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 July 31, 1995
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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
------------------------------- ------------------------------------
(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 .
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At August 15, 1995 there were 27,458,763 and zero shares outstanding of the
Company's Common ($.0033 par value) and Preferred ($.01 par value) Stock,
respectively.
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 13
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SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
Page No.
Part I Financial information
Consolidated Balance Sheets - 3-4
July 31, 1995 and October 31, 1994
Consolidated Statements of Income - 5
three and nine months ended July 31, 1995 and 1994
Consolidated Statements of Cash Flows - 6
nine months ended July 31, 1995 and 1994
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial 8-11
Condition and Results of Operations
Part II Other information 12
Signature Page 13
Page 2
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Part I - Financial Information
Item 1 - Financial Statements
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
July 31, October 31,
1995 1994
--------- ---------
(unaudited)
CURRENT ASSETS:
Cash and equivalents...................... $48.5 $60.2
Accounts receivable, less allowance for
doubtful accounts of $10.2 at July 31,
1995 and October 31, 1994.............. 153.3 153.0
Deferred income taxes..................... 4.6 4.5
Prepaid expenses and other current assets 24.5 20.0
--------- ---------
Total current assets.................. 230.9 237.7
--------- ---------
PROPERTY AND EQUIPMENT:
Data processing equipment................. 29.1 27.5
Furniture and office equipment............ 13.6 12.9
Leasehold improvements.................... 8.1 7.3
Transportation equipment.................. 3.0 6.0
--------- ---------
53.8 53.7
Less - Accumulated depreciation and
amortization........................ 30.2 26.1
--------- ---------
Total property and equipment........... 23.6 27.6
--------- ---------
OTHER ASSETS:
Software costs, less accumulated
amortization of $36.7 and $26.2....... 55.7 49.3
Cost in excess of net assets of acquired
businesses, less accumulated
amortization of $5.1 and $4.3......... 14.2 15.8
Investments in associated companies..... 7.2 1.5
Non-current receivables and other....... 13.7 1.3
--------- ---------
Total other assets.................... 90.8 67.9
--------- ---------
TOTAL ASSETS................................ $345.3 $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)
July 31, October 31,
1995 1994
-------- --------
(unaudited)
CURRENT LIABILITIES:
Accrued commissions and royalties......... $30.4 $27.2
Accounts payable and other accrued
liabilities............................ 42.3 44.0
Accrued compensation and related benefits 15.1 21.6
Deferred revenue.......................... 39.5 45.6
Income taxes payable...................... 14.1 6.6
--------- ---------
Total current liabilities............. 141.4 145.0
--------- ---------
LONG-TERM OBLIGATIONS....................... 34.6 32.7
--------- ---------
DEFERRED REVENUE............................ 28.9 30.3
--------- ---------
DEFERRED INCOME TAXES....................... 6.1 8.6
--------- ---------
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES................................ 1.1 1.9
--------- ---------
STOCKHOLDERS' EQUITY:
Common Stock, $.0033 par value 60,000,000
shares authorized, 27,457,000 and
26,994,000 shares issued (net of
treasury shares)....................... 0.1 0.1
Capital in excess of par value............ 24.0 20.7
Retained earnings......................... 111.2 97.2
Cumulative translation adjustment......... (0.5) (0.8)
--------- ---------
134.8 117.2
Less-cost of common stock in treasury,
271,000 and 411,000 shares............ 1.6 2.5
--------- ---------
Total stockholders' equity............ 133.2 114.7
--------- ---------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY.. $345.3 $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 Nine Months
Ended Ended
July 31, July 31,
--------------- ---------------
1995 1994 1995 1994
------ ------ ------ ------
Revenues:
License fees ....................... $72.3 $63.1 $173.4 $157.7
Client services and other........... 32.7 23.1 93.3 66.9
------ ------ ------ ------
Total revenues................... 105.0 86.2 266.7 224.6
------ ------ ------ ------
Costs and expenses:
Cost of license fees................ 21.0 18.0 51.9 44.1
Cost of client services and other... 21.3 13.8 56.3 39.6
Sales and marketing................. 20.7 24.2 58.8 63.1
Research and development............ 10.0 8.4 29.0 22.9
General and administrative.......... 14.6 13.6 43.9 40.9
------ ------ ------ ------
Total costs and expenses......... 87.6 78.0 239.9 210.6
------ ------ ------ ------
Operating income...................... 17.4 8.2 26.8 14.0
Non-operating income (expense), net... (0.1) (0.1) (0.1) (0.4)
------ ------ ------ ------
Income before income taxes and
minority interest................... 17.3 8.1 26.7 13.6
Provision for income taxes............ 6.1 2.8 9.4 4.9
------ ------ ------ ------
Income before minority interest....... 11.2 5.3 17.3 8.7
Minority interest..................... --- 0.1 (0.1) 0.5
------ ------ ------ ------
Net income............................ $11.2 $5.4 $17.2 $9.2
====== ====== ====== ======
Earnings per share.................... $0.40 $0.20 $0.62 $0.34
====== ====== ====== ======
Dividends per share................... --- --- $0.12 $0.12
====== ====== ====== ======
Weighted average common and equivalent
shares outstanding................. 28.0 27.0 27.8 27.0
====== ====== ====== ======
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)
Nine months ended
July 31,
-------------------
1995 1994
------ ------
Cash Flows From Operating Activities:
Net income........................................... $17.2 $9.2
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization of 5.9 6.0
property and equipment..........................
Amortization of other assets....................... 12.0 7.5
Provision for doubtful accounts.................... 1.0 3.7
Deferred income taxes.............................. (2.6) (0.1)
Deferred revenue................................... (7.5) 5.1
Minority Interest.................................. 0.1 --
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable............................. (0.4) (10.2)
Prepaid expenses and other current assets....... (3.7) 3.3
Accrued commissions and royalties............... 3.2 (3.6)
Accounts payable and other accrued liabilities.. (3.8) 2.5
Accrued compensation and other related benefits (6.5) (1.5)
Income taxes payable............................ 7.5 2.4
Non-current receivables and other............... (7.4) (0.7)
------ ------
Net cash provided by operating activities..... 15.0 23.6
------ ------
Cash Flows From Investing Activities:
Purchases of property and equipment................ (3.0) (11.0)
Proceeds from sale of property and equipment....... 1.7 --
Software costs..................................... (17.9) (23.8)
Acquisitions, net of cash acquired................. (3.8) (1.6)
Other.............................................. -- (0.2)
------ ------
Net cash used in investing activities........... (23.0) (36.6)
------ ------
Cash Flows From Financing Activities:
Principal payments under long-term obligations..... (3.1) (3.4)
Proceeds from exercise of stock options............ 3.3 0.1
Dividends paid..................................... (3.2) (3.2)
------ ------
Net cash used in financing activities........... (3.0) (6.5)
------ ------
Effect of exchange rate changes on cash.............. (0.7) (2.2)
------ ------
Net decrease in cash and equivalents............ (11.7) (21.7)
Cash and equivalents:
Beginning of period............................. 60.2 57.6
------ ------
End of period................................... $48.5 $35.9
====== ======
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 July 31, 1995
to the Three Months Ended July 31, 1994
---------------------------------------
Total revenues increased 22% to $105.0 million during the third quarter of 1995
over total revenues of $86.2 million recorded during the third quarter of 1994.
The revenue increase was generally balanced worldwide but included particularly
strong results in Europe and in the Latin America region. Client Services
revenue for the quarter was $32.7 million, an increase of 42% over the prior
year, reflecting significant investments in skills and resources and improving
productivity. Revenues related to BPCS Unix Client/Server software approximated
28% of the quarter's license fee revenues.
Cost of license fees as a percentage of related revenues was 29% for both the
third quarters of 1995 and 1994 despite higher software amortization costs
recorded during the third quarter of 1995.
Cost of Client Services as a percentage of related revenues was 65% for the
third quarter of 1995, an increase when compared to 60% for the same quarter
last year. The increase was due primarily to the costs of training and
education provided to client services professionals and SSA's affiliate partners
relating to new products.
Sales and marketing expenses were $20.7 million during the third quarter of
1995, as compared to $24.2 million in 1994, a reduction of 14% due mainly to
programs to reduce fixed expenses begun early in FY 1995.
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 decreased 9% in the
third quarter of 1995 when compared to the third quarter of 1994. The decrease
was attributable to the Company's expense reduction programs begun early in 1995
which impacted R&D favorably by replacing contracted technical personnel with
employed technical personnel.
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 $5.3 million of software
development costs in the third quarter of 1995 as compared to $8.4 million in
the third 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 was 35% in the third quarter of 1995 versus
50% in the third 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 third quarter of 1995 and 1994.
(in millions) Percentage
Quarter Ended July 31, Change
----------------------- ----------
1995 vs.
1995 1994 1994
----- ----- ------
Gross R&D expenditures $15.3 $16.8 (9)%
Less amount capitalized (5.3) (8.4) (37)%
----- ----- -----
Net R&D costs $10.0 $8.4 19%
----- ----- -----
General and administrative expenses of $14.6 million increasing $1.0 million or
7% over the prior year, in support of the Company's worldwide growth.
Page 9
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Comparison of the Nine Months Ended July 31, 1995
to the Nine Months Ended July 31, 1994
--------------------------------------
The principal variations for the nine months ended July 31, 1995, when
supplemented with the following comments, are relatively consistent with the
discussion of the third quarter results.
Total revenues increased 19% to $266.7 million for the first nine months of 1995
over total revenues of $224.6 million recorded during the first nine months of
1994. The revenue increase was attributable to higher license fees and
continued growth in the Company's global client services business, which was up
39% compared to the prior period.
The following table sets forth R&D expenditures and related capitalized amounts
for the first nine months of 1995 and 1994.
(in millions) Percentage
Nine Months Ended July 31, Change
----------------------- ----------
1995 vs.
1995 1994 1994
----- ----- ------
Gross R&D expenditures $44.6 $45.3 (2)%
Less amount capitalized (15.6) (22.4) (30)%
----- ----- -----
Net R&D costs $29.0 $22.9 27%
----- ----- -----
Page 10
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LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents declined from $60.2 million at October 31, 1994 to $48.5
million at July 31, 1995. The decline was less than management expected for the
period. Funds were used primarily for the Company's annual dividend, payment of
significant year-end accruals, and investments to enhance products and market
coverage.
During the third quarter, the Company acquired 10% of its affiliate, SSA
Northwest as well as the BPCS division of its California affiliate, Exigent
Computer Group. Through a stock-for-stock transaction, the Company combined
with one of its affiliates, SSA Northeast. Additionally, the Company acquired
several software products which were previously licensed.
In July, the Company entered into a strategic alliance relationship with
Harbinger Corporation ("Harbinger") pursuant to which the Company sold its EDI
software assets to Harbinger and was licensed by Harbinger to market and sell
AS/400, Unix and PC-based EDI software products (There was no gain or loss
recognized on the sale). Minimum royalties amounting to $1.4M and $5.7M will be
paid by the Company to Harbinger during the remainder of calendar year 1995 and
calendar 1996 respectively. The Company received as consideration 550,000
shares of Harbinger Common Stock and 4,000,000 shares of Harbinger Zero Coupon
Preferred Stock. The Zero Coupon Preferred Stock vests at the rate of up to
1,000,000 shares per year beginning in 1997 based upon achieving certain
performance targets, and must be redeemed by the Company upon vesting for cash
of $1.00 per share or, at the option of the Company an equal amount of Harbinger
Common Stock. In August, the Company purchased an additional 450,000 shares of
Harbinger Common Stock.
In June 1995, the Company increased its bank credit lines to $50M from $20M.
This added capacity is in line with the Company's overall growth.
Management anticipates that cash generated from operations together with current
working capital and available credit lines will provide sufficient liquidity to
meet ordinary capital requirements for the foreseeable future.
Page 11
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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 12
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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 August 25, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SSA's
third 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> JUL-31-1995
<CASH> 48,500,000
<SECURITIES> 0
<RECEIVABLES> 163,500,000
<ALLOWANCES> 10,200,000
<INVENTORY> 0
<CURRENT-ASSETS> 230,900,000
<PP&E> 53,800,000
<DEPRECIATION> 30,200,000
<TOTAL-ASSETS> 345,300,000
<CURRENT-LIABILITIES> 141,400,000
<BONDS> 0
<COMMON> 100,000
0
0
<OTHER-SE> 133,100,000
<TOTAL-LIABILITY-AND-EQUITY> 345,300,000
<SALES> 266,700,000
<TOTAL-REVENUES> 266,700,000
<CGS> 108,200,000
<TOTAL-COSTS> 239,900,000
<OTHER-EXPENSES> 100,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,600,000
<INCOME-TAX> 9,400,000
<INCOME-CONTINUING> 17,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,200,000
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
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