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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

                For the quarterly period ended January 31, 2003

OR

o            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 0-23057

LOGILITY, INC.

(Exact name of registrant as specified in its charter)

(404) 261-9777
(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 o

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

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LOGILITY, INC.

Form 10-Q

Quarter Ended January 31, 2003

Index

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PART I - FINANCIAL INFORMATION

Item 1.            Financial Statements

LOGILITY, INC.
Condensed Combined Balance Sheets (Unaudited)
(in thousands, except share data)

See accompanying notes to condensed combined financial statements (unaudited).

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Item 1.             Financial Statements (continued)

LOGILITY, INC.
Condensed Combined Statements of Operations (Unaudited)
(In thousands, except per share data)

See accompanying notes to condensed combined financial statements.

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Item 1.             Financial Statements (continued)

LOGILITY, INC.
Condensed Combined Statements of Cash Flows (Unaudited)
(in thousands)

See accompanying notes to condensed combined financial statements.

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Item 1.             Financial Statements (continued)

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)

A.        Basis of Presentation

The accompanying condensed combined financial statements of Logility, Inc. are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The financial information presented in the condensed combined financial statements reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the periods indicated. These financial statements should be read in conjunction with the Company’s Form 10-K for the fiscal year ended April 30, 2002 as filed with the SEC on July 26, 2002. The interim results reflected in the condensed combined financial statements are not necessarily indicative of the results to be expected for the full year or for any other future period.

We are an approximately 86% owned subsidiary of American Software, Inc., a publicly held provider of enterprise resource planning solutions (NASDAQ - AMSWA).

B.        Industry Segments

We have adopted Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. We operate and manage our business in one segment, providing business-to-business collaborative commerce solutions to optimize supply chain operations for manufacturers, distributors and retailers.

C.        Comprehensive Income

We have adopted Statement of Financial Accounting Standards No. 130 (“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 have been included in the accompanying condensed combined financial statements since comprehensive income and net income presented in the accompanying condensed combined statements of operations would be the same.

D.        Revenue Recognition

We recognize 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. We recognize license revenues in connection with license agreements for standard proprietary and tailored software upon delivery of the software, provided we consider collection to be probable, the fee is fixed or determinable, there is evidence of an arrangement, and vendor-specific evidence exists to defer any revenue related to undelivered elements of the arrangement.

Services. Revenues derived from services primarily include consulting, implementation, and training. We

bill under both time and materials and fixed fee arrangements and recognize revenues as we perform the services.

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Item 1.            Financial Statements (continued)

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

We utilize the percentage-of-completion method of accounting to recognize revenue on service implementation projects for fixed amounts. We measure progress under the percentage-of-completion method based on our best estimate of the cost of work completed in relation to the total cost of work to be performed under the contract. We recognize immediately any estimated losses on services or implementation projects for fixed amounts.

Maintenance. Revenues we derive from maintenance contracts primarily include telephone consulting, product updates and releases of new versions of products that the customer previously purchased, as well as error reporting and correction services. Typically, we enter into maintenance contracts for a separate fee, with initial contractual periods ranging from one to three years, with renewal for additional periods thereafter. Generally, we bill maintenance fees annually in advance and recognize the resulting revenues ratably over the term of the maintenance agreement. In situations where we bundle the maintenance fee with the license fee, we determine Vendor Specific Objective Evidence (“VSOE”) for maintenance based on stated renewal rates in the contract.

Deferred Revenues. Deferred revenues represent advance payments or billings for software licenses, services, and maintenance billed in advance of the time we recognize revenues.

Indirect Channel Revenues. We recognize revenues from sales we make through indirect channels only when the distributor makes a sale to an end-user. Revenues from indirect channels are recognized upon delivery of the software to the end-user assuming we meet all other conditions of SOP 97-2 and SOP 98-9.

E.        Net Earnings Per Common Share

Basic earnings per common share available to common shareholders is based on the weighted-average number of common shares outstanding. Diluted earnings 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 per common share for each period is the same as net earnings. The denominator is based on the following number of common shares:

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Item 1.            Financial Statements (continued)

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

For the three months ended January 31, 2003, we excluded options to purchase 416,348 shares of common stock, and for the nine months ended January 31, 2003, we excluded options to purchase 699,205 shares of common stock, from the computation of diluted earnings per share. For the three months ended January 31, 2002 we excluded options to purchase 735,222 shares of common stock from that computation, and for the nine months ended January 31, 2002 we excluded options to purchase 511,483 shares of common stock. We excluded these option share amounts because the exercise prices of those options were greater than the average market price of the common stock during the applicable period. As of January 31, 2003, we had a total of 786,194 options outstanding and as of January 31, 2002 we had a total of 767,722 options outstanding.

F.        Agreements with American Software, Inc. (“ASI”)

We have entered into certain contractual arrangements with ASI, as described below. Because ASI owns a majority of our shares, the terms of these agreements do not reflect arm’s length negotiation.

Tax Sharing Agreement—We compute a separate, stand-alone income tax provision and settle balances due to or from ASI on this basis. The Tax Sharing Agreement allocated to ASI all benefits derived from deferred tax assets as defined in the Tax Sharing Agreement (which include net operating loss and tax credit carryforwards) that arose prior to our October 1997 initial public offering ($5,768,000). Accordingly, we will not receive any benefit from the $5,768,000 of contributed gross deferred tax assets. In addition, the Tax Sharing Agreement allocates to us certain deferred tax liabilities that arose prior to the initial public offering (which gives rise to our net deferred tax liability of $2,882,000 at January 31, 2003). To the extent the tax computation produces a tax benefit for us, ASI is required to pay such amounts to us only if and when ASI realizes a reduction in income taxes payable with respect to the current tax period. At April 30, 2002, ASI had net operating loss carryforwards of approximately $19.0 million that ASI must utilize before we would receive payment for any currently generated tax benefits. Such net operating losses expire in varying amounts through 2022.

Services Agreement—We purchase or sell various services from or to ASI based upon various cost methodologies as described below:

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Item 1.            Financial Statements (continued)

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

Facilities Agreement—We lease various properties from ASI for specified square foot rates. The stated term of the agreement is for two years with automatic one year extensions; however, either party may terminate the agreement after a 90 day notice. ASI also allocates utilities, telephone and security expenses under this agreement based on our percentage of occupancy. The parties valued the services related to this agreement at $116,000 for the three months ended January 31, 2003, $134,000 for the three months ended January 31, 2002, $354,000 for the nine months ended January 31, 2003, and $384,000 for the nine months ended January 31, 2002.

Marketing License Agreement— Effective August 1, 2002, we entered into a Marketing License Agreement (the “Marketing License Agreement”) with American Software, USA (“USA”), a wholly-owned subsidiary of ASI, in which USA agreed to act as a nonexclusive marketing representative for licensing of our products. We pay USA 30% of net license fees collected by us for its services. This agreement replaced a similar agreement executed by the parties in 1997. It has a term of one year and may be extended by the agreement of both parties. We incurred no payment obligations under this agreement for the three months ended January 31, 2003. The parties valued the services related to this agreement at $84,000 for the three months ended January 31, 2002, $62,000 for the nine months ended January 31, 2003, and $109,000 for the nine months ended January 31, 2002.

Technology License Agreement—We have granted ASI a nonexclusive, nontransferable, worldwide right and license to use, execute, reproduce, display, modify and prepare derivatives of our Supply Chain Planning and Execution Solutions (which ASI had transferred to us) so that ASI may maintain and support end-users of the software products. The license is fully paid and royalty-free.

Stock Option Agreement—We have granted ASI an option to purchase that number of shares of our common stock that would enable ASI to maintain the necessary ownership percentage required to consolidate Logility in ASI’s consolidated Federal income tax return. The purchase price of the option is the average of the closing price on each of the five business days immediately preceding the date of payment.

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Item 1.            Financial Statements (continued)

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

G.       Lease Commitments

We occupy our principal office facilities under a facilities agreement with ASI dated August 1, 1997, that is cancelable upon 90-day notice by either party (see note “F”). Amounts allocated to the Company for rent expense for these facilities were $82,000 for the three months ended January 31, 2003, $85,000 for the three months ended January 31, 2002, $248,000 for the nine months ended January 31, 2003, and $254,000 for the nine months ended January 31, 2002. These amounts are included in the Facilities Agreement referenced above. In addition, we have various other operating facilities leases. Rent expense under these leases was $128,000 for the three months ended January 31, 2003, $86,000 for the three months ended January 31, 2002, $354,000 for the nine months ended January 31, 2003, and $359,000 for the nine months ended January 31, 2002.

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

FORWARD-LOOKING STATEMENTS

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

•          results of operations;

•          liquidity, cash flow and capital expenditures;

•          demand for and pricing of our products and services;

•          acquisition activities and the effect of completed acquisitions;

•          industry conditions and market conditions; and

•          general economic conditions.

Although we believe that the goals, plans, expectations, and prospects that our forward-looking statements reflect are reasonable in view of the information currently available to us, those statements are not guarantees of performance. There are many factors that could cause our actual results to differ materially from those anticipated by forward-looking statements made herein. These factors include, but are not limited to, continuing economic uncertainty, the timing and degree of business recovery, unpredictability and the irregular pattern of future revenues, competitive pressures, delays and other risks associated with new product development, the difficulty of predicting the effectiveness and duration of third-party marketing agreements, undetected software errors, and risks associated with market acceptance of our products and services. The terms “fiscal 2003” and “fiscal 2002” refer to our fiscal years ended April 30, 2003 and 2002, respectively.

OVERVIEW

We provide collaborative supply chain solutions to streamline and optimize the management, production and distribution of products between manufacturers, suppliers, distributors, retailers, carriers and other organizations and their respective trading partners. The supply chain refers to the complex network of relationships that organizations maintain with trading partners (customers, suppliers and carriers) to source,

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manufacture, and deliver products and services to the customer and includes demand chain, supply chain, logistics, warehouse management and business-to-business process management for collaborative relationships between customers, suppliers and carriers. Our solutions enable enterprises to build competitive advantages and increase profitability by significantly improving efficiencies, collaborating with suppliers and customers, more effectively responding to market demand and engaging in dynamic business relationships via the Internet.

Leveraging our supply chain management expertise, we have been an innovator in developing and deploying collaborative supply chain management solutions, with our first Internet-based collaborative planning solution implemented in 1996. We continue to invest and expand our e-Business offerings and innovative solutions, which support the Voluntary Interindustry Commerce Standards Association (“VICS”), collaborative planning, forecasting and replenishment (CPFR^®) standards, as well as other emerging collaborative supply chain management standards for transportation and distribution center management. In addition to enterprise supply chain optimization and collaboration, we designed our Logility Voyager Solutions suite and related services to power the emerging Internet trading exchanges and private marketplaces for collaborative planning and procurement of direct materials and collaborative transportation management. We market our solution worldwide, primarily to large enterprises that require comprehensive supply chain planning, warehouse management and logistics solutions. We make sales through a dedicated sales force and through relationships with third-party vendors (including American Software) and service providers.

We previously conducted our business and operations as three separate business units of American Software: a supply chain planning software group, a warehouse management software group, and a transportation management software group. In 1997, American Software transferred to us substantially all of its Supply Chain Planning division and its WarehousePRO software and substantially all associated operations (including research and development), assets and liabilities. Also in 1997, American Software’s wholly-owned subsidiary, Distribution Sciences, Inc., was merged into Logility, transferring its business, operations, assets and liabilities, including the Transportation Planning and Transportation Management software, to us.

We derive revenues primarily from three sources: software licenses, services, and maintenance. We base software license fees generally on the number of modules, servers, users and/or sites licensed. Services revenues consist primarily of fees from software implementation, training, consulting and customization services. Maintenance agreements typically are for a one- to three-year term and usually are entered into at the time of the initial product license.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have based this discussion and analysis of financial condition and results of operations upon our combined financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America. 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 revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to bad debts, 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 judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could differ from these estimates under different assumptions or conditions.

The critical accounting policies listed below affect significant judgments and estimates we use in preparing the combined financial statements.

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Revenue Recognition.   We recognize 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.” We recognize license revenues in connection with license agreements for standard proprietary and tailored software upon delivery of the software, provided we deem collection to be probable, the fee is fixed or determinable, there is evidence of an arrangement, and vendor-specific evidence exists to defer any revenue related to 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 under both time and materials and fixed fee 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 Emerging Issues Task Force Issue 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.”

Generally, our software products do not require significant modification or customization. Installation of the products is normally routine and is not essential to the functionality of the product. Our sales frequently include maintenance contracts and professional services with the sale of our software licenses. We have established vendor-specific objective evidence of fair value (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 we sell with the initial license, based on VSOE, which we typically derive from the renewal rate of the annual maintenance contract, and recognize the revenues ratably over the maintenance contract period. We recognize consulting and training service revenues, including those sold with license fees, as we perform the services based on their established VSOE. We determine the amount of revenue we allocate to the licenses sold with services or maintenance using the “residual method” of accounting. Under the residual method, we allocate the total value of the arrangement first to the undelivered elements based on their VSOE and allocate the remainder to license fees.

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

Valuation of Long-Lived and Intangible Assets.   In accordance with Financial Accounting Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) and Statement No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS No. 86”), we review the carrying value of intangible assets and other long-lived assets (asset group), including, but not limited to, capitalized computer software development costs, on a regular basis for the existence of facts or circumstances that may suggest impairment. Factors we consider important that could trigger an impairment review include:

•          significant under-performance relative to historical or projected future operating results;

•          significant negative industry or economic trends;

•          significant decline in our stock price for a sustained period;

•          significant decline in our technological value as compared to the market; and

•          our market capitalization relative to net book value.

If such circumstances exist, we evaluate the carrying value of long-lived assets (asset group) to determine if impairment exists based upon estimated undiscounted future cash flows over the remaining useful life of the

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assets and comparing that value to the carrying value of the assets. If the carrying value of the asset is greater than the estimated future cash flows, we write down the asset to the net realizable value for software or the estimated fair value for other long-lived and intangible assets. We determine the estimated fair value of the assets on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risks inherent in our current business model. In determining expected future cash flows, we group assets at the lowest level for which cash flows are identifiable and independent of cash flows from other asset groups. We estimate cash flows using appropriate and customary assumptions and projections.

Income taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. We measure deferred tax assets and liabilities using enacted statutory tax rates in effect in the year in which we expect the differences to reverse. We establish a deferred tax asset for the expected future benefit of net operating loss and credit carry-forwards. Under Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes,” we cannot recognize a deferred tax asset for the future benefit of our net operating losses, tax credits and temporary differences unless we can establish that it is “more likely than not” that we would realize the deferred tax asset. Due to our history of net losses, we have not recognized a tax asset and have recorded a full valuation allowance against our otherwise recognizable deferred tax asset, in accordance with SFAS No. 109. Future events could cause us to conclude that it is more likely than not that we will realize a portion of the deferred tax asset. If we reach such a conclusion, we would reduce the valuation allowance and recognize the deferred tax asset.

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COMPARISON OF RESULTS OF OPERATIONS

The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage changes in those items for the three months ended January 31, 2003 and 2002:

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The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage increases or decreases in those items for the nine months ended January 31, 2003 and 2002:

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2003 AND 2002:

REVENUES:

Our total revenues decreased 11% to approximately $6.4 million from $7.2 million for the comparable quarter a year ago. This decrease was due primarily to a decrease in services revenues, partially offset by an increase in license fee revenues. International revenues represented approximately 22% of total revenues in the quarter ended January 31, 2003, compared to approximately 12% a year ago. This increase was due primarily to one significant international license fee transaction in the current quarter. No single customer accounted for more than 10% of our total revenues in the quarter ended January 31, 2003.

LICENSES. License fee revenues increased 38% to approximately $2.3 million from $1.7 million for the same quarter a year ago primarily as a result of increased sales effectiveness of our direct sales channel. The direct sales channel provided approximately 88% of license fee revenues for the quarter ended January 31, 2003, compared to approximately 74% in the comparable quarter a year ago. This increase was due primarily to

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higher sales volume generated by the direct sales channel. For the quarter ended January 31, 2003, our margins after commissions on direct sales were approximately 89% and our margins after commissions on indirect sales were approximately 55%.

SERVICES AND OTHER. Services and other revenues decreased 52% to approximately $1.3 million from $2.8 million for the same quarter a year ago. This decrease was primarily a result of a decrease in software implementation services, which was primarily attributable to lower license fees in recent quarters.

MAINTENANCE. Maintenance revenues, at approximately $2.8 million, were unchanged from the same quarter a year ago. Maintenance revenues have a direct relationship to current and historic license fee revenues, since new licenses are the potential source of new maintenance customers.

GROSS MARGIN:

Total gross margin for the quarter ended January 31, 2003 was 64% of total revenues, compared to 57% a year ago. This increase was primarily due to increased gross margins on license fee revenues, and to a lesser extent increased gross margins on maintenance and services revenues. License fee gross margin increased to 52% from 42% a year ago, due to higher license fees combined with the relatively fixed level of cost of license fees. The gross margin on services revenues increased to 45% from 44% a year ago, due primarily to cost reduction efforts in recent quarters. Maintenance gross margins increased to 84% versus 80% for the prior year quarter, again due to cost containment efforts.

OPERATING EXPENSES:

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:

Gross product development costs decreased 7% in the quarter ended January 31, 2003 compared to a year ago, due to cost reduction efforts and the reallocation of some R&D resources to services and support activities. Capitalized development increased 14% from a year ago, and the rate of capitalized development as a percentage of gross product development costs increased to 51% versus 42% a year ago, primarily as a result of lower levels of gross development costs, and the shift of several projects from the research phase to the development phase during the quarter. Product development expenses, as a percentage of total revenues, decreased to 10% from 11% a year ago, due primarily to increased capitalized development, as well as lower gross product development costs.

SALES AND MARKETING. Sales and marketing expenses decreased 16% from the same period a year ago, due primarily to cost reduction efforts which resulted in lower headcount. As a percentage of total revenues, sales and marketing expenses were 27% for the quarter ended January 31, 2003, compared to 29% for the quarter ended January 31, 2002.

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GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 9% to approximately $898,000 from $824,000 a year ago, mainly as a result of increased professional services fees. For the three months ended January 31, 2003, we incurred a provision for doubtful accounts of $45,000, compared to $30,000 taken in the prior year period. For the three months ended January 31, 2003, the average number of total employees was approximately 124, compared to approximately 154 for the three months ended January 31, 2002.

OTHER INCOME:

Other income is comprised of earnings from the investment of our cash reserves. Our investments are short-term in nature, and all investments mature within one year. Investments consist of money market funds, U.S. Government Securities, A1/P1 rated commercial paper, and minimum A- rated corporate bonds. For the three months ended January 31, 2003, these investments generated an annualized yield of approximately 1.9%, compared to approximately 2.6% for the three months ended January 31, 2002.

INCOME TAXES:

We are included in the consolidated federal income tax return filed by American Software, Inc. However, we provide for income taxes as if we were filing a separate income tax return. For the quarter ended January 31, 2003, we did not record any income taxes as a result of cumulative net operating losses in prior years.

NINE MONTHS ENDED JANUARY 31, 2003 AND 2002:

REVENUES:

Our total revenues decreased 21% to approximately $17.7 million from $22.3 million for the comparable period a year ago. This decrease was due primarily to decreases in services revenues and license fees, and to a lesser extent a decrease in maintenance revenues. International revenues represented approximately 15% of total revenues in the nine months ended January 31, 2003, compared to 14% for the same period a year ago. No single customer accounted for more than 10% of our total revenues in the nine months ended January 31, 2003.

LICENSES. License fee revenues decreased 10% to approximately $5.4 million from $5.9 million for the same period a year ago due to slow general economic conditions. The direct sales channel provided approximately 87% of license fee revenues for the nine months ended January 31, 2003, compared to approximately 89% in the comparable period a year ago. For the nine months ended January 31, 2003, our margins after commissions on direct sales were approximately 90% and our margins after commissions on indirect sales were approximately 66%.

SERVICES AND OTHER. Services and other revenues decreased 48% to approximately $4.1 million from $7.9 million for the same period a year ago as a result of a decrease in software implementation services which was primarily attributable to lower license fees in recent quarters.

MAINTENANCE. Maintenance revenues decreased 3% to approximately $8.2 million from $8.4 million for the same period a year ago. Maintenance revenues have a direct relationship to current and historic license fee revenues, since new licenses are the potential source of new maintenance customers.

GROSS MARGIN:

Total gross margin for the nine months ended January 31, 2003 increased to 61% of total revenues, compared to

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57% a year ago. This increase was due primarily to increases in services and maintenance gross margins, partially offset by a decline in license fee gross margins. The gross margin on license fee revenues decreased to 46% from 51% a year ago, primarily due to lower license fees combined with the relatively fixed level of cost of license fees. Services gross margin increased to 36% from 34% a year ago, primarily due to cost reduction efforts. Maintenance gross margins increased slightly to 83% from 82% in the prior year period.

OPERATING EXPENSES:

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:

Gross product development costs decreased 6% in the nine months ended January 31, 2003 compared to a year ago, due to cost reduction efforts and the reallocation of some R&D resources to services and support activities. Capitalized development decreased 3% from a year ago, and the rate of capitalized development as a percentage of gross product development costs increased to 53% versus 52% a year ago. Product development expenses, as a percentage of total revenues, increased to 11% from 9% a year ago, due primarily to decreased total revenues.

SALES AND MARKETING. Sales and marketing expenses decreased 22% from the same period a year ago, due primarily to cost reduction efforts which resulted in lower headcount. As a percentage of total revenues, sales and marketing expenses were 32% for the nine months ended January 31, 2003, compared to 33% for the prior year period.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 2% to approximately $2.6 million from a year ago, mainly as a result of increased professional services fees, and an increase in the provision for doubtful accounts. For the nine months ended January 31, 2003, we incurred a provision for doubtful accounts of $135,000, compared to $64,500 for the prior year period. For the nine months ended January 31, 2003, the average number of employees was approximately 133, compared to approximately 159 for the same period in the prior year.

OTHER INCOME:

Other income is comprised of earnings from the investment of our cash reserves. Our investments are short-term in nature, and all investments mature within one year. Investments consist of money market funds, U.S. Government Securities, A1/P1 rated commercial paper, and minimum A- rated corporate bonds. For the nine months ended January 31, 2003, these investments generated an annualized yield of approximately 2.3%, compared to approximately 4.0% for the nine months ended January 31, 2002.

INCOME TAXES:

We are included in the consolidated federal income tax return filed by ASI. However, we provide for income

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taxes as if we were filing a separate income tax return. For the nine months ended January 31, 2003, we did not record any income taxes as a result of cumulative net operating losses in prior years.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

The following table shows information about our cash flows during the nine months ended January 31, 2003 and January 31, 2002. This table and the discussion that follows should be read in conjunction with our condensed combined statements of cash flows contained in “Item 1. Financial Statements” in Part I of this report.