<PAGE>
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, 1996
----------------
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 incorporation (IRS Employer Identification
or organization) Number)
500 W. Madison, 32nd Floor
Chicago, Illinois 60661
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(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 22, 1996, there were 42,202,663 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
--
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
Page No.
Part I Financial information
Consolidated Balance Sheets - 3-4
January 31, 1996 and October 31, 1995
Consolidated Statements of Income - 5
three months ended January 31, 1996 and 1995
Consolidated Statements of Cash Flows - 6
three months ended January 31, 1996 and 1995
Notes to Consolidated Financial 7
Statements
Management's Discussion and Analysis of 8-10
Financial Condition and Results of
Operations
Part II Other information 11
Signature Page 12
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
<TABLE>
<CAPTION>
<S> <C> <C>
January 31, October 31,
1996 1995
----------- -----------
(unaudited)
CURRENT ASSETS:
Cash and equivalents $ 25.2 $ 57.1
Accounts receivable, less allowance for doubtful accounts of
$11.8 and $12.5 192.0 199.7
Deferred income taxes 7.2 7.0
Prepaid expenses and other current assets 21.4 21.3
----------- -----------
Total current assets 245.8 285.1
----------- -----------
PROPERTY and EQUIPMENT:
Data processing equipment 31.8 30.9
Furniture and office equipment 14.8 14.1
Leasehold improvements 8.0 7.8
Transportation equipment 2.5 2.8
----------- -----------
57.1 55.6
Less - Accumulated depreciation and amortization 32.7 31.3
----------- -----------
Total property and equipment 24.4 24.3
----------- -----------
OTHER ASSETS:
Software costs, less accumulated amortization of $45.9 and $41.1 62.3 59.0
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $6.5 and $6.0 19.2 18.2
Investments in associated companies 21.6 16.5
Miscellaneous 7.5 8.1
----------- -----------
Total other assets 110.6 101.8
----------- -----------
TOTAL ASSETS $380.8 $411.2
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(in millions, except share data)
<TABLE>
<CAPTION>
January 31, October 31,
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of senior notes payable $ 4.0 $ 4.0
Accrued commissions and royalties 40.1 36.6
Accounts payable and other accrued liabilities 31.3 46.9
Accrued compensation and related benefits 18.3 24.4
Deferred revenue 50.7 51.0
Income taxes payable 16.1 19.9
------ ------
Total current liabilities 160.5 182.8
------ ------
LONG-TERM OBLIGATIONS 27.3 33.9
------ ------
DEFERRED REVENUE 24.4 27.3
------ ------
DEFERRED INCOME TAXES 9.9 9.9
------ ------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 1.0 1.0
------ ------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 100,000 shares authorized,
none issued or outstanding - -
Common stock, $.0033 par value, 60,000,000 shares authorized,
42,202,663 and 42,094,500 shares issued 0.1 0.1
Capital in excess of par value 26.9 26.1
Retained earnings 127.1 128.4
Unrealized gain on available-for-sale securities 5.2 2.5
Cumulative translation adjustment (1.6) (0.8)
------ ------
Total stockholders' equity 157.7 156.3
------ ------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $380.8 $411.2
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
--------------------
1996 1995
------ -------
<S> <C> <C>
Revenues:
License fees $ 59.3 $ 49.0
Client services and other 28.5 28.4
------ ------
Total revenues 87.8 77.4
------ ------
Costs and Expenses:
Cost of license fees 15.1 14.9
Cost of client services and other 19.4 16.3
Sales and marketing 20.5 18.5
Research and development 11.7 9.7
General and administrative 16.3 15.0
------ ------
Total costs and expenses 83.0 74.4
------ ------
Operating income 4.8 3.0
Non-operating income (expense), net (0.3) (0.1)
------ ------
Income before income taxes 4.5 2.9
Provision for income taxes 1.6 1.1
------ ------
Net income $ 2.9 $ 1.8
====== ======
Earnings per share $ 0.07 $ 0.05
====== ======
Dividends per share $ 0.10 $ 0.08
====== ======
Weighted average common and equivalent shares outstanding 43.1 41.1
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------
1996 1995
------ -----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $2.9 $ 1.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 2.0 2.0
Amortization of other assets 4.8 3.8
Provision for doubtful accounts (0.7) 1.0
Deferred income taxes (0.2) 0.3
Deferred revenue (1.8) (2.9)
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable 5.7 11.2
Prepaid expenses and other current assets (0.3) (2.1)
Miscellaneous assets 0.6 -
Accrued commissions and royalties (1.8) (1.3)
Accounts payable and other accrued liabilities (15.7) (6.9)
Accrued compensation and related benefits (5.7) (6.2)
Income taxes payable (5.3) 0.2
------- -------
Net cash provided by (used in) operating (15.5) 0.9
------- -------
Cash Flows From Investing Activities:
Purchases of property and equipment (1.5) (0.8)
Software costs (7.6) (5.2)
Investments and acquisitions, net of cash acquired (2.0) (0.8)
Proceeds from sales of assets - 1.4
------- -------
Net cash flows used in investing activities (11.1) (5.4)
------- -------
Cash Flows From Financing Activities:
Principal payments under financing obligations (1.5) (2.4)
Amount borrowed under line of credit 2.0 -
Repayment of amount borrowed under line of credit (2.0) -
Proceeds from exercise of stock options 0.9 1.2
Dividends paid (4.2) (3.2)
------- -------
Net cash used in financing activities (4.8) (4.4)
------- -------
Effect of exchange rate changes on cash (0.5) 0.4
------- -------
Net decrease in cash and equivalents (31.9) (8.5)
Cash and equivalents:
Beginning of year 57.1 60.2
------- -------
End of period $25.2 $51.7
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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,
1995, 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, 1995.
<PAGE>
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, 1996
to the Three Months Ended January 31, 1995
------------------------------------------
Total revenues increased 13% to $87.8 million during the first quarter of 1996
over total revenues of $77.4 million during the first quarter of 1995. Revenue
increased in all areas except Europe, with North America and Latin America
reporting particularly strong results. License fees of $59.3 million grew 21%
over the prior year quarter reflecting continuing strength of the Company's
product line. Client Services revenue for the quarter of $28.5 million was flat
when compared to the prior year, in part due to the Company's growing
partnerships with major consulting and systems integration firms.
Cost of license fees as a percentage of related revenues was 25% for the first
quarter of 1996, down from 30% for the corresponding prior year period. The
decrease is primarily attributable to declining Alliance partner royalty costs
due to the Company's acquisition of certain of these software products.
Alliance partner software products are developed by third parties and licensed
to the Company for which the Company pays a royalty based on revenues. The
decrease in cost of license fees was also due to decreasing affiliate
commissions, reflecting a higher percentage of license fee revenue generated by
SSA's direct sales organization in the first quarter of 1996 when compared to
the first quarter of 1995.
Cost of Client Services as a percentage of related revenues was 68% for the
first quarter of 1996 compared to 57% during the corresponding prior year
period. Lower productivity related to newly hired technical professionals
around the world, in particular those with open systems and object skills,
resulted in an increase in cost of client services.
Sales and marketing as a percentage of license fee revenue was 35% and 38% in
the first quarters of 1996 and 1995, respectively. The decrease was primarily
due to increased productivity of the Company's direct sales organization.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Gross (total) research and development (R&D) expenditures in the first quarter
of 1996 increased $3.7 million or 25% over the first quarter of 1995. The
increase is due to the Company's continuing development of its distributed
object computing technology and enhancements of its existing products.
The Company capitalizes software development costs once technological
feasibility is established, in accordance with Statement of Financial Accounting
Standard (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 $6.9 million of software development
costs in the first quarter of 1996 as compared to $5.2 million in the first
quarter of 1995. The capitalization ratio (capitalized software as a percentage
of gross R&D) in the first quarters of 1996 and 1995 was 37% and 35%,
respectively. The increase was due in part to construction and testing
activities related to the Company's distributed object computing architecture.
The following table sets forth R&D expenditures and related capitalized amounts
for the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
(in millions) Percentage
Quarter Ended January 31, Change
------------------------ ----------
1996 vs.
1996 1995 1995
-------- -------- ----------
<S> <C> <C> <C>
Gross R&D costs $ 18.6 $ 14.9 25%
Less amount capitalized (6.9) (5.2) 33%
-------- -------- ----------
Net R&D costs $ 11.7 $ 9.7 21%
-------- -------- ----------
</TABLE>
<PAGE>
General and administrative expenses of $16.3 million increased $1.3 million, or
9%, over the prior year to support the Company's worldwide expansion,
including the establishment of direct operations in Chile, Columbia and
Czechoslovakia, as well as various acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents declined from $57.1 million at October 31, 1995 to $25.2
million at January 31, 1996 due to the pay down of year-end accruals which
reflect the relatively high level of activity in the Company's fourth quarter,
payment of the Company's annual dividend which increased 25% over the prior year
($.10 per share versus $.08 in the prior year), tax payments related to the
Company's record profitability in fiscal 1995 and investments in product and
affiliate acquisitions.
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>
Part II - Other Information
Item 1. Legal Proceedings
On November 20, 1995, the Company filed an action against Owens-Illinois
("Owens") in Illinois state court seeking damages based on Owens' failure to
make payments required under a July 29, 1994, contract (the "Contract") between
the parties. The Company is seeking approximately $5.95 million in damages.
The Company believes it has a meritorious case and intends to prosecute the
action vigorously. On the same day the Company filed suit against Owens, Owens
filed a lawsuit in Illinois state court for rescission of the Contract and for
damages. Owens seeks recovery of the $5.76 million it has already paid to the
Company under the Contract as well as an unspecified amount of further actual
and punitive damages based on the Company's alleged fraud in inducing Owens to
enter into the Contract and the Company's alleged breach of the Contract.
Although the outcome of this proceeding cannot be determined with certainty,
management, in consultation with its legal counsel, believes that the
allegations of fraud and breach of contract are without merit and that the final
outcome should not have a material adverse effect on the Company's operations or
financial condition.
In late November, two class action lawsuits were filed in the federal
court in Chicago, Illinois, against the Company and certain of its
officers, alleging damages to persons who purchased the Company's
common stock during the period August 21, 1995 through November 22,
1995. The plaintiffs subsequently dismissed each of these suits
voluntarily, without any liability to the Company.
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>
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 27, 1996
-----------------
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>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 25,200,000
<SECURITIES> 0
<RECEIVABLES> 203,800,000
<ALLOWANCES> 11,800,000
<INVENTORY> 0
<CURRENT-ASSETS> 245,800,000
<PP&E> 57,100,000
<DEPRECIATION> 32,700,000
<TOTAL-ASSETS> 380,800,000
<CURRENT-LIABILITIES> 160,500,000
<BONDS> 0
<COMMON> 100,000
0
0
<OTHER-SE> 157,600,000
<TOTAL-LIABILITY-AND-EQUITY> 380,800,000
<SALES> 87,800,000
<TOTAL-REVENUES> 87,800,000
<CGS> 34,500,000
<TOTAL-COSTS> 83,000,000
<OTHER-EXPENSES> 3,000,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,500,000
<INCOME-TAX> 1,600,000
<INCOME-CONTINUING> 2,900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,900,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
