-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzaRK+Zs1aTAnYUbR+Jvz9r8ntfrTrgKzBexn1crTxrGHIVO1aKXQyotdcvxT/nq vrJVCEdvtKxZPV2BwRPlGw== 0000931763-99-000735.txt : 19990317 0000931763-99-000735.hdr.sgml : 19990317 ACCESSION NUMBER: 0000931763-99-000735 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SOFTWARE INC CENTRAL INDEX KEY: 0000713425 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 581098795 STATE OF INCORPORATION: GA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12456 FILM NUMBER: 99566198 BUSINESS ADDRESS: STREET 1: 470 E PACES FERRY RD NE CITY: ATLANTA STATE: GA ZIP: 30305 BUSINESS PHONE: 4042614381 MAIL ADDRESS: STREET 1: 470 EAST PACES FERRY ROAD NE CITY: ATLANTA STATE: GA ZIP: 30305 10-Q 1 FORM 10-Q 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, 1999 ------------------------------------------------ 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 11, 1999 - ------------------------------------ ----------------------------- Class A Common Stock, $.10 par value 17,124,377 Shares Class B Common Stock, $.10 par value 4,768,289 Shares 1 AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Form 10-Q Quarter ended January 31,1999 Index -----
Page No. ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - Unaudited - January 31, 1999 and April 30, 1998 3-4 Condensed Consolidated Statements of Operations - Unaudited - Three Months and Nine Months ended January 31, 1999 and January 31, 1998 5 Condensed Consolidated Statements of Cash Flows - Unaudited - Nine Months ended January 31, 1999 and January 31, 1998 6-7 Notes to Condensed Consolidated Financial Statements - Unaudited 8-9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-20 PART II - OTHER INFORMATION 20
2 PART I FINANCIAL INFORMATION ------ ITEM 1. FINANCIAL STATEMENTS AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands except share data) (Unaudited)
January 31, 1999 April 30, 1998 --------------------- ---------------------- ASSETS Current assets: Cash and cash equivalents $ 1,467 $ 2,161 Investments 43,078 58,062 Trade accounts receivable, less allowance for doubtful accounts of $1,759 at January 31, 1999 and $1,222 at April 30, 1998 Billed 24,125 20,309 Unbilled 3,103 7,091 Deferred income taxes 1,447 823 Refundable income taxes 1,117 1,117 Prepaid expenses and other current assets 1,919 2,577 --------------- ---------------- Total current assets 76,256 92,140 --------------- ---------------- Property and equipment, net 16,847 17,189 --------------- ---------------- Capitalized computer software development costs, net 9,045 30,338 Purchased computer software costs, net 570 888 --------------- ---------------- Total computer software costs 9,615 31,226 --------------- ---------------- Other assets, net 3,845 2,101 --------------- ---------------- $ 106,563 $ 142,656 =============== ================
See accompanying notes to condensed consolidated financial statements. 3 (continued) AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets, Continued (in thousands except share data) (Unaudited)
January 31, 1999 April 30, 1998 ------------------------ -------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,686 $ 2,972 Accrued compensation and related costs 5,112 3,798 Accrued royalties 697 574 Other current liabilities 6,679 4,523 Deferred revenue 18,763 17,283 ----------------- -------------- Total current liabilities 33,937 29,150 Deferred income taxes 6,020 6,260 Long term debt 950 --- ----------------- -------------- Total liabilities 40,907 35,410 ----------------- -------------- Minority interest in subsidiaries 4,925 6,709 ----------------- -------------- Shareholders' equity: Common stock: Class A, $.10 par value. Authorized 50,000,000 shares; Issued 19,464,888 shares at January 31, 1999 and 19,369,756 shares at April 30, 1998 1,945 1,937 Class B, $.10 par value. Authorized 10,000,000 shares; Issued and outstanding 4,768,289 shares at January 31, 1999 477 480 and 4,798,289 shares at April 30, 1998; convertible into Class A shares on a one-for-one basis Additional paid-in capital 58,115 57,656 Retained earnings 15,515 53,225 ----------------- -------------- 76,052 113,298 Less Class A treasury stock, 2,323,360 shares at January 31, 1999 And 1,428,427 shares at April 30, 1998, at cost 15,321 12,761 ----------------- -------------- Total shareholders' equity 60,730 100,537 ----------------- -------------- $ 106,563 $ 142,656 ================= ==============
See accompanying notes to condensed consolidated financial statements. 4 AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (in thousands except share and per share data) (Unaudited)
Three Months Ended Nine Months Ended January 31, January 31, --------------------------------- ---------------------------------- 1999 1998 1999 1998 -------------- --------------- --------------- -------------- Revenues: License fees $ 5,650 $ 8,038 $ 13,593 $ 24,758 Services 15,757 12,469 47,016 35,163 Maintenance 6,598 6,033 19,818 17,611 -------------- --------------- --------------- -------------- Total revenues 28,005 26,540 80,427 77,532 -------------- --------------- --------------- -------------- Cost of revenues: License fees 863 2,103 7,219 6,065 Services 11,630 8,178 33,223 24,091 Maintenance 2,583 1,945 7,633 5,877 -------------- --------------- --------------- -------------- Total cost of revenues 15,076 12,226 48,075 36,033 -------------- --------------- --------------- -------------- Gross margin 12,929 14,314 32,352 41,499 -------------- --------------- --------------- -------------- Operating expenses: Research and development 5,140 5,185 17,071 15,441 Less: Capitalized development (2,768) (2,090) (8,289) (6,463) Sales and marketing 6,618 6,641 22,909 18,603 General and administrative 3,525 2,839 12,543 8,401 Charge for Intangible Asset Impairment --- --- 28,005 --- -------------- --------------- --------------- -------------- Total operating expense 12,515 12,575 72,239 35,982 Operating income (loss) 414 1,739 (39,887) 5,517 Other income, net 926 1,162 1,198 2,695 Minority interest (154) (50) 1,351 (282) -------------- --------------- --------------- -------------- Income (loss) before income taxes 1,186 2,851 (37,338) 7,930 Income taxes 173 982 373 2,709 -------------- --------------- --------------- -------------- Net income (loss) $ 1,013 $ 1,869 $(37,711) $ 5,221 ============== =============== =============== ============== Basic net income (loss) per common share $ 0.05 $ 0.08 $ (1.68) $ 0.23 ============== =============== =============== ============== Diluted net income (loss) per common share* $ 0.05 $ 0.08 $ (1.68) $ 0.21 ============== =============== =============== ============== Weighted average common shares Outstanding: Basic 22,006 22,686 22,389 22,618 ============== =============== =============== ============== Diluted 22,019 24,485 23,309 24,614 ============== =============== =============== ==============
*Diluted weighted average common shares outstanding are not included in the 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. 5 AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands except share data) (Unaudited)
Nine Months Ended January 31, ----------------------------- 1999 1998 ------------- ------------ Cash flows from operating activities: Net earnings (loss) $(37,711) $ 5,221 Adjustments to reconcile net earnings (loss) to net cash provided Operating activities: Depreciation and amortization 8,097 7,402 Minority interest in subsidiary loss (1,201) 282 Net (gain) loss on investments 528 (1,234) Other --- 211 Deferred income taxes (864) 2,708 Charge for Asset Impairment 27,835 --- Change in operating assets and liabilities: Net (increase) decrease in money market funds 4,232 (5,920) Purchases of trading securities (6,272) (1,969) Proceeds from trading securities 8,952 --- Proceeds from sales and maturities of investments 452 4,989 Decrease/(increase) in Accounts receivable 390 (7,272) Decrease/(increase) in Prepaid expenses and other assets 1,257 (845) Increase/(decrease) in Accounts payable and other accrued liabilities 2,543 (318) Increase/(decrease) in Income taxes payable --- (55) Increase/(decrease) in Deferred revenue 825 3,688 ------------- ------------ Net cash provided by operating activities 9,063 6,888 ------------- ------------ Cash flows from investing activities: Additions to capitalized software development costs (8,742) (6,463) Additions to purchased computer software costs (86) --- Purchase of majority interest in subsidiaries (1,929) --- Minority investment and additional funding in business (858) --- Repurchase of common stock by subsidiary (1,502) --- Purchase of investments --- (9,724) Purchases of property and equipment (1,400) (1,831) Sale of short term investments, net 7,092 --- ------------- ------------ Net cash used in investing activities (7,425) (18,018) ------------- ------------ Cash flows from financing activities: Repurchase of common stock (2,560) (541) Proceeds, net, from initial public offering of Logility, Inc. --- 33,152 Proceeds from exercise of stock options 228 882 Proceeds from dividend reinvestment and stock purchase plan --- 8 ------------- ------------ Net cash provided by (used in) financing activities (2,332) 33,501 ------------- ------------ Net increase in cash (694) 22,371 Cash at beginning of period 2,161 3,442 ------------- ------------ Cash at end of period $ 1,467 $ 25,813 ============= ============ Supplemental disclosure of cash paid during the period for income taxes $ 373 $ 27 ============= ============
6 (continued) AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands except share data) (Unaudited)
Nine Months Ended January 31, 1998 ------------------------ Supplemental disclosures of non-cash operating, investing and financing activities: Acquisition of business: Fair value of assets acquired $ 2,472 Acquired in-process research and development costs 1,800 Fair value of liabilities assumed (1,693) --------------- Total cash paid for acquisition 2,579 --------------- Cash acquired (703) Net cash paid for acquisitions 1,876 --------------- Dividend payment during quarter ended October 31, 1998 53 --------------- Total $ 1,929 ---------------
See accompanying notes to condensed consolidated financial statements. 7 AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements - Unaudited January 31, 1999 A. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be used in conjunction with the consolidated financial statements and related notes contained in the 1998 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. Interim results reflected in the condensed financial statements are not necessarily indicative of the results expected for the full year or future periods. B. NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK On January 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"), which prescribes the calculation methodology and financial reporting requirements for basic and diluted earnings per share. Basic earnings (loss) per common share available to common shareholders are based on the weighted average number of common shares outstanding. Diluted earnings (loss) per common share available to common shareholders are based on the weighted average number of common shares outstanding and dilutive potential common shares, such as dilutive stock options. All prior period net earnings (loss) data presented in these condensed consolidated financial statements have been restated to conform to the provisions of SFAS No. 128. C. COMPLETION OF INITIAL PUBLIC OFFERING On October 10, 1997, Logility, Inc., a subsidiary of the Company, successfully completed its initial public offering of common stock. Logility, Inc. sold 2.2 million shares of Common Stock in the initial public offering for $31.9 million less issuance costs of $3.1 million. On November 6, 1997, Logility, Inc. sold 330,000 shares of Common Stock as part of the underwriters' over-allotment from the initial public offering for $4.8 million less issuance costs of approximately $400,000. D. PURCHASE OF MAJORITY INTEREST IN NEW GENERATION COMPUTING, INC. On July 10, 1998, the Company purchased a majority interest in New Generation Computing, Inc., 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. 8 Notes to Condensed Consolidated Financial Statements - continued E. WRITE-OFF OF CAPITALIZED SOFTWARE AND IMPAIRED ASSETS In the quarter ended October 31, 1998, the Company had a write-off of capitalized software ($24.2 million), asset impairment ($1.8 million) and restructuring charges ($0.2 million) in the amount of $26.2 million. These charges were mainly attributable to the uncertainty of the world economy and a general reallocation of the market's IT budgets to fix year 2000 problems which management believes have stalled the adoption of the Company's products. The restructuring charges (primarily employee severance costs) are related to management actions taken to address the current slowdown in license fee revenue and better position the Company for future growth. 9 AMERICAN SOFTWARE, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW American Software Inc. ("American Software" or the "Company") develops, markets, and supports enterprise resource planning ("ERP") and integrated supply chain management solutions. The product line encompasses integrated business applications such as demand forecasting, logistics planning, warehouse management, order management, financials, manufacturing, and transportation solutions. The Company offers professional services to its customers in support of its products and third party products. These services include training, system implementation, consulting, custom programming, network management, millennium conversion, and telephonic support services. The Company's revenues are derived primarily from three sources: software licenses, services and maintenance. Software licenses generally are based upon the number of modules, servers, users and/or sites licensed. License fee revenues are recognized at the time of product delivery and fulfillment of acceptance terms, provided persuasive evidence of an arrangement exists, the fee is fixed and determinable and collection is deemed probable. Services revenues consist primarily of fees from software implementation, training, consulting and customization services and are recognized as the services are rendered. 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. 10 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, 1999 and 1998:
Percentage of Percentage of Total Revenues % Total Revenues % -------------------------- ------------------------- 3 months ended Change 9 months ended Change -------------------------- ----------- ------------------------- ---------- 1999 1998 99 v. 98 1999 1998 99 v. 98 ----------- ----------- ----------- ---------- --------- ----------- Revenues: License fees 20% 30% (30%) 17% 32% (45%) Services 56 47 26 58 45 34 Maintenance 24 23 9 25 23 13 ----------- ----------- ----------- ---------- --------- ----------- Total revenues 100 100 6 100 100 4 ----------- ----------- ----------- ---------- --------- ----------- Cost of revenues: License fees 3 8 (59) 9 8 19 Services 42 31 42 41 31 38 Maintenance 9 7 33 9 8 30 ----------- ----------- ----------- ---------- --------- ----------- Total cost of revenues 54 46 23 60 46 33 ----------- ----------- ----------- ---------- --------- ----------- Gross margin 46 54 (10) 40 54 (22) ----------- ----------- ----------- ---------- --------- ----------- Operating expenses: Research and development 18 20 (1) 21 20 11 Less: Capitalizable software (10) (8) 32 (10) (8) 28 Sales and marketing 24 25 0 28 24 23 General and administrative 13 11 24 16 11 49 Charge for asset impairment 35 0 nm ----------- ----------- ----------- ---------- --------- ----------- Total operating expenses 45 47 0 90 46 nm ----------- ----------- ----------- ---------- --------- ----------- Operating earnings (loss) 1 7 (76) (50) 7 nm Other income, net 3 4 (20) 1 3 nm Minority interest in loss of subsidiary, net (1) 0 nm 2 0 nm ----------- ----------- ----------- ---------- --------- ----------- Earnings (loss) before income Tax expense 4 11 (58) (46) 10 nm Income tax expense 1 4 (82) 0 3 nm ----------- ----------- ----------- ---------- --------- ----------- Net earnings (loss) 4 7 (46) (47) 7 nm =========== =========== =========== ========== ========= ===========
nm - not meaningful 11 GENERAL MARKET CONDITIONS - ------------------------- Beginning in the second calendar of 1998 (the company's first quarter of fiscal 1999), several application software companies began to experience slowdowns in the sales of their software products. These companies, as well as industry experts, have identified the following factors as contributors to this slowdown in the buying market: - - Significant financial commitments devoted to Year 2000 readiness, which have led to limited discretionary financial resources available for the purchase of software products such as the Company's. - - Weakness in the overall global economy, which has affected certain customers' businesses. - - Related to the Company's Logility subsidiary, public announcements by large Enterprise Resource Planning (ERP) software vendors regarding plans for introduction of new products within the company's target markets, which have led to confusion and indecision by prospective buyers. The Company believes these factors, as well as possible others, have to some degree contributed to the Company's reduced revenues in each of the Company's first three quarters of fiscal 1999, particularly in the area of software license fees. THREE MONTHS ENDED JANUARY 31, 1999 AND 1998 - -------------------------------------------- REVENUES:. For the quarter ended January 31, 1999 revenues totaled $28 million, up 6% from $26.5 million in the corresponding quarter of fiscal 1998. International revenues represented approximately 13% of total revenues in the quarter ended January 31, 1999, compared to 12% for the quarter ended January 31, 1998. LICENSES: For the quarter ended January 31, 1999, software license fee revenues were 30% lower than the corresponding quarter a year ago. The Company believes the lower license fees were a result of lower than expected sales by the Company's direct sales force caused by 1) an increasingly competitive market for the Company's products and 2) several of the Company's potential customers delayed purchase decisions due to a variety of factors, including concern over global economic conditions and limited resources due to the allocation of resources to Year 2000 system projects. License fee revenues from the Company's subsidiary Logility Inc., constituted 59% of the total license fee revenues for the three month period ended January 31, 1999 compared to 63% in the prior comparable period last year. SERVICES: Services revenues for the quarter ended January 31, 1999 were $15.8 million or 26% higher than the corresponding quarter a year ago. The Company believes this was caused by 1) an improvement in the Company's ability to offer a more comprehensive package of services for its client server offerings and 2) an increase in demand for professional services in general. MAINTENANCE: Maintenance revenues for the quarter ended January 31, 1999 increased 9% from the same period a year ago. The increase for the quarter is due to increased license fees realized in prior quarters, as new licenses are the source of new maintenance customers and therefore future maintenance income streams. 12 GROSS MARGIN: The total gross margin was 46% in the third quarter ended January 31, 1999 compared to 54% during the same period a year ago. This decrease was largely due to a decrease in the gross margin on services and maintenance revenues for the three months January 31, 1999. The services gross margin decrease to 26% from 34% in the prior year was due mainly to the switch from higher margin services work to lower margin services work being performed. Maintenance gross margin decreased to 61% for the three months ended January 31, 1999 when compared to 68% in the same quarter a year ago. This reduction was due to slower than anticipated growth in maintenance revenue. The gross margin on license fee revenues increased for the period to 85% from 74% during the same period in the prior year as a result of lower capitalized software amortization expense. This expense is lower due to the write-off of the Company's Enterprise Resource Planning product in the second quarter ended October 31, 1998. RESEARCH AND DEVELOPMENT: Gross product development costs include all non- capitalized and capitalized software development costs. A breakdown of the research and development costs is as follows:
Three Months Ended ----------------------------------------- Jan. 31, Percent Jan. 31, 1999 Change 1998 --------- ---------- ---------- Gross product development costs $ 5,140 (1)% $ 5,185 Percentage of total revenues 18% 20% Less: capitalized development (2,768) 32% (2,090) Percentage of gross prod. dev. 40% Costs 54% --------- ---------- ---------- Product development expenses $ 2,372 23% $ 3,095 Percentage of total revenues 9% 12%
Gross product development costs remained relatively the same when compared to the same quarter in the prior year as a result of the Company's continued investment in new product development. Capitalized development costs increased by 32% for the quarter, while the rate of capitalized development increased to 54% from 40% for the quarter ended. Product development expenses, as a percentage of total revenues, decreased slightly to 9% from 12% for the same quarter last year. SALES & MARKETING: Sales and marketing expenses remained relatively the same as last year at $6.6 million for the quarter. As a percentage of total revenues, sales and marketing expenses were 24% for the three months ended January 31, 1999 when compared to 25% for the quarter ended January 31, 1998 GENERAL & ADMINISTRATIVE: General and administrative expenses increased 24% to $3.5 million for the quarter. These expenses increased primarily as a result of the Company's growth in employees and the resulting growth in administrative costs. During the quarter the average number of employees was 653 compared to 619 during the same period a year ago. 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 or loss. Other income decreased 31% to $772,000 in the third quarter ended January 31, 1999 compared to $1.1 million for the same period a year ago due to lower unrealized gains on investments and an increase in the minority interest charge. INCOME TAXES: The Company recorded $173,000 income tax expense in the quarter compared to $982,000 in the prior year quarter. This expense was based on the Company's estimate of tax liability for the fiscal year 1999. 13 THREE MONTHS ENDED JANUARY 31, 1999 AND OCTOBER 31, 1998: - --------------------------------------------------------- As a result of the adverse market conditions previously noted, the Company took several steps to reduce its expense structure in an attempt to return to operating profitability as soon as possible. These steps included reducing the Company's direct sales force in order to improve sales effectiveness through the use of the Company's most experienced and successful sales executives. Additionally, the Company reduced other operating expenses during the latter portion of the Company's second fiscal quarter. As a result of these market conditions and the steps taken in response, the Company believes it would be meaningful to compare key financial results from the Company's third quarter ended January 31, 1999 to the Company's second quarter ended October 31, 1998. REVENUES: The Company's total revenues increased 12% to $28 million from $25 million for the quarter ended October 31, 1998. This increase was largely due to an increase in the Company's license fee sales. LICENSES: License fee revenues increased 103% in the quarter ended January 31, 1999 from the quarter ended October 31, 1998. The Company believes it is realizing results from the measures taken previously to utilize its sales force in a more focused and efficient manner. SERVICES: Services revenues remained constant at $15.8 million, for the current quarter as well as the quarter ended October 31, 1998. MAINTENANCE: Maintenance revenues increased 1% to $6.6 million from the quarter ended October 31, 1998, due to an increase in the installed base of customers. Maintenance revenues have a direct relationship to current and historic license fee revenues, since license fees are the source of new maintenance customers. GROSS MARGIN: Total gross margin for the quarter ended January 31, 1999 was 46% compared to 29% for the quarter ended October 31, 1998. The gross margin on license fees rose to 85% from (13%) for the previous quarter, while gross margin on maintenance revenues increased to 61% compared to 58% in the previous quarter. The gross margin on license fees increased because of lower software amortization expense as a result of the previous quarter's write-off of capitalized software. The gross margin on services revenues increased to 26% compared to 24% in the prior quarter due mainly to cost reduction efforts. OPERATING EXPENSES: SALES AND MARKETING: Sales and marketing expenses decreased 16% from the quarter ended October 31, 1998. As a percentage of total revenues, sales and marketing expenses were 24% for the three months ended January 31, 1999 compared to 32% for the three months ended October 31, 1998. The Company believes that this cost reduction is a product of the Company's efforts to streamline and focus its sales and marketing efforts. GENERAL AND ADMINISTRATIVE: For the three months ended January 31, 1999, general and administrative expenses decreased 23% from $4.6 million for the quarter ended October 31, 1998, mainly as a result of the Company's reduction in employees and the resulting decline in administrative costs. During the quarter the average number of employees was 613 compared to 694 for the quarter ended October 31, 1998. 14 NINE MONTHS ENDED JANUARY 31, 1999 AND 1998 - ------------------------------------------- REVENUES: Revenues for the nine months ended January 31, 1999 totaled $80.4 million, up 4% from $77.5 million in the prior year period. International revenues represented approximately 10% for the nine months ended January 31, 1999 compared to approximately 9% for the same period a year ago. LICENSES: Software license fee revenues were 45% lower for the nine months ended January 31, 1999 when compared to the same period last year. The Company believes the lower license fees were a result of lower than expected sales by the Company's direct sales force caused by an increasingly competitive market for the Company's products and that several of the Company's potential customers delayed purchase decisions due to a variety of factors, including concern over global economic conditions and limited resources due to the allocation of resources to Year 2000 system projects. Logility's license fees for the nine months ended January 31, 1999 constituted 57% of the total license fee revenues compared to 60% in the prior year period. SERVICES: Services revenues were 34% higher for the nine months ended January 31, 1999 compared to the same period a year ago. The Company believes this was caused by 1) an increase in the demand for professional services in assisting customers to prepare their software systems for the year 2000, 2) an improvement in the Company's ability to offer a more comprehensive package of services for its client server offerings and 3) an increase in demand for professional services in general. MAINTENANCE: For the nine months ended January 31, 1999, maintenance revenues increased 13%, to $19.8 million compared to the same period a year ago. The increase is due to increased license fees realized in prior quarters, as new licenses are the source of new maintenance customers and therefore future maintenance income streams. GROSS MARGIN: For the nine months ended January 31, 1999, the gross margin was 40% compared to 54% for the same period a year ago. This decrease was largely due to the decrease in license fee gross margin that was caused by the commencement of amortization expense of the Company's new Enterprise Resource Planning product which became generally available this fiscal year. Services gross margin decreased to 29% for the nine months ended January 31, 1999 compared to 31% for the same period a year ago. The decrease during the nine months is due mainly to slowing demand for professional services when compared to last year, in particular Year 2000 remediation. The decrease can also be attributed to more services work being performed that is not producing the higher margins of the past. Maintenance gross margin decreased to 61% for the nine months ended January 31, 1999 when compared to 67% during the comparable period. This reduction was due to slower than anticipated growth in maintenance revenue. 15 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:
Nine Months Ended ----------------------------------------- Jan. 31, Percent Jan. 31, 1999 Change 1998 ----------- ----------- ----------- Gross product development costs $17,071 11% $15,441 Percentage of total revenues 21% 20% Less: capitalized development (8,289) 28% (6,463) Percentage of gross prod. dev. 49% 42% costs ----------- ---------- ----------- Product development expenses $ 8,782 2% $ 8,978 Percentage of total revenues 11% 12%
Gross product development costs increased 11% for the nine months ended January 31, 1999 as a result of the Company's continued investment in new product development. Capitalized development increased as well by 28% for the nine months ended, while the rate of capitalized development increased 49% from 42% for the nine months ended January 31, 1999. Product development expenses, as a percentage of total revenues did not change substantially from the same period in the prior year. SALES & MARKETING: Sales and marketing expenses increased 23% to $22.9 million for the nine months ended January 31, 1999. As a percentage of total revenues, sales and marketing expenses were 28% for the nine months ended January 31, 1999 compared to 24% for the same period last year. These increases were due to increased sales and marketing expenditures, as well as a decrease in the growth rate of revenues. GENERAL & ADMINISTRATIVE: General and administrative expenses increased 49% to $12.5 million for the nine months ended January 31, 1999. These expenses increased primarily as a result of the Company's growth in employees and the resulting growth in administrative costs. NON-RECURRING CHARGE: In the quarter ended October 31, 1998, the Company incurred a non-recurring charge against earnings of $26.2 million. This charge was the result of 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 were mainly attributable to the uncertainty of the world economy and a general reallocation of the market's IT budgets to fix year 2000 problems which management believes have stalled the adoption of the Company's products. An additional one-time cost of $1.8 million was 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 or loss. For the nine month period ended January 31, 1999, other income increased to $2.5 million from $2.4 million in the comparable period last year, due primarily to the effect of the minority interest calculation as a result of the losses incurred at the Company's majority owned subsidiary, Logility, Inc. This was partially offset by a reduction in the unrealized gains recorded on the Company's investments. INCOME TAXES: The Company recorded tax expense of $373,000 for the current nine months ended January 31, 1999 compared to $2.7 million for the nine months ended January 31, 1998. This expense was based on the Company's estimate of tax liability for the fiscal year 1999. 16 LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION The Company's operating activities provided cash of approximately $9.0 million in the nine months ended January 31, 1999, and provided cash of approximately $6.9 million in the same period last year. The cash provided by operations during the nine months ended January 31, 1999, was primarily attributable to a non cash charge of $27.8 million for in-process research and development, charge for asset impairment and restructuring expenses, an increase in proceeds from trading securities of $9.0 million, an increase in non-cash depreciation and amortization expense of $8.1 million, a decrease in money market funds of $4.2 million and an increase in accounts payable and other liabilities of $2.5 million and a decrease in prepaid expenses of $1.3 million. This is partially offset by a net loss of $37.7 million, purchases of trading securities of $6.3 million, a decrease in minority interest in subsidiary loss of $1.2 million. The cash provided by operations during the same period of the prior year was attributed to net income of $5.2 million, increase in non-cash depreciation and amortization expense of $7.4 million, an increase in the proceeds from the sales and maturities of investments of $4.9 million, an increase in deferred revenue of $3.7 million, and an increase in deferred income taxes of $2.7. This was partially offset by an increase in money market funds of $5.9 million, an increase in accounts receivable of $7.2 million and purchases of trading securities of $1.9 million. Cash used for investing activities was approximately $7.4 million for the nine months ended January 31, 1999 and approximately $18.0 million in the same period in the prior year. The substantial amount of cash was used for capitalized software development costs of $8.7 million, purchase of majority interest in companies for $2.0 million, the purchase of property and equipment of $1.4 million, the Company's Logility subsidiary in the amount of $1.5 million and minority interest in business of $858,000. This was substantially offset by the sale of investments of $7.1 million. Cash used for the same period in the prior year was primarily for capitalized software of $6.5 million, the purchase of property and equipment of $1.1 million and the purchase of investments of $9.7 million. Cash used in financing activities was approximately $2.3 million for the nine months ended January 31, 1999 and cash provided by financing activities in the amount of $33.5 million in the same period of the prior year. Cash was used to repurchase common stock of the Company in the amount of $2.6 million. Net cash provided by financing activities of $33.5 million in the nine months ended January 31, 1998 represented proceeds from the public offering of Logility, Inc. common stock. Days Sales Outstanding in accounts receivable was 88 days as of January 31, 1999, compared to 89 days as of January 31, 1998. The Company's current ratio was 2.2 to 1 and cash and investments totaled 42% of total assets at January 31, 1999 compared to 3.2 to 1 and cash and investments totaling 42% of total assets at April 30, 1998. The reduction in the current ratio was due to the operating losses incurred as of 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. 17 On December 18, 1997, American Software Inc.'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 through open market purchases. On March 11, 1999 the board of directors approved a resolution authorizing the Company to repurchase an additional 700,000 shares to bring the total to 2.2 million shares of the Company's class A common stock through open market purchases. The timing of any repurchases will depend on market conditions, the market price of the Company's common stock and management's assessment of the Company's liquidity and cash flow needs. Since this resolution was adopted, the Company has repurchased 993,833 shares of common stock at a cost of approximately $3,371,794 as of January 31, 1999. On December 15, 1997, The Company's subsidiary, Logility, Inc.'s Board of Directors approved a resolution authorizing the Company to repurchase up to 350,000 shares of the Company's common stock through open market purchases at prevailing market prices. Logility,Inc. completed this repurchase plan in November 1998. In November 1998 Logility,Inc. adopted an additional repurchase plan for up to 800,000 shares. The timing of any repurchases would depend on market conditions, the market price of Logility's common stock and management's assessment of Logility's liquidity and cash flow needs. For both plans, to date Logility,Inc. has purchased a cumulative total of 374,100 shares at a total cost of $3.4 million. YEAR 2000 READINESS DISCLOSURE PRODUCTS: - -------- Based on management's assessment, the Company believes that the current versions of its software products are Year 2000 compliant. However, the Company believes some of its customers may be running earlier versions of the Company's products that are not Year 2000 compliant, and the Company has been encouraging such customers to migrate to current product versions. The Company offers its customers the alternatives of implementing a modification to non-compliant legacy versions of its software or migrating to a later version of the software which is Year 2000 compliant. Moreover, the Company's products are generally integrated into other systems involving complex software products developed by other vendors. Year 2000 problems inherent in a customer's other software programs might significantly limit that customer's ability to utilize the Company's products. Software products as complex as those offered by the Company might contain undetected errors or failures when first introduced or when new versions are released, including products believed to be Year 2000 compliant. While the Company believes that it has assessed, corrected and tested its products to address the Year 2000 issue, there can be no assurances that the Company's software products contain or will contain all necessary date code changes or that errors will not be found in new products or product enhancements after commercial release, resulting in loss of or delay in market acceptance. In addition, the Company might experience difficulties that could delay or prevent the continued successful development and release of products that are Year 2000 compliant or that meet the Year 2000 requirements of customers. If the Company is unable or is delayed in its efforts to make the necessary date code changes, there could be a material adverse effect upon the Company's business, operating results, financial condition and cash flows. The Company may in the future be subject to claims based on Year 2000 problems in its own, as well as in others' products, and issues arising from the integration of multiple products within an overall system. Although the Company has not been a party to any litigation involving its products or services related to Year 2000 compliance issues, there can be no assurance that the Company will not in the future be required to defend its products or services in such proceedings, or otherwise address claims based on Year 2000 issues. The costs of defending and resolving Year 2000-related disputes, and any liability of the Company 18 for Year 2000-related damages, including consequential damages, could have a material adverse effect on the Company's business, operating results, and financial condition. The Company believes that Year 2000 issues have affected and may continue to affect the purchasing decisions of customers and potential customers of the Company's products. Many businesses are expending significant resources on projects to make their current hardware and software systems Year 2000 compliant. Such expenditures may result in reduced funding for projects to purchase software products such as those offered by the Company. Potential customers may also choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industry. Any of the foregoing could have a material adverse effect on the Company's business, operating results and financial condition. INTERNAL SYSTEMS: - ---------------- The Company is working to identify and remediate all internal systems which may impact the operations of the Company. The cost of converting the Company's internal systems is not expected to be material since the Company is utilizing internal resources to meet their Year 2000 readiness needs. The Company has completed 90% of it's system evaluation and 70% of it's remediation. The Company estimates the completion of it's remediation and testing by August 31, 1999. The Company utilizes third-party vendor equipment, telecommunication products and software products that may or may not be Year 2000 compliant. The Company has been communicating with such third party vendors about their plans and progress in addressing the Year 2000 problem, and the Company has requested assurances that such equipment, product and services will be Year 2000 compliant. The Company has received such assurances from certain of the third party vendors and is waiting to receive such assurances from the remaining vendors. In the event that such additional assurances are not timely received, the Company will switch to another vendor or take such other action as the Company shall deem appropriate. Although the Company is currently taking steps to address the impact, of the Year 2000 compliance issue surrounding such third- party products, failure of any critical technology components to be Year 2000 compliant may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. The Company's evaluation of Year 2000 issues includes the development of contingency plans for business functions that are susceptible to a substantive risk of disruption resulting from a Year 2000 related event. Because the Company has not yet identified any business function that is materially at risk of the Year 2000 related disruption, it has not yet developed detailed contingency plans specific to Year 2000 events for any business function. The Company is prepared for the possibility, however, that certain business functions may be hereafter identified as at risk and will develop contingency plans for such business functions when and if such determinations are made. Forward-looking statements contained in this Year 2000 Compliance discussion should be read in conjunction with the Company's disclosure under the heading of Forward Looking Statements, below, for the purposes of the Safe Harbor provisions of the Private Securities Litigation Act of 1995 RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS 130, Reporting Comprehensive Income. SFAS 130 requires companies to display, with the same prominence as other financial statements, the components of other comprehensive income. SFAS 130 requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes are required. 19 The Company's financial statements will include the disclosure of other comprehensive income in accordance with the provisions of SFAS 130 beginning in the first quarter of fiscal year ended April 30, 1999. In June 1997, the Financial Accounting Standards Board issued SFAS 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 requires that an enterprise disclose certain information about operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 with the first disclosure required in the annual financial statement thereafter. The Company will evaluate the need for such disclosures at that time. On May 1, 1998 the Company adopted Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2") which was effective for financial statements for fiscal years beginning after December 15, 1997. The implementation of this statement has not had a material impact on the Company's unaudited condensed financial statements. The Company does not expect that adoption of SOP 97-2 will significantly affect its results of operations. FORWARD-LOOKING STATEMENTS It should be noted that this discussion 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 include changes in general economic conditions, the growth rate of the market for the Company's products and services, the timely availability and market acceptance of these products and services, the effect of competitive products and pricing, and the irregular pattern of revenues, as well as a number of other risk factors which could affect the future performance of the Company. For further information, refer to the Company's Form 10-K for the year ended April 30, 1998, and other reports and documents subsequently filed with the Securities and Exchange Commission which are publicly available. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------ ----------------- The registrant is not currently involved in legal proceedings requiring further disclosure under this item. Item 2. Changes in Securities and Use of Proceeds - ------ ----------------------------------------- (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) Not applicable. 20 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 (b) No report on Form 8-K was filed during the quarter ended January 31, 1999. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN SOFTWARE, INC. DATE March 15, 1999 /s/ James C. Edenfield -------------- ---------------------------------- James C. Edenfield President, Chief Executive Officer and Treasurer DATE March 15, 1999 /s/ Vincent C. Klinges -------------- ---------------------------------- Vincent C. Klinges Chief Accounting Officer 21 EXHIBIT INDEX -------------
Exhibit Page ------- ---- 11.1 Statement re: Computation of Per Share Earnings (Loss) (Unaudited) 23 27.1 Financial Data Schedule (Unaudited) 24
22 EX-11.1 2 STATEMENT RE: COMPUTATION OF EARNINGS EXHIBIT 11.1 AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Statement re: computation of Per Share Earnings (loss) (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended ------------------ ----------------- January 31, January 31, ------------- ------------ 1999 1998 1999 1998 --------- ---------- ----------- ------------ Common stock: Weighted average common shares outstanding: Class A shares 17,221 17,888 17,595 17,811 Class B shares 4,785 4,798 4,794 4,807 --------- ---------- ----------- ------------ Basic weighted average common shares outstanding 22,006 22,686 22,389 22,618 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) 13 1,799 920 1,996 --------- ---------- ----------- ------------ Diluted weighted average common shares outstanding for earnings per share - 22,019 24,485 23,309 24,614 ========= ========== =========== ============ Net earnings (loss) $ 1,013 $ 1,869 $ (37,711) $ 5,221 ========= ========== =========== ============ Basic net earnings(loss)per common share $ .05 $ .08 $ (1.68) $ .23 ========= ========== =========== ============ Diluted net earnings(loss)per common share* $ .05 $ .08 $ (1.68) $ .21 ========= ========== =========== ============
*Diluted weighted average common shares outstanding are not included in the nine months ended January 31, 1999 calculations due to the anti-dilution of the net loss per share. 23 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS APR-30-1999 APR-30-1999 NOV-01-1998 MAY-01-1998 JAN-31-1999 JAN-31-1999 1,467 1,467 43,078 43,078 28,987 28,987 (1,759) (1,759) 0 0 4,483 4,483 45,394 45,394 (28,547) (28,547) 106,563 106,563 33,937 33,937 0 0 0 0 0 0 2,422 2,422 58,309 58,309 106,563 106,563 0 0 28,005 80,427 0 0 15,076 48,075 12,515 72,239 414 (39,887) 0 0 1,186 (37,338) 173 373 0 0 0 0 0 0 0 0 1,013 (37,711) .05 (1.68) .05 (1.68)
-----END PRIVACY-ENHANCED MESSAGE-----