<PAGE>
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 JUNE 30, 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
-------- ----------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
11190 Sunrise Valley Drive
Reston, Virginia 20191
-----------------------
(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
------------------- --------------------
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 July 24, 1998, 30,055,109 shares of the Registrant's common stock were
outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
P A R T I
1. Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998...................... 3
Condensed Consolidated Statements of Operations for the three and six months ended June
30, 1997 and 1998.................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
1997 and 1998........................................................................................ 5
Notes to Condensed Consolidated Financial Statements................................................. 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 10
</TABLE>
<TABLE>
<CAPTION>
P A R T II
<S> <C> <C>
4. Submission of Matters to a Vote of Security Holders.................................................. 15
6. Exhibits and Reports on Form 8-K..................................................................... 15
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Dec. 31, June 30,
1997 1998
-------- --------
Assets (Unaudited)
<S> <C> <C>
Current:
Cash and cash equivalents.................................................................. $ 50,429 $ 55,158
Accounts receivable:
Invoiced and currently due.............................................................. 40,212 42,880
Advanced billings on maintenance........................................................ 10,287 12,857
Unbilled services....................................................................... 10,384 13,341
Installment............................................................................. 24,434 29,250
Other................................................................................... 2,858 804
Less: allowance for doubtful accounts................................................... (9,301) (8,719)
-------- --------
Total accounts receivable............................................................ 78,874 90,413
Current portion of deferred income taxes................................................... 6,217 6,217
Income taxes receivable.................................................................... --- 2,895
Prepaid expenses........................................................................... 1,371 2,398
Other current assets....................................................................... 2,663 2,510
-------- --------
Total current assets................................................................. 139,554 159,591
Cooperation agreement, net of accumulated amortization ........................................ 21,737 20,562
Installment accounts receivable, net of current portion........................................ 8,932 10,692
Property, equipment and leasehold improvements, net of accumulated depreciation
and amortization ........................................................................... 10,077 9,108
Goodwill, net of accumulated amortization...................................................... 11,286 10,690
Deferred income taxes.......................................................................... 2,848 2,848
Other assets................................................................................... 1,692 766
-------- --------
Total assets......................................................................... $196,126 $214,257
======== ========
Liabilities and Stockholders' Equity
Current:
Accounts payable........................................................................... $ 8,545 $ 6,512
Accrued payroll and employee benefits...................................................... 10,170 8,889
Payable to SAG............................................................................. 10,050 9,683
Income taxes payable....................................................................... 1,752 ---
Other current liabilities.................................................................. 4,274 5,262
Current portion of deferred revenues, net of deferred royalties........................... 42,711 45,970
-------- --------
Total current liabilities........................................................... 77,502 76,316
Deferred revenues, net of deferred royalties................................................... 28,806 30,647
-------- --------
Total liabilities................................................................... 106,308 106,963
Stockholders' equity........................................................................... 89,818 107,294
-------- --------
Total liabilities and stockholders' equity.......................................... $196,126 $214,257
======== ========
</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)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Successor
----------- ------------------------------------------
Three Three Three Six
months months months months
ended ended ended ended
Mar. 31, June 30, June 30, June 30,
1997 1997 1998 1998
----------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software license fees................................. $ 7,341 | $14,254 $24,578 $ 46,227
Maintenance fees...................................... 17,352 | 18,394 20,496 40,296
Professional services fees............................ 9,948 | 10,299 15,278 29,692
------- | ------- ------- --------
Total revenues................................... 34,641 | 42,947 60,352 116,215
------- | ------- ------- --------
Cost of revenues: |
Software license...................................... 2,098 | 4,074 5,055 10,725
Maintenance........................................... 6,205 | 6,577 7,039 14,096
Professional services................................. 9,211 | 9,451 12,047 23,548
------- | ------- ------- --------
Total cost of revenues........................... 17,514 | 20,102 24,141 48,369
------- | ------- ------- --------
Gross profit.............................................. 17,127 | 22,845 36,211 67,846
------- | ------- ------- --------
Operating expenses: |
Software product development.......................... --- | 283 1,146 1,901
Sales and marketing................................... 7,317 | 11,477 13,124 24,997
Administrative and general............................ 8,500 | 8,932 12,521 23,326
------- | ------- -------- --------
Total operating expenses......................... 15,817 | 20,692 26,791 50,224
------- | ------- ------- --------
Income from operations..................................... 1,310 | 2,153 9,420 17,622
Other income and expense, net......................... 978 | 1,597 953 1,859
------- | ------- ------- --------
Income before income taxes................................. 2,288 | 3,750 10,373 19,481
Income tax provision.................................. 915 | 1,599 4,228 7,946
------- | ------- ------- --------
Net income................................................. $ 1,373 | $ 2,151 $6,145 $ 11,535
======= | ======= ====== ========
|
Net income per common share................................ $ 0.06 | $ 0.09 $ 0.21 $ 0.39
======= | ======= ====== ========
|
Net income per common share-assuming dilution............ $ 0.05 | $ 0.08 $ 0.19 $ 0.36
======= | ======= ====== ========
|
Shares used in computing net income per common |
share: |
Net income per common share.............................. 24,338 | 24,338 29,764 29,641
Net income per common share-assuming dilution............ 25,894 | 25,894 31,976 31,791
</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)
z (Unaudited)
<TABLE>
<CAPTION>
Predecessor Successor
----------- --------------------------
Three Three Six
months months months
ended ended ended
Mar. 31, June 30, June 30,
1997 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 1,373 | $ 2,151 $ 11,535
Adjustments to reconcile net income to net cash provided by |
(used for) operating activities: |
Depreciation and amortization......................................... 941 | 1,670 4,008
Loss on disposals of property and equipment........................... --- | --- 347
Deferred gain......................................................... (36) | --- ---
Net proceeds from sales of accounts receivable........................ 8,894 | 6,516 18,119
Write-off of investment............................................... --- | --- 848
Compensation expense on options granted............................... --- | --- 388
Changes in operating accounts......................................... (746) | (11,090) (29,914)
------- | ------- -------
Net cash provided by (used for) operating activities......... 10,426 | (753) 5,331
------- | ------- -------
|
Cash flows from investing activities: |
Additions to property, equipment and leasehold improvements........... (208) | (1,791) (1,637)
Proceeds from sales of property and equipment......................... --- | --- 22
Purchase of Cooperation Agreement..................................... --- | (22,612) ---
------- | -------- -------
Net cash used in investing activities........................ (208) | (24,403) (1,615)
------- | -------- -------
|
Cash flows from financing activities: |
Repurchase of common stock............................................ --- | (33,920) ---
Issuance of common stock.................................................. --- | 31,525 ---
Proceeds from stock options exercised..................................... --- | --- 1,157
Expenses relating to public offerings..................................... --- | --- (144)
------- | -------- --------
Net cash provided by (used for) financing activities......... --- | (2,395) 1,013
------- | -------- -------
Net increase (decrease) in cash and cash equivalents...................... 10,218 | (27,551) 4,729
Cash and cash equivalents, beginning...................................... 25,773 | 35,991 50,429
------- | -------- -------
Cash and cash equivalents, ending......................................... $35,991 | $ 8,440 $55,158
======= | ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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 and
six month periods ended June 30, 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 its 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. Therefore, the results of operations for the six months ended
June 30, 1997 are not comparative with the results of operations for the six
months ended June 30, 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, where applicable, 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.
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.
6
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SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
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
----------- ---------------------------------------
Three Three Three Six
months months months months
ended ended ended ended
Mar. 31, June 30, June 30, June 30,
1997 1997 1998 1998
-------- -------- -------- --------
(In thousands, except for per share dollar amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net income.............................................. $ 1,373 | $ 2,151 $ 6,145 $11,535
======= | ======= ======= =======
Denominator: |
Basic: |
Weighted average shares outstanding.................... 24,338 | 24,338 29,764 29,641
Effect of dilutive securities: |
Stock options............................................ 1,556 | 1,556 2,212 2,150
------- | ------- ------- -------
Diluted: |
Weighted average shares outstanding- |
assuming dilution........................................ 25,894 | 25,894 31,976 31,791
======= | ======= ======= =======
EPS: |
Net income per common share............................ $ 0.06 | $ 0.09 $ 0.21 $ 0.39
======= | ======= ======= =======
Net income per common share- |
assuming dilution................................... $ 0.05 | $ 0.08 $ 0.19 $ 0.36
======= | ======= ======= =======
</TABLE>
Reclassifications
Certain amounts in 1997 have been reclassified to conform to the 1998
presentation.
(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.
7
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
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 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 June 30, 1998, accumulated amortization on the Cooperation Agreement
and the goodwill was $2,938,000 and $800,000, 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 Company's
initial public offering consummated in November 1997.
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
June 30, 1998, accumulated amortization on the goodwill was $372,000.
As of October 1, 1997, the operating results of R.D. Nickel have been
consolidated with the Company's operating results.
8
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(5) NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The SOP requires that certain costs related to the development
or purchase of internal-use software be capitalized and amortized over the
estimated useful life of the software. The SOP also requires that costs related
to the preliminary project stage and the post-implementation/operations stage
(as defined in SOP 98-1) in an internal-use computer software development
project be expensed as incurred. SOP 98-1 is effective for financial statements
issued for fiscal years beginning after December 15, 1998. The Company does not
expect the adoption of this standard to have an impact on the Company's
financial statements.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 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 $116.2 million and
$77.6 million for the six months ended June 30, 1998 and 1997, respectively,
representing an increase of 50%.
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 $46.2 million and
$21.6 million for the six months ended June 30, 1998 and 1997, respectively,
representing an increase of 114%. 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 volume and
acceptance of Enterprise License Agreements ("ELA") by its customer base. For
the six months ended June 30, 1998, the Company entered into 27 ELAs with a
total product value of $26.9 million, compared to 15 ELAs with a total product
value of $8.5 million for the six months ended June 30, 1997.
Maintenance Fees. The Company's maintenance fees are derived primarily from
providing technical support to customers that 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
$40.3 million and $35.7 million for the six months ended June 30, 1998 and 1997,
respectively, representing an increase of 13%. This increase was primarily
attributable to an expansion of the installed base due to strong software
license sales combined with incremental revenue as the result of the R.D. Nickel
acquisition completed in September 1997.
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
$29.7 million and $20.2 million for the six months ended June 30, 1998 and 1997,
respectively, representing an increase of 47%. This increase was primarily
attributable to the increases in the revenue generated from the Company's year
2000 and traditional professional services compared to the prior year.
COST OF REVENUES
Software License. Software license costs consist primarily of royalties paid
to third parties. Software license costs were $10.7 million and $6.2 million for
the six months ended June 30, 1998 and 1997, respectively, representing 23% 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 attributable to a shift in product mix since royalty rates on third-party
products range from 24% to 40% and an increase in the sale of the Company
developed products.
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 $14.1 million and $12.8 million for the six
months ended June 30, 1998 and 1997, respectively, representing 35% and 36% of
maintenance fees for each respective period. The increase in dollar amount was
primarily attributable to the increase in sales of software licenses and related
maintenance.
10
<PAGE>
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.
Professional services costs were $23.5 million and $18.7 million for the six
months ended June 30, 1998 and 1997, respectively, representing 79% and 92% 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 $1.9 million and
$0.3 million for the six months ended June 30, 1998 and 1997 representing 4% and
1% of software license fees for each respective period. Prior to the
Recapitalization in March 1997, the Company's ability to invest in software
product development was constrained. However, since the Recapitalization, the
Company has begun building its internal product development group. 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 $25.0 million and $18.8
million for the six months ended June 30, 1998 and 1997, respectively,
representing 22% and 24% of total revenues for each respective period. The
increase in dollar amount was primarily due to several new marketing programs
implemented in 1998 combined with the increased commissions associated with
higher revenues compared to the prior year.
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 $23.3 million and $17.4 million for the
six months ended June 30, 1998 and 1997, respectively, representing 20% and 22%
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 and the Cooperation Agreement resulting from the
Recapitalization on March 31, 1997 and the R.D. Nickel acquisition completed in
September 1997.
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 other miscellaneous
income and expenses. Other income and expenses, net, was $1.9 million and $2.6
million for the six months ended June 30, 1998 and 1997, respectively. This
decrease was 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 and a refund received from one of the
Company's vendors in 1997. The decrease in other income and expenses, net, was
offset by the increase in the interest income from investments in 1998 compared
to 1997.
Income Tax Provision. The income tax provision was $7.9 million and $2.5
million for the six months ended June 30, 1998 and 1997, respectively, resulting
in effective tax rates of 40.8% and 41.6%, respectively.
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES
Total Revenues. The Company's total revenues were $60.4 million and $42.9
million for the three months ended June 30, 1998 and 1997, respectively,
representing an increase of 41%.
11
<PAGE>
Software License Fees. Software license fees were $24.6 million and $14.3
million for the three months ended June 30, 1998 and 1997, respectively,
representing an increase of 72%. This increase was primarily attributable to
the increased acceptance of ELAs by its customer base as a result of the
reorganization of the direct sales force at the beginning of 1997. For the
three months ended June 30, 1998, the Company entered into 14 ELAs with a total
product value of $14.2 million, compared to 11 ELAs with a total product value
of $6.6 million for the three months ended June 30, 1997.
Maintenance Fees. Maintenance fees were $20.5 million and $18.4 million for
the three months ended June 30, 1998 and 1997, respectively, representing an
increase of 11%. This increase was primarily attributable to an increase in the
maintenance base from the sale of new software licenses.
Professional Services Fees. Professional services fees were $15.3 million
and $10.3 million for the three months ended June 30, 1998 and 1997,
respectively, representing an increase of 48%. This increase was primarily
attributable to the increases in the revenue generated from the Company's year
2000 and traditional professional services in the current year.
COST OF REVENUES
Software License. Software license costs were $5.1 million and $4.1 million
for the three months ended June 30, 1998 and 1997, respectively, representing
21% 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 attributable to a shift in product mix since royalty
rates on third-party products range from 24% to 40% and an increase in the sale
of the Company developed products.
Maintenance. Maintenance costs were $7.0 million and $6.6 million for the
three months ended June 30, 1998 and 1997, respectively, representing 34% and
36% of maintenance fees for each respective period. The increase in dollar
amount was primarily attributable to the increase in sales of software licenses
and related maintenance.
Professional Services. Professional services costs were $12.0 million and
$9.5 million for the three months ended June 30, 1998 and 1997, respectively,
representing 79% and 92% 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 costs were $1.1
million and $0.3 million for the three months ended June 30, 1998 and 1997,
respectively, representing 5% and 2% of software license fees for each
respective period. Prior to the Recapitalization in March 1997, the Company's
ability to invest in software product development was constrained. However,
since the Recapitalization, the Company has begun building its internal product
development group. 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 were $13.1 million and
$11.5 million for the three months ended June 30, 1998 and 1997, respectively,
representing 22% and 27%, of total revenues for each respective period. The
increase in dollar amount was primarily due to several new marketing programs
implemented in 1998 combined with the increased commissions associated with
higher revenues compared to the prior period. The decrease in percentage was
primarily a result of the increase in sales compared to the prior period.
Administrative and General. Administrative and general expenses were $12.5
million and $8.9 million for the three months ended June 30, 1998 and 1997,
respectively, representing 21% of total revenues for both respective periods.
The increased dollar amount was primarily attributable to increases in personnel
related expenses and
12
<PAGE>
infrastructure required to support an independent company and amortization
expenses relating to the goodwill resulting and the R.D. Nickel acquisition
completed in September 1997.
OTHER
Other Income and Expense, Net. Interest and investment income, net of
expenses, was $1.0 million and $1.6 million for the three months ended June 30,
1998 and 1997, respectively. This decrease was primarily attributable to a
refund received from one of the Company's vendors in the prior period. 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 $4.2 million and $1.6
million for the three months ended June 30, 1998 and 1997, respectively,
resulting in effective tax rates of 40.8% and 42.6%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations principally through cash flows from
operating activities. However, the Company periodically sells long term
customer receivable contracts in order to meet its short term cash needs. Sales
of long term customer receivable contracts increased in subsequent years in
order to meet SAG's directives prior to the Recapitalization, in connection with
the Recapitalization and to fund the acquisition of R.D. Nickel. Net cash
provided by operating activities was $5.3 million and $9.7 million for the six
months ended June 30, 1998 and 1997, respectively. This decrease is primarily
due to the increase in accounts receivable as a result of increased revenue
compared to the prior year.
Investing activities used net cash of $1.6 million and $24.6 million for the
six months ended June 30, 1998 and 1997, respectively, primarily to purchase the
Cooperation Agreement from SAG and to fund capital expenditures needed to
support expansion of the Company's business.
Financing activities provided net cash of $1.0 million for the six months
ended June 30, 1998 primarily from the proceeds received from stock options
exercised. Financing activities used net cash of $2.4 million for the six
months ended June 30, 1997 primarily to fund the Recapitalization.
The Company has no long term debt, and as of June 30, 1998 and December 31,
1997, had $55.2 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 June 30, 1998 and December 31, 1997, the
Company remained contingently liable under the recourse provisions associated
with these sales in the amount of $51.6 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 approximately 2% 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 3% 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 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. To the extent sufficient cash is not available from operations, the
Company may need additional financing. There can be no assurances that any
necessary additional financing will
13
<PAGE>
be available to the Company on commercially reasonable terms. The Company had no
material capital commitments or planned expenditures as of June 30, 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.
14
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 18, 1998
(the "Meeting"). Three proposals were presented for a vote at the Meeting:
Proposal 1 - the election of two directors, Daniel F. Gillis and Dr. Philip S.
Dauber, each to serve as a director of the Company for a three-year term
expiring at the annual meeting of stockholders to be held in 2001 and until the
election and qualification of his successor; Proposal 2 - the approval of the
Company's Employee Stock Purchase Plan; and Proposal 3 - the ratification of the
appointment of KPMG Peat Marwick LLP as the Company's independent public
accountants for fiscal year 1998. All of the above proposals were approved as
follows:
<TABLE>
<CAPTION>
Exception/ Withheld/ Broker
Matter For Abstain Against Non-votes Total
- ----------------------- --------------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Proposal 1:
Dr. Philip S. Dauber 28,026,127 --- 63,240 --- 28,089,367
Daniel F. Gillis 27,943,277 --- 146,090 --- 28,089,367
Proposal 2 26,732,171 1,675 130,375 1,225,146 28,089,367
Proposal 3 28,083,157 2,575 3,635 --- 28,089,367
</TABLE>
The terms of Dr. Erwin Koenigs, Edward E. Lucente, Carl J. Rickertsen and Dr.
Paul G. Stern as directors of the Company continued after the Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 18, 1998 to report
the appointment of Katherine E. Butler to the offices of Vice President, General
Counsel and Secretary of the Company.
15
<PAGE>
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: August 12, 1998 Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Officer)
16
<PAGE>
EXHIBIT 11
Software AG Systems, Inc.
Computation of Earnings Per Share
(In thousands, except for per share dollar amounts)
(Unaudited)
<TABLE>
<CAPTION>
Predecessor Successor
------------ ---------------------------------------------
Three months Three months Three months Six months
ended ended ended ended
Mar. 31, June 30, June 30, June 30,
1997 1997 1998 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding..... 24,338 | 24,338 29,764 29,641
Effect of dilutive securities.................. 1,556 | 1,556 2,212 2,150
----------- | ----------- ----------- -----------
Weighted average common shares outstanding - |
assuming dilution............................. 25,894 | 25,894 31,976 31,791
=========== | =========== =========== ===========
|
Calculation of net income per share: |
Net income..................................... $ 1,373 | $ 2,151 $ 6,145 $ 11,535
=========== | =========== =========== ===========
Net income per share........................... $ 0.06 | $ 0.09 $ 0.21 $ 0.39
=========== | =========== =========== ===========
Net income per share - assuming dilution........ $ 0.05 | $ 0.08 $ 0.19 $ 0.36
=========== | =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 55,158
<SECURITIES> 0
<RECEIVABLES> 99,132
<ALLOWANCES> 8,719
<INVENTORY> 0
<CURRENT-ASSETS> 159,591
<PP&E> 33,567
<DEPRECIATION> 24,459
<TOTAL-ASSETS> 214,257
<CURRENT-LIABILITIES> 76,316
<BONDS> 0
0
0
<COMMON> 301
<OTHER-SE> 106,993
<TOTAL-LIABILITY-AND-EQUITY> 214,257
<SALES> 116,215
<TOTAL-REVENUES> 116,215
<CGS> 48,369
<TOTAL-COSTS> 48,369
<OTHER-EXPENSES> 50,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,481
<INCOME-TAX> 7,946
<INCOME-CONTINUING> 11,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,535
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.36
</TABLE>
