10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2009

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
incorporation or organization)
 

(IRS Employer

Identification Number)

 

470 East Paces Ferry Road, N.E., Atlanta, Georgia   30305
(Address of principal executive offices)   (Zip Code)

(404) 261-4381

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Classes

  

Outstanding at December 7, 2009

Class A Common Stock, $.10 par value    22,467,547 Shares
Class B Common Stock, $.10 par value    2,877,086 Shares

 

 

 


Table of Contents

AMERICAN SOFTWARE, INC. AND SUBSIDIARIES

Form 10-Q

Quarter ended October 31, 2009

Index

 

     Page No.
Part I—Financial Information   

Item 1. Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets October 31, 2009 and April 30, 2009

   3

Condensed Consolidated Statements of Operations Three and Six Months ended October 31, 2009 and 2008

   4

Condensed Consolidated Statements of Cash Flows Six Months ended October 31, 2009 and 2008

   5

Notes to Condensed Consolidated Financial Statements—Unaudited

   6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   30

Item 4. Controls and Procedures

   31
Part II—Other Information   

Item 1. Legal Proceedings

   32

Item 1A. Risk Factors

   32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   32

Item 3. Defaults Upon Senior Securities

   32

Item 4. Submission of Matters to a Vote of Security Holders

   32

Item 5. Other Information

   33

Item 6. Exhibits

   33

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

American Software, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

(in thousands, except share data)

 

     October 31,
2009
    April 30,
2009
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 26,005      $ 37,629   

Investments

     15,528        16,371   

Trade accounts receivable, less allowance for doubtful accounts of $142 at October 31, 2009 and $484 at April 30, 2009:

    

Billed

     9,098        10,234   

Unbilled

     2,766        2,995   

Deferred income taxes

     280        246   

Prepaid expenses and other current assets

     2,992        2,886   
                

Total current assets

     56,669        70,361   

Investments—Noncurrent

     14,822        17,094   

Property and equipment, net of accumulated depreciation of $25,754 at October 31, 2009 and $25,121 at April 30, 2009

     6,936        7,189   

Capitalized software, net of accumulated amortization of $7,330 at October 31, 2009 and $7,050 at April 30, 2009

     5,745        4,859   

Goodwill

     11,709        11,709   

Other intangibles, net of accumulated amortization of $2,463 at October 31, 2009 and $2,233 at April 30, 2009

     719        950   

Other assets

     118        157   
                

Total assets

   $ 96,718      $ 112,319   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 1,112      $ 822   

Accrued compensation and related costs

     2,133        2,374   

Dividends payable

     2,281        2,277   

Other current liabilities

     2,699        3,355   

Deferred revenue

     14,153        16,101   
                

Total current liabilities

     22,378        24,929   

Deferred income taxes

     1,163        1,163   

Shareholders’ equity:

    

American Software, Inc. shareholders’ equity:

    

Common stock:

    

Class A, $.10 par value. Authorized 50,000,000 shares: Issued 26,692,582 shares at October 31, 2009 and 26,642,744 shares at April 30, 2009

     2,669        2,664   

Class B, $.10 par value. Authorized 10,000,000 shares: Issued and outstanding 2,887,086 shares at October 31, 2009 and April 30, 2009; convertible into Class A shares on a one-for-one basis

     288        288   

Additional paid-in capital

     83,522        88,164   

Retained earnings

     9,600        11,625   

Class A treasury stock, 4,230,288 shares at October 31, 2009 and April 30, 2009

     (22,902     (22,902
                

Total American Software, Inc. shareholders’ equity

     73,177        79,839   

Noncontrolling interests

     —          6,388   

Total shareholders’ equity

     73,177        86,227   
                

Commitments and contingencies

    

Total liabilities and shareholders’ equity

   $ 96,718      $ 112,319   
                

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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American Software, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except earnings per share data)

 

     Three Months Ended
October 31,
    Six Months Ended
October 31,
 
     2009    2008     2009     2008  

Revenues:

         

License

   $ 3,579    $ 3,794      $ 7,723      $ 6,536   

Services and other

     8,223      9,012        15,096        18,343   

Maintenance

     6,917      7,042        13,734        14,167   
                               

Total revenues

     18,719      19,848        36,553        39,046   
                               

Cost of revenues:

         

License

     947      1,518        1,803        2,806   

Services and other

     5,682      6,290        10,306        12,298   

Maintenance

     1,839      1,808        3,550        3,622   
                               

Total cost of revenues

     8,468      9,616        15,659        18,726   
                               

Gross margin

     10,251      10,232        20,894        20,320   
                               

Research and development

     1,702      1,842        3,372        3,671   

Sales and marketing

     3,829      3,472        7,529        7,268   

General and administrative

     2,875      2,780        6,926        5,875   

Amortization of acquisition-related intangibles

     87      87        175        174   

Provision for (recovery of) doubtful accounts

     22      54        (298     54   
                               

Total operating expenses

     8,515      8,235        17,704        17,042   
                               

Operating income

     1,736      1,997        3,190        3,278   

Other income (expense):

         

Interest income

     352      455        761        827   

Other, net

     49      (1,642     258        (2,150
                               

Earnings before income taxes

     2,137      810        4,209        1,955   

Income tax expense

     784      152        1,585        600   
                               

Net earnings

   $ 1,353    $ 658      $ 2,624      $ 1,355   

Less net earnings attributable to noncontrolling interests

     —        (188     (90     (275
                               

Net earnings attributable to American Software, Inc.

   $ 1,353    $ 470      $ 2,534      $ 1,080   
                               

Earnings per common share attributable to American Software, Inc.(a):

         

Basic

   $ 0.05    $ 0.02      $ 0.10      $ 0.04   
                               

Diluted

   $ 0.05    $ 0.02      $ 0.10      $ 0.04   
                               

Cash dividends declared per common share

   $ 0.09    $ 0.09      $ 0.18      $ 0.18   
                               

Shares used in the calculation of earnings per common share attributable to American Software, Inc.:

         

Basic

     25,324      25,357        25,313        25,375   
                               

Diluted

     26,003      25,860        25,857        25,931   
                               

 

(a) Basic per share amounts are the same for Class A and Class B shares. Diluted per share amounts for Class A shares are shown above. Diluted earnings per share for Class B shares under the two-class method are $0.05 and $0.02 for the three months ended October 31, 2009 and 2008 and $0.10 and $0.04 for the six months ended October 31, 2009 and 2008, respectively. See Note G to the Condensed Consolidated Financial Statements.

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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American Software, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     Six Months Ended
October 31,
 
     2009     2008  

Cash flows from operating activities:

    

Net earnings

   $ 2,534      $ 1,080   

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     1,145        1,962   

Stock-based compensation expense

     619        418   

Bond amortization

     334        166   

Tax benefit of stock options exercised

     395        194   

Excess tax benefits from stock-based compensation

     (126     (69

Net (gain)/loss on investments

     (268     1,995   

Minority interest in net earnings of subsidiary

     90        275   

Deferred income taxes

     (34     (253

Changes in operating assets and liabilities:

    

Purchases of trading securities

     (6,881     (5,742

Proceeds from sale of trading securities

     2,998        1,608   

Proceeds from maturities of trading securities

     —          607   

Accounts receivable, net

     1,365        3,733   

Prepaid expenses and other assets

     (81     (499

Accounts payable and other liabilities

     (607     (2,915

Deferred revenue

     (1,948     (2,021
                

Net cash (used in) provided by operating activities

     (465     539   
                

Cash flows from investing activities:

    

Capitalized computer software development costs

     (1,165     (1,039

Intangible assets

     —          (145

Goodwill

     —          (72

Purchases of property and equipment, net of disposals

     (382     (466

Proceeds from maturities of investments

     6,946        55,571   

Purchases of investments

     —          (72,673

Net change in minority interest resulting from changes in subsidiary equity

     —          (245

Repurchase of noncontrolling interest

     (12,328     0   

Proceeds from exercise of stock options of subsidiary

     29        233   
                

Net cash used in investing activities

     (6,900     (18,836
                

Cash flows from financing activities:

    

Proceeds from Dividend Reinvestment Plan and Stock Purchase Plan

     —          34   

Repurchase of common stock

     —          (1,055

Excess tax benefits from stock based compensation

     126        69   

Proceeds from exercise of stock options

     170        268   

Dividends paid

     (4,555     (4,572
                

Net cash used in financing activities

     (4,259     (5,256
                

Net change in cash and cash equivalents

     (11,624     (23,553

Cash and cash equivalents at beginning of period

     37,629        59,236   
                

Cash and cash equivalents at end of period

   $ 26,005      $ 35,683   
                

See accompanying notes to condensed consolidated financial statements—unaudited.

 

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AMERICAN SOFTWARE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

October 31, 2009

 

A. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-1 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of our management, these condensed consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the financial position at October 31, 2009, the results of operations for the three and six months ended October 31, 2009 and 2008 and cash flows for the six months ended October 31, 2009 and 2008. The results for the three and six months ended October 31, 2009 are not necessarily indicative of the results expected for the full year. You should read these statements in conjunction with our audited consolidated financial statements and management’s discussion and analysis and results of operations included in our annual report on Form 10-K for the year ended April 30, 2009.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements for the fiscal year ended April 30, 2009, describes the significant accounting policies that we have used in preparing our financial statements. On an ongoing basis, we evaluate our estimates, including but not limited to those related to revenue/vendor specific object evidence (“VSOE”), bad debts, capitalized software costs, goodwill, intangible assets, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions.

 

B. Principles of Consolidation

The consolidated financial statements include the accounts of American Software, Inc. (“American Software” or the “Company”), and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

C. Revenue Recognition

We recognize revenue in accordance with the Software Revenue Recognition Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.

License. We recognize license revenue in connection with license agreements for standard proprietary software upon delivery of the software, provided we consider collection to be probable, the fee is fixed or determinable, there is evidence of an arrangement, and VSOE exists with respect to any undelivered elements of the arrangement. For multiple-element arrangements, we recognize revenue under the residual method, whereby (1) the total fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently recognized 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. We record revenues from sales of third-party products in accordance with Principal Agent Considerations within the Revenue Recognition Topic of the FASB’s Accounting Standards Codification. Furthermore, we evaluate sales through our indirect channel on a case-by-case basis to determine whether the transaction should be recorded gross or net, including but not limited to assessing whether or not we: (1) act as principal in the transaction, (2) take title to the products, (3) have risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and (4) act as an agent or broker with compensation on a commission or fee basis. Accordingly, in most cases we record our sales through the Demand Management, Inc. (“DMI”) channel on a gross basis.

Maintenance. Revenue derived from maintenance contracts primarily includes telephone consulting, product updates, and releases of new versions of products previously purchased by the customer, as well as error reporting and correction services. Maintenance contracts are typically sold for a separate fee with initial contractual periods ranging from one to three years with renewal for additional periods thereafter. Maintenance fees are generally billed annually in advance. We recognize maintenance revenue ratably over the term of the maintenance agreement. In situations where we bundle all or a portion of the maintenance fee with the license fee, VSOE for maintenance is determined based on prices when sold separately.

 

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Services. Revenue derived from services primarily includes consulting, implementation, and training. We primarily bill fees under time and materials arrangements and recognize them as services are performed. In accordance with the other presentation matters within the Revenue Recognition Topic of the FASB’s Accounting Standards Codification, we recognize amounts received for reimbursement of travel and other out-of-pocket expenses incurred as revenue in the condensed consolidated statements of operations under services and other. These amounts totaled approximately $265,000 and $469,000 for the three and six months ended October 31, 2009, respectively, and $334,000 and $711,000 for the three and six months ended October 31, 2008, respectively.

Indirect Channel Revenue. We recognize revenues for sales made through indirect channels principally when the distributor makes the sale to an end-user, when the license fee is fixed or determinable, the license fee is nonrefundable, and the sale meets all other conditions for revenue recognition.

Deferred Revenue. Deferred revenue represents advance payments or billings for software licenses, services, and maintenance billed in advance of the time revenue is recognized.

Sales Taxes. We account for sales taxes collected from customers on a net basis.

Unbilled Accounts Receivable. The unbilled receivable balance consists of amounts generated from license fee and services revenues. At October 31, 2009 and April 30, 2009, unbilled license fees were approximately $1.2 million and $2.0 million, respectively, and unbilled services revenues were approximately $1.5 million and $1.0 million, respectively. Unbilled license fee accounts receivable represents revenue that has been recognized but under the terms of the license agreement, which include specified payment terms that are considered normal and customary, certain payments have not yet been invoiced to the customers. Unbilled services revenues primarily occur due to the timing of the respective billings, which occur subsequent to the end of each reporting period.

 

D. Reclassification

Certain prior year amounts have been reclassified for presentation purposes.

 

E. Major Customer

One customer, The Home Depot, accounted for approximately 12% of our total revenues in the three months ended October 31, 2009 and no single customer accounted for more than 10% of our total revenues in the six months ended October 31, 2009. The related accounts receivable balance for this customer as of October 31, 2009 was approximately $1.3 million.

This one customer accounted for approximately 11% of our total revenues for the three and six months ended October 31, 2008, principally from our IT consulting segment (see footnote M). The related accounts receivable balance for this customer as of October 31, 2008 was approximately $1.4 million.

 

F. Declaration of Dividend Payable

On August 18, 2009, our Board of Directors declared a quarterly cash dividend of $0.09 per share of our Class A and Class B common stock. The cash dividend is payable on December 1, 2009 to Class A and Class B shareholders of record at the close of business on November 19, 2009.

 

G. Earnings Per Common Share

We have two classes of common stock of which Class B Common Shares are convertible into Class A Common Shares at any time, on a one-for-one basis. Under our Articles of Incorporation, if dividends are declared, holders of Class A Common Shares shall receive a $.05 dividend per share prior to the Class B Common Shares receiving any dividend and holders of Class A Common Shares shall receive a dividend at least equal to Class B Common Shares dividends on a per share basis. As a result, we have computed the earnings per share in accordance with Earnings Per Share within the Presentation Topic of the FASB’s Accounting Standards Codification, which requires companies that have multiple classes of equity securities to use the “two-class” method in computing earnings per share.

For our basic earnings per share calculation, we use the “two-class” method. Basic earnings per share are calculated by dividing net earnings attributable to each class of common stock by the weighted average number of shares outstanding. All undistributed earnings are allocated evenly between Class A and B Common Shares in the earnings per share calculation to the extent that earnings equal or exceed $.05 per share. This allocation is based on management’s judgment after considering the dividend rights of the two-classes of common stock, the control of the Class B shareholders and the convertibility rights of the Class B shares to Class A shares.

Diluted earnings per share is calculated similar to basic earnings per share, except that the calculation includes the dilutive effect of the assumed exercise of options issuable under our stock incentive plans. For our diluted earnings per share calculation for Class A shares, we use the “if-converted” method. This calculation assumes that all Class B Common Shares are converted into Class A Common Shares and, as a result, assumes there are no holders of Class B Common Shares to participate in undistributed earnings.

 

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For our diluted earnings per share calculation for Class B shares, we use the “two-class” method. This calculation does not assume that all Class B Common Shares are converted into Class A Common Shares. In addition, this method assumes the dilutive effect if Class A stock options were converted to Class A shares and the undistributed earnings are allocated evenly to both Class A and B shares including Class A shares issued pursuant to those converted stock options. This allocation is based on management’s judgment after considering the dividend rights of the two classes of common stock, the control of the Class B shareholders and the convertibility rights of the Class B shares into Class A shares.

The following tables set forth the computation of basic earnings per common share and diluted earnings per common share (in thousands except for per share amounts):

Basic earnings per common share:

 

     Three Months Ended
October 31, 2009
    Six Months Ended
October 31, 2009
 
     Class A     Class B     Class A     Class B  

Distributed earnings

   $ 0.09      $ 0.09      $ 0.18      $ 0.18   

Undistributed loss

     (0.04     (0.04     (0.08     (0.08
                                

Total

   $ 0.05      $ 0.05      $ 0.10      $ 0.10   
                                

Distributed earnings

   $ 2,022      $ 259      $ 4,047      $ 519   

Undistributed loss

     (823     (105     (1,802     (230
                                

Total

   $ 1,199      $ 154      $ 2,245      $ 289   
                                

Basic weighted average common shares

     22,447        2,877        22,436        2,877   

 

     Three Months Ended
October 31, 2008
    Six Months Ended
October 31, 2008
 
     Class A     Class B     Class A     Class B  

Distributed earnings

   $ 0.09      $ 0.09      $ 0.18      $ 0.18   

Undistributed earnings

     (0.07     (0.07     (0.14     (0.14
                                

Total

   $ 0.02      $ 0.02      $ 0.04      $ 0.04   
                                

Distributed earnings

   $ 2,019      $ 260      $ 4,044      $ 520   

Undistributed earnings

     (1,603     (206     (3,086     (398
                                

Total

   $ 416      $ 54      $ 958      $ 122   
                                

Basic weighted average common shares

     22,471        2,886        22,488        2,887   

Diluted EPS for Class A Common Shares Using the If-Converted Method

Three Months Ended October 31, 2009

 

     Undistributed
& Distributed
earnings to
Class A
Common
   Class A
Common
Shares
   EPS

Per Basic

   $ 1,199    22,447    $ 0.05

Common Stock Equivalents

     —      679      —  
                  
     1,199    23,126      0.05

Class B Conversion

     154    2,877      —  
                  

Diluted EPS for Class A

   $ 1,353    26,003    $ 0.05
                  

 

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Six Months Ended October 31, 2009

 

     Undistributed
& Distributed
earnings to
Class A
Common
   Class A
Common
Shares
   EPS

Per Basic

   $ 2,245    22,436    $ 0.10

Common Stock Equivalents

     —      544      —  
                  
     2,245    22,980      0.10

Class B Conversion

     289    2,877      —  
                  

Diluted EPS for Class A

   $ 2,534    25,857    $ 0.10
                  

 

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Three Months Ended October 31, 2008

 

     Undistributed
& Distributed
earnings to
Class A
Common
   Class A
Common
Shares
   EPS

Per Basic

   $ 416    22,471    $ 0.02

Common Stock Equivalents

     —      503      —  
                  
     416    22,974      0.02

Class B Conversion

     54    2,886      —  
                  

Diluted EPS for Class A

   $ 470    25,860    $ 0.02
                  

Six Months Ended October 31, 2008

 

     Undistributed
& Distributed
earnings to
Class A
Common
   Class A
Common
Shares
   EPS

Per Basic

   $ 958    22,488    $ 0.04

Common Stock Equivalents

     —      556      —  
                  
     958    23,044      0.04

Class B Conversion

     122    2,887      —  
                  

Diluted EPS for Class A

   $ 1,080    25,931    $ 0.04
                  

Diluted EPS for Class B Common Shares Using the Two-Class Method

Three Months Ended October 31, 2009

 

     Undistributed
& Distributed
earnings to
Class B
Common
   Class B
Common
Shares
   EPS

Per Basic

   $ 154    2,877    $ 0.05

Reallocation of undistributed earnings to Class A shares from Class B shares

     3    —        —  
                  

Diluted EPS for Class B

   $ 157    2,877    $ 0.05
                  

Six Months Ended October 31, 2009

 

     Undistributed
& Distributed

earnings to
Class B
Common
   Class B
Common
Shares
   EPS

Per Basic

   $ 289    2,877    $ 0.10

Reallocation of undistributed earnings to Class A shares from Class B shares

     5    —        —  
                  

Diluted EPS for Class B

   $ 294    2,877    $ 0.10
                  

 

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Three Months Ended October 31, 2008

 

     Undistributed
& Distributed
earnings to
Class B
Common
   Class B
Common
Shares
   EPS

Per Basic

   $ 54    2,886    $ 0.02

Reallocation of undistributed earnings to Class A shares from Class B shares

     4    —        —  
                  

Diluted EPS for Class B

   $ 58    2,886    $ 0.02
                  

Six Months Ended October 31, 2008

 

     Undistributed
& Distributed
earnings to
Class B
Common
   Class B
Common
Shares
   EPS

Per Basic

   $ 122    2,887    $ 0.04

Reallocation of undistributed earnings to Class A shares from Class B shares

     8    —        —  
                  

Diluted EPS for Class B

   $ 130    2,887    $ 0.04
                  

For the three and six months ended October 31, 2009, we excluded options to purchase 1,287,421 and 1,801,771 Class A Common Shares, respectively, and for the three and six months ended October 31, 2008, we excluded options to purchase 1,818,389 and 1,502,252 Class A Common Shares, respectively, from the computation of diluted earnings per Class A Common Shares. We excluded these option share amounts because the exercise prices of those options were greater than the average market price of the Class A Common Shares during the applicable period. As of October 31, 2009, we had a total of 4,015,097 options outstanding and, as of October 31, 2008, we had a total of 3,304,538 options outstanding.

 

H. Acquisitions

On May 23, 2009, we commenced a cash tender offer for all the outstanding shares of common stock, no par value, of our majority-owned subsidiary, Logility, Inc. (“Logility”), not already owned by the Company at a price of $7.02 per share, without interest. On June 30, 2009, we announced that we had accepted for payment 1,504,866 shares of Logility, Inc. common stock. On July 9, 2009, we caused Logility to merge with a wholly-owned subsidiary of the Company, after which all remaining shares of Logility common stock were converted into the right to receive $7.02 per share, without interest. As a result of the merger, Logility became a wholly-owned subsidiary of the Company on July 9, 2009.

In connection with the tender offer and subsequent merger, we adopted the Logility, Inc. 1997 Stock Plan and the Logility, Inc. 2007 Stock Plan, and all outstanding Logility stock options were either converted into options to purchase shares of our Class A Common Shares or net cash settled. The conversion ratio was structured so as to maintain the “spread” between the exercise price and fair market value of our Class A Common Shares on July 9, 2009, in accordance with the regulations of the U.S. Treasury designed to maintain the status of the converted stock options as incentive stock options under Internal Revenue Code Section 422. As a result of these transactions, we have paid approximately $12,300,000 in cash to Logility shareholders and issued options to purchase 1,942,595 of our Class A Common Shares. We incurred fees and expenses related to the transaction of approximately $809,000, of which $552,000 is included in the Condensed Consolidated Statement of Operations for the six months ended October 31, 2009. We accounted for this transaction in accordance with Identifiable Assets and Liabilities, and Any Noncontrolling Interests within the Business Combination Topic of the FASB’s Accounting Standards Codification. As a result, we recorded the total consideration of $12.3 million by recording debits to noncontrolling interest and additional paid-in capital of $6.5 million and $5.8 million, respectively.

As a result of the tender offer and subsequent merger we incurred stock compensation expense of approximately $230,000, primarily related to those non-vested Logility stock options that became fully vested on the date of acquisition. Options held by those option holders who elected not to cash settle their awards were converted into fully vested options to purchase our Class A Common Shares.

 

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I. Stock-Based Compensation

During the six months ended October 31, 2009 and 2008, we granted options for 803,310 and 494,978 shares of common stock, respectively. We recorded stock option compensation cost of approximately $207,000 and $202,000 and related income tax benefits of approximately $49,000 and $38,000 during the three months ended October 31, 2009 and 2008, respectively. We recorded stock option compensation cost of approximately $619,000 and $418,000 and related income tax benefits of approximately $200,000 and $76,000 during the six months ended October 31, 2009 and 2008, respectively. We record stock-based compensation expense on a straight-line basis over the vesting period directly to additional paid-in capital.

Cash flows resulting from the tax benefits generated by tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as financing cash flows. During the six months ended October 31, 2009 and 2008, we realized excess tax benefits of approximately $126,000 and $69,000, respectively.

During the six months ended October 31, 2009 and 2008, we issued 48,341 and 94,012 shares of common stock, respectively, resulting from the exercise of stock options. The total intrinsic value of options exercised during the six months ended October 31, 2009 and 2008 based on market value at the exercise dates was approximately $81,000 and $280,000, respectively. As of October 31, 2009, unrecognized compensation cost related to unvested stock option awards approximated $2.4 million, which we expect to recognize over a weighted average period of 1.9 years.

 

J. Fair Value of Financial Instruments

We measure our investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. A number of factors affect market price observability, including the type of asset or liability and its characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:

 

   

Level 1—Quoted prices in active markets for identical instruments.

 

   

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

   

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The following is a general description of the valuation methodologies we use for financial assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Cash Equivalents—Cash equivalents include investments in government obligation based money-market funds, other money market instruments and interest-bearing deposits with initial or remaining terms of three months or less. The fair value of cash equivalents approximates its carrying value due to the short-term nature of these instruments.

Marketable Securities—Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include municipal bonds. We value these securities using market-corroborated pricing or other models that use observable inputs such as yield curves.

The following table presents our assets and liabilities that we measured at fair value on a recurring basis as of October 31, 2009, and indicates the fair value hierarchy of the valuation techniques we used to determine such fair value (in thousands):

 

     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Balance as of
October 31, 2009

Cash equivalents

   $ 24,961      —        —      $ 24,961

Marketable securities

     1,423      4,553      —      $ 5,976
                           

Total

   $ 26,384    $ 4,553    $ —      $ 30,937
                           

 

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In addition to cash equivalents and marketable securities classified as trading securities, we also have an equity method investment valued at approximately $200,000 and approximately $24.2 million in held-to-maturity investments which are not recorded at fair value and thus are not included in the table above. The held-to-maturity investments consist of certificates of deposits and tax-exempt state and municipal bonds as well as U.S. Government debt securities and are recorded at amortized cost. Fair values for these securities are obtained from third-party broker statements. The fair value amounts are primarily derived from quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These investments consisted of the following at October 31, 2009 (in thousands):

 

     October 31, 2009
   Carrying
value
   Unrealized
Gain
   Unrealized
Loss
   Fair
value

Held-to-maturity:

           

Certificates of Deposit

   6,417    13    —      6,430

Tax-exempt and municipal bonds

   17,757    328    29    18,056
                   
   24,174    341    29    24,486
                   

The contractual maturity of debt securities classified as held to maturity at October 31, 2009 was as follows (in thousands):

 

Due within one year

   $ 12,807

Due between one and two years

     5,538

Due between two and three years

     4,869

Due after three years

     960
      
   $ 24,174
      

The Fair Value Option within the Financial Instruments Topic of the FASB’s Accounting Standards Codification permits but does not require us to measure financial instruments and certain other items at fair value. We did not elect to measure at fair value any of our financial instruments under the guidance. Thus, our adoption of this guidance effective May 1, 2008 did not have an impact on our condensed consolidated financial statements.

 

K. Stock Repurchases

On August 19, 2002, our Board of Directors approved a resolution authorizing the repurchase of up to 2.0 million shares of our Class A common stock. These repurchases have been and will be made through open market purchases at prevailing market prices. The timing of any repurchase will depend upon market conditions, the market price of our common stock and management’s assessment of our liquidity and cash flow needs. Under this repurchase plan, through October 31, 2009, we have repurchased 695,335 shares of common stock at a cost of approximately $3.5 million. Under all repurchase plans as of October 31, 2009, we have repurchased 4,230,288 shares of common stock at a cost of approximately $22.9 million.

 

L. Comprehensive Income

We have not included condensed consolidated statements of comprehensive income in the accompanying unaudited condensed consolidated financial statements since comprehensive income and net earnings presented in the accompanying condensed consolidated statements of operations would be substantially the same.

 

M. Industry Segments

We provide our software solutions through three major business segments, which are further broken down into a total of four major product and service groups. The three business segments are (1) Supply Chain Management (SCM), (2) Enterprise Resource Planning (ERP), and (3) Information Technology “IT” Consulting.

The SCM segment consists of Logility, Inc., a wholly owned subsidiary (as of July 9, 2009), as well as its subsidiary, DMI, that provides collaborative supply chain solutions to streamline and optimize the forecasting, production, distribution and management of products between trading partners. The ERP segment consists of (i) American Software ERP, which provides purchasing and materials management, customer order processing, financial, e-commerce, Flow Manufacturing and traditional manufacturing solutions, and (ii) New Generation Computing (NGC), which provides industry-specific business software to both retailers and manufacturers in the Apparel, Sewn Products and Furniture industries. The IT Consulting segment consists of The Proven Method, Inc., an IT staffing and consulting services firm. We also provide support for our software products, such as software enhancements, documentation, updates, customer education, consulting, systems integration services, and maintenance.

Our chief operating decision maker is the President and Chief Executive Officer. While the CEO is apprised of a variety of financial metrics and information, our business is principally managed on a segment basis, with the CEO evaluating performance based upon segment operating profit or loss that includes an allocation of common expenses, but excludes certain unallocated expenses.

 

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In the following table, we have broken down the intersegment transactions applicable to the three and six months ended October 31, 2009 and 2008:

 

     Three Months Ended
October 31,
    Six Months Ended
October 31,
 
   2009     2008     2009     2008  

Revenues:

        

Enterprise Resource Planning

   $ 4,259      $ 4,372      $ 8,056      $ 9,749   

Collaborative Supply Chain Management

     10,000        10,483        20,671        19,870   

IT Consulting

     4,460        4,993        7,826        9,427   
                                
   $ 18,719      $ 19,848      $ 36,553      $ 39,046   
                                

Operating income (loss) before intersegment eliminations:

        

Enterprise Resource Planning

   $ (426   $ (343   $ (1,609   $ (150

Collaborative Supply Chain Management

     2,061        2,192        4,659        3,178   

IT Consulting

     101        148        140        250   
                                
   $ 1,736      $ 1,997      $ 3,190      $ 3,278   
                                

Intersegment eliminations:

        

Enterprise Resource Planning

   $ (452   $ (413   $ (876   $ (817

Collaborative Supply Chain Management

     452        413        876        817   

IT Consulting

     —          —          —          —     
                                
     —          —          —          —     
                                

Operating income (loss) after intersegment eliminations:

        

Enterprise Resource Planning

   $ (878   $ (756   $ (2,485   $ (967

Collaborative Supply Chain Management

     2,513        2,605        5,535        3,995   

IT Consulting

     101        148        140        250   
                                
   $ 1,736      $ 1,997      $ 3,190      $ 3,278   
                                

Capital expenditures:

        

Enterprise Resource Planning

   $ 107      $ 236      $ 205      $ 421   

Collaborative Supply Chain Management

     52        25        174        45   

IT Consulting

     3        —          3        —     
                                
   $ 162      $ 261      $ 382      $ 466   
                                

Capitalized Software:

        

Enterprise Resource Planning

   $ —        $ 6     $ —        $ 16   

Collaborative Supply Chain Management

     606        516        1,165        1,023   

IT Consulting

     —          —          —          —     
                                
   $ 606      $ 522      $ 1,165      $ 1,039   
                                

Depreciation and amortization:

        

Enterprise Resource Planning

   $ 301      $ 293      $ 594      $ 553   

Collaborative Supply Chain Management

     281        715        551        1,408   

IT Consulting

     —          —          —          1   
                                
   $ 582      $ 1,008      $ 1,145      $ 1,962   
                                

 

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N. Contingencies

We more often than not indemnify our customers against damages and costs resulting from claims of patent, copyright or trademark infringement associated with use of our products. We have historically not been required to make any payments under such indemnifications. However, we continue to monitor the conditions that are subject to the indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the indemnifications when those losses are estimable. In addition, we warrant to our customers that our products operate substantially in accordance with the software product’s specifications. Historically, we have incurred no costs related to software product warranties and we do not expect to incur such costs in the future, and as such we have made no accruals for software product warranty costs. Additionally, we are involved in various claims arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position or results of operations.

 

O. Recently Adopted Accounting Pronouncements

In December 2007, the FASB issued authoritative guidance on business combinations. The guidance requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose in its financial statements the information needed to evaluate and understand the nature and financial effect of the business combination. This guidance was effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively. We adopted the guidance effective May 1, 2009 and will apply it to any business combinations on or after that date. The impact on our consolidated financial statements will depend upon the nature, terms and size of the acquisitions we consummate after the effective date. As a result of our adoption of this guidance, we accounted for our tender offer and repurchase of Logility’s shares not as a business combination but as an acquisition of a non-controlling interest (see below). Additionally, during the six months ended October 31, 2009, we expensed acquisition-related costs of approximately $552,000 related to the buy-back of Logility shares.

In December 2007, the FASB issued authoritative guidance on Noncontrolling Interests in Consolidated Financial Statements, which amended the accounting and reporting standards for a parent’s noncontrolling interest in a subsidiary and the accounting for future ownership changes with respect to the subsidiary. This guidance defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary that is not attributable, directly or indirectly, to a parent. The guidance requires, among other things, that a noncontrolling interest be clearly identified, labeled and presented in the consolidated balance sheet as equity, but separate from the parent’s equity; and that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of operations. Effective May 1, 2009, we adopted the guidance and applied it retrospectively, which affected only presentation and disclosure. As a result, we reclassified noncontrolling interest in the amount of $6.4 million from other long-term liabilities to equity in our April 30, 2009 consolidated balance sheet. We reclassified certain amounts for prior periods in our consolidated statement of operations to conform to the presentation of the current period. Recorded amounts for prior periods previously presented as net earnings, which are now presented as net earnings attributable to American Software, Inc., have not changed as a result of our adoption of this guidance.

 

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The following table represents a reconciliation of the carrying amount of total equity, equity attributable to American Software, Inc. and equity attributable to the noncontrolling interest:

 

     American
Software, Inc.
    Noncontrolling
Interest
    Total  

Balance at April 30, 2009

   $ 79,839      $ 6,388      $ 86,227   

Net income

     2,534        90        2,624   

Dividends

     (4,559     —          (4,559

Stock Compensation

     619        —          619   

Repurchase of noncontrolling interest

     (5,850     (6,478     (12,328

Other

     594        —          594   
                        

Balance at October 31, 2009

   $ 73,177      $ —        $ 73,177   
                        

 

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In April 2008, the FASB issued authoritative guidance on the determination of the useful life of intangible assets. This guidance amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognizable intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognizable intangible asset and the period of expected cash flows used to measure the fair value of the asset. The guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Our adoption of this guidance effective May 1, 2009 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on the recognition and presentation of other-than-temporary impairments. This guidance amended the other-than-temporary impairment accounting guidance for debt securities. This guidance requires that other-than-temporary impairment be separated into the amount of the total impairment related to credit losses and the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit losses is recognized in earnings and the amount related to all other factors is recognized in other comprehensive income. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Our adoption of this guidance effective May 1, 2009 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on interim disclosures about fair value of financial instruments. This guidance amended previously released FASB guidance on Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments at interim reporting periods. This guidance was effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Our adoption effective May 1, 2009 did not have a material impact on our consolidated financial statements. The disclosure requirements are presented in Note J.

In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the subsequent events guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for fiscal years and interim periods ended after June 15, 2009. We adopted this standard effective June 15, 2009 and have evaluated any subsequent events through the date of this filing. The adoption of the subsequent events guidance did not have an impact on our consolidated results of operations or consolidated financial position.

In June 2009, the FASB issued the FASB Accounting Standards CodificationTM and a new Hierarchy of Generally Accepted Accounting Principles, which establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB’s Accounting Standards Codification (the “Codification”) is now the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (the “SEC”), which are additional sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification become nonauthoritative. The Codification is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We adopted the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the second quarter of fiscal year 2010. As the Codification is not intended to change or alter existing GAAP for public companies, it does not have any impact on our consolidated financial statements.

 

P. Subsequent Event

On November 17, 2009, our Board of Directors declared a quarterly cash dividend of $0.09 per share of our Class A and Class B common stock. The cash dividend is payable on March 5, 2010 to Class A and Class B shareholders of record at the close of business on February 19, 2010.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements relating to our future financial performance, business strategy, financing plans and other future events that involve uncertainties and risks. You can identify these statements by forward-looking words such as “anticipate,” “intend,” “plan,” “continue,” “could,” “grow,” “may,” “potential,” “predict,” “strive” “will,” “seek,” “estimate,” “believe,” “expect,” and similar expressions that convey uncertainty of future events or outcomes. Any forward-looking statements we make herein are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning future:

 

   

results of operations;

 

   

liquidity, cash flow and capital expenditures;

 

   

demand for and pricing of our products and services;

 

   

acquisition activities and the effect of completed acquisitions;

 

   

industry conditions and market conditions; and

 

   

general economic conditions.

Although we believe that the goals, plans, expectations, and prospects that our forward-looking statements reflect are reasonable in view of the information currently available to us, those statements are not guarantees of performance. There are many factors that could cause our actual results to differ materially from those anticipated by forward-looking statements made herein. These factors include, but are not limited to, continuing economic uncertainty, the timing and degree of business recovery, unpredictability and the irregular pattern of future revenues, competitive pressures, delays and other risks associated with new product development, the difficulty of predicting the effectiveness and duration of third-party marketing agreements, undetected software errors, and risks associated with market acceptance of our products and services. We discuss certain factors in greater detail in “Business Overview” below. The terms “fiscal 2010” and “fiscal 2009” refer to our fiscal years ending April 30, 2010 and 2009, respectively.

ECONOMIC OVERVIEW

Corporate capital spending trends and commitments are the primary determinants of the size of the market for business software. Corporate capital spending is, in turn, a function of general economic conditions in the U.S. and abroad and in particular may be affected by conditions in U.S. global credit markets. In recent years, the weakness in the overall world economy and the U.S. economy in particular, has resulted in reduced expenditures in the business software market.

Overall information technology spending continues to be relatively weak as a result of the current global economic environment particularly in the United States. However, we experienced some improvement in our license fee sales close rate in our SCM and ERP business units during the first half of the current fiscal year. We believe information technology spending will incrementally improve over the long term as increased global competition forces companies to improve productivity by upgrading their technology systems. Although this improvement could slow or regress at any time, due in part to concerns in global capital markets and general economic conditions, we believe that our organizational and financial structure will enable us to take advantage of any sustained economic rebound. Customers continue to take long periods to evaluate discretionary software purchases.

We believe weak economic conditions may be driving some businesses to focus on achieving more process and efficiency improvements in their operations and to invest in solutions that improve operating margins, rather than make large infrastructure-type technology purchases. If this trend continues we believe it may tend to favor solutions such as our Logility supply chain solutions, which are designed to provide a more rapid return on investment and are targeted at some of the largest profit drivers in a customer’s business. While the current economic crisis has had a particularly adverse impact on the weaker companies in our target markets, we believe a larger percentage of our customers are seeking to make investments to strengthen their operations, and some are taking advantage of current economic conditions to gain market share.

BUSINESS OVERVIEW

American Software was incorporated as a Georgia corporation in 1970. We develop market and support a portfolio of software and services that deliver enterprise management and collaborative supply chain solutions to the global marketplace. We have designed our software and services to bring business value to enterprises by supporting their operations over intranets, extranets, client/servers or the Internet. References to “the Company,” “our products,” “our software,” “our services” and similar references include the appropriate business unit actually providing the product or service.

 

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We provide our software solutions through three major business segments, which are further broken down into a total of four major product and service groups. The three business segments are (1) Supply Chain Management (“SCM”), (2) Enterprise Resource Planning (“ERP”) and (3) Information Technology (“IT”) Consulting. The SCM segment consists of Logility, a wholly-owned subsidiary (as of July 9, 2009) that provides collaborative supply chain solutions to streamline and optimize the production, distribution and management of products between trading partners. The ERP segment consists of (i) American Software ERP, which provides purchasing and materials management, customer order processing, financial, e-commerce, Flow Manufacturing and traditional manufacturing solutions, and (ii) New Generation Computing (“NGC”), which provides industry-specific business software to both retailers and manufacturers in the apparel, sewn products and furniture industries. The IT Consulting segment consists of The Proven Method, an IT staffing and consulting services firm.

In 2004, Logility acquired certain assets and the distribution channel of privately-held Demand Management Inc. (“DMI”), a St. Louis-based provider of supply chain planning systems marketed under the Demand Solutions® brand. The acquisition provided more than 800 active customers, which brought the Logility customer base to approximately 1,100 companies, located in 70 countries, and gives Logility what we believe to be the largest installed base of supply chain planning customers among application software vendors. Since the acquisition, Logility has continued to market and sell the Demand Solutions product line through DMI’s existing value-added reseller (“VAR”) distribution network. Logility also continues to offer the Logility Voyager Solutions™ suite to its traditional target market of upper-midsize to Fortune 1000 companies with distribution-intensive supply chains.

We derive revenues primarily from three sources: software licenses, services and other, and maintenance. We generally determine software license fees based on the number of modules, servers, users and/or sites licensed. Services and other revenues consist primarily of fees from software implementation, training, consulting and customization services. We primarily bill under time and materials arrangements and recognize revenues as we perform services. We typically enter into maintenance agreements for a one- to three-year term at the time of the initial product license. We generally bill maintenance fees annually in advance and then recognize the resulting revenues ratably over the term of the maintenance agreement. Deferred revenues represent advance payments or billings for software licenses, services and maintenance billed in advance of the time we recognize the related revenues.

Our cost of revenue for licenses includes amortization of capitalized computer software development costs, royalties paid to third-party software vendors, and agent commission expenses related to license revenues generated by the indirect channel, primarily from DMI. Costs for maintenance and services include the cost of personnel to conduct implementations and customer support, consulting, other personnel-related expenses, and agent commission expenses related to maintenance revenues generated by the indirect channel, primarily from DMI. We account for the development costs of software intended for sale in accordance with the Intangibles – Goodwill and Other topic of FASB’s Accounting Standards Codification. We monitor the net realizable value of our capitalized software on a quarterly basis based on an estimate of future product revenues. We currently expect to fully recover the value of the capitalized software asset recorded on our consolidated balance sheet; however, if future product revenues are less than management’s current expectations, we may incur a write-down of capitalized software costs.

Our selling expenses generally include the salary and commissions paid to our sales professionals, along with marketing, promotional, travel and associated costs. Our general and administrative expenses generally include the salary and benefits paid to executive, corporate and support personnel, as well as facilities-related costs, utilities, communications expenses, and various professional fees. DMI sells its products primarily through indirect channels.

We currently view the following factors as the primary opportunities and risks associated with our business:

Dependence on Capital Spending Patterns. There is risk associated with our dependence on the capital spending patterns of U.S. and international businesses, which in turn are functions of economic trends and conditions over which we have no control.

Acquisition Opportunities. There are opportunities for select acquisitions or investments to provide opportunities to expand our sales distribution channels and/or broaden our product offering by providing additional solutions for our target markets.

Acquisition Risks. There are risks associated with acquisitions of complementary companies, products and technologies, including the risks that we will not achieve the financial and strategic goals that we contemplate at the time of the transaction. More specifically, in any acquisition we will face risks and challenges associated with the uncertain value of the acquired business or assets, the difficulty of assimilating operations and personnel, integrating acquired technologies and products and maintaining the loyalty of the customers of the acquired business.

Competitive Technologies. There is a risk that our competitors may develop technologies that are substantially equivalent or superior to our technology.

Competition in General. There are risks inherent in the market for business application software and related services, which has been and continues to be intensely competitive; for example, some of our competitors may become more aggressive with their prices and/or payment terms, which may adversely affect our profit margins.

Sarbanes-Oxley Section 404. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include our assessment of the effectiveness of our internal control over financial reporting in our annual reports. Our independent registered public accounting firm is also required to attest as to whether or not they believe that we maintained, in all material respects, effective internal control over financial reporting. If for any fiscal year we fail to timely complete this assessment, we could be subject to regulatory sanctions and a possible loss of public confidence in the reliability of our financial reporting. Such a failure, as well as difficulties in implementing required new or improved controls, could result in our inability to provide timely and reliable financial information and could adversely affect our business.

 

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A discussion of a number of additional risk factors associated with our business is included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2009.

COMPARISON OF RESULTS OF OPERATIONS

Three-Month Comparisons. The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage changes in those items for the three months ended October 31, 2009 and 2008:

 

     Three Months Ended October 31,  
     Percentage of Total
Revenues
    Pct. Change in
Dollars
 
     2009     2008     2009 vs 2008  

Revenues:

      

License

   19   19   (6 )% 

Services and other

   44      45      (9

Maintenance

   37      36      (2
                  

Total revenues

   100      100      (6
                  

Cost of revenues:

      

License

   5      8      (38

Services and other

   30      32      (10

Maintenance

   10      9      2   
                  

Total cost of revenues

   45      49      (12
                  

Gross margin

   55      51      —     
                  

Research and development

   9      9      (8

Sales and marketing

   20      18      10   

General and administrative

   15      14      3   

Amortization of acquisition-related intangibles

   1      —        nm   

Provision for doubtful accounts

   —        —        nm   
                  

Total operating expenses

   45      41      3   
                  

Operating income

   10      10      (13
                  

Other income:

      

Interest income

   2      2      (23

Other, net

   —        (8   nm   
                  

Earnings before income taxes

   12      4      164   

Income tax expense

   (4   (1   416   
                  

Net earnings

   8      3      106   
                  

Less net earnings attributable to noncontrolling interest

   —        (1   nm   
                  

Net earnings attributable to American Software, Inc.

   8   2   188
                  

 

nm - not meaningful

 

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Six-Month Comparisons. The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage changes in those items for the six months ended October 31, 2009 and 2008:

 

     Six Months Ended October 31,  
     Percentage of Total
Revenues
    Pct. Change in
Dollars
 
     2009     2008     2009 vs 2008  

Revenues:

      

License

   21   17   18

Services and other

   41      47      (18

Maintenance

   38      36      (3
                  

Total revenues

   100      100      (6
                  

Cost of revenues:

      

License

   5      7      (36

Services and other

   28      31      (16

Maintenance

   10      9      (2
                  

Total cost of revenues

   43      47      (16
                  

Gross margin

   57      53      3   
                  

Research and development

   9      9      (8

Sales and marketing

   21      19      4   

General and administrative

   19      15      18   

Amortization of acquisition-related intangibles

   —        —        nm  

Provision for doubtful accounts

   (1 )   —        Nm   
                  

Total operating expenses

   48      43      4   
                  

Operating income

   9      10      (3

Other income:

      

Interest income

   2      2      (8

Other, net

   1      (6   nm   
                  

Earnings before income taxes

   12      6      115   

Income tax expense

   (4   (2   164   
                  

Net earnings

   8      4      94   

Less net earnings attributable to noncontrolling interests

   —        (1   nm   
                  

Net earnings attributable to American Software, Inc.

   8   3   135
                  

 

nm - not meaningful

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 AND 2008

Revenue

 

     Three Months Ended October 31,  
   2009    2008    % Change     % of Total Revenue  
           2009     2008  
   (in thousands)                   

License

   $ 3,579    $ 3,794    (6 )%    19   19

Services and other

     8,223      9,012    (9 )%    44   45

Maintenance

     6,917      7,042    (2 )%    37   36
                                

Total revenues

   $ 18,719    $ 19,848    (6 )%    100   100
                                

 

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Table of Contents
     Six Months Ended October 31,  
   2009    2008    % Change     % of Total Revenue  
           2009     2008  
   (in thousands)                   

License

   $ 7,723    $ 6,536    18   21   17

Services and other

     15,096      18,343    (18 )%    41   47

Maintenance

     13,734      14,167    (3 )%    38   36
                                

Total revenues

   $ 36,553    $ 39,046    (6 )%    100   100
                                

For the three months ended October 31, 2009, the 6% decrease in revenues from the three months ended October 31, 2008 was attributable primarily to a 9% decrease in service and other and, to a lesser extent, declines in license and maintenance revenues. For the six months ended October 31, 2009, the 6% decrease in revenues from the six months ended October 31, 2008 was attributable primarily to an 18% decrease in service and other and, to a lesser extent, maintenance revenues. These declines during the six-month period were partially offset by an increase in license fee revenues when compared to the same period last year. The primary reason for these declines was the poor economic environment, which has resulted in reduced licensed fees in most recent periods resulting in less demand for implementation services. The economic slowdown has led also to a decline in IT consulting services when compared to the same periods last year, as some customers have scaled back or eliminated third-party staffing and software consulting projects. However, we did experience some improvement in our license fee sales in the six-month period ended October 31, 2009 due to improved sales close rates primarily in the first quarter of fiscal 2010.

Due to intensely competitive markets we discount license fees from our published list price due to pricing pressure in our industry. Numerous factors contribute to the amount of the discounts we provide, such as previous customer purchases, the number of customer sites utilizing the software, the number of modules purchased and the number of users, as well as the overall size of the contract. While all these factors may affect the discount amount of a particular contract, the overall percentage discount we use with our contracts generally has not materially changed in recent reported fiscal periods. Accordingly, changes in our revenues from period to period primarily are due to the volume of products and related services sold in any period and the amounts of products or modules purchased with each sale, rather than variations in pricing.

International revenues represented approximately 12% and 11% of total revenues in the three and six months ended October 31, 2009, respectively, and 9% and 10% of total revenues in the three and six months ended October 31, 2008, respectively. Our revenues, in particular our international revenues, may fluctuate substantially from period to period primarily because we derive most of our license fee revenues from a relatively small number of customers in a given period.

License Revenue

 

     Three Months Ended October 31,  
   2009    2008    % Change  
   (in thousands)       

Enterprise Resource Planning

   $ 780    $ 521    50

Supply Chain Management

     2,799      3,273    (14 )% 
                    

Total license revenues

   $ 3,579    $ 3,794    (6 )% 
                    
     Six Months Ended October 31,  
   2009    2008    % Change  
   (in thousands)       

Enterprise Resource Planning

   $ 1,401    $ 1,254    12

Supply Chain Management

     6,322      5,282    20
                    

Total license revenues

   $ 7,723    $ 6,536    18
                    

 

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For the three and six months ended October 31, 2009, license fee revenues decreased 6% and increased 18%, respectively, when compared to the same periods in the prior year. While we expect a degree of quarterly fluctuation due to the timing of signing license fee agreements, we have experienced an improvement in our license fee close rate in the first half of the current fiscal year when compared to the same period last year. However, the financial crisis that emerged during the past year has interfered with customers’ normal sources of financing and has greatly increased the level of uncertainty about future economic conditions. In the three months ended October 31, 2009, license fee revenues from Logility decreased 14% and in the six months ended October 31, 2009 license fee revenues from Logility increased 20%, when compared to the corresponding periods in the prior year. We believe that the increase in the first quarter of the current fiscal year followed by a decline in the most recent quarter was due primarily to timing of closing license fee deals. Logility constituted 78% and 82% of total license fee revenues for the three and six months ended October 31, 2009, respectively, compared to 86% and 81% for the three and six months ended October 31, 2008, respectively. Our ERP business unit license fees increased by 50% and 12% for the three and six months ended October 31, 2009, respectively, when compared to the same periods in the prior year due to improved license fee sales in our NGC subsidiary, which primarily sells to the apparel and retail industries.

The direct sales channel provided approximately 60% and 67% of license fee revenues for the three and six months ended October 31, 2009, respectively, compared to approximately 56% and 54% of license fee revenues for the three and six months ended October 31, 2008, respectively. These increases were due to improved sales execution and improvements in the sales environment that our direct channel primarily targets, namely large and midsized companies. In general, large and midsized companies do not require access to capital markets to fund expenditures to the same degree as smaller companies. Thus, our indirect sales channel faced relatively greater challenges in the current economy, as the indirect channel tends to target smaller companies. For the three and six months ended October 31, 2009, our margins after commissions on direct sales were approximately 84%, compared to 87% and 83% for the three and six months ended October 31, 2008, respectively. For the three and six months ended October 31, 2009, our margins after commissions on indirect sales were approximately 46% and 42%, respectively, compared to 47% and 48% for the three and six months ended October 31, 2008, respectively. The indirect channel margins for the current periods decreased when compared to the same periods in the prior year due to an increase of several new VARs that are given temporary commission draws for several months to assist in the selling process. These margin calculations include only commission expense for comparative purposes and do not include other costs of license fees such as amortization of capitalized software.

Services and Other Revenue

 

     Three Months Ended October 31,  
   2009    2008    % Change  
   (in thousands)       

Enterprise Resource Planning

   $ 2,296    $ 2,633    (13 )% 

Supply Chain Management

     1,467      1,386    6

IT Consulting

     4,460      4,993    (11 )% 
                    

Total services and other revenues

   $ 8,223    $ 9,012    (9 )% 
                    
     Six Months Ended October 31,  
   2009    2008    % Change  
   (in thousands)       

Enterprise Resource Planning

   $ 4,356    $ 5,961    (27 )% 

Supply Chain Management

     2,914      2,955    (1 )% 

IT Consulting

     7,826      9,427    (17 )% 
                    

Total services and other revenues

   $ 15,096    $ 18,343    (18 )% 
                    

For the three months ended October 31, 2009, services revenue decreased by 9%, due to decreased services revenues from our ERP and IT Consulting business segments, partially offset by an increase in SCM implementation services. For the six months ended October 31, 2009, services revenue decreased by 18%, due primarily to decreased services revenues from our ERP and IT Consulting business segments. For the three and six months ended October 31, 2009, services and other revenues from Logility (SCM) increased by 6% and decreased by 1%, respectively, when compared to the prior year periods. Logility services revenues increased for the current quarter due to improved license fee sales in recent periods, which tend to increase services implementation revenue. For the three and six months ended October 31, 2009, our IT Consulting segment’s revenues decreased 11% and 17%, respectively, when compared to the prior year periods due to decreases in project work from customers as a result of adverse economic conditions. For the three and six months ended October 31, 2009, our ERP segment’s revenues decreased 13% and 27%, respectively, when compared to the prior year periods due to lower ERP license fees in the recent periods, which resulted in lower implementation revenues. We have observed that there is a tendency for services and other revenues, other than from IT Consulting, to lag changes in license revenues by one to three quarters, as new licenses in one quarter often involve implementation and consulting services in subsequent quarters, for which we recognize revenues only as we perform those services.

 

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Table of Contents

Maintenance Revenue

 

     Three months Ended October 31,  
   2009    2008    % Change  
   (in thousands)       

Enterprise Resource Planning

   $ 1,183    $ 1,218    (3 )% 

Supply Chain Management

     5,734      5,824    (2 )% 
                    

Total maintenance revenues

   $ 6,917    $ 7,042    (2 )% 
                    
     Six months Ended October 31,  
   2009    2008    % Change  
   (in thousands)       

Enterprise Resource Planning

   $ 2,299    $ 2,533    (9 )% 

Supply Chain Management

     11,435      11,634    (2 )% 
                    

Total maintenance revenues

   $ 13,734    $ 14,167    (3 )% 
                    

For the three and six months ended October 31, 2009, maintenance revenues decreased 2% and 3%, respectively, when compared to the same periods in the prior year due primarily to lower renewals rates in our legacy ERP unit, which experienced decreases of 3% and 9%, respectively, for the three and six months ended October 31, 2009 compared to the same periods in the prior year. In our SCM unit we experienced 2% declines in maintenance revenue for both the three and six months ended October 31, 2009 when compared to the same periods last year. We believe that the decline in maintenance revenue generally is due to adverse economic conditions, as some customers may use nonrenewal of software system maintenance as a short-term cost-saving measure. Logility accounted for 83% of total maintenance revenues for both the three and six month periods ended October 31, 2009, compared to 83% and 82%, respectively, of total maintenance revenues for the three and six month period ended October 31, 2008. Typically, our maintenance revenues have had a direct relationship to current and historic license fee revenues, since new licenses are the potential source of new maintenance customers.

GROSS MARGIN:

The following table provides both dollar amounts and percentage measures of gross margin:

 

($000’s omitted)

   Three months ended October 31,   Six months ended October 31,
   2009        2008        2009        2008     

Gross margin on license fees:

   $ 2,632    74%   $ 2,276    60%   $ 5,920    77%   $ 3,730    57%

Gross margin on services and other:

     2,541    31%     2,722    30%     4,790    32%     6,045    33%

Gross margin on maintenance:

     5,078    73%     5,234    74%     10,184    74%     10,545    74%
                                    

Total gross margin:

   $ 10,251    55%   $ 10,232    52%   $ 20,894    57%   $ 20,320    52%
                                    

For the three and six months ended October 31, 2009, total gross margin percentage increased when compared to the corresponding periods in the prior year.

Gross Margin on License Fees

For the three months ended October 31, 2009, gross margin on license fees increased when compared to the same period in the prior year due to the lower computer software amortization expense when compared to the same period last year and an increase in the proportion of license fees attributable to our direct sales channel, partially offset by lower license fee revenue. For the six months ended October 31, 2009, gross margin on license fees increased when compared to the same period in the prior year due to the increase in license fee revenue, lower computer software amortization expense and an increase in the proportion of license fees attributable to our direct sales channel when compared to the same period last year. License fee gross margin percentage tends to be directly related to the level of license fee revenues due to the relatively fixed cost of computer software amortization expense, amortization of acquired software and the sales mix between our direct and indirect channels. During the three-month period ended October 31, 2009, however, the proportion of license fees attributable to our higher margin direct sales channel increased substantially and amortization of capitalized computer software development costs declined by $445,000 for the three-month period and $880,000 for the six-month period due to timing of computer software development.

 

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Table of Contents

Gross Margin on Services and Other

For the three months ended October 31, 2009, the gross margin percentage on services and other revenue increased 1% when compared to the same period in the prior fiscal year. This change was due to the improved margins at our IT Consulting segment’s staffing and consulting firm, The Proven Method, Inc. (“TPM”), partially offset by lower services revenue at our ERP business unit. For the six months ended October 31, 2009, the gross margin percentage on services and other decreased 1% when compared to the same period in the prior fiscal year due to a decrease in higher margin services revenue in the first quarter of fiscal 2010 when compared to the same period last year. Services and other gross margin normally are directly related to the level of services and other revenues. The primary component of cost of services and other revenues is services staffing, which is relatively inelastic in the short term.

Gross Margin on Maintenance

Maintenance gross margin percentage was relatively unchanged for the three and six months ended October 31, 2009 when compared to the same periods last year. Maintenance gross margin normally is directly related to the level of maintenance revenues. The primary component of cost of maintenance revenue is maintenance staffing, which is relatively inelastic in the short term.

Expenses

 

     Three Months Ended October 31,     Six Months Ended October 31,  
                % of Revenue                 % of Revenue  
     2009    2008     2009     2008     2009     2008     2009     2008  
     (in thousands)                 (in thousands)              

Research and development

   1,702    1,842      9   9   3,372      3,671      9   9

Sales and marketing

   3,829    3,472      20   18   7,529      7,268      21   19

General and administrative

   2,897    2,834      15   14   6,628      5,929      18   15

Amortization of acquisition-related intangible assets

   87    87      1   0   175      174      0   0

Other income (expense), net

   401    (1,187   2   -6   1,019      (1,323   3   -3

Income tax expense

   784    152      4   1   1,585      600      4   2

Noncontrolling interest

   —      (188   0   -1   (90   (275   0   -1

Research and Development

Gross product research and 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
(in thousands)
 
     October 31,
2009
    Percent
Change
    October 31,
2008
 

Total capitalized computer software development costs

   $ 606      17   $ 516   

Percentage of gross product research and development costs

     26       22

Total research and development expense

     1,702      (8 )%      1,842   
                  

Percentage of total revenues

     9       9

Total research and development expense and capitalized computer software development costs

   $ 2,308      (2 )%    $ 2,358   
                  

Percentage of total revenues

     12       12

Total amortization of capitalized computer software development costs *

   $ 140      (76 )%    $ 585   

 

     Six months ended
(in thousands)
 
     October 31,
2009
    Percent
Change
    October 31,
2008
 

Total capitalized computer software development costs

   $ 1,165      14   $ 1,023   

Percentage of gross product research and development costs

     26       22

Total research and development expense

     3,372      (8 )%      3,671   
                  

Percentage of total revenues

     9       9

Total research and development expense and capitalized computer software development costs

   $ 4,537      (3 )%    $ 4,694   
                  

Percentage of total revenues

     12       12

Total amortization of capitalized computer software development costs *

   $ 280      (76 )%    $ 1,161   

 

* Included in cost of license fees

 

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Table of Contents

For the three and six months ended October 31, 2009, gross product research and development costs decreased when compared to the same periods last year due to cost containment efforts. Capitalized software development costs increased for the three and six months ended October 31, 2009 when compared to the same period last year due to timing of capitalizable project work. We expect capitalized product development costs to be lower in coming quarters as a result of fewer capitalizable R&D projects; however, we expect capitalized software amortization expense to increase when compared to the three months ended October 31, 2009 as a result of the expected completion of Logility’s next Voyager product release during the fourth quarter of fiscal 2010. Costs included in gross product development are salaries of product development personnel, hardware lease expense, computer software expense, telephone expense and rent.

Sales and Marketing

For the three and six months ended October 31, 2009, sales and marketing expenses increased 10% and 4%, respectively, when compared to the same periods a year ago. These changes were due primarily to the increase of direct sales commissions as a result of increased license fee sales by our direct channel and increased health care costs. We generally include commissions on indirect sales in cost of sales.

General and Administrative

For the three and six months ended October 31, 2009, the increases in general and administrative expenses were primarily due to increased healthcare costs, variable compensation and, for the six-month period, expenses related to the Logility tender offer process that was concluded in the quarter ended July 31, 2009.

At October 31, 2009, the total number of employees was 293 compared to 299 at October 31, 2008.

Operating Income/(Loss)

 

     Three Months Ended October 31,     Six Months Ended October 31,  
     2009     2008     % Change     2009     2008     % Change  
     (in thousands)           (in thousands)        

Enterprise Resource Planning

   ($ 426   ($ 343   24   ($ 1,609   ($ 150   nm   

Collaborative Supply Chain Management

     2,061        2,192      -6     4,659        3,178      47

IT Consulting

     101        148      -32     140        250      -44
                                    

Total Operating Income

   $ 1,736      $ 1,997        $ 3,190      $ 3,278     
                                    

 

nm: not meaningful             

Our ERP segment operating loss in the three and six months ended October 31, 2009 was due primarily to the decline in revenues. In particular, the decline in service implementation fees and maintenance revenue was due to a difficult selling environment as a result of the overall general economic conditions in the U.S. and the increased competition in the ERP segment from major and niche software vendors. To a lesser extent, the increase in operating loss in the six months ended October 31, 2009 is due to expenses related to the Logility tender offer process that was completed in the three months ended July 31, 2009. We have taken actions to reduce our costs in fiscal 2010 as a result of the current difficult economic environment.

Our SCM segment’s contribution to operating income increased by 47% for the six months ended October 31, 2009 compared to same period last year. This increase was primarily due to the 20% increase in Logility license fee revenue and lower capitalized software amortization expense for the six months ended October 31, 2009 compared to same period last year. This increase was partially offset by expenses incurred related to the Logility tender offer process in the three months ended July 31, 2009.

Our IT consulting segment operating income decreased 32% and 44% for the three and six months ended October 31, 2009, respectively, compared to same period in fiscal 2009 due to 11% and 17% decreases in revenues for the three and six months ended October 31, 2009, respectively. These declines in revenues resulted from reduced utilization of outside contractors by several customers due to declining economic conditions.

 

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Other Income

Other income is comprised of net interest and dividend income, rental income net of related depreciation expenses, exchange rate gains and losses, and realized and unrealized gains and losses from investments. For the three and six months ended October 31, 2009, the increase in other income was due primarily to higher unrealized gains on investments as a result of improved financial market conditions when compared to the same period of the prior year, increased interest income on our investments achieved as a result of the company’s investment mix consisting of more certificates of deposit and municipal bonds, and to a lesser extent higher rental income when compared to the same period last year. We recorded total gains of approximately $51,000 and $266,000 for the three and six months ended October 31, 2009, respectively, compared to total losses of approximately $1.4 million and $1.9 million for the three and six months ended October 31, 2008, respectively, from our trading securities.

For the three and six months ended October 31, 2009, our investments generated an annualized yield of approximately 1.43% and 2.85%, respectively, compared to approximately 2.51% and 4.50% for the three and six months ended October 31, 2008, respectively.

Income Taxes

We recognize deferred tax assets and liabilities based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. We measure deferred tax assets and liabilities using statutory tax rates in effect in the year in which we expect the differences to reverse. We establish a deferred tax asset for the expected future benefit of net operating loss and credit carry-forwards. Under the Income Tax Topic of the FASB Accounting Standards Codification, we cannot recognize a deferred tax asset for the future benefit of our net operating losses, tax credits and temporary differences unless we can establish that it is “more likely than not” that the deferred tax asset would be realized. During the three and six months ended October 31, 2009, we recorded several discrete tax items in the first quarter of fiscal 2010 as result of the Logility tender offer process. Our effective tax rate was 36.6% in the current quarter compared to our effective tax rate of 18.8% in the three months ended October 31, 2008. The tax rate for the three months ended October 31, 2008 was impacted by the extension of the Research Tax credit which expired on December 31, 2007. As a result of this extension the Company recorded as a discrete item, a tax benefit of approximately $98,000 related to qualified R&D expenses incurred during the period after the credit expired through the end of our prior fiscal year. We expect our effective rate to be between 35% and 38% during fiscal year 2010.

Noncontrolling Interest

Noncontrolling interest is a function of our majority-owned subsidiaries’ earnings or losses, with noncontrolling interest losses recorded when these subsidiaries have earnings, and noncontrolling interest earnings recorded when they have losses. As of July 9, 2009, we acquired the remaining outstanding shares of Logility. As a result of this transaction, for the six months ended October 31, 2009 we recorded only the portion of noncontrolling interest expense incurred through the acquisition date of July 9, 2009. For the portion of the six months ended October 31, 2009 prior to the July 9, 2009 acquisition date, we recorded noncontrolling interest expenses of approximately $90,000, and for the six months ended October 31, 2008 we recorded noncontrolling interest expenses of approximately $275,000. Since we now own 100% of Logility, there will not be any noncontrolling interest recorded in future periods.

Operating Pattern

We experience an irregular pattern of quarterly operating results, caused primarily by fluctuations in both the number and size of software license contracts received and delivered from quarter to quarter and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies. We expect this pattern to continue.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

Sources and Uses of Cash

We have historically funded, and continue to fund, our operations and capital expenditures primarily with cash generated from operating activities. The changes in net cash that our operating activities provide generally reflect the changes in net earnings and non-cash operating items plus the effect of changes in operating assets and liabilities, such as investment trading securities, trade accounts receivable, trade accounts payable, accrued expenses and deferred revenue. We have no debt obligations or off-balance sheet financing arrangements, and therefore we used no cash for debt service purposes.

The following tables show information about our cash flows and liquidity positions during the six months ended October 31, 2009 and 2008. You should read this table and the discussion that follows in conjunction with our condensed consolidated statements of cash flows contained in “Item 1. Financial Statements” in Part I of this report and in our Annual Report on Form 10-K for the fiscal year ended April 30, 2009.

 

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     Six Months Ended
October 31,
(in thousands)
 
     2009     2008  

Net cash (used in) provided by operating activities

   $ (465   $ 539   

Net cash used in investing activities

     (6,900     (18,836

Net cash used in financing activities

     (4,259     (5,256
                

Net change in cash and cash equivalents

   $ (11,624   $ (23,553
                

For the six months ended October 31, 2009, the net increase in cash used in operating activities when compared to cash provided by operating activities during the same period last year was due primarily to a decrease in customer accounts receivables caused by lower sales, an increase in unrealized gain on investments due to an improving market compared to unrealized losses in the same period last year, an increase in purchases of trading securities, lower depreciation and amortization expense due to timing of capitalized software development, lower proceeds from the maturity of trading securities and reduced minority interest expense due to the completion of the Logility tender offer. These factors were partially offset by a lower level of increase in accounts payable and other accruals due to timing of payments, an increase in net earnings, an increase in the proceeds of trading securities due to timing of sales, a decrease in prepaid expenses due to timing of marketing related purchases, lower deferred income taxes and deferred revenues.

The decrease in cash used in investing activities when compared to the same period in the prior year was due primarily to a decrease in the purchases of investments, partially offset by a decrease in proceeds in maturities of investments and the repurchase of the noncontrolling interest in Logility in connection with the Logility tender offer.

Cash used in financing activities decreased when compared to the same period in the prior year due primarily to a decrease in repurchase of our common stock and an increase in excess tax benefits from stock-based compensation, partially offset by lower proceeds from exercise of stock options.

The following table shows net changes in total cash, cash equivalents, and investments, which is one measure management uses to view net total cash generated by our activities:

 

     As of October 31,
(in thousands)
 
     2009     2008  

Cash and cash equivalents

   $ 26,005      $ 35,683   

Short and Long-Term Investments

     30,350        35,373   
                

Total cash and short and long-term investments

   $ 56,355      $ 71,056   
                

Net (decrease) increase in total cash and investments (six months ended October 31)

   $ (14,739   $ (5,085

Our total activities used cash and investments during the six months ended October 31, 2009, when compared to the prior year period, due primarily to the repurchase of a noncontrolling interest (Logility Tender offer), changes in operating assets and liabilities noted above and the payment of the quarterly dividend.

Days Sales Outstanding in accounts receivable were 58 days as of October 31, 2009, compared to 56 days as of October 31, 2008. This increase was due in part to the timing of closing and collecting license fees sales. Our current ratio on October 31, 2009 was 2.5 to 1 and on October 31, 2008 was 3.4 to 1. This ratio decreased primarily due to the decrease in cash and investments as a result of the repurchase of a noncontrolling interest (Logility Tender offer) and the purchase of municipal bonds with a maturity of greater than twelve months that are classified as long-term investments.

Our business has in recent periods generated substantial positive cash flow from operations, excluding purchases and proceeds of sale of trading securities. For this reason, and because we had $56.4 million in cash and investments with no debt as of October 31, 2009, we believe that our sources of liquidity and capital resources will be sufficient to satisfy our presently anticipated requirements during at least the next twelve months for working capital, capital expenditures and other corporate needs. However, at some future date we may need to seek additional sources of capital to meet our requirements. If such need arises, we may be required to raise additional funds through equity or debt financing. We do not currently have a bank line of credit. We can provide no assurance that bank lines of credit or other financing will be available on terms acceptable to us. If available, such financing may result in dilution to our shareholders or higher interest expense.

On December 18, 1997, our Board of Directors approved a resolution authorizing the repurchase up to 1.5 million of our Class A Common Shares. On March 11, 1999, our Board of Directors approved a resolution authorizing us to repurchase an additional 700,000 shares for a total of up to 2.2 million of our Class A Common Shares. On August 19, 2002, our Board of Directors approved a

 

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resolution authorizing us to repurchase an additional 2.0 million shares for a total of up to 4.2 million of our Class A Common Shares. These repurchases have been and will be made through open market purchases at prevailing market prices. The timing of any repurchases will depend upon market conditions, the market price of our common stock and management’s assessment of our liquidity and cash flow needs. Under these repurchase plans, as of December 8, 2009, we have repurchased approximately 2.9 million shares of common stock at a cost of approximately $10.9 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have based the following discussion and analysis of financial condition and results of operations on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 in the Notes to the Consolidated Financial Statements for the fiscal year ended April 30, 2009, describes the significant accounting policies that we have used in preparing our financial statements. On an ongoing basis, we evaluate our estimates, including, but not limited to those related to VSOE, bad debts, capitalized software costs, goodwill, intangible asset impairment, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ materially from these estimates under different assumptions or conditions.

We believe the critical accounting policies listed below affect significant judgments and estimates used in the preparation of the financial statements.

Revenue Recognition. We recognize revenue in accordance with the Software Revenue Recognition Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification. We recognize license revenues in connection with license agreements for standard proprietary software upon delivery of the software, provided we deem collection to be probable, the fee is fixed or determinable, there is evidence of an arrangement, and vendor specific objective evidence (VSOE) exists with respect to any undelivered elements of the arrangement. We generally bill maintenance fees annually in advance and recognize the resulting revenues ratably over the term of the maintenance agreement. We derive revenues from services which primarily include consulting, implementation, and training. We bill for these services primarily under time and materials arrangements and recognize fees as we perform the services. Deferred revenues represent advance payments or billings for software licenses, services, and maintenance billed in advance of the time we recognize revenues. We record revenues from sales of third-party products in accordance with Principal Agent Considerations within the Revenue Recognition Topic of the FASB’s Accounting Standards Codification. Furthermore, we evaluate sales through our indirect channel on a case-by-case basis to determine whether the transaction should be recorded gross or net, including but not limited to assessing whether or not we 1) act as principal in the transaction, 2) take title to the products, 3) have risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and 4) act as an agent or broker with compensation on a commission or fee basis. Accordingly, our sales through the DMI channel are typically recorded on a gross basis.

Generally, our software products do not require significant modification or customization. Installation of the products is routine and is not essential to their functionality. Our sales frequently include maintenance contracts and professional services with the sale of our software licenses. We have established VSOE for our maintenance contracts and professional services. We determine fair value based upon the prices we charge to customers when we sell these elements separately. We defer maintenance revenues, including those sold with the initial license fee, based on VSOE, and recognize the revenue ratably over the maintenance contract period. We recognize consulting and training service revenues, including those sold with license fees, as we perform the services based on their established VSOE. We determine the amount of revenue we allocate to the licenses sold with services or maintenance using the “residual method” of accounting. Under the residual method, we allocate the total value of the arrangement first to the undelivered elements based on their VSOE and allocate the remainder to license fees.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of these customers were to deteriorate, resulting in an impairment of their ability to make payments, we may require additional allowances or we may defer revenue until we determine that collectibility is probable. We specifically analyze accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when we evaluate the adequacy of the allowance for doubtful accounts.

Valuation of Long-Lived and Intangible Assets. In accordance with the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification, we do not amortize goodwill and other intangible assets with indefinite lives. Our goodwill is subject to annual impairment tests, which require us to estimate the fair value of our business compared to the carrying value. The impairment reviews require an analysis of future projections and assumptions about our operating performance. Should such review indicate the assets are impaired, we would record an expense for the impaired assets.

 

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In accordance with the Property, Plant, and Equipment Topic of the FASB Accounting Standards Codification, long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability would be measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The determination of estimated future cash flows, however, requires management to make estimates. Future events and changes in circumstances may require us to record a significant impairment charge in the period in which such events or changes occur. Impairment testing requires considerable analysis and judgment in determining results. If other assumptions and estimates were used in our evaluations, the results could differ significantly.

Annual tests or other future events could cause us to conclude that impairment indicators exist and that our goodwill is impaired. For example, if we had reason to believe that our recorded goodwill and intangible assets had become impaired due to decreases in the fair market value of the underlying business, we would have to take a charge to income for that portion of goodwill or intangible assets that we believed was impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. At October 31, 2009, our goodwill balance was $11.7 million and our intangible assets with definite lives balance was approximately $719,000, net of accumulated amortization.

Valuation of Capitalized Software Assets. We capitalize certain computer software development costs in accordance with Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification. Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established. Thereafter, we capitalize all software development costs and report those costs at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers. We make ongoing evaluations of the recoverability of our capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, we write off the amount by which the unamortized software development costs exceed net realizable value. We amortize capitalized computer software development costs ratably based on the projected revenues associated with the related software or on a straight-line basis over three years, whichever method results in a higher level of amortization. Amortization of capitalized computer software development costs is included in the cost of license revenues in the condensed consolidated statements of operations.

Stock-Based Compensation. We estimate the value of options granted on the date of grant using the Black-Scholes option pricing model. Management judgments and assumptions related to volatility, the expected term and the forfeiture rate are made in connection with the calculation of stock compensation expense. We periodically review all assumptions used in our stock option pricing model. Changes in these assumptions could have a significant impact on the amount of stock compensation expense.

Income Taxes. We provide for the effect of income taxes on our financial position and results of operations in accordance with the Income Tax Topic of the FASB Accounting Standards Codification. Under this accounting guidance, income tax expense is recognized for the amount of income taxes payable or refundable for the current year and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. Management must make significant assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, allowable deductions, and projected tax credits. Changes in tax law or our interpretation of tax laws could significantly impact the amounts provided for income taxes in our financial position and results of operations. Our assumptions, judgments and estimates relative to the value of our deferred tax assets take into account our expectations of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years, which could significantly increase tax expense, could render inaccurate our current assumptions, judgments and estimates of recoverable net deferred taxes.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency. In the three and six months ended October 31, 2009, we generated approximately 12% and 11%, respectively of our revenues outside the United States. We typically make international sales through our foreign subsidiaries or our Logility subsidiary and denominate those sales typically in U.S. Dollars, British Pounds Sterling or Euros. However, expenses incurred in connection with these sales are typically denominated in the local currencies. We recorded exchange rate gains of approximately $15,000 and $80,000 for the three and six months ended October 31, 2009, respectively, compared to exchange rate losses of approximately $193,000 and $196,000 for the three and six months ended October 31, 2008, respectively. We estimate that a 10% movement in foreign currency rates would have had the effect of creating up to a $111,000 exchange gain or loss for the six months ended October 31, 2009. We have not engaged in any hedging activities.

 

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Interest Rates and Other Market Risks. We have no debt, and therefore limit our discussion of interest rate risk to risk associated with our investment profile. We manage our interest rate risk by maintaining an investment portfolio of trading and held-to-maturity investments 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 our Board of Directors. These instruments are denominated in U.S. Dollars. The fair market value of these instruments as of October 31, 2009 was approximately $55.4 million compared to $70.1 million as of October 31, 2008.

We also hold 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 and are minor.

Many of our investments carry a degree of interest rate risk. When interest rates fall, our income from investments in variable-rate securities declines. When interest rates rise, the fair market value of our investments in fixed-rate securities declines. In addition, our investments in equity securities are subject to stock market volatility. Due in part to these factors, our future investment income may fall short of expectations or we may suffer losses in principal if forced to sell securities, which have seen a decline in market value due to changes in interest rates. We attempt to mitigate risk by holding fixed-rate securities to maturity, but, if our liquidity needs force us to sell fixed-rate securities prior to maturity, we may experience a loss of principal.

Inflation. Although we cannot accurately determine the amounts attributable thereto, we have been affected by inflation through increased costs of employee compensation and other operational expenses. To the extent permitted by the marketplace for our products and services, we attempt to recover increases in costs by periodically increasing prices.

 

Item 4. Controls and Procedures

Management’s Report on Internal Control Over Financial Reporting

As of the end of the period covered by this report, our management evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) under the supervision and with the participation of our chief executive officer and chief financial officer. Based on and as of the date of such evaluation, the aforementioned officers have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

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Our chief executive officer and chief financial officer, with the assistance of our Disclosure Committee, have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

We believe our financial statements fairly present in all material respects our financial position, results of operations and cash flows in our quarterly report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not currently involved in legal proceedings requiring disclosure under this item.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2009.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Not applicable

 

(b) Not applicable

 

(c) The following table summarizes repurchases of our stock in the three months ended October 31, 2009:

 

Fiscal Period

   Total
Number
of Shares
Purchased
   Average
Price Paid
Per Share
   Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
   Maximum
Number of
Shares that
May Yet Be
Purchased
Under the Plans
or Programs*

August 1, 2009 through August 31, 2009

   0    $ 0.00    0    1,304,665

September 1, 2009 through September 30, 2009

   0    $ 0.00    0    1,304,665

October 1, 2009 through October 31, 2009

   0    $ 0.00    0    1,304,665
                   

Total Fiscal 2010 Second Quarter

   0    $ 0.00    0    1,304,665
                   

 

* Our Board of Directors approved the above share purchase authority on August 19, 2002, when the Board approved a resolution authorizing us to repurchase up to 2.0 million shares of Class A common stock. This action was announced on August 22, 2002. The authorization has no expiration date.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. Submission of Matters to a Vote of Security Holders

We held our 2009 Annual Meeting of Shareholders on August 17, 2009. At the meeting, a Class A shareholders vote was taken with respect to the re-election of W. Dennis Hogue, John J. Jarvis and James B. Miller as directors for a one-year term. There were no other nominees. The results of that shareholder vote were as follows:

Election of W. Dennis Hogue

Votes “For:” 19,942,932; Withholding Authority to Vote “For:” 1,109,025.

Election of John J. Jarvis

Votes “For:” 19,606,169; Withholding Authority to Vote “For:” 1,445,788.

 

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Election of James B. Miller

Votes “For:” 18,326,511; Withholding Authority to Vote “For:” 2,725,446.

The Class B shareholders unanimously re-elected James C. Edenfield, J. Michael Edenfield, Thomas L. Newberry and Thomas L. Newberry, V as Directors.

There was a shareholder vote on an amendment to increase our 2001 Stock Plan to increase the number of Class A Common Shares that may be subject to options granted under the Plan from 5,275,000 shares to 6,075,000 shares. The results of that shareholder vote were: Votes “For:” 3,249,973; “Against:” 1,096,121.

There was also a shareholder vote on the ratification and approval of the conversion of stock options outstanding under the Logility, Inc. stock option plans to Company stock options and related actions. The results of that shareholder vote were: Votes “For:” 4,253,604; “Against:” 93,958.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibits 31.1-31.2.   Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1.   Section 906 Certifications

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    AMERICAN SOFTWARE, INC.
Date: December 9, 2009     By:       /s/ James C. Edenfield
      James C. Edenfield
      President, Chief Executive Officer and Treasurer
Date: December 9, 2009     By:   /s/ Vincent C. Klinges
      Vincent C. Klinges
      Chief Financial Officer
Date: December 9, 2009     By:   /s/ Herman L. Moncrief
      Herman L. Moncrief
      Controller and Principal Accounting Officer

 

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