $21.0
million was debt and $6.7 million was equity. Interest income on the Company's
investments is carried in "Other income/(expense)."
The Company also holds cash balances in accounts with commercial banks in the
United States and foreign countries. These cash balances represent operating
balances only and are invested in short-term time deposits of the local bank.
Such operating cash balances held at banks outside the United States are
denominated in the local currency.
Many of the Company's investments carry a degree of interest rate risk. When
interest rates fall, the Company's income from investments in variable-rate
securities declines. When interest rates rise, the fair market value of the
Company's investments in fixed-rate securities declines. In addition, the
Company's equity securities are subject to stock market volatility. Due in part
to these factors, the Company's future investment income may fall short of
expectations or the Company may suffer losses in principal if forced to sell
securities which have seen a decline in market value due to changes in interest
rates. The Company attempts to mitigate these risks by holding fixed-rate
securities to maturity, but should its liquidity needs force it to sell fixed-
rate securities prior to maturity, the Company may experience a loss of
principal.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
The registrant is not currently involved in legal proceedings
requiring disclosure under this item.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. Other Information
- ------- -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
11.1 Statement re: Computation of Per Share Earnings (Loss).
27.1 Financial Data Schedule.
99.1 1991 Employee Stock Option Plan (Amended and restated effective
February 14, 2000)
(b) No report on Form 8-K was filed during the quarter ended January 31, 2000.
19
<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 March 15, 2000 /s/ James C. Edenfield
------------------- -------------------------------------
James C. Edenfield
President, Chief Executive Officer
and Treasurer
DATE March 15, 2000 /s/ Vincent C. Klinges
------------------- -------------------------------------
Vincent C. Klinges
Chief Financial Officer
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit Page
- ------- ----
<S> <C>
11.1 Statement re: Computation of Per Share Earnings (Loss) (Unaudited) 22
27.1 Financial Data Schedule 23
99.1 1991 Employee Stock Option Plan (Amended and restated effective February 14, 2000) 24
</TABLE>
21
<PAGE>
EXHIBIT 11.1
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES
Statement re: computation of Per Share Earnings (loss)
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
January 31, January 31,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock:
Weighted average common
shares outstanding:
Class A shares 16,723 17,221 16,753 17,595
Class B shares 4,753 4,785 4,753 4,794
-------- ------- ------- --------
Basic weighted average common
shares outstanding 21,476 22,006 21,506 22,389
Dilutive effect of outstanding
Class A common stock
options (as determined by
the application of the treasury
stock method using the
average market price for
the period) 1,943 13 1,258 920
-------- ------- ------- --------
Diluted weighted average common
shares outstanding for
earnings per share - 23,419 22,019 22,764 23,309
======== ======= ======= ========
Net earnings (loss) $ (418) $ 1,013 $ 1,489 $(37,711)
======== ======= ======= ========
Basic net earnings(loss)per common share $ (0.02) $ .05 $ 0.07 $ (1.68)
======== ======= ======= ========
Diluted net earnings(loss)per common share* $ 0.02) $ .05 $ 0.07 $ (1.68)
======== ======= ======= ========
</TABLE>
* Diluted weighted average common shares outstanding are not included in the
quarter ended January 31, 2000 and nine months ended January 31, 1999
calculations due to the anti-dilution of the net loss per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> APR-30-2000 APR-30-2000
<PERIOD-START> NOV-01-1999 MAY-01-1999
<PERIOD-END> JAN-31-2000 JAN-31-2000
<CASH> 17,197 17,197
<SECURITIES> 27,734 27,734
<RECEIVABLES> 22,354 22,354
<ALLOWANCES> (1,674) (1,674)
<INVENTORY> 0 0
<CURRENT-ASSETS> 69,035 69,035
<PP&E> 47,104 47,104
<DEPRECIATION> (30,953) (30,953)
<TOTAL-ASSETS> 109,248 109,248
<CURRENT-LIABILITIES> 33,879 33,879
<BONDS> 0 0
0 0
0 0
<COMMON> 2,464 2,464
<OTHER-SE> 66,580 66,580
<TOTAL-LIABILITY-AND-EQUITY> 109,248 109,248
<SALES> 0 0
<TOTAL-REVENUES> 25,803 82,220
<CGS> 0 0
<TOTAL-COSTS> 15,033 45,707
<OTHER-EXPENSES> 11,641 36,279
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (453) (1,405)
<INCOME-PRETAX> (418) 1,639
<INCOME-TAX> 0 (150)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (418) 1,489
<EPS-BASIC> (.02) .07
<EPS-DILUTED> (.02) .07
</TABLE>
<PAGE>
EXHIBIT 99.1
AMERICAN SOFTWARE, INC.
1991 EMPLOYEE STOCK OPTION PLAN
(Amended and Restated Effective February 14, 2000)
1. Purpose. This Plan shall be known as the "1991 Employee Stock Option
-------
Plan" (hereinafter referred to as "the Plan" or "this Plan"). The purpose of
the Plan is to provide certain key employees of American Software, Inc. (the
"Company") and its subsidiaries with additional incentive to increase their
efforts on the Company's behalf and to remain in the employ of the Company or
any of its subsidiaries by granting key employees from time to time options to
purchase Class A Common Shares of the Company.
The options granted under this Plan may, but need not, constitute
"incentive stock options" (referred to herein as "Incentive" options) within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). An option granted which does not constitute an Incentive option shall
for purposes of the Plan constitute a "Non-Qualified" option. The terms
"subsidiary" or "subsidiaries" mean and include any corporation or other entity
at least a majority of the outstanding voting shares of which is, at the time,
directly or indirectly owned by the Company or by one or more subsidiaries.
2. Shares. The shares to be optioned under the Plan shall be the Company's
------
Class A Common Shares, $0.10 par value (the "Shares"), which Shares may either
be authorized but unissued Shares or treasury Shares. The aggregate number of
Shares for which options may be granted under the Plan shall (subject to the
provisions of paragraph 8) be (i) 4,600,000 Shares (inclusive of the total
number of Shares with respect to which no options have been granted under the
Company's Incentive Stock Option Plan and Nonqualified Stock Option Plan
(collectively the "Prior Plans") on the Effective Date as provided in paragraph
15), plus (ii) the total number of Shares as to which options granted under the
Prior Plans or this Plan terminate (including options terminated upon the
granting of replacement options or otherwise) or expire without being wholly
exercised. New options may be granted under this Plan covering the number of
Shares to which such termination or expiration relates.
3. Administration. The Plan shall be administered by the Employee Stock
--------------
Option Plan Committee (the "Committee") of the Company's Board of Directors (the
"Board"). The Committee shall consist of such members (not less than two) of
the Board as shall be appointed from time to time by the Board. No member of
the Committee while serving as such shall be eligible for participation in the
Plan. Subject to the provisions of the Plan, the Committee shall have exclusive
power to select the employees to whom options will be granted under the Plan, to
determine the number of options to be awarded to each employee selected and to
determine the time or times when options will be awarded. The Committee shall
have full power and authority to administer and interpret the Plan and to adopt
such rules, regulations, agreements and instruments for implementing the Plan
and for the conduct of its business as the Committee deems necessary or
advisable. The Committee's interpretation of the Plan, and all determinations
made by the Committee pursuant to the powers vested in it hereunder, shall be
conclusive and binding on all persons having any interest in the Plan or in any
options granted hereunder.
<PAGE>
4. Eligibility. Participants in the Plan shall be selected by the Committee
-----------
from among key personnel of the Company or a subsidiary; provided, however, that
no director, officer or 10% shareholder (as such terms are defined pursuant to
Section 16 of the Securities Exchange Act of 1934, as amended) of the Company
shall be eligible to participate in the Plan. Options held by a person who
subsequently becomes a director, officer or 10% shareholder shall not be
affected by this restriction. Options shall be granted to individuals solely in
connection with their employment with the Company or a subsidiary.
5. Grant of Options. The Committee may from time to time grant options to
----------------
purchase Shares to such of the eligible employees as may be selected by the
Committee and for such number or numbers of shares as may be determined by the
Committee. Each grant of an option pursuant to this Plan shall be granted
within ten years from the date this Plan is adopted by the Board. Each grant of
an option pursuant to this Plan shall be made upon such terms and conditions as
may be determined by the Committee at the time of grant, subject to the terms,
conditions and limitations set forth in this Plan.
An individual optionee may be granted (i) an Incentive option, (ii) a
Non-Qualified option, or (iii) an Incentive option and a Non-Qualified option at
the same time.
6. Terms, Conditions and Form of Options. Each option shall be evidenced by
-------------------------------------
a written agreement ("option agreement") in such form as the Board shall from
time to time approve, which agreement shall comply with and be subject to the
following terms and conditions:
6.1 Option Effective Date. Each option agreement shall specify an
---------------------
effective date, which shall be the date on which the option is granted by the
Committee.
6.2 Option Term. (a) An option shall in no event be exercisable after
-----------
the expiration of ten years from the effective date of the option. In addition,
and in limitation of the above, the option period of any option shall terminate
three months after the termination of the option holder's employment by the
Company for any reason except (i) the Retirement (as hereinafter defined), death
or disability of the option holder-employee (the "optionee") and (ii) as
provided in Section 6.2(e).
(b) (i) The term "Retirement" means the voluntary termination
of employment by an option holder whose age and/or years of employment qualify
that employee for normal retirement under the policies of the Company in effect
from time to time.
(ii) For any option granted on or before August 23, 1994,
the Committee may in its discretion amend that option, on an individual basis,
to permit the exercise of such option beyond the date of Retirement, through the
expiration date of the option.
(iii) The Committee may in its discretion provide in standard
option grant agreements that any option granted after August 23, 1994 may be
exercised after the date of Retirement, through the expiration date of the
option.
<PAGE>
(iv) Notwithstanding the foregoing, no option may be
exercised after the expiration of ten years from the effective date of the
option, nor may an option be exercised beyond the amount which is vested as of
the date of Retirement.
(c) In the event of termination of employment due to the death or
disability of an optionee, the option period of the option held by him upon the
date of such termination shall terminate upon the earlier of (a) twelve months
after the date of the optionee's death or termination due to disability, as the
case may be, or (b) the date of termination of such option as determined by his
option agreement. In the event of termination of an optionee's employment due
to the death of the optionee, such optionee's options may be exercised during
the 12-month period by his estate or by the person who acquired the right to
exercise such options through bequest or inheritance.
As used herein, "disability" shall mean the inability of the employee
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or has lasted or can be expected to last for a continuous period of at
least twelve months.
No transfer of an option by an optionee by will or by the laws of
descent and distribution shall be effective unless the Company shall have been
furnished with written notice thereof and a copy of the will and/or such other
evidence as the Committee may deem necessary to establish the validity of the
transfer and the acceptance by the successor-in-interest or successors-in-
interest of the terms and conditions of the option.
(d) If an optionee is placed on leave of absence status by the
Company or any subsidiary, any then exercisable option shall be suspended at
such time. If an optionee is placed on lay-off status by the Company or any
subsidiary, any then exercisable option may be exercised during the following
period of three months and shall be suspended thereafter. In either case, the
unexercised portion of the option shall either (i) terminate three months after
the optionee's termination of employment with the Company and its subsidiaries
or (ii) be reinstated upon such optionee being re-employed from leave of absence
or lay-off status by the Company or any subsidiary.
(e) Notwithstanding the foregoing, the Committee may determine, in
its sole discretion, that specific nonqualified stock options may be exercisable
by the option holder for a period beyond the termination of the option holder's
employment by the Company, but not after the expiration of ten years from the
effective date of the option. Exercisability of such options following the death
of the optionee shall be governed by Section 6.2(c) as if termination of
employment occurred on the date of death.
<PAGE>
6.3 Exercise Price. The exercise price of options shall be the price per
--------------
share fixed by the Committee (the "Exercise Price"); provided, however, that the
Exercise Price per Share for Incentive options shall not be less than the fair
market value of a Share on the date the option is granted. In the event that
the Shares are then listed on an established stock exchange, such fair market
value shall be deemed to be the closing price of the Shares on such stock
exchange on the day the option is granted or, if no sale of the Shares shall
have been made on any stock exchange on that day, the fair market value shall be
determined as such price for the next preceding day upon which a sale shall have
occurred. In the event that the Shares are not listed upon an established
exchange but are quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the fair market value shall be deemed to
be the closing price for the Shares as quoted on NASDAQ on the day the option is
granted. If no sale of the Shares shall have been made on NASDAQ on that day,
the fair market value shall be determined by such prices on the next preceding
day on which a sale shall have occurred. In the event that the Shares are
neither listed on an established stock exchange nor quoted on NASDAQ, the fair
market value on the day the option is granted shall be determined by the
Committee.
6.4 Nontransferability of Options. An option shall not be transferable by
-----------------------------
the optionee otherwise than by will, by the laws of descent and distribution or
by a qualified domestic relations order, and shall be exercised during the
lifetime of the optionee only by the optionee or by his guardian or legal
representative. No option or interest therein may be transferred, assigned,
pledged or hypothecated by the optionee during his lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
7. Exercise of Options. An option granted pursuant to this Plan shall be
-------------------
exercisable at any time within the option period, subject to the terms and
conditions of such option. Exercise of any option shall be made by the
delivery, during the period that such option is exercisable, to the Company in
person or by mail of (i) written notice from the optionee stating that he is
exercising such option and (ii) the payment of the aggregate purchase price of
all Shares as to which such option is then exercised. Such aggregate purchase
price shall be paid to the Company at the time of exercise. Payment shall
normally be made by cash or check; provided, however, that in its sole
discretion the Committee may approve of payment in whole or in part by the
giving of a note with adequate stated interest or by the surrender of common
stock. Upon the exercise of an option in compliance with the provisions of this
paragraph, and upon the receipt by the Company of the payment for said Shares,
the Company shall (i) deliver or cause to be delivered to the optionee so
exercising his option a certificate or certificates for the number of Shares
with respect to which the option is so exercised and payment is so made, and
(ii) register or cause such Shares to be registered in the name of the
exercising optionee.
<PAGE>
8. Changes in Capital Structure. Appropriate adjustments shall be made to the
----------------------------
price of the Shares and the number of Shares subject to outstanding options and
the number of Shares issuable under this Plan if there are any changes in the
Shares by reason of stock dividends, stock splits, reverse stock splits,
mergers, recapitalizations or consolidations.
9. Controlling Terms. Option agreements pertaining to options granted
-----------------
pursuant hereto may include conditions that are more (but not less) restrictive
to the optionee than the conditions contained herein and, in such event, the
more restrictive conditions shall apply.
10. Termination of the Plan. This Plan shall terminate upon the close of
-----------------------
business of the day preceding the tenth anniversary of the approval of this Plan
by the Board unless it shall have been sooner terminated by the Board or by
reason of there having been granted and fully exercised stock options covering
all of the Shares subject to this Plan. Upon such termination, no further
options may be granted hereunder. If, after termination of this Plan upon the
tenth anniversary hereof or by Board action as provided above, there are
outstanding options which have not been fully exercised, such options shall
remain in effect in accordance with their terms and shall remain subject to the
terms of this Plan.
11. Amendment or Discontinuance of Plan. The Board may amend, suspend or
-----------------------------------
discontinue this Plan at any time without restriction; provided, however, that
the Board may not alter, amend, discontinue, revoke or otherwise impair any
outstanding options which have been granted pursuant to this Plan and which
remain unexercised, except in the event that there is secured the written
consent of the holder of the outstanding option proposed to be so altered or
amended. Nothing contained in this paragraph, however, shall in any way
condition or limit the termination of an option, as hereinabove provided, where
reference is made to termination of employment of an optionee, or as provided in
an option agreement.
12. Limitation of Rights.
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12.1 No Implied Employment Agreement. Neither this Plan nor the
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granting of an option nor any other action taken pursuant to this Plan, shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company or any subsidiary will retain any person as an employee for any
period of time.
12.2 No Rights as Shareholder. An optionee shall have no rights as a
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shareholder with respect to Shares covered by his option until the date of
exercise of the option, and, except as provided in paragraph 8, no adjustment
will be made for dividends or other rights for which the record date is before
the date of such exercise.
13. Liquidation of the Company. In the event of the complete liquidation or
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dissolution of the Company, other than as an incident to a merger,
reorganization or other adjustment referred to in paragraph 8, any options
granted pursuant to this Plan and remaining unexercised shall be deemed canceled
without regard to or limitation by any other provisions of this Plan.
<PAGE>
14. Intention of Construction. To the extent options granted hereunder are
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intended to constitute Incentive options and comply with Section 422 of the Code
and all provisions of this Plan, all such options and all option agreements
relating thereto shall be construed in such a manner as to effectuate that
intent.
15. Shareholder Approval; Effective Date. This Plan shall become effective on
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the date it is approved by the shareholders of the Company (the "Effective
Date").
