<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, 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
-------- ----------
(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 28, 2000, 29,361,776 shares of the Registrant's common stock were
outstanding.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
P A R T I
1. Financial Statements:
Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999............ 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and 1999................................................................. 5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999........................................................................ 6
Notes to Condensed Consolidated Financial Statements.................................... 7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10
3. Quantitative and Qualitative Disclosures about Market Risk................................. 15
P A R T II
4. Legal Proceedings.......................................................................... 17
5. Submission of Matters to a Vote of Security Holders........................................ 17
6. Exhibits and Reports on Form 8-K........................................................... 19
</TABLE>
2
<PAGE>
ITEM 1. Financial Statements
SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, Dec. 31,
2000 1999
----------------- ----------------
Assets (Unaudited)
<S> <C> <C>
Current:
Cash and cash equivalents............................................... $ 40,170 $ 33,701
Short-term investments.................................................. 6,000 14,500
Accounts receivable:
Invoiced and currently due.......................................... 36,868 36,486
Advanced billings on maintenance.................................... 14,215 9,355
Unbilled services................................................... 1,871 1,792
Installment......................................................... 59,312 42,672
Other............................................................... 2,142 2,131
Less: allowance for doubtful accounts............................... (3,442) (2,884)
----------------- ----------------
Total accounts receivable...................................... 110,966 89,552
Income taxes receivable................................................. 214 ---
Prepaid expenses........................................................ 7,650 3,186
Current portion of deferred income taxes................................ 1,980 2,175
Other current assets.................................................... 2,391 939
----------------- ----------------
Total current assets........................................... 169,371 144,053
Installment accounts receivable, net of current portion......................... 49,358 35,510
Goodwill and other intangible assets, net of accumulated amortization........... 20,549 22,674
Cooperation agreement, net of accumulated amortization.......................... 15,863 17,037
Property, equipment and leasehold improvements, net of accumulated depreciation
and amortization............................................................ 7,653 8,423
Deferred income taxes........................................................... 975 883
Purchased software costs, net of accumulated amortization....................... 854 861
Other assets.................................................................... 450 1,303
----------------- ----------------
Total assets................................................... $ 265,073 $ 230,744
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, Dec. 31,
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current:
Current portion of long-term obligations................................ $ 623 $ 649
Accounts payable........................................................ 4,577 6,640
Accrued payroll and employee benefits................................... 5,560 6,044
Payable to SAG.......................................................... 11,142 8,427
Income taxes payable.................................................... --- 1,376
Other current liabilities............................................... 5,621 6,481
Current portion of deferred revenues, net of deferred royalties......... 61,961 47,882
------------ -----------
Total current liabilities...................................... 89,484 77,499
Long-term obligations, net of current portion................................... 315 680
Deferred revenues, net of deferred royalties.................................... 42,730 33,110
------------ -----------
Total liabilities.............................................. 132,529 111,289
Stockholders' equity
Common stock ($0.01 par value, 75,000,000 shares authorized;
32,094,439 issued at June 30, 2000; and 30,882,422 shares issued
at December 31, 1999)................................................ 321 309
Additional paid-in capital.............................................. 110,647 98,936
Retained earnings....................................................... 57,271 50,123
Accumulated other comprehensive income.................................. (450) (225)
------------ -----------
167,789 149,143
Treasury stock, at cost, 2,733,800 shares at June 30, 2000 and
2,414,600 shares at December 31, 1999............................... (35,245) (29,688)
------------ -----------
Total stockholders' equity.................................... 132,544 119,455
------------ -----------
Total liabilities and stockholders' equity..................... $ 265,073 $ 230,744
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2000 and 1999
(in thousands, except per share dollar amounts)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software license fees..................... $ 18,081 $ 17,172 $ 37,842 $ 30,352
Maintenance fees.......................... 20,722 20,828 41,332 41,462
Professional services fees................ 10,375 17,938 21,566 37,730
------------- ------------- ------------- -------------
Total revenues................... 49,178 55,938 100,740 109,544
------------- ------------- ------------- -------------
Cost of revenues:
Software license.......................... 4,363 4,034 8,658 7,152
Maintenance............................... 6,808 6,914 13,834 13,955
Professional services..................... 9,447 14,017 20,011 29,007
------------- ------------- ------------- -------------
Total cost of revenues........... 20,618 24,965 42,503 50,114
------------- ------------- ------------- -------------
Gross profit...................................... 28,560 30,973 58,237 59,430
------------- ------------- ------------- -------------
Operating expenses:
Software product development.............. 4,020 2,315 7,467 4,724
Sales and marketing....................... 11,006 10,240 21,993 20,051
Administrative and general................ 9,098 11,347 19,778 20,052
------------- ------------- ------------- -------------
Total operating expenses......... 24,124 23,902 49,238 44,827
------------- ------------- ------------- -------------
Income from operations............................ 4,436 7,071 8,999 14,603
Other income and expense, net............. 1,362 1,303 2,568 2,647
------------- ------------- ------------- -------------
Income before income taxes 5,798 8,374 11,567 17,250
Income tax provision...................... 2,215 3,266 4,419 6,728
------------- ------------- ------------- -------------
Net income........................................ 3,583 5,108 7,148 10,522
Other comprehensive income (loss):
Foreign currency translation adjustments.. (15) 83 (225) 256
------------- ------------- ------------- -------------
Comprehensive income.............................. $ 3,568 $ 5,191 $ 6,923 $ 10,778
============= ============= ============= =============
Net income per common share:
Basic.................................... $ 0.12 $ 0.17 $ 0.25 $ 0.34
Diluted.................................. $ 0.12 $ 0.16 $ 0.23 $ 0.33
Shares used in computing net income per common
share:
Basic..................................... 28,986 30,630 28,740 30,603
Diluted................................... 30,280 31,653 30,535 31,746
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SAGA SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
2000 1999
----------- --------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 7,148 $ 10,522
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation and amortization........................................ 5,126 4,071
Loss on disposal of property and equipment........................... 40 21
Compensation expenses on options granted............................. (183) 356
Changes in operating accounts........................................ (14,251) (10,657)
-------------- --------------
Net cash provided by / (used) in operating activities (2,120) 4,313
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of short-term investments............................... 10,481 8,600
Purchase of short-term investments......................................... (1,981) (11,000)
Additions to property, equipment and leasehold improvements................ (1,206) (757)
Proceeds from sales of property and equipment.............................. 30 ---
Cash received from settlement of an acquisition, net....................... 187 ---
Acquisition, net of cash received.......................................... --- (12,036)
-------------- --------------
Net cash provided by / (used) in investing activities... 7,511 (15,193)
-------------- --------------
Cash flows from financing activities:
Proceeds from stock options exercised...................................... 6,247 241
Proceeds from Employee Stock Purchase Program.............................. 882 1,071
Repurchase of common stock................................................. (5,557) (3,985)
Payments made on capital leases............................................ (331) (243)
-------------- --------------
Net cash provided by / (used) in financing activities. 1,241 (2,916)
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents................... (163) 29
-------------- --------------
Net increase / (decrease) in cash and cash equivalents......................... 6,469 (13,767)
Cash and cash equivalents, beginning........................................... 33,701 60,298
-------------- --------------
Cash and cash equivalents, ending.............................................. $ 40,170 $ 46,531
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
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 six and three
months ended June 30, 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 $2.1 million and $146,000 for the six and three month period ended
June 30, 2000, respectively. In addition, the deferred maintenance revenue would
have been lower by approximately $2.1 million at June 30, 2000 had the Company
not applied the residual method.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB expresses the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company can apply the accounting and disclosure requirements of this SAB
retrospectively, or may report a change in accounting principle as of January 1,
2000 no later than the quarter beginning October 1, 2000. Management of the
Company expects the SEC to issue further guidance with respect to certain
implementation issues of SAB No. 101. Management does not believe that the
adoption of SAB No. 101 will have an impact on the Company's financial
statements for the years ending December 31, 1999 and prior. Management is
currently evaluating whether the adoption of SAB No. 101 will materially impact
its quarterly financial statements in the year ending December 31, 2000.
7
<PAGE>
SAGA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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", the Company expenses software development costs 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.
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 $854,000 and
$861,000 at June 30, 2000 and December 31, 1999, respectively, and accumulated
amortization was $7,000 at June 30, 2000. None of the products for which these
costs were capitalized were available for general release at December 31, 1999;
therefore, there was no accumulated amortization balance at December 31, 1999.
Related amortization expense (included in the cost of software license fees) was
$7,000 for both the six and three months ended June 30, 2000. There was no
amortization expense in the comparable prior year period, as there were no
capitalized purchased software costs at June 30, 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 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 that are dilutive. The following
information is a reconciliation of the amounts used in these calculations:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------- --------------------------------
2000 1999 2000 1999
----------- --------------- ------------ --------------
(In thousands, except for per share dollar amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net income.................................. $ 3,583 $ 5,108 $ 7,148 $ 10,522
============= ============= ============== =============
Denominator:
Basic weighted average shares outstanding... 28,986 30,630 28,740 30,603
Effect of dilutive securities:
Stock options.......................... 1,294 1,023 1,795 1,143
------------- ------------- -------------- -------------
Diluted weighted average shares outstanding...... 30,280 31,653 30,535 31,746
============= ============= ============== =============
Net income per common share:
Basic....................................... $ 0.12 $ 0.17 $ 0.25 $ 0.34
============= ============= ============== =============
Diluted..................................... $ 0.12 $ 0.16 $ 0.23 $ 0.33
============= ============= ============== =============
</TABLE>
(3) Class Action Lawsuit
In addition to the legal proceedings and litigation arising in the ordinary
course of business, the Company is currently 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
8
<PAGE>
SAGA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. The settlement is still
subject to a fairness hearing scheduled to be held on September 8, 2000 and is
subject to final approval of the court. Each shareholder class member has been
given notice of the proposed settlement and has the right to reject the
settlement. Pursuant to the settlement, the proposed settlement fund has been
fully funded by the Company in the amount of $3.5 million, from which funds will
be distributed to participating shareholders provided that the settlement
receives final approval of the court and is not rejected by a certain percentage
of participating shareholders. The Company also retains the right to reject the
settlement based on shareholder participation. The $3.5 million payment made by
the Company into the settlement fund is included in the current prepaid expense
amount in the balance sheet at June 30, 2000. On August 3, 2000, $3.0 million
was reimbursed to the Company by its insurance carrier for the proposed
settlement. It is not possible at this time to predict with certainty whether
the settlement will be finally approved by the court. If the settlement is not
approved by the court, the lawsuit may go to trial. It is not possible at this
time to predict the outcome of the litigation or the amount or nature of any
loss. Therefore, there were no amounts expensed, other than the insurance
deductible, relating to the lawsuit as of June 30, 2000. 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.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and Notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. This Quarterly
Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Words such as "may," "plans,"
"expects," "anticipates," "approximates," "believes," "estimates," "intends,"
"hopes," "potential," or "continue" and variations of such words and similar
expressions are intended to identify such forward-looking statements. The
Company intends such forward-looking statements, all of which are qualified by
this statement, to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Litigation Securities Reform Act of 1995 and
is including this statement for purposes of complying with these safe harbor
provisions. The Company has based these statements on its current expectations
and projections about future events. These forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from those projected in these
statements. These risks and uncertainties include, but are not limited to,
significant quarterly and other fluctuations in revenues and results of
operations including the signing of large contracts in certain quarters but not
others, reliance on acquisitions and the timely development, production,
marketing, delivery and acceptance of products and services including Sagavista
and its adapters, interoperability of the Company's products with other software
application products, new or competitive products or services offered by
competitors, demand for the Company's products and services, and reliance on the
mainframe and enterprise computing environments and Software AG, a German
software company, to develop and deliver products timely. The forward-looking
statements contained in this Quarterly Report on Form 10-Q include, among other
issues, statements about the following:
. references to the development, acquisition, marketing and acceptance of
the Company's products and services including, but not limited to
Sagavista and its adapters, professional services and customer support;
. alliances and relationships with third parties including but not limited
to the Company's distributors, 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 fact.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's views only as of the date hereof. The
Company is not obligated to publicly update or revise any forward-looking
statements, whether as a result of new information, future 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. Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for the fiscal year ended December 31,
1999 and the Quarterly Reports on Form 10-Q filed by the Company in fiscal 2000.
10
<PAGE>
Results of Operations
Six months ended June 30, 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 decreased $8.8
million or 8% to $100.7 million for the six months ended June 30, 2000 compared
to the same period in 1999. This decrease in total revenues was primarily due to
a decrease in professional services fees as described below.
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 Sagavista, the Company's e-business
integration product suit, and EntireX, a family of integration products.
Software license fees increased 25% to $37.8 million for the six months ended
June 30, 2000 compared to $30.4 million from the prior period. This increase was
primarily attributable to Sagavista sales of $6.5 million in the current year.
Sagavista was generally released in September 1999. Included in the $37.8
million of software license fees was one large contract that contributed $9.3
million of revenue, which included a Sagavista sale. Despite this increase,
software license fees were negatively impacted in the first six months of 2000
by approximately $2.1 million due to the adoption of the residual method under
SOP 98-9 for accounting for certain contracts. See Note 2 of Notes to Condensed
Consolidated Financial Statements for further detail.
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
$41.3 million and $41.5 million for the six months ended June 30, 2000 and 1999,
respectively. Maintenance fees were negatively affected in the current year
period primarily by the decreased royalties received from the international
distributors. On the other hand, as mentioned above, due to the adoption of the
residual method in accordance with SOP 98-9, maintenance fees revenue was
positively impacted by approximately $34,000 for the first six months in the
current year. Additionally, deferred maintenance fees were positively impacted
and were approximately $2.1 million higher at June 30, 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. The services are delivered on either a time and material
basis or a fixed price basis. Professional services fees were $21.6 million and
$37.7 million for the six months ended June 30, 2000 and 1999, respectively,
representing a decrease of 43%. This decrease was, in part, due to the absence
of year 2000 analysis and remediation services revenue in the current period
compared to $12.8 million in 1999. The decrease was also, in part, attributable
to lower traditional core professional services fees in 2000 compared to 1999,
which primarily resulted from changing general market conditions where companies
are focusing more toward the emerging e-business integration area from the
traditional enterprise systems area. As such, the Company expects its future
growth in professional services revenue will principally result from its focus
on e-business integration services.
Cost of Revenues
Software License. Software license costs consist primarily of royalties paid
to third parties. Software license costs were $8.7 million and $7.2 million for
the six months ended June 30, 2000 and 1999, respectively, representing
11
<PAGE>
23% and 24% of software license fees for each respective period. The increase in
dollar amount was primarily due to an increase in software license fees coupled
with the inclusion of amortization expense relating to the capitalized acquired
technology costs resulting from the Blue Lobster Software, Inc. ("Blue Lobster")
acquisition completed in June 1999. The decrease in percentage was primarily due
to a shift in the mix of products sold from the third party owned products to
the Company owned products, offset by the inclusion of the amortization expense
resulting from the Blue Lobster acquisition as discussed above. Royalty rates on
third party products vary from 24% to 40% of software license fees, whereas
there are generally no royalties on Company owned products. The Company owned
product sales represented 22% of the total software license fees compared to 7%
from the prior period.
Maintenance. Maintenance costs consist primarily of royalties paid to third
parties, the costs of providing customer support and the distribution costs of
new releases. Maintenance costs were $13.8 million and $14.0 million for the six
months ended June 30, 2000 and 1999, respectively, representing 33% and 34% of
maintenance fees for each respective period. The decreases in both amount and
percentage were primarily attributable to improved utilization and efficiency of
existing support personnel.
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 $20.0 million and $29.0 million for the six
months ended June 30, 2000 and 1999, respectively, representing 93% and 77% of
professional services fees for each respective period. The decrease in dollar
amount was primarily due to a decrease in professional services fees revenue.
The increase in percentage was primarily due 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 the year 2000 analysis
and remediation business in 1999. The Company believes that the professional
services gross margin for the remainder of the year may improve as the Company
has taken certain actions to improve the utilization rate.
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 increased $2.7 million
or 58% to $7.5 million for the six months ended June 30, 2000 compared to the
respective prior year period. This increase was primarily due to the additional
developers needed for the ongoing enhancements being made to the core Sagavista
product since its release in September 1999 and to build additional adapters.
The total number of developers has increased to 104 from 68 as of June 30, 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 $22.0 million
and $20.1 million for the six months ended June 30, 2000 and 1999, respectively,
representing 22% and 18% of total revenues for each respective reporting period.
The increases in both dollar amount and percentage were attributable to the
increase in the infrastructure needed to support the ongoing marketing and sale
of 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 $19.8 million and $20.1 million for the
six months ended June 30, 2000 and 1999, respectively, representing 20% and 18%
of total revenues for each respective six month period. The decrease in dollar
amount was attributable to the overall reduction in various administration and
general expense categories, which is in alignment with the Company's plan for
the year 2000. The increase in percentage was due to lower total revenues in
2000 compared to the same period in 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
12
<PAGE>
income. Other income and expense, net, decreased $79,000 or 3% to $2.6 million
for the six months ended June 30, 2000 compared to the respective prior period.
Income Tax Provision. The income tax provision was $4.4 million and $6.7
million for the six months ended June 30, 2000 and 1999, respectively, resulting
in effective tax rates of 38.2% and 39.0%, respectively.
Three months ended June 30, 2000 and 1999
Revenues
Total Revenues. The Company's total revenues were $49.2 million and $55.9
million for the three months ended June 30, 2000 and 1999, respectively,
representing a decrease of 12%. This decrease in total revenues was primarily
due to a decrease in professional services fees as described below.
Software License Fees. Software license fees increased 5% to $18.1 million for
the three months ended June 30, 2000 compared to $17.2 million from the
comparable period in 1999. This increase was mainly attributable to Sagavista
sales of $2.3 million in the current quarter. Software license fees for the
three months ended June 30, 2000 were negatively impacted in the current quarter
by approximately $146,000 due to the adoption of the residual method under the
SOP 98-9 for accounting for certain contracts.
Maintenance Fees. Maintenance fees decreased 1% to $20.7 million for the
second quarter of 2000 from $20.8 million for the same period in 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 $23,000 for
the last three months compared to the respective prior year period.
Professional Services Fees. Professional services fees were $10.4 million and
$17.9 million for the three months ended June 30, 2000 and 1999, respectively,
representing a decrease of 42%. This decrease was primarily due to the absence
of year 2000 analysis and remediation services revenue in the current period
compared to $5.6 million in the prior period. The decrease was also, in part,
attributable to lower traditional core professional services fees in 2000
compared to 1999, which primarily resulted from changing general market
conditions where companies are focusing more toward the emerging e-business
integration area from the traditional enterprise systems area. As such, the
Company expects its future growth in professional services revenue will
principally result from its focus on e-business integration services.
Cost of Revenues
Software License. Software license costs were $4.4 million and $4.0 million
for the three months ended June 30, 2000 and 1999, respectively, representing
24% and 23% of software license fees for each respective period. The increase in
dollar amount was primarily due to an increase in software license fees coupled
with the inclusion of amortization expense relating to the capitalized acquired
technology costs resulting from the Blue Lobster acquisition completed in June
1999. The percentage increase was primarily due to the inclusion of amortization
expense relating to capitalized acquired technology costs resulting from the
Blue Lobster acquisition offset by a shift in the mix of products sold from
those that are third party owned products to those that are Company owned
products.
Maintenance. Maintenance costs were $6.8 million and $6.9 million for the
three months ended June 30, 2000 and 1999, respectively, each representing 33%
of maintenance fees for each respective period.
Professional Services. Professional services costs were $9.4 million and $14.0
million for the three months ended June 30, 2000 and 1999, respectively,
representing 91% and 78% of professional services fees for each respective
period. The decrease in dollar amount was primarily due to a decrease in
professional services fees revenue. The increase in percentage was primarily due
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 the year 2000 analysis and remediation business in 1999.
13
<PAGE>
Operating Expenses
Software Product Development. Software product development costs were $4.0
million and $2.3 million for the three months ended June 30, 2000 and 1999,
respectively. This increase was primarily due to the additional developers
needed for the ongoing enhancements being made to the core Sagavista product
since its release in September 1999 and to build additional adapters.
Sales and Marketing. Sales and marketing expenses were $11.0 million and
$10.2 million for the three months ended June 30, 2000 and 1999, respectively,
representing 22% and 18% of total revenues for each respective three-month
period. The increases in both dollar amount and percentage were attributable to
the increase in the infrastructure needed to support the ongoing marketing and
sale of Sagavista.
Administrative and General. Administrative and general expenses were $9.1
million and $11.3 million for the three months ended June 30, 2000 and 1999,
respectively, representing 19% and 20% of total revenues for each respective
period. The decrease in dollar amount and percentage was due to the overall
reduction in various administration and general expense categories, which is in
alignment with the Company's plan for the year 2000.
Other
Other Income and Expense, Net. Other income and expense, net, was $1.4
million and $1.3 million for the three months ended June 30, 2000 and 1999,
respectively.
Income Tax Provision. The income tax provision was $2.2 million and $3.3
million for the three months ended June 30, 2000 and 1999, respectively,
resulting in effective tax rates of 38.2% and 39.0%, respectively.
Liquidity and Capital Resources
The Company has historically financed its operations principally through cash
flow generated from operating activities. The Company had $46.2 million and
$48.2 million in cash, cash equivalents and short-term investments as of June
30, 2000 and December 31, 1999, respectively. Working capital increased to $79.9
million at June 30, 2000 from $66.6 million at December 31, 1999, resulting
principally from increases in accounts receivable and prepaid expenses,
partially offset by an increase in the current portion of deferred revenues.
Net cash used by operating activities was $2.1 million for the six months
ended June 30, 2000, primarily due to the funding of the escrow account for the
proposed settlement related to the class action lawsuit in the amount of $3.5
million. On August 3, 2000, $3.0 million was reimbursed to the Company by its
insurance carrier for the proposed settlement. See Note 3 of Notes to Condensed
Consolidated Financial Statements for further detail. For the six months ended
June 30, 1999, net cash provided by operating activities was $4.3 million,
primarily from net income for the respective six month period.
Investing activities provided net cash of $7.5 million for the six months
ended June 30, 2000, primarily from the proceeds from the sale of short-term
investments, partially offset by the purchase of short-term investments and the
funding of capital expenditures. For the six months ended June 30, 1999,
investing activities used net cash of $15.2 million, primarily to fund the
acquisition of Blue Lobster in June 1999, to purchase short-term investments and
to fund capital expenditures.
Financing activities provided net cash of $1.2 million for the six months
ended June 30, 2000, primarily from the proceeds from stock options exercised
and common stock issued under the Employee Stock Purchase Plan, partially offset
by cash used to repurchase the Company's common stock. For the six months ended
June 30, 1999, financing activities used net cash of $2.9 million, primarily to
repurchase the Company's common stock, partially offset by the proceeds from
common stock issued under the Employee Stock Purchase Plan.
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
14
<PAGE>
June 30, 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 $3.0 million and $7.3 million, respectively. The Company's
accounts receivable days sales outstanding at June 30, 2000 and December 31,
1999 was 68 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 June 30, 2000.
The Company intends to expand its distribution channels internationally during
2001. The Company may expand through establishing a presence in Western Europe
or by entering into strategic alliances with other companies, which may require
capital expenditures to be made by the Company. There can be no assurance,
however, that the Company's operating income and/or capital resources will be
adequate to support the opening of additional offices or expand its
international business operations or that any strategic alliances will be
formed. Even if the Company does open additional offices, expand its
international business operations or form strategic alliances, there can be no
assurance 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 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 June 30, 2000. The Company believes that inflation did not
have a material effect on its results of operations as of June 30, 2000.
Year 2000 Compliance
As of August 4, 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
15
<PAGE>
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 June 30, 2000 and December 31, 1999 was $6.0 million
and $14.5 million, respectively, which approximates their 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.
16
<PAGE>
PART II
ITEM 1. Legal Proceedings
In addition to the legal proceedings and litigation arising in the ordinary
course of business, the Company is currently 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. The settlement is still subject to a fairness hearing
scheduled to be held on September 8, 2000 and is subject to final approval of
the court. Each shareholder class member has been given notice of the proposed
settlement and has the right to reject the settlement. Pursuant to the
settlement, the proposed settlement fund has been fully funded by the Company in
the amount of $3.5 million, from which funds will be distributed to
participating shareholders provided that the settlement receives final approval
of the court and is not rejected by a certain percentage of participating
shareholders. The Company also retains the right to reject the settlement based
on shareholder participation. The $3.5 million payment made by the Company into
the settlement fund is included in the current prepaid expense amount in the
balance sheet at June 30, 2000. On August 3, 2000, $3.0 million was reimbursed
to the Company by its insurance carrier for the proposed settlement. It is not
possible at this time to predict with certainty whether the settlement will be
finally approved by the court. If the settlement is not approved by the court,
the lawsuit may go to trial. It is not possible at this time to predict the
outcome of the litigation or the amount or nature of any loss. Therefore, there
were no amounts expensed, other than the insurance deductible, relating to the
lawsuit as of June 30, 2000. 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 17, 2000
(the "Meeting"). Three proposals were presented for a vote at the Meeting:
Proposal 1 - The election of four directors, including John F. Burton, to serve
as a Class II director of the Company for a two-year term expiring at the annual
meeting of stockholders to be held in 2002 and until the election and
qualification of his successor, and each Paul A. Brands, Carl J. Rickertsen and
Dr. Paul G. Stern to serve as a Class III director of the Company for a three-
year term expiring at the annual meeting of stockholders to be held in 2003 and
until the election and qualification of each successor; Proposal 2 - The
approval of an amendment to the Company's 1997 Stock Option Plan increasing the
number of shares of the Company's common stock reserved for issuance thereunder
by 2,000,000 shares from 6,875,000 shares to 8,875,000 shares; and Proposal 3 -
The ratification of the appointment of KPMG LLP as the Company's independent
public accountants for fiscal year 2000. All of the above proposals were
approved as follows:
17
<PAGE>
<TABLE>
<CAPTION>
Against/ Withheld/ Broker
Matter For Abstain Exception Non-votes Total
----------------------- ----------------- ----------------- -------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Proposal 1
Class II Director:
John F. Burton 26,498,802 --- 457,728 --- 26,956,530
Class III Directors:
Paul A. Brands 26,490,802 --- 465,728 --- 26,956,530
Carl J. Rickertsen 26,489,402 --- 467,128 --- 26,956,530
Dr. Paul G. Stern 23,542,249 --- 3,414,281 --- 26,956,530
Proposal 2 17,502,953 6,400,544 --- 3,053,033 26,956,530
Proposal 3 26,867,735 88,795 --- --- 26,956,530
</TABLE>
The terms of Dr. Philip S. Dauber, Daniel F. Gillis, Edward E. Lucente and
Frederic V. Malek as directors of the Company continued after the Meeting.
18
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<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.
Date: August 11, 2000 By: /s/ Dale E. Williams
-------------------------------
Dale E. Williams
Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Officer)
20
