FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1995
----------------
OR
[ ]TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
---------------- ----
Commission file number 0-15322
SYSTEM SOFTWARE ASSOCIATES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3144515
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
500 W. Madison, 32nd Floor
Chicago, Illinois 60661
------------------------------- ------------------------------
(Address of principal (Zip Code)
executive offices)
(Registrant's telephone number, including area code) (312) 258-6000
----------------------
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 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 .
----- ---- ---------
At February 20, 1995 there were 27,139,737 and zero shares outstanding of the
Company's Common ($.0033 par value) and Preferred ($.01 par value) Stock,
respectively.
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 12
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SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
Page
No.
Part I Financial information
Consolidated Balance Sheets -- 3-4
January 31, 1995 and October 31, 1994
Consolidated Statements of Income -- 5
three months ended January 31, 1995 and 1994
Consolidated Statements of Cash Flows -- 6
three months ended January 31, 1995 and 1994
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of 8-10
Financial Condition and Results
of Operations
Part II Other information 11
Signature Page 12
Page 2
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Part I - Financial Information
Item 1 - Financial Statements
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
January 31, October 31,
1995 1994
--------- ---------
(unaudited)
CURRENT ASSETS:
Cash and equivalents.......................... $51.7 $60.2
Accounts receivable, less allowance for
doubtful accounts of $10.2 at January 31,
1995 and October 31, 1994.................. 139.4 153.0
Deferred income taxes......................... 4.2 4.5
Prepaid expenses and other current assets..... 22.1 20.0
--------- ---------
Total current assets....................... 217.4 237.7
--------- ---------
PROPERTY and EQUIPMENT:
Data processing equipment..................... 27.7 27.5
Furniture and office equipment................ 13.0 12.9
Leasehold improvements........................ 8.0 7.3
Transportation equipment...................... 3.4 6.0
--------- ---------
52.1 53.7
Less - Accumulated depreciation and
amortization............................... 27.0 26.1
--------- ---------
Total property and equipment............... 25.1 27.6
--------- ---------
OTHER ASSETS:
Software costs, less accumulated amortization
of $29.5 and $26.2......................... 51.1 49.3
Cost in excess of net assets of acquired
businesses, less accumulated amortization
of $4.8 and $4.3........................... 16.2 15.8
Investments in associated companies........... 1.5 1.5
Miscellaneous................................. 1.3 1.3
--------- ---------
Total other assets......................... 70.1 67.9
--------- ---------
TOTAL ASSETS $312.6 $333.2
========= =========
The accompanying notes are an integral part of these financial statements.
Page 3
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SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(in millions, except share data)
January 31, October 31,
1995 1994
--------- ---------
(unaudited)
CURRENT LIABILITIES:
Accrued commissions and royalties............. $25.7 $27.2
Accounts payable and other accrued liabilities 35.1 44.0
Accrued compensation and related benefits..... 15.0 21.6
Deferred revenue.............................. 44.5 45.6
Income taxes payable.......................... 6.8 6.6
--------- ---------
Total current liabilities.................. 127.1 145.0
--------- ---------
LONG-TERM OBLIGATIONS........................... 32.4 32.7
--------- ---------
DEFERRED REVENUE................................ 28.5 30.3
--------- ---------
DEFERRED INCOME TAXES........................... 8.6 8.6
--------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.. 1.9 1.9
--------- ---------
STOCKHOLDERS' EQUITY:
Common Stock, $.0033 par value 60,000,000
shares authorized, 27,127,000 and
26,994,000 shares issued (net of treasury
shares).................................... 0.1 0.1
Capital in excess of par value................ 21.9 20.7
Retained earnings............................. 95.8 97.2
Cumulative translation adjustment............. (1.2) (0.8)
--------- ---------
116.6 117.2
Less-cost of common stock in treasury, 411,000
shares..................................... 2.5 2.5
--------- ---------
Total stockholders' equity................. 114.1 114.7
--------- ---------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY...... $312.6 $333.2
========= =========
The accompanying notes are an integral part of these financial statements.
Page 4
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SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
(unaudited)
Three Months Ended
January 31,
------------------
1995 1994
--------- ---------
Revenues
License fees.................................. $49.0 $45.4
Client services and other..................... 28.4 21.0
--------- ---------
Total revenues............................. 77.4 66.4
--------- ---------
Costs and expenses:
Cost of license fees.......................... 14.9 14.5
Cost of client services and other............. 16.3 12.5
Sales and marketing........................... 18.5 17.3
Research and development...................... 9.7 6.8
General and administrative.................... 15.0 13.4
--------- ---------
Total costs and expenses................... 74.4 64.5
--------- ---------
Operating income................................ 3.0 1.9
Non-operating income (expense), net............. (0.1) (0.2)
--------- ---------
Income before income taxes and minority interest 2.9 1.7
Provision for income taxes...................... 1.1 0.7
--------- ---------
Income before minority interest................. 1.8 1.0
Minority interest in net (income) loss of
consolidated subsidiaries..................... -- 0.2
--------- ---------
Net income...................................... $1.8 $1.2
========= =========
Earnings per share.............................. $0.07 $0.04
========= =========
Dividends per share............................. $0.12 $0.12
========= =========
Weighted average common and equivalent shares
outstanding.................................. 27.4 27.3
========= =========
The accompanying notes are an integral part of these financial statements.
Page 5
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SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
Three months ended
January 31,
------------------
1995 1994
-------- --------
Cash Flows From Operating Activities:
Net income...................................... $1.8 $1.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment.................................. 2.0 1.7
Amortization of other assets.................. 3.8 2.3
Provision for doubtful accounts............... 1.0 2.0
Deferred income taxes......................... 0.3 (0.1)
Deferred revenue.............................. (2.9) 0.1
Change in operating assets and liabilities, net
of acquisitions:
Accounts receivable........................ 11.2 10.8
Prepaid expenses and other current assets.. (2.1) 0.6
Accrued commissions and royalties.......... (1.3) (2.2)
Accounts payable and other accrued
liabilities.............................. (6.9) (3.6)
Accrued compensation and related benefits.. (6.2) (2.5)
Income taxes payable....................... 0.2 (0.2)
Other...................................... -- 0.4
-------- --------
Net cash provided by operating activities 0.9 10.5
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment........... (0.8) (1.4)
Proceeds from sale of property and equipment.. 1.4 --
Software costs................................ (5.2) (7.2)
Acquisitions, net of cash acquired............ (0.8) --
-------- --------
Net cash used in investing activities...... (5.4) (8.6)
-------- --------
Cash Flows From Financing Activities:
Principal payments under financing obligations (2.4) (1.2)
Proceeds from exercise of stock options...... 1.2 --
Dividends paid................................ (3.2) (3.2)
-------- --------
Net cash used in financing activities...... (4.4) (4.4)
-------- --------
Effect of exchange rate changes on cash......... 0.4 (1.2)
-------- --------
Net decrease in cash and equivalents....... (8.5) (3.7)
Cash and equivalents:
Beginning of period........................ 60.2 57.6
-------- --------
End of period.............................. $51.7 $53.9
======== ========
The accompanying notes are an integral part of these financial statements.
Page 6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 ---- Basis of Presentation
The consolidated financial statements include the accounts of System Software
Associates, Inc. and its majority owned subsidiaries ("SSA", or "the Company").
Except for the consolidated balance sheet for the fiscal year ended October 31,
1994, the financial information included herein is unaudited. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. Results shown for interim periods
are not necessarily indicative of the results to be obtained for a full fiscal
year.
These interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1994.
Page 7
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended January 31, 1995
to the Three Months Ended January 31, 1994
-------------------------------------------
Total revenues increased 17% to $77.4 million during the first quarter of 1995
over total revenues of $66.4 million recorded during the first quarter of 1994.
The revenue increase was balanced geographically, with all regions reporting
double-digit growth. Client Services revenue for the quarter was $28.4 million,
an increase of 35% over the prior year, reflecting significant investments in
skills and resources and improving productivity.
Cost of license fees as a percentage of related revenues was 30% for the first
quarter of 1995, down from 32% for the corresponding prior year period. The
decrease is primarily attributable to sales mix, reflecting a higher percentage
of license fee revenue generated by SSA's direct sales organization in the first
quarter of 1995 compared to the first quarter of 1994.
Cost of Client Services as a percentage of related revenues was 57% for the
first quarter of 1995, compared to 60% during the corresponding prior year
period. The three percentage point improvement reflects efficiencies gained
from achieving critical mass in several geographic areas and improving
productivity of Client Services professionals world-wide.
Sales and marketing expenses were $18.5 million during the first quarter of
1995, as compared to $17.3 million in 1994, an increase of 7%, directly in line
with the growth in license fees.
Page 8
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Gross (total) research and development (R&D) expenditures increased 15%
comparing the first quarter of 1994 with the first quarter of 1995. The
increase supported the development and enhancement of new and existing products
(including development of open-systems products in both periods) and is
consistent with the Company's strategy of continuous improvement and expansion
of its product line.
The Company capitalizes software development costs once technological
feasibility is established, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86. These costs generally include a portion of construction
costs as well as costs incurred during final product testing prior to full
product release. The Company capitalized $5.2 million of software development
costs in the first quarter of 1995 as compared to $6.2 million in the first
quarter of 1994. The decrease in capitalized software is driven by a higher
portion of R&D spending being made to support and maintain existing products.
The capitalization rate dropped to 35% in the first quarter of 1995 versus 48%
in the first quarter of 1994. The Company expects the rate to be at or near 35%
for the remainder of 1995.
The following table sets forth R&D expenditures and related capitalized amounts
for the periods indicated.
- --------------------------------------------------------------------------------
(in millions)
Quarter Ended Percentage
January 31, Change
- --------------------------------------------------------------------------------
1995
versus
1995 1994 1994
- --------------------------------------------------------------------------------
Gross R&D expenditures $14.9 $13.0 15%
Less amount capitalized (5.2) (6.2) (16%)
- --------------------------------------------------------------------------------
Net R&D costs $9.7 $6.8 43%
- --------------------------------------------------------------------------------
General and administrative expenses of $15.0 million increased $1.6 million, or
12%, over the prior year, largely outside of the United States, in support of
the Company's worldwide growth.
Page 9
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LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents declined from $60.2 million at October 31, 1994 to $51.7
million at January 31, 1995, due largely to payment of the Company's annual
dividend, which aggregated $3.2 million ($.12 per share) and the paydown of
year-end accruals which reflect the relatively high activity in the fourth
quarter.
Management anticipates that cash generated from operations combined with current
working capital and available credit lines will provide sufficient liquidity to
meet ordinary capital requirements for the foreseeable future.
Page 10
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Part II - Other Information
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8K None
Page 11
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Signature Page
Pursuant to the requirements 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.
Date February 24, 1995
---------------------
System Software Associates, Inc.
/s/ Roger E. Covey
----------------------------------------
Roger E. Covey
Chairman and
Chief Executive Officer
/s/ Joseph J. Skadra
----------------------------------------
Joseph J. Skadra
Chief Financial Officer
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SSA's
FIRST QUARTER 10Q FOR 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> JAN-31-1995
<CASH> 51,700,000
<SECURITIES> 0
<RECEIVABLES> 149,600,000
<ALLOWANCES> 10,200,000
<INVENTORY> 0
<CURRENT-ASSETS> 217,400,000
<PP&E> 52,100,000
<DEPRECIATION> 27,000,000
<TOTAL-ASSETS> 312,600,000
<CURRENT-LIABILITIES> 127,100,000
<BONDS> 0
<COMMON> 100,000
0
0
<OTHER-SE> 114,000,000
<TOTAL-LIABILITY-AND-EQUITY> 312,600,000
<SALES> 77,400,000
<TOTAL-REVENUES> 77,400,000
<CGS> 31,200,000
<TOTAL-COSTS> 74,400,000
<OTHER-EXPENSES> (100,000)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F1>
<INCOME-PRETAX> 2,900,000
<INCOME-TAX> 1,100,000
<INCOME-CONTINUING> 1,800,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,800,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<FN>
<F1>INTEREST EXPENSE IS INCLUDED IN THE OTHER-EXPENSES BALANCE.
</FN>
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