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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 001-13609
SOFTWARE AG SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 54-1167173
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(State or other jurisdiction of
incorporation or organization) (I.R.S. employer identification no.)
11190 Sunrise Valley Drive
Reston, Virginia 20191
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(Address of principal executive offices)
Registrant's telephone number, including area code: (703) 860-5050
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: None
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 [_]
As of April 13, 1998, 29,531,391 shares of the Registrant's common stock
were outstanding.
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TABLE OF CONTENTS
ITEM PAGE
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P A R T I
1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1997 and March 31,1998............................. 3
Condensed Consolidated Statements of Operations for the three months ended March 31,
1997 and 1998............................................................................................. 4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
1997 and 1998............................................................................................. 5
Notes to Condensed Consolidated Financial Statements........................................................ 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9
P A R T II
5. Other Information............................................................................................. 12
6. Exhibits and Reports on Form 8-K.............................................................................. 12
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Dec. 31, Mar. 31,
1997 1998
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Assets (Unaudited)
Current:
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 50,429 $ 50,276
Accounts receivable:
Invoiced and currently due.......................................................... 40,212 27,816
Advanced billings on maintenance.................................................... 10,287 7,281
Unbilled services................................................................... 10,384 13,894
Installment......................................................................... 24,434 33,574
Other............................................................................... 2,858 5,466
Less: allowance for doubtful accounts............................................... (9,301) (9,383)
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Total accounts receivable........................................................ 78,874 78,648
Current portion of deferred income taxes............................................... 6,217 6,217
Prepaid expenses....................................................................... 1,371 2,679
Other current assets................................................................... 2,663 3,343
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Total current assets............................................................. 139,554 141,163
Cooperation agreement, net of accumulated amortization................................... 21,737 21,150
Installment accounts receivable, net of current portion.................................. 8,932 12,273
Property, equipment and leasehold improvements, net of accumulated depreciation
and amortization........................................................................ 10,077 10,415
Deferred income taxes.................................................................... 2,848 2,848
Goodwill, net of accumulated amortization................................................ 11,286 10,988
Other assets............................................................................. 1,692 763
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Total assets..................................................................... $ 196,126 $ 199,600
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Liabilities and Stockholders' Equity
Current:
Accounts payable.................................................................... $ 8,545 $ 8,419
Accrued payroll and employee benefits............................................... 10,170 7,234
Payable to SAG...................................................................... 10,050 8,591
Income taxes payable................................................................ 1,752 3,337
Other current liabilities........................................................... 4,274 5,219
Current portion of deferred revenues, net of deferred royalties..................... 42,711 42,934
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Total current liabilities........................................................ 77,502 75,734
Deferred revenues, net of deferred royalties............................................. 28,806 28,623
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Total liabilities................................................................. 106,308 104,357
Stockholders' equity..................................................................... 89,818 95,243
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Total liabilities and stockholders' equity........................................ $ 196,126 $ 199,600
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share dollar amounts)
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<CAPTION>
Predecessor Successor
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Three Months Three Months
Ended Ended
Mar. 31, Mar. 31,
1997 1998
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(Unaudited)
Revenues:
<S> <C> <C>
Software license fees................................................ $ 7,341 $ 21,649
Maintenance fees..................................................... 17,352 19,800
Professional services fees........................................... 9,948 14,414
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Total revenues.................................................... 34,641 55,863
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Cost of revenues:
Software license..................................................... 2,098 5,670
Maintenance.......................................................... 6,205 7,057
Professional services................................................ 9,211 11,501
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Total cost of revenues............................................ 17,514 24,228
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Gross profit........................................................... 17,127 31,635
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Operating expenses:
Software product development......................................... -- 755
Sales and marketing.................................................. 7,317 11,873
Administrative and general........................................... 8,500 10,805
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Total operating expenses.......................................... 15,817 23,433
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Income from operations................................................. 1,310 8,202
Other income and expense, net.......................................... 978 906
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Income before income taxes............................................. 2,288 9,108
Income tax provision................................................... 915 3,718
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Net income............................................................. $ 1,373 $ 5,390
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Net income per common share............................................ $ 0.06 $ 0.18
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Net income per common share-assuming dilution.......................... $ 0.05 $ 0.17
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Shares used in computing net income per common share:
Net income per common share.......................................... 24,338 29,517
Net income per common share-assuming dilution........................ 25,894 31,491
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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<CAPTION>
Predecessor Successor
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Three Months Three Months
Ended Ended
Mar. 31, Mar. 31,
1997 1998
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(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 1,373 $ 5,390
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 941 2,070
Gain on sales of property and equipment.............................. --- (22)
Deferred gain........................................................ (36) ---
Write-off of investment.............................................. --- 848
Compensation expense on options granted.............................. --- 194
Changes in operating accounts........................................ 8,148 (7,044)
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Net cash provided by operating activities.................... 10,426 1,436
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Cash flows from investing activities:
Additions to property, equipment and leasehold improvements............ (208) (1,523)
Proceeds from sales of property and equipment.......................... --- 22
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Net cash used in investing activities........................ (208) (1,501)
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Cash flows from financing activities:
Proceeds from stock options exercised.................................. --- 12
Adjustment to expenses relating to initial public offering............. --- (100)
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Net cash used in financing activities....................... --- (88)
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Net increase (decrease) in cash and cash equivalents..................... 10,218 (153)
Cash and cash equivalents, beginning..................................... 25,773 50,429
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Cash and cash equivalents, ending........................................ $ 35,991 $ 50,276
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by management, pursuant to the rules and regulations of the Securities
and Exchange Commission. 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 such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Software AG Systems, Inc. Annual Report on Form 10-K for the year ended December
31, 1997.
In the opinion of management, the accompanying balance sheets and related
statements of operations and cash flows include all adjustments (consisting only
of normal recurring items) necessary for their fair presentation in conformity
with generally accepted accounting principles. The results for the three months
ended March 31, 1998 are not necessarily indicative of the results expected for
the full year.
Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). As is more fully described in Note 3, on March 31, 1997, the
Company consummated a recapitalization agreement under which the Company
repurchased from SAG 24,750,000 shares of common stock, and certain senior
management of the Company and Thayer Equity Investors III, L.P. ("Thayer")
acquired approximately 89% of the then outstanding common stock of the Company
(the "Recapitalization"). The Company's results of operations for the three
months ended March 31, 1997 are based on operations which occurred prior to the
Recapitalization and are not comparable with the results of operations for the
three months ended March 31, 1998.
(2) ACCOUNTING POLICIES
Revenue Recognition
On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 focuses on when and in
what amounts revenue should be recognized for licensing, selling, leasing, or
otherwise marketing computer software. The adoption of SOP 97-2 did not have a
material impact on the Company's revenue recognition policies.
Software license revenues for an arrangement to deliver software that does
not require significant production, modification or customization of software is
recognized when there is an executed license agreement, the software and
authorization code have been delivered, the fee is fixed or determinable, and
collectibility is probable.
Maintenance revenues, which include unspecified when-and-if deliverable
software upgrades, user documentation, and technical support for software
products, are deferred and recognized on a straight-line basis over the term of
the maintenance agreement, generally one year.
Customer training revenues and revenues from time and material type
professional consulting and custom application contracts are recognized as the
services are provided and the work is performed. Revenues from long-term fixed
price professional consulting and custom application contracts are accounted for
under the percentage of completion method. When estimates of costs, on long-
term fixed price contracts, indicate a loss, such a loss is provided for
currently.
6
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SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Sales of enterprise license agreements, generally bundle a combination of
products, technical services and professional consulting services. In
accordance with SOP 97-2, these elements are unbundled for revenue recognition
purposes, and are accounted for according to their component parts using the
criteria described above.
Net Income per Common Share
The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share. Basic earnings per share is based on income
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is based on income
available to common stockholders divided by the sum of the weighted average
number of common shares outstanding and all potential common shares which are
dilutive. The following information is a reconciliation of the amounts used in
these calculations:
<TABLE>
<CAPTION>
Predecessor Successor
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Three Months Three Months
Ended Ended
Mar. 31, Mar. 31,
1997 1998
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(Unaudited)
(in thousands, except for per share dollar amounts)
<S> <C> <C>
Numerator:
Net income.................................................... $ 1,373 $ 5,390
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Denominator:
Basic:
Weighted average shares outstanding........................... 24,338 29,517
Effect of dilutive securities:
Stock options................................................. 1,556 1,974
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Diluted:
Weighted average shares outstanding-assuming dilution......... 25,894 31,491
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EPS:
Net income per common share................................... $ 0.06 $ 0.18
============= ==============
Net income per common share-assuming dilution................. $ 0.05 $ 0.17
============= ==============
</TABLE>
(3) RECAPITALIZATION OF THE COMPANY
On March 31, 1997, the Company consummated the Recapitalization under which
the Company repurchased from its former parent, SAG, 24,750,000 shares of its
common stock and sold 21,450,000 shares of its common stock to Thayer and
certain of the Company's senior managers. As a result of this change in control,
the acquisition by Thayer and such managers was accounted for as a purchase
business combination, and as such the fair value of the Company's assets and
liabilities was recorded as of April 1, 1997.
Prior to the consummation of the Recapitalization, the Company entered into
a perpetual and exclusive (unless otherwise terminated by the written agreement
of the parties) cooperation agreement ("Cooperation Agreement") with SAG that
terminated and superseded the license agreement dated January 1, 1995. As
consideration for the Cooperation Agreement, the Company paid SAG approximately
$22,600,000. Under the Cooperation Agreement, each of the Company and SAG are
required to pay the other royalties of 24% of net revenues from sales of
licenses of, and technical services on, each other's products for the initial 20
years of the perpetual term of the agreement. For calendar years 1997 through
2000, the Company is required to pay SAG minimum annual royalties of
$21,000,000, provided that SAG's worldwide product and technical services
revenues for each of those years are at
7
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SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
least equal to SAG's 1996 worldwide revenues. In the event of a decrease in
SAG's worldwide revenues, the minimum annual royalty requirement will be reduced
proportionately.
Pursuant to the Recapitalization, Thayer and certain of the Company's
senior managers acquired approximately 89% of the then outstanding common stock
of the Company for approximately $31,500,000. The determination of fair value
allocated to the identifiable assets and liabilities of the Company has been
made by management based on the nature of the assets and liabilities acquired,
and general economic factors. Based on this allocation, the fair value of the
Company's Cooperation Agreement has been recorded at $23,500,000, based on an
independent appraisal. The amortization period for the Cooperation Agreement is
ten years. The fair value of the Company's remaining assets and liabilities has
been presumed to be equal to the book value as of the date of the acquisition.
Based on allocation of the purchase price to the net assets and liabilities, an
excess of purchase price over net assets acquired (goodwill) of $6,402,000 was
recorded. Such goodwill is being amortized on a straight-line basis over ten
years. At March 31, 1998, accumulated amortization on the Cooperation Agreement
and the goodwill was $2,350,000 and $640,000, respectively.
(4) ACQUISITION
On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel and Associates, Inc.
("R.D. Nickel") by merging R.D. Nickel with and into Software AG Systems
(Canada) Inc., a wholly owned subsidiary of SAG Systems (Canada) Holdings Ltd.
(a 90% owned subsidiary of the Company and a 10% owned subsidiary of Software AG
Americas, Inc.) ("Software AG (Canada)"), with Software AG (Canada) as the
surviving entity. Software AG (Canada) is a software company that develops,
licenses and supports a family of application development products.
Additionally, R.D. Nickel served as the exclusive distributor of the Company's
products in Canada since 1973. The transaction was accounted for using the
purchase method of accounting for a business combination. The aggregate purchase
price of Cdn$14,000,000 (US$10,130,000) was funded through a cash payment of
Cdn$7,000,000 (US$5,065,000) and a note payable of Cdn$7,000,000 (US$5,065,000).
The note payable was paid in November 1997 with the proceeds from the IPO.
In connection with the transaction, the Company recorded a $6,051,000 non-
recurring charge against earnings for in-process research and development costs
in September 1997. The remaining excess purchase price of $4,960,000 represents
goodwill. The related amortization period for the goodwill is ten years. At
March 31, 1998, accumulated amortization on the goodwill was $250,000.
As of October 1, 1997, the operating results of R.D. Nickel have been
consolidated with the Company's operating results.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES
Total Revenues. The Company's revenues are currently derived from fees from
licensing the Company's software products, fees for providing maintenance to
customers which have licensed the Company's software products and fees from
professional services. The Company's total revenues were $55.9 million and $34.6
million for the three months ended March 31, 1998 and 1997, respectively,
representing an increase of 61%.
Software License Fees. The Company's software license fees are derived
primarily from the licensing of the Company's enterprise development and
enterprise enablement products. Software license fees were $21.6 million and
$7.3 million for the three months ended March 31, 1998 and 1997, respectively,
representing an increase of 195%. This increase was primarily attributable to
the reorganization of the direct sales force at the beginning of 1997. As a
result of this reorganization, the Company has experienced increased acceptance
of ELAs by its customer base. For the three months ended March 31, 1998, the
Company entered into 13 ELAs, compared to 4 ELAs for the three months ended
March 31, 1997.
Maintenance Fees. The Company's maintenance fees are derived primarily
from providing technical support to customers which have licensed the Company's
enterprise development and enterprise enablement products. Maintenance is
available in various levels of support and priced as a percentage of the
software license fees. The most commonly contracted level is priced at 18% of
the applicable license fee at the time of renewal. Software customers are not
required to renew their maintenance agreements and renewals can be expected only
if the customer continues to use the licensed product. Maintenance fees were
$19.8 million and $17.4 million for the three months ended March 31, 1998 and
1997, respectively, representing an increase of 14%. This increase was primarily
attributable to the effect of price increases, combined with an increase in the
maintenance base from the sale of new software licenses.
Professional Services Fees. The Company's professional service fees are
derived primarily from work performed by the Company on behalf of customers who
have licensed the Company's software products. Professional services fees were
$14.4 million and $9.9 million for the three months ended March 31, 1998 and
1997, respectively, representing an increase of 45%. This increase was primarily
attributable to the Company's year 2000 program, which began in 1997 and
contributed $4.6 million of professional services fees for the three months
ended March 31, 1998 compared to $0.8 million for the three months ended March
31, 1997.
COST OF REVENUES
Software License. Software license costs consist primarily of royalties
paid to third parties. Software license costs were $5.7 million and $2.1 million
for the three months ended March 31, 1998 and 1997, respectively, representing
26% and 29% of software license fees for each respective period. The increase in
dollar amount was primarily due to an increase in sales volume. The percentage
decrease was primarily due to a shift in product mix since royalty rates on
third-party products range from 24% to 40%.
Maintenance. Maintenance costs consist of royalties paid to third parties,
the costs of providing customer support and the distribution costs of new
releases. Maintenance costs were $7.1 million and $6.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 36% of
maintenance fees for each respective period. The increase in dollar amount was
primarily attributable to the increase in sales of software licenses.
Professional Services. Professional services costs consist of labor and
related overhead costs for the people performing the services. Such costs
include costs for project management, quality control and project review.
9
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Professional services costs were $11.5 million and $9.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 80% and 93% of
professional services fees for each respective period. The improvement in margin
was primarily attributable to improved performance on fixed price contracts
combined with improved utilization of resources.
OPERATING EXPENSES
Software Product Development. Software product development expenses
include all labor and overhead costs related to the development of software
products owned by the Company. Software product development costs were $0.8
million for the three months ended March 31, 1998 representing 3% of software
license fees. There were no software product development expenses for the three
months ended March 31, 1997. Prior to the Recapitalization, the Company's
ability to invest in software product development was constrained. The Company
expects software product development expenses to increase in the future as a
percentage of software license fees.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, marketing programs, public relations,
trade shows, seminars, advertising and related communications and associated
overhead costs. Sales and marketing expenses were $11.9 million and $7.3
million for the three months ended 1998 and 1997, respectively, representing 21%
of total revenues for both respective periods. The increase in dollar amount
was primarily due to several new marketing programs implemented in 1998.
Administrative and General. Administrative and general expenses include
employee salaries and benefits for administration, executive, finance, legal,
human resources, data center, distribution and internal systems personnel and
associated overhead costs, as well as bad debt, accounting and legal expenses.
Administrative and general expenses were $10.8 million and $8.5 million for the
three months ended March 31, 1998 and 1997, respectively, representing 19% and
25% of total revenues for each respective period. The increased dollar amount
was primarily attributable to increases in personnel related expenses and
infrastructure required to support an independent company, amortization expenses
relating to the goodwill resulting from the Recapitalization on March 31, 1997
and the R.D. Nickel acquisition on September 1997, as well as amortization of
the Cooperation Agreement and write-off of certain short-term investments.
OTHER
Other Income and Expense, Net. Other income and expense, net, consists
primarily of interest earned on cash, cash equivalents, short term investments
and long term customer contracts carried by the Company, and miscellaneous
income, offset in part by interest expense associated with equipment financing.
Interest and investment income net of expenses, was $0.9 million and $1.0
million for the three months ended March 31, 1998 and 1997, respectively. This
slight decrease was primarily attributable to the interest income recorded in
1997 on $30.0 million in loans made to SAG which was offset against payables due
SAG in March 1997 prior to the Recapitalization. This decrease was offset by
the increase in the interest income from investments in 1998 compared to 1997.
Income Tax Provision. The income tax provision was $3.7 million and $0.9
million for the three months ended March 31, 1998 and 1997, respectively,
resulting in effective tax rates of 40.8% and 40.0%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since 1988, when the Company became a wholly owned subsidiary of SAG, the
Company has financed its operations principally through cash flow from operating
activities. In order to meet its short term cash needs and to pay dividends to
SAG, the Company began to periodically sell long term customer receivable
contracts. Sales of long term customer receivable contracts increased in
subsequent years in order to meet SAG's directives and in connection with the
Recapitalization. Net cash provided by operating activities was $1.4 million
and $1.5 million (excluding $8.9 million of proceeds from the sales of accounts
receivable) for the three months ended March 31, 1998 and 1997, respectively.
10
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Investing activities used net cash of $1.5 million and $0.2 million for
the three months ended March 31, 1998 and 1997, respectively, primarily to fund
capital expenditures needed to support expansion of the Company's business.
Financing activities used net cash of $0.1 million for the three months
ended March 31, 1998, primarily due to additional payments made for costs
incurred in connection with the initial public offering. There were no financing
activities for the three months ended March 31, 1997.
The Company has no long term debt, and as of March 31, 1998 and December
31, 1997, had $50.3 million and $50.4 million in cash and cash equivalents,
respectively. The Company currently has relationships with two third parties
whereby the Company may sell long term receivable contracts. These transactions
are treated as sales by the Company as the economic interest in the contract is
transferred to the buyer. As of March 31, 1998 and December 31, 1997, the
Company remained contingently liable under the recourse provisions associated
with these sales in the amount of $42.8 Million and $47.9 Million, respectively.
The Company's international distributors report to and pay the Company in
U.S. dollars. In addition, royalties reported and paid by the Company to SAG
under the Cooperation Agreement are in U.S. dollars. The Company's Mexican
operations commenced in 1996 and represented less than 3% of total revenues
since that time. With the acquisition of R.D. Nickel, the Company began direct
sales in Canada effective October 1, 1997. Revenues from this source were
approximately 7% of total revenues since the acquisition. The Company,
therefore, has not to date engaged in foreign currency hedging transactions. The
Company may enter into hedging transactions in the future.
The Company traditionally leases all major equipment, and has no investment
in inventory or facilities other than leasehold improvements.
The Company believes that its existing cash balances, funds generated from
operations and funds received from the sale of receivables, if any, will be
sufficient to finance the Company's operations for at least the next twelve
months. Although operating activities may provide cash in certain periods, to
the extent the Company grows in the future, its operating and investing
activities may use such cash. There can be no assurances that any necessary
additional financing will be available to the Company on commercially reasonable
terms. The Company had no material capital commitments or planned expenditures
as of March 31, 1998.
SAFE HARBOR PROVISION FOR FORWARD-LOOKING STATEMENTS
The statements contained in this report include forward-looking statements
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on the Company's
current knowledge, beliefs, expectations and specific assumptions with respect
to future business decisions. Accordingly, the statements are subject to
significant risks, contingencies and uncertainties that could cause actual
operating results, performance or business prospects to differ materially from
those expressed in, or implied by, these statements. These risks, contingencies
and uncertainties include, but are not limited to, significant quarterly and
other fluctuations in revenues and results of operations; reliance on Software
AG, Darmstadt, Germany for development and timely delivery of products; reliance
on acquisitions and the timely development, production, marketing and delivery
of new products and services; increased demand for year 2000 products and
services: risks associated with conducting a professional services business;
reliance on the mainframe computing environment and demand for the Company's
products; changes in the Company's product and service mix and product and
service pricing; interoperability of the Company's products with leading
software application products; risks of protecting intellectual property rights
and litigation; dependence on third-party technology; risks associated with
international sales, distributors and operations; dependence on government
contracts; control of the company by affiliates; the Company's ability to
implement its acquisition strategy, successfully integrate any acquired
products, services and businesses, adjust to changes in technology, customer
preferences, enhanced competition and new competitors in software and
professional services markets, maintain and enhance its relationships with
vendors, and attract and retain key employees; general economic and business
conditions; and other risks detailed from time to time in the Company's
Securities and Exchange Commission reports.
11
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PART II
ITEM 5. OTHER INFORMATION
Effective April 10, 1998, James H. Daly, previously the Vice President,
General Counsel and Secretary of the Company, is no longer with the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings per Share
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 21, 1998 to
report the consolidation of the operations and professional services segments of
Software AG Americas, Inc. ("SAGA"), a wholly owned subsidiary of the Company,
into one unit reporting to Derek Brigden who previously headed operations. The
professional services function previously reported to Thomas Gorley. Effective
January 12, 1998, Mr. Gorley is no longer with SAGA.
12
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOFTWARE AG SYSTEMS, INC.
BY: /s/ Harry K. McCreery
---------------------
Harry K. McCreery
Date: April 21, 1998 Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Officer)
13
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EXHIBIT 11
Software AG Systems, Inc.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Predecessor Successor
------------- ------------
Three months Three months
ended ended
Mar. 31, Mar. 31,
1997 1998
------------- ------------
(in thousands, except for per
share dollar amounts)
<S> <C> <C>
Weighted average common shares outstanding............................ 24,338 29,517
Effect of dilutive securities......................................... 1,556 1,974
-------------- -------------
Weighted average common shares outstanding - assuming dilution........ 25,894 31,491
============== =============
Calculation of net income per share:
Net income.......................................................... $ 1,373 $ 5,390
-------------- -------------
Net income per share................................................ $ 0.06 $ 0.18
-------------- -------------
Net income per share - assuming dilution............................ $ 0.05 $ 0.17
============== =============
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The companies listed below are directly or indirectly owned by Software AG
Systems, Inc. and are included in its consolidated financial statements.
Software AG Americas, Inc. and Systems Software I, Inc. are wholly owned
subsidiaries of Software AG Systems, Inc. Argenta, Inc., Insight Consulting,
Inc., Software AG Insurance Solutions, Inc., Software AG Professional Services,
Inc., Software A.G. Venezolana, C.A. and Software AG FSC, Inc. are wholly owned
subsidiaries of Software AG Americas, Inc. Software AG Systems, Inc. and
Software AG Americas, Inc. jointly own all of the issued and outstanding stock
of SAG Systems (Canada) Holdings Ltd. and Software AG Americas, Latin America
Operations S.A. de C.V. Software AG Systems (Canada) Inc. is a wholly owned
subsidiary of SAG Systems (Canada) Holdings Ltd. Software AG of Canada Inc. is a
wholly owned subsidiary of Software AG Systems (Canada) Inc.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
NAME JURISDICTION OF INCORPORATION
---------------------------------------------------------------------------
<S> <C>
Software AG Americas, Inc. Commonwealth of Virginia
---------------------------------------------------------------------------
Systems Software I, Inc. State of Delaware
---------------------------------------------------------------------------
Argenta, Inc. Commonwealth of Virginia
---------------------------------------------------------------------------
Insight Consulting, Inc. Commonwealth of Virginia
---------------------------------------------------------------------------
Software AG Insurance Solutions, Inc. Commonwealth of Virginia
---------------------------------------------------------------------------
Software AG Professional Commonwealth of Virginia
Services, Inc.
---------------------------------------------------------------------------
Software AG Americas, Latin America Mexico
Operations S.A.de C.V.
---------------------------------------------------------------------------
Software A.G. Venezolana, C.A. Venezuela
---------------------------------------------------------------------------
SAG Systems (Canada) Canada
Holdings Ltd.
---------------------------------------------------------------------------
Software AG Systems (Canada) Inc. Canada
---------------------------------------------------------------------------
Software AG of Canada Inc. Canada
---------------------------------------------------------------------------
Software AG FSC, Inc. Virgin Islands
---------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 50,276
<SECURITIES> 0
<RECEIVABLES> 88,031
<ALLOWANCES> 9,383
<INVENTORY> 0
<CURRENT-ASSETS> 141,163
<PP&E> 41,379
<DEPRECIATION> 30,964
<TOTAL-ASSETS> 199,600
<CURRENT-LIABILITIES> 75,734
<BONDS> 0
0
0
<COMMON> 327
<OTHER-SE> 94,916
<TOTAL-LIABILITY-AND-EQUITY> 199,600
<SALES> 55,863
<TOTAL-REVENUES> 55,863
<CGS> 24,228
<TOTAL-COSTS> 24,228
<OTHER-EXPENSES> 23,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,108
<INCOME-TAX> 3,718
<INCOME-CONTINUING> 5,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,390
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
