News Column

AMERICAN SOFTWARE INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 14, 2014

The following discussion and analysis should be read in conjunction with "Item 6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data". This discussion 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," "estimate," "believe," "expect" and similar expressions that convey uncertainty of future events or outcomes. Any forward-looking statements herein are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from the results anticipated by these forward-looking statements as a result of many known and unknown factors that are beyond our ability to control or predict, including but not limited to those discussed above in "Risk Factors" and elsewhere in this report. See also "Special Cautionary Notice Regarding Forward-Looking Statements" at the beginning of "Item 1. Business."



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have based the following discussion and analysis of financial condition and results of operations on our consolidated 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 to the Consolidated Financial Statements for the fiscal year ended April 30, 2014, 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 objective evidence (VSOE), bad debts, capitalized software costs, goodwill, intangible asset measurement and 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 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 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. 54



--------------------------------------------------------------------------------

Table of Contents

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 collectability 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. We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification. Effective fiscal 2012, we opted to perform a qualitative assessment to test a reporting unit's goodwill for impairment. Based on our qualitative assessment, if we determine that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, the two step impairment test will be performed. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the impairment. Our reporting units are consistent with our operating segments identified in Note 9 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report. 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 April 30, 2014, our goodwill balance was $13.8 million and our intangible assets with definite lives balance was $534,000, net of accumulated amortization. 55



--------------------------------------------------------------------------------

Table of Contents

Valuation of Capitalized Software Assets. We capitalize certain computer software development costs in accordance with the Costs of Software to be Sold, Leased, or Marketed 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. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. There was no impairment charge related to capitalized computer software during the years ended April 30, 2014, 2013 and 2012. At April 30, 2014, our capitalized software balance was $10.7 million, net of accumulated amortization. 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 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, tax planning strategies, projected tax credits and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of current and future tax audits 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 asset 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. Business Combinations and Intangible Assets Including Goodwill. We account for business combinations using the acquisition method of accounting and accordingly, the identifiable assets acquired and liabilities assumed are recorded based upon management's estimates of current fair values as of the acquisition date. The estimation process includes analyses based on income and market approaches. Goodwill represents the excess purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The goodwill generated is due in part to the synergies that are not included in the fair value of identifiable intangible assets. Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues. Identifiable intangible assets with finite lives are amortized over there useful lives. Amortization of current technology is recorded in cost of revenue-license and amortization of all other intangible assets is recorded in amortization of acquisition-related intangibles. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in general and administrative expenses in the periods in 56



--------------------------------------------------------------------------------

Table of Contents

which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

RESULTS OF OPERATIONS

The following table sets forth certain revenue and expense items as a percentage of total revenues for the three years ended April 30, 2014, 2013, and 2012 and the percentage increases and decreases in those items for the years ended April 30, 2014 and 2013: Pct. Change in Pct. Change in Percentage of Total Revenues Dollars Dollars 2014 2013 2012 2014 vs. 2013 2013 vs. 2012 Revenues: License 20 % 21 % 27 % (6 )% (24 )% Services and other 44 45 41 (2 ) 7 Maintenance 36 34 32 7 5 Total revenues 100 100 100 - (2 ) Cost of revenues: License 4 6 7 (33 ) (16 ) Services and other 31 31 30 (1 ) 2 Maintenance 8 8 7 5 1 Total cost of revenues 43 45 44 (4 ) (1 ) Gross margin 57 55 56 4 (3 ) Research and development 9 9 8 2 8 Sales and marketing 20 20 18 3 5 General and administrative 13 12 13 4 (9 ) Total operating expenses 42 41 40 3 1 Operating income 15 14 16 5 (15 ) Other income: Interest income 1 1 1 (18 ) (11 ) Other, net - - - (27 ) nm Earnings before income taxes 16 15 17 2 (10 ) Income tax expense 6 5 6 9 (14 ) Net earnings. 10 % 10 % 11 % (1 )% (8 )% nm-not meaningful



Economic Overview and Significant Trends in Our Business

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. In April 2014, the International Monetary Fund ("IMF") provided an update to the World Economic Outlook ("WEO") for the 2014 world economic growth forecast. The update noted that, "Looking ahead, global growth is projected to strengthen from 3 percent in 2013 to 3.6 percent in 2014 and 3.9 percent in 2015, broadly unchanged from the October 2013 outlook. In advanced economies, growth is expected to increase to about 57



--------------------------------------------------------------------------------

Table of Contents

2 1/4 percent in 2014-15, an improvement of about 1 percentage point compared with 2013. Key drivers are a reduction in fiscal tightening, except in Japan, and still highly accommodative monetary conditions. Growth will be strongest in the United States at about 2 3/4 percent. Growth is projected to be positive but varied in the euro area: stronger in the core, but weaker in countries with high debt (both private and public) and financial fragmentation, which will both weigh on domestic demand. In emerging market and developing economies, growth is projected to pick up gradually from 4.7 percent in 2013 to about 5 percent in 2014 and 5 1/4 percent in 2015." For fiscal 2015, we expect the world economy to improve when compared to the prior year, which could result in an improved selling environment. Overall information technology spending continues to be relatively weak as a result of the current global economic environment when compared to the period prior to the last recession. However, we noted some improvement in sales activity in the U.S. and Europe, the Middle East, and Africa during fiscal 2014 after a slow start in the first quarter of fiscal 2014. 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 enhancements 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 large 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 opportunities and risks

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 selective 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.

For more information, please see "Risk Factors" in Item 1A. above.

58



--------------------------------------------------------------------------------

Table of Contents

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on May 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, to change the criteria for determining which disposals can be presented as discontinued operations and enhanced the related disclosure requirements. The new standard is effective for annual periods beginning on or after December 15, 2014 and interim periods within that year. The standard is applied prospectively, with early adoption permitted for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The Company does not expect the standard to have a material impact on its consolidated financial statements. In July 2013, the FASB issued an accounting standard update relating to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This update amends existing GAAP that required in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, and retrospective application is permitted. The Company does not expect any impact from this update on our financial statements.



Market Conditions by Operating Segment

We operate and manage our business in three segments based on software and services provided in three key product markets: (1) Supply Chain Management (SCM), which provides collaborative supply chain solutions to streamline and optimize the production, distribution and management of products between trading partners; (2) Enterprise Resource Planning (ERP), which automates customers' internal financing, human resources, and manufacturing functions; and (3) IT Consulting, which consists of IT staffing and consulting services. The SCM segment represents the business of Logility, as well as its subsidiary, DMI. Our SCM segment experienced increased revenues during fiscal 2014 when compared to fiscal 2013, due primarily to a 9% increase in services and other revenues and a 7% increase in maintenance revenue. This was partially offset by a 6% decrease in license fees. The ERP segment revenues decreased 10% in fiscal 2014 when compared to fiscal 2013, primarily due to a 27% decrease in services and other revenues partially offset by a 7% increase maintenance revenues and a 2% increase in license fees. Our SCM segment experienced decreased revenues during fiscal 2013 when compared to fiscal 2012, due primarily to a 23% decrease in license fees. This was partially offset by a 25% increase in services and other revenues and a 6% increase in maintenance revenues from Logility customers. The ERP segment revenues decreased 6% in fiscal 2013 when compared to fiscal 2012, primarily due to a 32% decrease in license fees and a 2% decrease in maintenance revenues partially offset by a 6% increase in services and other revenues. 59



--------------------------------------------------------------------------------

Table of Contents

Our IT Consulting segment experienced a decrease in revenues of approximately 2% in fiscal 2014 when compared to fiscal 2013 and a 1% decrease in revenues in fiscal 2013 when compared to fiscal 2012, due primarily to a decrease in IT staffing work at our primary customer. As companies have moved to cut costs and limit IT budgets, they have utilized more outsourcing services, which tend to be more cost-effective for them. In the past this trend has resulted in increased business for this segment. However, there is a countervailing trend to outsourcing IT to international markets that historically have been more price competitive than domestic sources like ourselves. Our primary customer comprised 39% of our IT Consulting revenues in fiscal 2014 and 44% in fiscal 2013. The loss of this customer would negatively and materially affect our IT consulting business. REVENUES Years Ended April 30, % Change % of Total Revenues 2014 2013 2012 2014 to 2013 2013 to 2012 2014 2013 2012 (in thousands) License $ 20,011$ 21,184$ 27,826 (6 )% (24 )% 20 % 21 % 27 % Services and other 44,377 45,323 42,380 (2 )% 7 % 44 % 45 % 41 % Maintenance 36,213 33,960 32,430 7 % 5 % 36 % 34 % 32 % Total revenues $ 100,601$ 100,467$ 102,636 0 % (2 )% 100 % 100 % 100 %



For fiscal year ended April 30, 2014, total revenues remained relatively consistent with fiscal year ended April 30, 2013.

For the fiscal year ended April 30, 2013, the 2% decrease in total revenues was attributable primarily to a 24% decrease in license fee revenues. This was partially offset by a 7% increase in services and other revenues and a 5% increase in maintenance revenues.

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 provided, 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 affect the discount amount of one contract, the overall percentage discount has not materially changed in the recent reported fiscal periods. The change in our revenues from period to period is primarily due to the volume of products and related services sold in any period and the amounts of products or modules purchased with each sale. International revenues represented approximately 17% of total revenues for the year ended April 30, 2014, 14% of total revenues for the year ended April 30, 2013, and 16% for the year ended April 30, 2012. Our international revenues may fluctuate substantially from period to period primarily because we derive these revenues from a relatively small number of customers in a given period. License revenues Years Ended April 30, % Change 2014 2013 2012 2014 to 2013 2013 to 2012 (in thousands)



Enterprise Resource Planning $ 2,319$ 2,272$ 3,350

2 % (32 )% Supply Chain Management 17,692 18,912 24,476 (6 )% (23 )% Total license revenues $ 20,011$ 21,184$ 27,826 (6 )% (24 )% 60



--------------------------------------------------------------------------------

Table of Contents

For the year ended April 30, 2014, license fee revenues decreased by 6% when compared to the previous year due to a difficult selling environment at our SCM unit partially offset by a small increase at our ERP unit. Logility experienced a decline in license fees partly due to cancellations and/or delays in business investment as a result of an uncertainty in the direction of the global economy and partly due to several customer contracts that included Logility Cloud Services that require revenue to be deferred over the life of the contracted period. These contracts were closed in the second quarter of fiscal 2014 and included license fees of approximately $1.1 million. Logility, including its DMI subsidiary, constituted 88%, 89% and 88% of our total license fee revenues for the years ended April 30, 2014, 2013 and 2012, respectively. License fees from our ERP segment, which includes NGC, increased in fiscal 2014, primarily due to an increase in our legacy license fee sales. For the year ended April 30, 2013, license fee revenues decreased by 24% when compared to the previous year due to a difficult selling environment as our SCM and ERP units have experienced a decline in license fee close rates in the current fiscal year due to cancellations and/or delays in business investment as a result of an uncertainty in the direction of the global economy. Logility, including its DMI subsidiary, constituted 89%, 88% and 87% of our total license fee revenues for the years ended April 30, 2013, 2012 and 2011, respectively. License fees from our ERP segment, which includes NGC, also decreased in fiscal 2013, primarily due to a decrease in license fee sales to the apparel and retail industries also as a result of uncertainty in the direction of the global economy. The direct sales channel provided approximately 73% of license fee revenues for the year ended April 30, 2014, compared to approximately 70% in fiscal 2013 and 70% in fiscal 2012. The decrease in indirect license fees from fiscal 2013 to fiscal 2014 was largely the result of lower license fee sales through our indirect channel, which primarily sells software products through its DMI subsidiary to small and midsize companies. As a result of the current economic conditions, we believe the ability of small and midsize companies to access the credit markets to finance capital purchases is difficult when compared to the same period last year and also the uncertainly of the direction of the global economy is delaying capital purchasing decisions at all company sizes but particularly the small and midsize companies. For the year ended April 30, 2014, our margins after commissions on direct sales were approximately 81%, and our margins after commissions on indirect sales were approximately 51%. For the year ended April 30, 2013, our margins after commissions on direct sales were approximately 83%, and our margins after commissions on indirect sales were approximately 49%. For the year ended April 30, 2012, our margins after commissions on direct sales were approximately 81%, and our margins after commissions on indirect sales were approximately 48%. The margins after commissions were relatively consistent in a range between 81% and 83% for direct and 48% and 51% for indirect sales. DMI is the source of the bulk of our indirect sales. 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 channel. Services and other revenue Years Ended April 30, % Change 2014 2013 2012 2014 to 2013 2013 to 2012 (in thousands) Enterprise Resource Planning $ 4,488$ 6,162$ 5,827 (27 )% 6 % Supply Chain Management 15,136 13,929 11,178 9 % 25 % IT Consulting 24,753 25,232 25,375 (2 )% (1 )%



Total services and other revenues $ 44,377$ 45,323$ 42,380

(2 )% 7 % The 2% decrease in services and other revenues for the year ended April 30, 2014 when compared to fiscal 2013 was due primarily to a decrease in revenue from our ERP business unit as a large implementation project at NGC ended in fiscal 2013 and was not replaced in fiscal 2014. The decrease was also partially due to a 2% decrease in services and other revenues in our IT Consulting business unit due to its customers'-particularly its primary customer's-decreased utilization of outside contractors. This was partially offset by a 9% increase at 61



--------------------------------------------------------------------------------

Table of Contents

our SCM business unit, as higher SCM license fees sales in prior periods resulted in more project implementation services and increased services revenue related to our Logility Cloud Services area.

The 7% increase in services and other revenues for the year ended April 30, 2013 when compared to fiscal 2012 was due primarily to an increase in revenue from our SCM business unit, as higher SCM license fees sales in prior periods resulted in more project implementation services, and to a lesser extent was attributable to our ERP business unit as higher license fees sales in prior periods resulted in more project implementation services. This was partially offset by a 1% decrease in services and other revenues in IT Consulting business unit due to its customers'-particularly its primary customer's-decreased utilization of outside contractors. In our software business units, we have observed that there is a tendency for services and other revenues 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. Thus, it is not necessary for the proportion of customers purchasing implementation services to increase if the amount of license fees increased in recent quarters. Maintenance revenue Years Ended April 30, % Change 2014 2013 2012 2014 to 2013 2013 to 2012 (in thousands) Enterprise Resource Planning $ 4,710$ 4,391$ 4,474 7 % (2 )% Supply Chain Management 31,503 29,569 27,956 7 % 6 % Total maintenance revenues $ 36,213$ 33,960$ 32,430 7 % 5 % The 7% increase in total maintenance revenues for the year ended April 30, 2014 was primarily due to a 7% increase in maintenance revenues from our SCM business unit as a result of increased license fees and improved maintenance renewal rates and a 7% increase in our ERP business unit from higher maintenance renewal rates and an increase in license fees. The 5% increase in total maintenance revenues for the year ended April 30, 2013 was primarily due to a 6% increase in maintenance revenues from our SCM business unit as a result of increased license fees and improved maintenance renewal rates. This was partially offset by a 2% decrease from our ERP business unit from lower maintenance renewal rates. Logility's maintenance revenues constituted 87% of total maintenance revenues for the years ended April 30, 2014 and 2013 compared to 86% for the year ended April 30, 2012. 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: Years Ended April 30, 2014 2013 2012 (in thousands) Gross margin on license fees $ 15,968 80 % $ 15,158 72 % $ 20,684 74 % Gross margin on services and other 12,732 29 % 13,453 30 % 11,279 27 % Gross margin on maintenance 28,186 78 % 26,296 77 % 24,833 77 % Total gross margins $ 56,886 57 % $ 54,907 55 % $ 56,796 55 % 62



--------------------------------------------------------------------------------

Table of Contents

The increase in total gross margin percentage for the year ended April 30, 2014 was primarily due to the increase in gross margin percentage on license fees and to a lesser extent the slight increase in maintenance gross margins partially offset by a slight decrease in services and other gross margins when compared to the same period last year.



The total gross margin percentage for the year ended April 30, 2013 was primarily the same percentage as the same period last year.

Gross Margin on License Fees

The increase in license fee gross margin percentage for the fiscal year ended April 30, 2014 when compared to fiscal 2013 was due primarily to lower capitalized software amortization expense (approximately $625,000 per quarter) which temporarily declined due to our Voyager 8.0 project being fully amortized at the end of the first quarter of fiscal 2014, and a reduction in the proportion of license fee sales through our indirect channel at DMI, for which agent commissions are expensed to cost of license fees. We expect capitalized software amortization expense to increase in fiscal 2015 since the next major Voyager 8.5 project was released in March 2014. The decrease in license fee gross margin percentage for the fiscal year ended April 30, 2013 when compared to fiscal 2012 was due primarily to the decrease in license fee sales. 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 channel.



Gross Margin on Services and Other

For the year ended April 30, 2014, our gross margin percentage on services and other revenues decreased from 30% in fiscal 2013 to 29% in fiscal 2014, primarily due to lower gross margins at our SCM segment, Logility's gross margin decreased from 44% in fiscal 2013 compared to 38% in fiscal 2014 due to increased headcount and lower billing utilization rates and our ERP segment, as services gross margin decreased from 36% in fiscal 2013 compared to 26% in fiscal 2014 due to lower services revenue and billing utilization rates. This was partially offset by our IT Consulting segment, The Proven Method, Inc. ("TPM"), as its services gross margin increased to 23% in fiscal 2014 compared to 20% in fiscal 2013, as a result of improved contracted utilization and hourly billing rates. For the year ended April 30, 2013, our gross margin percentage on services and other revenues increased from 27% in fiscal 2012 to 30% in fiscal 2013, primarily due to higher gross margins at our IT Consulting segment, The Proven Method, Inc. ("TPM"), as its services gross margin increased to 20% in fiscal 2013 compared to 18% in fiscal 2012, as a result of improved contracted utilization and hourly billing rates. Also, to a lesser extent, the increase was due to higher gross margins at our ERP segment, as services gross margin increased from 33% in fiscal 2012 compared to 36% in fiscal 2013 as a result of higher services revenue. In our SCM segment, Logility's gross margin increased slightly to 44% in fiscal 2013 compared to 43% in fiscal 2012 due to higher services revenue. As discussed above, our IT Consulting business unit typically has lower margins when compared to the other business units that have higher margin implementation service revenue, so a decrease in the percentage of services revenues from our IT Consulting segment tends to cause our overall services gross margin percentage to increase. The IT Consulting segment was 56%, 56% and 60% of the Company's services revenues in fiscal 2014, 2013 and 2012, respectively. Our SCM segment was 34%, 31% and 26% of the Company's services revenues in fiscal 2014, 2013 and 2012, respectively. Our ERP segment was 10%, 14% and 14% of the Company's services revenues in fiscal 2014, 2013 and 2012, respectively. 63



--------------------------------------------------------------------------------

Table of Contents

Gross Margin on Maintenance

Maintenance gross margin percentage remained relatively consistent for the years ended April 30, 2014, 2013 and 2012. The slight improvement in maintenance gross margin percentage in fiscal 2014 compared to fiscal 2013 was primarily due to an increase in maintenance revenue. EXPENSES Years Ended April 30, % of Revenues 2014 2013 2012 2014 2013 2012 (in thousands) Research and development $ 9,074$ 8,882$ 8,226 9 % 9 % 8 % Sales and marketing 20,414 19,829 18,797 20 % 20 % 18 % General and administrative 12,401 11,911 13,070 12 % 12 % 13 % Amortization of acquisition-related intangible assets 472 501 535 0 % 0 % 1 % Other income, net 1,372 1,741 1,103 1 % 2 % 1 % Income tax expense 5,566 5,114 5,928 6 % 5 % 6 %



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:

Years Ended April 30, Percent April 30, Percent April 30, 2014 Change 2013 Change 2012 (in thousands) Total capitalized computer software development costs $ 2,949 (14 )% $ 3,418 25 % $ 2,731 Percentage of gross product research and development costs 25 % 28 % 25 % Total research and development expense 9,074 2 % 8,882 8 % 8,226 Percentage of total revenues 9 % 9 % 8 % Total research and development expense and capitalized computer software development costs $ 12,023 (2 )% $ 12,300 12 % $ 10,957 Percentage of total revenues 12 % 12 % 11 % Total amortization of capitalized computer software development costs* $ 925 (63 )% $ 2,501 0 % $ 2,502



* Included in cost of license fees

For the year ended April 30, 2014, gross product research and development costs decreased slightly due to lower spending by our ERP unit. Capitalized software development costs decreased in fiscal 2014 compared to fiscal 2013 due to timing of project work. Amortization of capitalized software development decreased in fiscal 2014 when compared to fiscal 2013, due to our Voyager 8.0 software project being fully amortized at the end of the first quarter of fiscal 2014. In March 2014, we released Voyager 8.5 and began amortizing it at approximately $300,000 per month. Sales and Marketing In the year ended April 30, 2014, the increase in sales and marketing expenses compared to fiscal 2013 was due primarily to higher marketing related costs such as trade shows and our customer conferences, variable compensation and travel. 64



--------------------------------------------------------------------------------

Table of Contents

In the year ended April 30, 2013, the increase in sales and marketing expenses compared to fiscal 2012 was due primarily to expenditures related to increased headcount and higher marketing related costs.



General and Administrative

For the year ended April 30, 2014, the increase in general and administrative expenses compared to fiscal 2013 was primarily due to higher variable compensation expense, legal and audit related fees. The total number of employees was approximately 383 on April 30, 2014, 377 on April 30, 2013 and 332 on April 30, 2012. For the year ended April 30, 2013, the decrease in general and administrative expenses compared to fiscal 2012 was primarily due to lower variable compensation expense. The total number of employees was approximately 377 on April 30, 2013, 332 on April 30, 2012 and 297 on April 30, 2011.



Amortization of Acquisition-related Intangible Assets

For the year ended April 30, 2014, we recorded $472,000 in intangible amortization expense related to the Optiant acquisition that occurred on March 19, 2010. This amount is included in operating expenses. Additionally, we recorded approximately $88,000 related to the August 14, 2013 acquisition of certain assets of privately-held Taylor Manufacturing Systems, USA, LLC ("TMS") an Atlanta-based provider in the advance planning systems ("APS"). This amount is included in cost of license fees. Additionally, we recorded approximately $64,000 in amortization expense related to the Logility treasury stock buy-back (see Note 1(l) to the Consolidated Financial Statements). This amount is included in general and administrative expenses. For the year ended April 30, 2013, we recorded $501,000 in intangible amortization expense related to the Optiant acquisition that occurred on March 19, 2010. This amount is included in operating expenses. Additionally, we recorded approximately $75,000 in amortization expense related to the Logility treasury stock buy-back (see Note 1(l) to the Consolidated Financial Statements). This amount is included in general and administrative expenses. For the year ended April 30, 2012, we recorded $535,000 in intangible amortization expense related to the Optiant acquisition that occurred on March 19, 2010. This amount is included in operating expenses. Additionally, we recorded approximately $82,000 in amortization expense related to the Logility treasury stock buy-back (see Note 1(l) to the Consolidated Financial Statements). This amount is included in general and administrative expenses. Operating Income/(Loss) Years Ended April 30, % Change 2014 2013 2012 2014 to 2013 2013 to 2012 (in thousands) Enterprise Resource Planning $ (5,132 )$ (4,741 )$ (4,947 ) (8 )% 4 % Supply Chain Management 17,468 16,881 19,335 3 % (13 )% IT Consulting 2,189 1,644 1,780 33 % (8 )% Total Operating Income $ 14,525$ 13,784$ 16,168 5 % (15 )% The higher ERP segment operating loss in fiscal 2014 when compared to fiscal 2013 was due primarily to lower revenues and additional cost related to building maintenance, legal and audit. Also, during the current fiscal year, the Company continued to invest approximately 17% of total ERP revenues, or approximately $2.0 million, in research and development for new software products to compete more effectively in the sewn products, apparel and retail industries. 65



--------------------------------------------------------------------------------

Table of Contents

The lower ERP segment operating loss in fiscal 2013 when compared to fiscal 2012 was due primarily to cost containment efforts. Also, during the current fiscal year, the Company continued to invest approximately 18% of total ERP revenues, or approximately $2.3 million, in research and development for new software products to compete more effectively in the sewn products, apparel and retail industries.



Our SCM segment increased operating income by 3% in fiscal 2014 compared to fiscal 2013 primarily due to a 3% increase in revenues. Our SCM segment decreased operating income by 13% in fiscal 2013 compared to fiscal 2012 primarily due to a 2% decrease in revenues and increased investment in sales and R&D efforts.

Our IT consulting segment operating income increased 33% in fiscal 2014 compared to fiscal 2013 primarily due an increase in gross margins from improved billing utilization project work. Our IT consulting segment operating income decreased 8% in fiscal 2013 compared to fiscal 2012 primarily due to a 1% decrease in revenues.



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. Other income was approximately $1.4 million in the year ended April 30, 2014 compared to $1.7 million in fiscal 2013. The decrease was primarily due to a decrease in unrealized and realized gains on investments and to a lesser extent lower interest income. This was partially offset by lower exchange rate losses and higher rental income from leases on our Atlanta property in fiscal 2014. We incurred an exchange rate loss of approximately $73,000 in the year ended April 30, 2014 compared to a loss of approximately $258,000 in fiscal 2013. Other income was approximately $1.7 million in the year ended April 30, 2013 compared to $1.1 million in fiscal 2012. The increase was primarily due to increase in unrealized and realized gains on investments and to a lesser extent higher rental income from leases on our Atlanta property in fiscal 2013 and lower exchange rate losses. We incurred an exchange rate loss of approximately $258,000 in the year ended April 30, 2013 compared to a loss of approximately $289,000 in fiscal 2012. This was partially offset by lower interest income.



Income Taxes

During fiscal 2014, the Company recorded income tax expense of $5.6 million compared to $5.1 million in fiscal 2013 and $5.9 million in fiscal 2012. Our effective income tax rate takes into account the source of taxable income, by state, and available income tax credits. Our tax effective rate was 35.0%, 32.9%, and 34.3% in fiscal years 2014, 2013 and 2012, respectively. The effective tax rate for the current fiscal year is higher than last year primarily due to the expiration of the research and development tax credit in fiscal 2014 (January 2014 to April 2014). The effective tax rate for fiscal 2013 is lower than fiscal 2012 primarily due to the approval of the research and development tax credit during the third quarter of the current year which resulted in a "catch-up" credit adjustment for the period January 1, 2012 to January 31, 2013 which included four months (January 2012 to April 2012) of the fiscal 2012 tax credit in fiscal 2013. We expect our tax effective rate to be in the range of 33% to 36% in fiscal 2015.



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.

66



--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources

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 as of and for the fiscal years ended April 30, 2014 and 2013. You should read these tables and the discussion that follows in conjunction with our consolidated statements of cash flows contained in Item 8 of this report.

Years ended April 30, 2014 2013 (in thousands) Net cash provided by operating activities $ 18,311 $



19,128

Net cash used in investing activities (4,220 )



(2,966 )

Net cash provided by (used in) financing activities 548 (14,109 )

Net change in cash and cash equivalents $ 14,639 $



2,053

The decrease in cash provided by operating activities in fiscal 2014 compared to fiscal 2013 was due primarily to: (1) an increase in accounts receivable in fiscal 2014 compared to a decrease in fiscal 2013 due to timing of sales and billing, (2) lower depreciation and amortization expense due to timing of closing capitalized software projects, (3) an increase in prepaid expenses and other assets in fiscal 2014 compared to an decrease in fiscal 2013 due to timing of purchases, (4) a decrease in the net proceeds from sales and maturities of trading securities in fiscal 2014 compared to fiscal 2013 due to timing of purchases and maturity dates, (5) an increase in excess tax benefits from stock-based compensation due to a increase in stock option exercises in fiscal 2014 compared to fiscal 2013, (6) a decrease in retirement of property and equipment, (7) a decrease in net earnings, (8) an increase in the purchases of trading securities due to timing, and (9) lower bond amortization. These factors were partially offset by: (1) an increase in accounts payable and other liabilities when compared to fiscal 2013 due primarily to timing and amount of sales commissions, bonuses and tax liabilities, (2) an increase in deferred revenues when compared to fiscal 2013 primarily due to an increase maintenance fees, (3) an increase in the loss on unrealized investments compared to a gain in the prior year due to investment markets,(4) an increase in deferred income taxes due to timing, (5) an increase in tax benefits of options exercised due to an increase in stock option exercises in the current year compared to fiscal 2013, and (6) an increase in stock-based compensation expense due to the increase value of option grants. The increase in cash used in investing activities in fiscal 2014 compared to fiscal 2013 was due primarily to: (1) the purchase of a business in fiscal 2014, and (2) a decrease in proceeds from maturities of investments because all debt securities acquired during fiscal 2014 and 2013 were classified as "trading" and are included in operating activities. This was partially offset by: (1) a decrease in purchases of equipment, and (2) a decrease in capitalized software development costs due to the timing of R&D efforts. The increase in cash provided by financing activities in fiscal 2014 when compared to cash used in financing activities in fiscal 2013 was due primarily to: (1) a decrease in cash dividends paid on common stock in fiscal 2014 as a result of accelerated dividends in fiscal 2013, (2) an increase in proceeds from exercise of stock options, (3) no repurchases of common stock in fiscal 2014, and (4) an increase in excess tax benefits from stock-based compensation due to an increase in stock option exercises in fiscal 2014 compared to fiscal 2013. 67



--------------------------------------------------------------------------------

Table of Contents

The following table provides information regarding the changes in our total cash and investments position: As of April 30, 2014 2013 (in thousands) Cash and cash equivalents $ 55,803 $



41,164

Investments 23,771



25,260

Total cash and investments $ 79,574 $



66,424

Net increase (decrease) in total cash and investments $ 13,150 $

(446 )

The following table provides information regarding our known contractual obligations as of April 30, 2014 (in thousands): (See Notes to Consolidated Financial Statements-Note 8) Payments due by Period 1-3 3-5 More than Contractual Obligations Total 1 year years years 5 years Operating Leases $ 1,999$ 780$ 763$ 456 $ - As a result of the positive cash flow from operations our business has generated in recent periods, and because as of April 30, 2014, we had $79.6 million in cash and cash equivalents and investments with no debt, we believe that our sources of liquidity and capital resources will be sufficient to satisfy our presently anticipated requirements for working capital, capital expenditures and other corporate needs during at least the next twelve months. However, due to the uncertainty in the recent economic environment, 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 currently do not 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. Days Sales Outstanding (DSO) in accounts receivable were 66 days as of April 30, 2014, compared to 62 days as of April 30, 2013. This increase was due the timing of collections. Our current ratio on April 30, 2014 was 2.7 to 1, compared to 2.8 to 1 on April 30, 2013. DSO can fluctuate significantly on a quarterly basis due to a number of factors including the percentage of total revenues that comes from software license sales (which typically have installment payment terms), seasonality, shifts in customer buying patterns, the timing of customer payments and annual maintenance renewals, lengthened contractual payment terms in response to competitive pressures, the underlying mix of products and services, and the geographic concentration of revenues. On December 18, 1997, our Board of Directors approved a resolution authorizing the repurchase up to 1.5 million shares of our Class A common stock. 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 shares of our Class A common stock. On August 19, 2002, our Board of Directors approved a resolution authorizing us to repurchase an additional 2.0 million shares for a total of up to 4.2 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 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 June 30, 2014, we have repurchased approximately 3.1 million shares of common stock at a cost of approximately $12.3 million.



See Item 5 of this report, under the caption "Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities."

68



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters