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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 001-13609
SAGA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 54-1167173
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
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 May 5, 2000, 29,073,361 shares of the Registrant's common stock were
outstanding.
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TABLE OF CONTENTS
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ITEM PAGE
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P A R T I
1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2000 and December 31, 1999................... 3
Condensed Consolidated Statements of Operations for the three months ended March 31,
2000 and 1999................................................................................. 5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2000 and 1999................................................................................. 6
Notes to Condensed Consolidated Financial Statements............................................ 7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 9
3. Quantitative and Qualitative Disclosures about Market Risk......................................... 12
P A R T II
1. Legal Proceedings.................................................................................. 14
6. Exhibits and Reports on Form 8-K................................................................... 14
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2
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ITEM 1. Financial Statements
SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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Mar. 31, Dec. 31,
2000 1999
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(Unaudited)
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Assets
Current:
Cash and cash equivalents...................................................... $ 40,892 $ 33,701
Short-term investments......................................................... 6,000 14,500
Accounts receivable:
Invoiced and currently due................................................. 28,002 36,486
Advanced billings on maintenance........................................... 8,246 9,355
Unbilled services.......................................................... 1,619 1,792
Installment................................................................ 54,344 42,672
Other...................................................................... 2,314 2,131
Less: allowance for doubtful accounts...................................... (3,053) (2,884)
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Total accounts receivable............................................. 91,472 89,552
Income taxes receivable........................................................ 144 --
Prepaid expenses............................................................... 4,561 3,186
Current portion of deferred income taxes....................................... 1,979 2,175
Other current assets .......................................................... 3,368 939
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Total current assets.................................................. 148,416 144,053
Installment accounts receivable, net of current portion................................ 45,223 35,510
Goodwill and other intangible assets, net of accumulated amortization.................. 21,477 22,674
Cooperation agreement, net of accumulated amortization................................. 16,450 17,037
Property, equipment and leasehold improvements, net of accumulated depreciation
and amortization................................................................... 8,273 8,423
Deferred income taxes.................................................................. 975 883
Purchased software costs, net of accumulated amortization.............................. 861 861
Other assets........................................................................... 1,247 1,303
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Total assets.......................................................... $ 242,922 $ 230,744
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (continued)
(in thousands, except share data)
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Mar. 31, Dec. 31,
2000 1999
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(Unaudited)
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Liabilities and Stockholders' Equity
Current:
Current portion of long-term obligations....................................... $ 567 $ 649
Accounts payable............................................................... 4,527 6,640
Accrued payroll and employee benefits ......................................... 6,258 6,044
Payable to SAG................................................................. 6,569 8,427
Income taxes payable........................................................... -- 1,376
Other current liabilities...................................................... 6,030 6,481
Current portion of deferred revenues, net of deferred royalties................ 55,508 47,882
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Total current liabilities............................................. 79,459 77,499
Long-term obligations, net of current portion.......................................... 379 680
Deferred revenues, net of deferred royalties........................................... 38,279 33,110
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Total liabilities..................................................... 118,117 111,289
Stockholders' equity
Common stock ($0.01 par value, 75,000,000 shares authorized
31,110,036 issued at March 31, 2000; and 30,882,422 shares issued
at December 31, 1999)....................................................... 311 309
Additional paid-in capital..................................................... 102,200 98,936
Retained earnings.............................................................. 53,688 50,123
Accumulated other comprehensive income......................................... (435) (225)
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155,764 149,143
Treasury stock, at cost, 2,483,800 shares at March 31, 2000 and
2,414,600 shares at December 31, 1999...................................... (30,959) (29,688)
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Total stockholders' equity........................................... 124,805 119,455
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Total liabilities and stockholders' equity............................ $ 242,922 $ 230,744
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</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2000 and 1999
(in thousands, except per share dollar amounts)
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2000 1999
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(Unaudited)
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Revenues:
Software license fees.......................... $ 19,761 $ 13,180
Maintenance fees............................... 20,610 20,634
Professional services fees..................... 11,191 19,792
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Total revenues........................ 51,562 53,606
Cost of revenues:
Software license............................... 4,295 3,118
Maintenance.................................... 7,026 7,041
Professional services.......................... 10,564 14,990
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Total cost of revenues................ 21,885 25,149
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Gross profit........................................... 29,677 28,457
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Operating expenses:
Software product development................... 3,447 2,409
Sales and marketing............................ 10,987 9,811
Administrative and general..................... 10,680 8,705
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Total operating expenses.............. 25,114 20,925
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Income from operations................................. 4,563 7,532
Other income and expense, net.................. 1,206 1,344
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Income before income taxes............................. 5,769 8,876
Income tax provision........................... 2,204 3,462
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Net income............................................. 3,565 5,414
Other comprehensive income (loss):
Foreign currency translation adjustments....... (210) 173
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Comprehensive income................................... $ 3,355 $ 5,587
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Net income per common share:
Basic......................................... $ 0.13 $ 0.18
Diluted....................................... $ 0.12 $ 0.17
Shares used in computing net income per common share:
Basic.......................................... 28,493 30,577
Diluted........................................ 30,515 31,839
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2000 and 1999
(in thousands)
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2000 1999
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(Unaudited)
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Cash flows from operating activities:
Net income............................................................... $ 3,565 $ 5,414
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation and amortization...................................... 2,558 2,005
Loss on disposal of property and equipment......................... 30 15
Compensation expenses on options granted........................... (209) 194
Changes in operating accounts...................................... (6,260) (7,177)
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Net cash provided by / (used) in operating activities (316) 451
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Cash flows from investing activities:
Proceeds from sale of short-term investments............................. 8,500 --
Purchase of short-term investments....................................... -- (400)
Additions to property, equipment and leasehold improvements.............. (905) (430)
Proceeds from sales of property and equipment............................ 19 --
Cash received from settlement of an acquisition.......................... 214 --
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Net cash provided by / (used) in investing activities 7,828 (830)
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Cash flows from financing activities:
Proceeds from stock options exercised.................................... 1,317 131
Repurchase of common stock............................................... (1,271) --
Payments made on capital leases.......................................... (129) (120)
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Net cash provided by / (used) in financing activities (83) 11
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Effect of exchange rate changes on cash and cash equivalents................. (238) 81
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Net increase / (decrease) in cash and cash equivalents....................... 7,191 (287)
Cash and cash equivalents, beginning......................................... 33,701 60,298
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Cash and cash equivalents, ending............................................ $ 40,892 $ 60,011
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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SAGA 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 SAGA
SYSTEMS, Inc. Annual Report on Form 10-K for the year ended December 31, 1999.
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, 2000 are not necessarily indicative of the results expected for
the full year.
(2) Accounting Policies
Revenue Recognition
As of January 1, 1998, SAGA SYSTEMS, Inc., together with its subsidiaries
(the "Company") adopted Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9. SOP 97-2 focuses
on when and in what amounts revenue should be recognized for licensing, selling,
leasing, or otherwise marketing computer software. SOP 98-4 and SOP 98-9
deferred certain portions of SOP 97-2 until the Company's fiscal year 2000.
Effective January 1, 2000, the Company adopted SOP 98-9, which has resulted in
application of the "residual method" (as defined in SOP 98-9) in the accounting
for certain contracts. Under the residual method, the arrangement fee for
certain multiple-element arrangements, which bundle products and services is as
follows: (a) the total fair value of the undelivered elements, as indicated by
vendor-specific objective evidence, is deferred and (b) the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements. Had the Company not
adopted the residual method and accounted for all of its contracts consistent
with the method used during 1999, the Company's product revenue would have been
higher by $2.0 million for the three-month period ended March 31, 2000 and the
deferred maintenance revenue would have been lower by approximately the same
amount at March 31, 2000.
Software Development Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed", software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers.
Based on the Company's development cycle, technological feasibility is
established upon the completion of a working model.
The Company expenses the costs incurred related to the development of its
products. For products where technological feasibility has been reached,
software purchased to be used in the development of those products has been
capitalized. Capitalized purchased software is recorded at the lower of cost or
net realizable value and is amortized over the estimated useful life of three
years beginning at the point in which the product becomes available for general
release to customers. Capitalized purchased software costs were $861,000 as of
March 31, 2000 and December 31, 1999. None of the products for which these costs
were capitalized were available for general release at March 31, 2000,
therefore, there was no amortization expense in the first quarter of 2000.
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SAGA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Additionally, there was no amortization expense for the three months ended March
31, 1999, as there were no capitalized purchased software costs at March 31,
1999.
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 are based on income
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share are 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 that are
dilutive. The following information is a reconciliation of the amounts used in
these calculations:
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Three months ended March 31,
--------------------------------
2000 1999
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(Unaudited)
(In thousands, except for
per share dollar amounts)
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Numerator:
Net income ...................................................... $ 3,565 $ 5,414
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Denominator:
Basic weighted average shares outstanding ....................... 28,493 30,577
Effect of dilutive securities:
Stock options ............................................. 2,022 1,262
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Diluted weighted average shares outstanding .......................... 30,515 31,839
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Net income per common share:
Basic ........................................................... $ 0.13 $ 0.18
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Diluted ......................................................... $ 0.12 $ 0.17
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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, 2000 and 1999
Revenues
Total Revenues. The Company's revenues are primarily derived from license
fees for the use of software products, fees for maintenance related to those
products and fees for professional services. The Company's total revenues were
$51.6 million and $53.6 million for the three months ended March 31, 2000 and
1999, respectively, representing a decrease of 4%. This decrease in total
revenues was primarily due to a decrease in professional services fees as
described below. Revenues were also negatively impacted due to the adoption of
the residual method under the SOP 98-9 as discussed in detail in Note 2 of the
Notes to Condensed Consolidated Financial Statements.
Software License Fees. The Company's software license fees are derived
primarily from the licensing of the Company's enterprise systems and e-business
integration products. Enterprise systems products include Adabas, a
high-performance data management system; and Natural, a 4GL programming
language. E-business integration products include EntireX, a family of
integration products; and Sagavista, the Company's new e-business product suite,
which was generally released in September 1999. Software license fees increased
50% to $19.8 million for the three months ended March 31, 2000 compared to $13.2
million from the prior period. This increase was attributable, in part, to
Sagavista sales of $4.2 million in the current quarter period. Additionally,
this increase was, in part, due to one large contract in the current period,
which contributed $9.3 million of revenue (including $3.3 million of Sagavista
license revenue) towards the total software license fees. Despite this increase,
software license fees were negatively impacted in the current quarter by
approximately $2.0 million due to the adoption of the residual method under the
SOP 98-9 for accounting for certain contracts.
Maintenance Fees. The Company's maintenance fees are derived primarily from
providing technical support services to customers who have licensed the
Company's enterprise systems and e-business integration 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 products. Maintenance fees were
each $20.6 million for the three months ended March 31, 2000 and 1999. As
mentioned above, due to the adoption of the residual method in accordance with
SOP 98-9, maintenance fees were positively impacted by approximately $54,000 in
this quarter. Additionally, deferred maintenance revenue was positively impacted
and was approximately $1.9 million higher at March 31, 2000 due to the
application of the residual method.
Professional Services Fees. The Company's professional services fees are
derived primarily from services provided with the implementation and deployment
of the Company's enterprise systems and e-business integration products and
through educational services. The Company's professional services offerings
include consulting, software integration, system implementation and large
project management. Prior to year 2000, the Company also provided year 2000
analysis and remediation services. The services are delivered on either a time
and material basis or a fixed price basis. Professional services fees were $11.2
million and $19.8 million for the three months ended March 31, 2000 and 1999,
respectively, representing a decrease of 43%. This decrease was mainly
attributable to the absence of year 2000 analysis and remediation services
revenue in the current period compared to $7.3 million in the prior year. The
Company expects the professional services fees for the second quarter 2000 to
remain similar to the current quarter's professional services fees.
Cost of Revenues
Software License. Software license costs consist primarily of royalties
paid to third parties. Software license costs were $4.3 million and $3.1 million
for the three months ended March 31, 2000 and 1999, respectively,
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representing 22% and 24% of software license fees for each respective period.
The increase in dollar amount was primarily due to an increase in software
license revenue in the current period. The percentage decrease was primarily due
to a shift in the mix of products sold from the third party owned products to
the Company owned products. Royalty rates on third party owned products
generally vary from 24% to 40% of software license fees, whereas there are no
royalties on the Company owned products. The Company owned product sales
represented 26% of the total software license fees compared to 8% from the prior
period.
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 each $7.0 million for the three months ended
March 31, 2000 and 1999, respectively, representing 34% of maintenance fees for
each period.
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 $10.6 million and $15.0 million for the three
months ended March 31, 2000 and 1999, respectively, representing 94% and 76% of
professional services fees for each respective period. The decrease in dollar
amount was primarily due to a decrease in professional services revenue. The
increase in percentage was primarily attributable to less than expected new core
professional services business in the current period which resulted in an under
utilization of existing personnel who transitioned from year 2000 analysis and
remediation business in 1999. The Company expects the professional services
gross margin for the second quarter 2000 to remain similar to the current
quarter's gross margin.
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 $3.4 million and
$2.4 million for the three months ended March 31, 2000 and 1999, respectively,
representing an increase of 43%. This increase was primarily due to expenses
incurred in the continued enhancements being made to the core Sagavista product
and to build additional adapters. The total number of developers has increased
to 93 from 56 as of March 31, 1999. Sagavista, the Company's new e-business
integration product suite, became available for general release on September 29,
1999.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, marketing programs, public relations,
proposal writing, trade shows, seminars, advertising and related communications
and associated overhead costs. Sales and marketing expenses were $11.0 million
and $9.8 million for the three months ended March 31, 2000 and 1999,
respectively, representing 21% and 18% of total revenues, respectively. The
increases in both dollar amount and percentage were primarily due to the
increase in the infrastructure needed to support the ongoing marketing and sale
of the Company's new e-business integration product, Sagavista.
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 $10.7 million and $8.7 million for the
three months ended March 31, 2000 and 1999, respectively, representing 21% and
16% of total revenues for each respective period. The increases in both dollar
amount and percentage were, in part, due to a lower bad debt reserve balance in
the prior period as a result of a lower accounts receivable balance as of March
31, 1999. The increase in administrative and general expenses was also, in part,
due to an increase in amortization expense as a result of the goodwill and other
intangible assets recorded from the Blue Lobster Software, Inc. acquisition in
June 1999.
Other
Other Income and Expense, Net. Other income and expense, net, consists
primarily of interest earned on cash, cash equivalents, short-term investments,
long-term customer contracts carried by the Company and miscellaneous income.
Other income and expense, net, was $1.2 million and $1.3 million for the three
months ended March 31,
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2000 and 1999, respectively. This decrease was primarily attributable to the
decrease in interest income as a result of a decrease in the average cash, cash
equivalents and the short-term investments balances at March 31, 2000 compared
to the respective prior period.
Income Tax Provision. The income tax provision was $2.2 million and $3.5
million for the three months ended March 31, 2000 and 1999, respectively,
resulting in effective tax rates of 38.2% and 39.0%, respectively.
Liquidity and Capital Resources
The Company generally financed its operations principally through cash flow
from operating activities. Net cash used by operating activities was $0.3
million for the three months ended March 31, 2000, primarily due to an increased
accounts receivable balance at March 31, 2000 compared to December 31, 1999. Net
cash provided by operating activities was $0.5 million for the three months
ended March 31, 1999, primarily from the net income for the period.
Investing activities provided net cash of $7.8 million for the three months
ended March 31, 2000, primarily from the proceeds from the sale of short-term
investments. Investing activities used net cash of $0.8 million for the three
months ended March 31, 1999, primarily to fund capital expenditures and to
purchase short-term investments.
Financing activities used net cash of $83,000 for the three months ended
March 31, 2000 primarily to repurchase the Company's common stock, pursuant to a
stock repurchase program, which commenced in June 1999, coupled with payments
made on long-term capital leases. These usages of cash were offset by proceeds
received from stock options exercised in the current period. For the three
months ended March 31, 1999, financing activities provided net cash of $11,000,
primarily from the proceeds from stock options exercised offset by payments made
on long-term capital leases.
The Company had $46.9 million and $48.2 million in cash, cash equivalents
and short-term investments as of March 31, 2000 and December 31, 1999,
respectively. The Company currently has relationships with two third parties
whereby the Company may sell long-term receivable contracts in which control
over and the economic interest in the contract is transferred to the buyer. As
of March 31, 2000 and December 31, 1999, the Company remained contingently
liable under the recourse provisions associated with the sales made prior to
1998 in the amount of $5.6 million and $7.3 million, respectively. The Company's
accounts receivable days sales outstanding at March 31, 2000 and December 31,
1999 was 49 and 65, respectively.
The Company currently has a revolving credit agreement, which provides an
unsecured revolving credit loan in the aggregate principal amount of up to $25.0
million ("Revolving Credit Agreement"). The funds under the Revolving Credit
Agreement may be used for general corporate purposes including future potential
acquisitions, if any, but excluding any repurchase of the Company's common stock
under the stock repurchase program. The commitments made under the Revolving
Credit Agreement expire November 1, 2002. The Company has not borrowed any funds
under the Revolving Credit Agreement as of March 31, 2000.
Currently, the Company intends to open one branch office in Western Europe
in late 2000 and capital expenditures will be necessary in order for the Company
to expand its distribution channels internationally as planned. However, there
can be no assurance that the Company's operating income and/or capital resources
will be adequate to support the opening of additional offices, expand its
distribution channels, or support its international business operations. In
addition, there can be no assurance that even if the Company does open
additional offices, expand its distribution channels or expand its international
business operations, that any of the foregoing efforts will ultimately prove to
be successful.
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, short-term
investments, funds generated from operations, funds available under the
Revolving Credit Agreement and funds received from the sale of receivables, if
any, will
11
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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 other material capital commitments or planned
expenditures as of March 31, 2000. The Company believes that inflation did not
have a material effect on its results of operations as of March 31, 2000.
Year 2000 Compliance
As of May 5, 2000, the Company has not experienced any significant year
2000 related problems for its internal hardware and software systems. Also, the
Company is not aware of any material problems related to the year 2000 with
respect to its products sold and remediation services provided prior to the year
2000. However, there can be no assurances that the Company will not encounter
any year 2000 related problems in the future which may have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Year 2000 Compliance" in the Company's Quarterly Report on Form 10-Q filed
with the SEC on November 12, 1999.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Foreign Currency. The Company's international distributors primarily report
and pay in U.S. dollars. In addition, royalties reported and paid by the Company
to Software AG, a German software company (former parent company) under a
cooperation agreement, which was amended in September 1999, are in U.S. dollars.
The Company's Mexican operations have represented approximately 2% of total
revenues. Revenues from the Company's Canadian operations were approximately 6%
of total revenues since its acquisition in September 1997. The Company,
therefore, has not to date engaged in foreign currency hedging transactions. The
Company may enter into hedging transactions in the future.
Interest Rates. The Company manages its interest rate risk by maintaining
an investment portfolio of available-for-sale instruments that are highly liquid
short-term investments with relatively short average maturities. These
instruments include high grade corporate and United States government debt
securities and money market funds, in accordance with the Company's investment
policy. These instruments are denominated in U.S. dollars. The carrying value of
these instruments held at March 31, 2000 and December 31, 1999 was $6.0 million
and $14.5 million, respectively, which approximates the fair value.
The Company also maintains depository relationships with several banks in
the United States, Canada and Mexico. The majority of these cash balances
represents operating balances only. At times, the Company's cash deposits may
exceed federally insured limits and the Company invests excess cash in highly
liquid short-term investments as indicated above.
Many of the Company's short-term investments carry a degree of interest
rate risk. When interest rates fall, the Company's income from investments in
variable-rate securities declines. When interest rates rise, the fair market
value of the Company's short-term investments in fixed rates declines. The
Company attempts to mitigate risk by investing its cash in instruments with
short maturities and holding fixed-rate securities to maturity, but should its
liquidity needs force it to sell fixed-rate securities prior to maturity, the
Company may experience a loss of principal. The Company's management believes
its depository accounts and short-term investments are not exposed to any
significant market risk.
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Safe Harbor Provision for Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q and in documents
incorporated herein by reference, including any statements regarding beliefs,
plans, expectations or intentions regarding the future, include forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and are covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to, references to
the development, acquisition, marketing and acceptance of the Company's products
and services including, but not limited to, Sagavista and its adapters, Adabas,
Natural and EntireX, professional services and customer support; alliances and
relationships with third parties including but not limited to the Company's
distributors, Software AG, original equipment manufacturers and value-added
resellers; markets in which the Company competes; competition and competitors;
results of operations; and the Company's financial condition and other
statements regarding matters that are not historical facts. The statements are
based on the Company's current knowledge, beliefs, expectations, specific
assumptions and projections about future events and 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 including, but not limited to, the signing of large contracts in
certain quarters but not others; reliance on Software AG for development and
timely delivery of products; reliance on acquisitions and the timely
development, production, marketing, delivery and acceptance of new products and
services including, but not limited to, Sagavista and its adapters; the
Company's ability to implement its business strategy; risks associated with
conducting a professional services business; reliance on the mainframe and
enterprise computing environments and demand for and acceptance of 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; development by competitors of new or competitive
products or services; entry into the market by new competitors; the Company's
ability to retain customers or attract customers from other businesses; risks of
protecting intellectual property rights and litigation; dependence on
third-party technology and relationships; 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, technologies, 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 distributors, Software AG, original
equipment manufacturers, value-added resellers, vendors, and other third parties
and attract and retain key employees; volatility of the Company's stock price;
the Company's ability to successfully defend itself in current or future
litigation; general economic and business conditions; and other risks detailed
from time to time in the Company's Securities and Exchange Commission reports.
Readers should carefully review the risk factors described in the documents. The
Company has no obligation to publicly update or revise any forward-looking
statements, whether as result of new information, further events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Quarterly Report on Form 10-Q might not occur.
13
<PAGE>
PART II
ITEM 1. Legal Proceedings
In addition to the legal proceedings and litigation arising in the ordinary
course of business, as previously reported, the Company is involved in a class
action shareholders lawsuit. The Company, certain of its directors and executive
officers and the Company's principal shareholder have been named as defendants
in a class action suit consolidated as In re: Software AG Systems, Inc.
Securities Litigation now pending in the Federal District Court for the Eastern
District of Virginia. The suit alleges violations of the federal securities
laws, claiming, among other things, that the Company's accounting policies
artificially inflated revenues and earnings and that defendants caused or
permitted the Company to issue a series of materially false and misleading
public statements about the Company's operations and financial results while, at
the same time, selling the Company's common stock at artificially inflated
prices while in possession of material non-public information. Although the
Company believes that the allegations in the lawsuit are without merit and has,
and will continue to vigorously defend the charges, the parties to the
litigation have entered into a settlement, which was preliminarily approved by
the court on May 5, 2000. Pursuant to the settlement, $3.5 million will be paid
into a settlement fund from which funds will be distributed to participating
shareholders. The settlement is still subject to a fairness hearing and needs
final approval of the court; each shareholder class member will be given notice
of the proposed settlement and will have the right to reject the settlement. It
is not possible at this time to predict with certainty whether the settlement
will be finally approved, and if the settlement is not approved, it is not
possible at this time to predict the outcome of the litigation or the amount or
nature of any loss. There are no assurances that the resolution or reactivation
of the lawsuit may not materially adversely affect the Company's financial
condition or results of operations.
The Company is involved in various other claims and legal proceedings of a
nature considered normal to its business, primarily relating to product and
contract performance issues and employee termination matters. While it is not
feasible to predict or determine the final outcome of these proceedings,
management does not believe that they will have a material adverse affect on the
Company's financial position or results of operations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on February 1, 2000 to
announce the appointment of Dale E. Williams as Vice President and Chief
Financial Officer of the Company. The Company also filed a Current Report on
Form 8-K on February 16, 2000 to report the resignation of Timothy L. Hill from
the position of Vice President Marketing and International Operations of the
Company.
14
<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.
SAGA SYSTEMS, Inc.
By: /s/ Dale E. Williams
--------------------
Dale E. Williams
Date: May 12, 2000 Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Officer)
15
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