UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2000 -------------------------------------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________________________ to _______________ Commission File Number: 0-12456 -------------------------------------------------- AMERICAN SOFTWARE, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-1098795 - --------------------------------- ------------------------------ (State or other jurisdiction of (IRS Employer Identification incorporation or organization) Number) 470 East Paces Ferry Road, N.E., Atlanta, Georgia 30305 - ------------------------------------------------- -------- (Address of principal executive offices) (Zip Code) (404) 261-4381 --------------------------------------------------- (Registrant's telephone number, including area code) None - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Classes Outstanding at September 12, 2000 - -------------------------------- --------------------------------- Class A Common Stock, $.10 par value 18,624,046 Shares Class B Common Stock, $.10 par value 4,082,289 Shares
AMERICAN SOFTWARE, INC Form 10-Q Quarter ended July 31,2000 Index ----- <TABLE> <CAPTION> Page No. ---- <S> <C> Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - Unaudited - July 31, 2000 and April 30, 2000 3 Condensed Consolidated Statements of Operations - Unaudited - Three Months ended July 31, 2000 and July 31, 1999 4 Condensed Consolidated Statements of Cash Flows - Unaudited - Three Months ended July 31, 2000 and July 31, 1999 5 Notes to Condensed Consolidated Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II - Other Information 18 </TABLE> 2
PART I - FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN SOFTWARE, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands except share and per share data) <TABLE> <CAPTION> July 31, April 30, 2000 2000 ------------------ ------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 8,439 $ 12,910 Investments - current 21,458 21,457 Trade accounts receivable, less allowance for doubtful accounts of $1,645 at July 31, 2000 and $1,739 at April 30, 2000: Billed 14,303 15,233 Unbilled 4,233 5,143 Deferred income taxes 1,975 1,975 Prepaid expenses and other current assets 2,257 2,099 ------------------ ------------------- Total current assets 52,665 58,817 Investments - noncurrent 8,074 9,878 Property and equipment, less accumulated depreciation 18,242 18,614 Intangible assets, less accumulated amortization 24,201 23,391 Other assets 2,494 2,347 ------------------ ------------------- $ 105,676 $ 113,047 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of obligations under capital leases $ 1,524 $ 1,493 Accounts payable 3,475 3,505 Accrued compensation and related costs 4,074 4,545 Income tax payable 2,922 3,122 Other current liabilities 4,720 7,012 Deferred revenue 15,504 15,936 ------------------ ------------------- Total current liabilities 31,861 35,613 Obligations under capital leases, net of current portion 548 907 Deferred income taxes 1,975 1,975 ------------------ ------------------- Total liabilities 34,743 38,495 ================== =================== Minority interest in subsidiaries 4,846 4,743 Shareholders' equity: Common stock: Class A, $.10 par value. Authorized 50,000,000 shares; Issued 21,508,243 shares at July 31, 2000 and 21,476,284 shares at April 30, 2000 2,151 2,148 Class B, $.10 par value. Authorized 10,000,000 shares; Issued and outstanding 4,082,289 shares at July 31, 2000 and 4,086,289 shares at April 30, 2000; convertible into Class A shares on a one-for-one basis 408 409 Additional paid-in capital 65,420 65,241 Other comprehensive income 243 247 Retained earnings 15,472 19,165 Class A treasury stock, 2,920,854 shares at July 31, 2000 and 2,920,854 shares at April 30, 2000, respectively (17,504) (17,504) ------------------ ------------------- Total shareholders' equity 66,190 69,706 ------------------ ------------------- $ 105,676 $ 113,047 ================== =================== </TABLE> See accompanying notes to condensed consolidated financial statements. 3
AMERICAN SOFTWARE, INC. Condensed Consolidated Statements of Operations (in thousands except share and per share data) (Unaudited) Three Months Ended July 31, --------------------------- 2000 1999 ----------- --------- Revenues: License fees $ 2,497 $ 6,277 Services 13,277 15,747 Maintenance 6,270 6,211 ----------- --------- Total revenues 22,044 28,235 ----------- --------- Cost of revenues: License fees 1,421 1,328 Services 10,566 11,583 Maintenance 1,833 2,685 ----------- --------- Total cost of revenues 13,820 15,596 ----------- --------- Gross margin 8,224 12,639 ----------- --------- Operating expenses: Research and development 4,502 5,120 Less: capitalized development (1,444) (2,963) Marketing and sales 5,832 6,492 General and administrative 3,313 3,405 ----------- --------- Total operating expense 12,203 12,054 Operating earnings (loss) (3,979) 585 Other income, net 278 426 Minority interest 9 (107) ----------- --------- Earnings (loss) before income taxes (3,692) 904 Income taxes --- --- ----------- --------- Net earnings (loss) $ (3,692) $ 904 =========== ========= Basic net earnings (loss) per common share $ (0.16) $ 0.04 =========== ========= Diluted net earnings (loss) per common share* $ (0.16) $ 0.04 =========== ========= Shares used in per share calculation Outstanding: Basic 22,604 21,597 =========== ========= Diluted 22,604 22,280 =========== ========= * Diluted weighted average common shares outstanding are not included in the quarter ended July 31, 2000 calculation due to the anti-dilution of the net loss. See accompanying notes to condensed financial statements. 4
AMERICAN SOFTWARE, INC Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Three Months Ended July 31, ------------------------------- 2000 1999 -------------- ------------- <S> <C> <C> Cash flows from operating activities: Net (loss) earnings $ (3,692) $ 904 Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 2,548 2,516 Minority interest in subsidiary income/(loss) (9) 107 Net (gain) loss on investments 9 125 Change in operating assets and liabilities: Purchases of trading securities (1,035) (1,260) Proceeds from trading securities 1,678 2,524 Proceeds from sales and maturities of investments 120 1,169 Decrease/(increase) in Accounts receivable 1,840 717 Decrease/(increase) in Prepaid expenses and other assets (238) 240 Increase/(decrease) in Accounts payable and other accrued liabilities (2,994) 1,024 Increase/(decrease) in Deferred revenue (432) 506 -------------- ------------- Net cash (used in) provided by operating activities (2,205) 8,572 -------------- ------------- Cash flows from investing activities: Additions to capitalized software development costs (1,444) (2,963) Additions to purchased computer software costs (280) ---- Purchase of majority interest in subsidiaries (517) ---- Minority investment and additional funding in business (68) (150) Repurchase of common stock by subsidiary ---- (224) Purchases of property and equipment (655) (523) Sales (purchases) of short term investments, net 1,031 (2,011) -------------- ------------- Net cash used in investing activities (1,933) (5,871) -------------- ------------- Cash flows from financing activities: Repayment of long-term debt ---- (250) Payment of capital lease obligation (420) (590) Repurchase of common stock ---- (621) Proceeds from exercise of stock options 72 5 Proceeds from dividend reinvestment and stock purchase plan 15 3 -------------- ------------- Net cash provided by (used in) financing activities (333) (1453) -------------- ------------- Net (decrease) increase in cash and cash equivalents (4,471) 1,248 Cash and cash equivalents at beginning of period $ 12,910 $ 12,647 -------------- ------------- Cash and cash equivalents at end of period $ 8,439 $ 13,895 ============== ============= Cash paid for income taxes $ ----- $ ----- ============== ============= Cash paid for interest $ 16 $ 26 ============== ============= Supplemental disclosure of non cash, investing, and financing activities: Assumption of capital lease obligations for property and equipment $ 93 $ 572 ============== ============= </TABLE> See accompanying notes to condensed consolidated financial statements. 5
AMERICAN SOFTWARE, INC. Notes to Condensed Consolidated Financial Statements - Unaudited July 31, 2000 A. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be used in conjunction with the consolidated financial statements and related notes contained in the 2000 Annual Report on Form 10-K. The financial information presented in the condensed consolidated financial statements reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the period indicated. B. Comprehensive Income (Loss) The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. No statements of comprehensive income (loss) have been included in the accompanying combined financial statements since comprehensive income (loss) and net income (loss) presented in the accompanying combined statements of operations would be materially the same. C. Revenue Recognition The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions. License. License revenues in connection with license agreements for standard proprietary and tailored software are recognized upon delivery of the software, providing collection is considered probable, the fee is fixed or determinable, there is evidence of an arrangement, and vendor specific evidence exists to defer any revenue related to undelivered elements of the arrangement. Maintenance. Maintenance fees are generally billed annually in advance and the resulting revenues are recognized ratably over the term of the maintenance agreement. Services. Revenues derived from services primarily include consulting, implementation, training, and managed hosting. Fees are billed under both time and materials and fixed fee arrangements and are recognized as services are performed. The percentage-of-completion method of accounting is utilized to recognize revenue on products under development for fixed amounts. Progress under the percentage-of-completion method is measured based on management's best estimate of the cost of work completed in relation to the total cost of work to be performed under the contract. Any estimated losses on products under development for fixed amounts are immediately recognized in the consolidated financial statements. Deferred Revenues. Deferred revenues represent advance payments or billings for software licenses, services, and maintenance billed in advance of the time revenues are recognized. 6
AMERICAN SOFTWARE, INC. Notes to Condensed Consolidated Financial Statements - Unaudited (continued) July 31, 2000 D. Major Customer One customer accounted for 10% of the Company's total revenues and 16% of services revenues during the quarter ended July 31, 2000. E. Purchase of Majority Interest in New Generation Computing On July 10, 1998, the Company purchased an 80% interest in New Generation Computing, a leading software vendor that specializes in accounting and manufacturing control software for the sewn goods industry (apparel, handbags, shoes, hats, etc.). This investment was accounted for based on the purchase accounting method with the results of operations included from the date of acquisition. In August 1999, the Company purchased an additional 6.6% interest and in July 2000 another 6.6% interest, bringing the ownership interest in New Generation Computing to 93% at July 31, 2000. 7
AMERICAN SOFTWARE, INC. Notes to Condensed Consolidated Financial Statements - Unaudited (continued) July 31, 2000 F. Net Earnings (Loss) Per Common Share Basic earnings (loss) per common share available to common shareholders are based on the weighted-average number of Class A and B common shares outstanding, since the Company considers the two classes of common stock as one class for the purposes of the per share computation. Diluted earnings (loss) per common share available to common shareholders is based on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive stock options. The numerator in calculating both basic and diluted earnings (loss) per common share for each year is the same as net earnings (loss). The denominator is based on the following number of common shares: <TABLE> <CAPTION> Quarter ended July 31, --------------------------- 2000 1999 ---------- ----------- (in thousands) <S> <C> <C> Common Shares: Weighted average common shares outstanding: Class A Shares 18,522 16,829 Class B Shares 4,082 4,768 ---------- ----------- Basic weighted average common shares outstanding: 22,604 21,597 ---------- ----------- Dilutive effect of outstanding Class A common Stock Options outstanding: - 683 ---------- ----------- Total 22,604 22,280 ========== =========== Net (loss) earnings: $ (3,692) $ 904 Net (loss) earnings per common share: Basic $ (0.16) $ 0.04 ========== =========== Diluted $ (0.16) $ 0.04 ---------- ----------- </TABLE> For the quarter ended July 31, 2000 approximately 3,796,508 stock options were excluded from the computation of diluted loss per share because they were antidilutive. Options to purchase 2,715,362 shares were outstanding during the 3 month period ending July 31, 1999 but were not included in the computation of diluted earnings per common share because the options exercise price was greater than the average market price of the common shares. 8
AMERICAN SOFTWARE, INC. Notes to Condensed Consolidated Financial Statements - Unaudited (continued) July 31, 2000 G. Industry Segments The Company operates and manages its business in three segments based on software and services provided in three key product markets. First, the Enterprise Resource Planning (ERP) segment automates customers' internal financing, human resources, and manufacturing functions. Second, the Business-to-Business Collaborative Commerce (BBCC) segment provides advanced business-to-business collaborative planning and integrated logistics capabilities. Third, the Managed Hosting Provider (MHP) segment provides data center infrastructure, network outsourcing services, e-commerce solution hosting and monitoring, and professional services staffing. Intersegment charges are based on marketing and general administration services provided to the BBCC and MHP segments by the ERP segment. Intersegment charges are also based on managed hosting services provided to the ERP and BBCC segments by the MHP segment. 9
AMERICAN SOFTWARE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Unaudited (continued) Three Months Ended July 31, --------------------------- 2000 1999 -------- ------------- Revenues: Enterprise resource planning $ 11,092 15,345 B-to-B Collaborative Commerce 6,922 8,368 Managed hosting provider External customers 4,024 4,522 Intersegment revenues 1,031 1,046 Elimination of intersegment revenues (1,031) (1,046) --------- ------------- Total 22,044 28,235 ========= ============= Operating income before intersegment Eliminations: Enterprise resource planning $ (1,903) 464 B-to-B Collaborative Commerce (1,082) 501 Managed hosting provider (994) (380) --------- ------------- Total (3,979) 585 ========= ============= Intersegment eliminations: Enterprise resource planning $ (44) 232 B-to-B Collaborative Commerce 741 576 Managed hosting provider (697) (808) --------- ------------- Total -- -- ========= ============= Operating income after intersegment eliminations: Enterprise resource planning $ (1,947) 696 B-to-B Collaborative Commerce (341) 1,077 Managed hosting provider (1,691) (1,188) --------- ------------- Total (3,979) 585 ========= ============= Capital expenditures: Enterprise resource planning 309 246 B-to-B Collaborative Commerce 116 150 Managed hosting provider 137 127 --------- ------------- Total $ 655 523 ========= ============= Capitalized Software: Enterprise resource planning 646 2,171 B-to-B Collaborative Commerce 798 792 Managed hosting provider -- -- --------- ------------- Total $ 1,444 2,963 ========= ============= Depreciation and amortization: Enterprise resource planning 1,169 1,109 B-to-B Collaborative Commerce 830 740 Managed hosting provider 549 667 --------- ------------- Total $ 2,548 2,516 ========= ============= July 31, April 30, 2000 2000 ----------- ------------- Identifiable assets: Enterprise resource planning $ 56,667 61,497 B-to-B Collaborative Commerce 42,418 44,53 Managed hosting provider 6,591 7,016 ----------- ------------- Total 105,676 113,047 =========== ============= 10
AMERICAN SOFTWARE, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements, which are subject to substantial risks and uncertainties. There are a number of factors that could cause actual results to differ materially from those anticipated by statements made herein. The timing of releases of the Company's software products can be affected by client needs, marketplace demands and technological advances. Development plans frequently change, and it is difficult to predict with accuracy the release dates for products in development. In addition, other factors, including changes in general economic conditions, the growth rate of the market for the Company's products and services, the timely availability and market acceptance of these products and services, the effect of competitive products and pricing, the performance of direct and indirect sales channels and the irregular pattern of revenues, as well as a number of other risk factors, could affect the future performance of the Company. OVERVIEW American Software, Inc. ("American Software" or the "Company"), through its subsidiaries, develops, markets and supports a portfolio of software and services that deliver e-business (business over the Internet) and enterprise management solutions to the global marketplace. The Company's software and services are designed to bring business value to traditional and e-businesses by supporting their operations over intranets, extranets, client/servers and the Internet. The Company launched its comprehensive suite of e-business solutions in December 1999, positioning itself as a single source e-business solution. The Company focuses its e-business solutions in five major product and services groups: (i) e-intelliprise, a fully web-based Enterprise Resource Planning (ERP) solution which includes both traditional and Flow Manufacturing capabilities; (ii) e-applications, which are e-business solutions that focus on web-enabling a specific task for e-businesses; (iii) e-collaboration, provided by Logility Voyager Solutions(TM) which is an Internet-based suite of business-to-business collaborative commerce solutions, offered by Logility, Inc., ("Logility") a subsidiary of American Software; (iv) e-services, which are comprehensive services to support traditional and e-business solutions; and (v) e-hosting, which are Managed Hosting Provider (MHP) services provided by AmQUEST, Inc., ("AmQUEST") a subsidiary of the Company. American Software's products are designed to bring rapid business value to clients and to support their transition into e-business. The Company also provides support for its software products, such as software enhancements, documentation, updates, customer education, consulting, systems integration services, maintenance and IT hosting. 11
Item 2. Management's Discussion (continued) The Company's revenues are derived primarily from three sources: software licenses, maintenance and services. Software license fee revenues generally are based upon the number of modules, servers, users and/or sites licensed. License fee revenues are recognized upon delivery of the software, provided collection is considered probable, the fee is fixed or determinable, there is evidence of an arrangement, and vendor-specific evidence exists to allocate the total fee to all elements of the arrangement. Maintenance agreements typically are for a one- to three-year term and usually are entered into at the time of the initial product license. Maintenance revenues are recognized ratably over the term of the maintenance agreement. Services revenues consist primarily of fees from software implementation, training, consulting and customization services and managed hosting, and are recognized as the services are rendered. RESULTS OF OPERATIONS The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage increases in those items for the three months ended July 31, 2000 and 1999: <TABLE> <CAPTION> Percentage of Pct. Change Total Revenues in Dollars ------------------------------------ ------------------ 2000 1999 2000 vs 1999 ---------------- ---------------- ------------------ <S> <C> <C> <C> Revenues: License fees 11% 22% (60%) Services 60 56 (16) Maintenance 29 22 1 ---------------- ---------------- ------------------ Total revenues 100 100 (22) ---------------- ---------------- ------------------ Cost of revenues: License fees 6 5 7 Services 48 41 (9) Maintenance 8 9 (32) ---------------- ---------------- ------------------ Total cost of revenues 63 55 (11) ---------------- ---------------- ------------------ Gross margin 37 45 (34) Operating expenses: Research and development expenses 20 18 (12) Less: capitalized development (7) (10) (51) Sales and marketing 26 23 (10) General and administrative expenses 15 12 (3) ---------------- ---------------- ------------------ Total operating expenses 55 43 1 ---------------- ---------------- ------------------ Operating earnings (loss) (18) 2 nm Other income, net (1) 2 (34) Minority interest nm nm nm ---------------- ---------------- ------------------ Earnings (loss) before income taxes (17) 3 nm Income taxes --- --- nm ---------------- ---------------- ------------------ Net earnings (loss) (17%) 3% nm ================ ================ ================== </TABLE> nm - not meaningful 12
Item 2. Management's Discussion (continued) THREE MONTHS ENDED JULY 31, 2000 AND 1999 - ----------------------------------------- REVENUES For the quarter ended July 31, 2000 revenues totaled $22.0 million, down 22% from $28.2 million in the corresponding quarter of fiscal year 2000. This decrease was primarily due to a decrease in license fee revenues and, and to a lesser extent, a decrease in services revenues. International revenues represented approximately 9% of total revenues in the quarter ended July 31, 2000 compared to approximately 7% in the quarter ended July 31, 1999, due primarily to the decrease in total revenues. LICENSES. Software license fee revenues decreased 60% to $2.5 million in the quarter ended July 31, 2000 from $6.3 million in the quarter ended July 31, 1999. The decrease in license fees was a result of lower than expected post-year 2000 sales recovery due to limited distribution channels and reduced sales effectiveness of direct and indirect sales channels of both the Company and the Company's subsidiary, Logility. License fee revenues from Logility, decreased 57% to $1.9 million and constituted 74% of the total license fee revenues for the three month period ended July 31, 2000 compared to the same prior year period, when they were $4.3 million and comprised 69% of license fee revenues. SERVICES. Services revenues, which consist primarily of consulting, implementation, training and managed hosting services, were $13.3 million or 16% lower than the corresponding quarter a year ago. This decrease was primarily a result of a reduction in new consulting and implementation projects due to lower prior period ERP sales. Services revenues for Logility and AmQuest, constituted 18% and 30% of total services revenues, respectively, for the quarter ended July 31, 2000 and constituted 12% and 29% of total services revenues, respectively, for the quarter ended July 31, 1999. Services revenues constituted 60% and 56% of total revenues for the period ending July 31, 2000 and July 31, 1999, respectively. MAINTENANCE. Maintenance revenues, which consist of product support activities and on-going product enhancements provided to customers who license the Company's products and purchase maintenance agreements, increased 1% for the first quarter of fiscal year 2001 to $6.3 million from $6.2 million in the first quarter of fiscal year 2000. This was due primarily to increases in Logility's new license fees in the latter portion of fiscal year 2000. Maintenance revenues for Logility increased 20% to $2.7 million and constituted 42% of the total maintenance revenues for the quarter ended July 31, 2000 compared to the prior year period, when they were $2.2 million and constituted 36% of maintenance revenues. Maintenance revenues constituted 29% of total revenues for the quarter ended July 31, 2000 and 22% of total revenues for the quarter ended July 31, 1999. GROSS MARGIN: The total gross margin in the quarter ended July 31, 2000 was 37% compared to 45% a year ago. This decrease was largely due to a decrease in the license fees gross margin to 43% this quarter compared to 79% in the same quarter a year ago, which was due primarily to the reduced total license fees in the most recent quarter. The Company anticipates a further reduction in license fees gross margin due to increased amortization of capitalized software costs as additional products are released in future quarters. The gross margin on services revenues decreased to 20% compared to 26% the same quarter a year ago. This is due to the higher margin services work related to the "Year 2000" remediation being performed in the first quarter of fiscal year 2000 compared to the lower margin services work that is currently being performed. Maintenance gross margin increased to 71% when compared to 57% during the same period one year ago. This increase was primarily due to the increased maintenance revenues of Logility and the cost management efforts by the ERP area that were begun in the prior fiscal year. 13
Item 2. Management's Discussion (continued) RESEARCH AND DEVELOPMENT. Gross product development costs include all non- capitalized and capitalized software development costs. A breakdown of the research and development costs is as follows: <TABLE> <CAPTION> July 31, Percent July 31, 2000 Change 1999 ----------- ---------- ----------- <S> <C> <C> <C> Gross product development costs $ 4,502 (12)% $ 5,120 Percentage of total revenues 20% 18% Less: capitalized development (1,444) (51)% (2,963) Percentage of gross prod. dev. costs 32% 58% ----------- ---------- ----------- Product development expenses $ 3,058 42% $ 2,157 Percentage of total revenues 14% 8% </TABLE> Gross product development costs decreased 12% in the quarter ended July 31, 2000 compared to the same period a year ago primarily as a result of the Company's cost containment and restructuring efforts in response to lower license fees. Capitalized development decreased by 51% from a year ago, as well as the rate of capitalized development, which decreased to 32% from 58% a year ago. These reductions were also primarily due to the restructuring and cost containment efforts as well as a reduction in capitalizable projects. Product development expenses, as a percentage of total revenues, increased to 14% compared to 8% a year ago due to the decrease in total revenues and the decrease in capitalized development costs as noted above. SALES & MARKETING. Sales and marketing expenses decreased 10% to $5.8 million for the quarter ended July 31, 2000 compared to $6.5 million for the same period a year ago. This decrease was due to the decrease in sales commissions due to lower sales, as well as controls of sales and marketing expenditures. As a percentage of total revenues, sales and marketing expenses were 26% for the quarter ended July 31, 2000 compared to 23% for the quarter ended July 31, 1999. It is anticipated that sales and marketing expenses will increase as increased market share in the e-business arena is pursued. GENERAL & ADMINISTRATIVE. General and administrative expenses decreased 3% to $3.3 million for the quarter ended July 31, 2000 compared to $3.4 million for the same period last year as a result of the continued management of these expenses, such as a reduction in the number of employees. During the quarter the average number of employees was 673 compared to 726 during the same period a year ago. As percentage of total revenues, general and administrative expenses were 15% for the quarter ended July 31, 2000 compared to 12% for the quarter ended July 31, 1999. It is anticipated OTHER INCOME. Other income is comprised predominantly of interest income, gains and losses from sales of investments, changes in the market value of investments, and minority interest in subsidiary's earnings (loss). Other income decreased to $287,000 in the quarter ended July 31, 2000 from $319,000 in the same period one year ago. INCOME TAXES. For the quarter ended July 31, 2000, the Company did not record any income taxes as a result of operating losses incurred in prior periods. 14
Item 2. Management's Discussion (continued) LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION The Company's operating activities used cash of approximately $2.2 million in the three months ended July 31, 2000, and provided cash of approximately $8.6 million in the same period last year. The cash used in operations during the three months ended July 31, 2000, was primarily attributable to a net loss of $3.7 million, a decrease in accounts payable and other accrued liabilities of $3.0 million, purchase of trading securities of $1.0 million and a decrease of $432,000 in deferred revenue. This was partially offset by non-cash depreciation and amortization expense of $2.5 million, proceeds from trading securities of $1.7 million, and a decrease in accounts receivable of $1.8 million. The cash provided by operations during the three months ended July 31, 1999, was primarily attributable to proceeds from trading securities of $2.5 million, proceeds from sales and maturities of investments of $1.2 million, non-cash depreciation and amortization expense of $2.5 million, net income of $904,000, a decrease in accounts receivable of $717,000, an increase in accounts payable and other liabilities of $1.0 million and an increase to deferred revenue of $506,000. This was offset by purchases of trading securities of $1.3 million. Cash used in investing activities was approximately $1.9 million for the three months ended July 31, 2000. The major use of cash was for capitalized software development costs of $1.4 million, purchase of property and equipment of $655,000, purchase of majority interest in subsidiary of $517,000 and purchase of computer software of $280,000. This was partially offset by the sale of short-term investments, net of $1.0 million. Cash used for investing activities was approximately $5.9 million for the three months ended July 31, 1999. The major use of cash was for capitalized software development costs of $3.0 million, the purchase of short-term investments, net of $2.0 million, purchase of the Company's subsidiary common stock of $224,000, purchase of property and equipment of $523,000 and the purchase of minority interest in business of $150,000. Cash used in financing activities was approximately $333,000 for the three months ended July 31, 2000 and was primarily for payments to capital lease obligations of $420,000. This was partially offset by proceeds from exercise of stock options of $72,000, and proceeds from dividend reinvestment of $15,000. Cash used in financing activities was approximately $1.5 million for the three months ended July 31,1999 and was primarily used for payments to capital lease obligations of $590,000, to purchase common stock of the Company of $621,000, and repayment of long-term debt of $250,000. Days Sales Outstanding (DSO) in accounts receivable were 76 days as of July 31, 2000 compared to 65 days as of July 31, 1999 and 70 days as of April 30, 2000. The Company's current ratio was 1.65 to 1 and cash and investments totaled 36% of total assets at July 31, 2000 compared to a current ratio of 1.65 to 1 and cash and investments totaling 39% of total assets at July 31, 1999. The Company expects existing cash and investments, combined with cash generated from operations, to be sufficient to meet its cash requirements for at least the next twelve months. To the extent that such amounts are insufficient to finance the Company's capital requirements, the Company will be required to raise additional funds through equity or debt financing. The Company does not currently have a bank line of credit. No assurance can be given that bank lines of credit or other financing will be available on terms acceptable to the Company. If available, such financing may result in further dilution to the Company's shareholders and higher interest expense. 15
Item 2. Management's Discussion (continued) On December 18, 1997, the Company's Board of Directors approved a resolution authorizing the Company to repurchase up to 1.5 million shares of the Company's Class A common stock. On March 11, 1999, the Company's Board of Directors approved a resolution authorizing the Company to repurchase an additional 700,000 shares for a total of up to 2.2 million shares of the Company's Class A common stock. These repurchases have been and will be made through open market purchases at prevailing market prices. The timing of any repurchases will depend on market conditions, the market price of the Company's common stock and management's assessment of the Company's liquidity and cash flow needs. Since the adoption of these resolutions, the Company has repurchased approximately 1.6 million shares of common stock at a cost of approximately $5.6 million as of July 31, 2000. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board "(FASB)" issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement was amended in June 2000 by Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Statement No. 138 will be effective for the Company beginning May 1, 2001. The new Statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting treatment for three types of hedges: (1) hedges of changes in the fair value of assets, liabilities, or firm commitments; (2) hedges of the variable cash flows of forecasted transactions; and (3) hedges of foreign currency exposures of net investments in foreign operations. The Company has not invested in derivative instruments or participated in hedging activities and, therefore, does not anticipate there will be a material impact on its results of operations or financial position from Statement No. 133 or No. 138. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") and amended it in March and June 2000. We are required to adopt the provisions of SAB 101 in our fourth quarter of fiscal 2001. We are currently reviewing the provisions of SAB 101 and have not fully assessed the impact of its adoption. While SAB 101 does not supercede the software industry-specific revenue recognition guidance, with which we believe we comply, the SEC Staff has recently informally indicated its views related to SAB 101 that may change current interpretations of software revenue recognition requirements. Such SEC interpretations could result in many software companies, including us, recording a cumulative effect of a change in accounting principles retroactive to May 1, 2000. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency. In the year ended July 31, 2000, the Company generated 9% of its revenues outside the United States. International sales usually are made by the Company's foreign subsidiaries and are denominated typically in U.S. Dollars or British Pounds Sterling. However, the expense incurred by foreign subsidiaries is denominated in the local currencies. The effect of foreign exchange rate fluctuations on the Company during the quarter ended July 31, 2000 was not material. Interest rates. The Company manages its interest rate risk by maintaining an investment portfolio of available-for-sale instruments with high credit quality and relatively short average maturities. These instruments include, but are not limited to, money-market instruments, bank time deposits, and taxable and tax- advantaged variable rate and fixed rate obligations of corporations, municipalities, and national, state, and local government agencies, in accordance with an investment policy approved by the Company's Board of Directors. These instruments are denominated in U.S. dollars. The fair market value of securities at July 31, 2000 was approximately $29.5 million. Interest income on the Company's investments is carried in "Other income/(expense)." The Company also holds cash balances in accounts with commercial banks in the United States and foreign countries. These cash balances represent operating balances only and are invested in short-term time deposits of the local bank. Such operating cash balances held at banks outside the United States are denominated in the local currency. Many of the Company's investments carry a degree of interest rate risk. When interest rates fall, the Company's income from investments in variable-rate securities declines. When interest rates rise, the fair market value of the Company's investments in fixed-rate securities declines. In addition, the Company's investments in equity securities are subject to stock market volatility. Due in part to these factors, the Company's future investment income may fall short of expectations or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The Company attempts to mitigate risk by holding fixed-rate securities to maturity, but should its liquidity needs force it to sell fixed-rate securities prior to maturity, the Company may experience a loss of principal. 17
PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- The Company is not party to any material legal proceedings Item 2. Changes in Securities and Use of Proceeds - ------- ----------------------------------------- Not applicable. Item 3. Defaults Upon Senior Securities - ------- ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- There were no matters submitted to a vote of shareholders during the quarter ended July 31, 2000. Item 5. Other Information - ------- ----------------- None. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits: Exhibit No. Description ----------- ----------- 27 Financial Data Schedule (b) No report on Form 8-K was filed during the quarter ended July 31, 2000. 18
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN SOFTWARE, INC. DATE September 10, 2000 /s/ James C. Edenfield ------------------------------ ----------------------------------- James C. Edenfield President, Chief Executive Officer and Treasurer DATE September 10, 2000 /s/ Vincent C. Klinges ------------------------------- ----------------------------------- Vincent C. Klinges Chief Financial Officer DATE September 10, 2000 /s/ Deirdre J. Lavender ------------------------------- ----------------------------------- Deirdre J. Lavender Accounting Officer 19
EXHIBIT INDEX ------------- Exhibit ------- 27.1 Financial Data Schedule 20