<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 April 30, 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 (IRS Employer Identification Number)
incorporation or organization)
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 June 10, 1996, there were 42,351,867 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
--
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Part I Financial information
Consolidated Balance Sheets - 3-4
April 30, 1996 and October 31, 1995
Consolidated Statements of Income - 5
three and six months ended April 30,
1996 and 1995
Consolidated Statements of Cash Flows - 6
six months ended April 30, 1996 and 1995
Notes to Consolidated Financial 7
Statements
Management's Discussion and Analysis of 8-11
Financial Condition and Results of
Operations
Part II Other information 12
Signature Page 13
</TABLE>
2
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
<TABLE>
<CAPTION>
April 30, October 31,
1996 1995
---------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 21.6 $ 57.1
Accounts receivable, less allowance for doubtful accounts of $11.8
and $12.5 219.1 199.7
Deferred income taxes 7.4 7.0
Prepaid expenses and other current assets 24.6 21.3
---------- ----------
Total current assets 272.7 285.1
---------- ----------
PROPERTY and EQUIPMENT:
Data processing equipment 33.9 30.9
Furniture and office equipment 16.2 14.1
Leasehold improvements 8.1 7.8
Transportation equipment 2.0 2.8
---------- ----------
60.2 55.6
Less - Accumulated depreciation and amortization 34.2 31.3
---------- ----------
Total property and equipment 26.0 24.3
---------- ----------
OTHER ASSETS:
Software costs, less accumulated amortization of $50.7 and $41.1 67.9 59.0
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $7.0 and $6.0 19.4 18.2
Investments in associated companies 24.8 16.5
Miscellaneous 6.9 8.1
---------- ----------
Total other assets 119.0 101.8
---------- ----------
TOTAL ASSETS $417.7 $411.2
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(in millions, except share data)
<TABLE>
<CAPTION>
April 30, October 31,
1996 1995
---------- ----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short term borrowings and current maturities of senior notes payable $ 24.3 $ 4.0
Accrued commissions and royalties 48.9 36.6
Accounts payable and other accrued liabilities 35.8 46.9
Accrued compensation and related benefits 19.4 24.4
Deferred revenue 44.7 51.0
Income taxes payable 16.6 19.9
---------- ----------
Total current liabilities 189.7 182.8
---------- ----------
LONG-TERM OBLIGATIONS 27.3 33.9
---------- ----------
DEFERRED REVENUE 29.7 27.3
---------- ----------
DEFERRED INCOME TAXES 9.9 9.9
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES - 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,
42,351,192 and 42,094,500 shares issued 0.1 0.1
Capital in excess of par value 28.0 26.1
Retained earnings 127.4 128.4
Unrealized gain on available-for-sale securities 7.3 2.5
Cumulative translation adjustment (1.7) (0.8)
---------- ----------
Total stockholders' equity 161.1 156.3
---------- ----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $417.7 $411.2
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
---------------------- -----------------------
1996 1995 1996 1995
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 71.5 $ 52.1 $ 130.8 $ 101.1
Client services and other 30.6 32.2 59.1 60.6
--------- ---------- ---------- ----------
Total revenues 102.1 84.3 189.9 161.7
--------- ---------- ---------- ----------
Costs and Expenses:
Cost of license fees 24.9 16.0 40.0 30.9
Cost of client services and other 22.0 18.7 41.4 35.0
Sales and marketing 25.3 19.6 45.8 38.1
Research and development 11.6 9.3 23.3 19.0
General and administrative 17.4 14.3 33.7 29.3
--------- ---------- ---------- ----------
Total costs and expenses 101.2 77.9 184.2 152.3
--------- ---------- ---------- ----------
Operating income 0.9 6.4 5.7 9.4
Non-operating income (expense), net (0.5) 0.1 (0.8) -
--------- ---------- ---------- ----------
Income before income taxes and minority interest 0.4 6.5 4.9 9.4
Provision for income taxes 0.1 2.2 1.7 3.3
--------- ---------- ---------- ----------
Income before minority interest 0.3 4.3 3.2 6.1
Minority interest - (0.1) - (0.1)
--------- ---------- ---------- ----------
Net income $ 0.3 $ 4.2 $ 3.2 $ 6.0
========= ========== ========== ==========
Earnings per share $ 0.01 $ 0.10 $ 0.07 $ 0.15
========= ========== ========== ==========
Dividends per share $ - $ - $ 0.10 $ 0.08
========= ========= ========== =========
Weighted average common and equivalent shares
outstanding 43.0 41.9 43.1 41.6
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 3.2 $ 6.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 4.1 4.1
Amortization of other assets 10.7 7.7
Provision for doubtful accounts (0.7) 1.0
Deferred income taxes (0.4) 0.5
Deferred revenue (2.8) (3.2)
Minority interest - 0.1
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (21.5) 10.1
Prepaid expenses and other current assets (3.6) (5.5)
Miscellaneous assets 1.1 0.1
Accrued commissions and royalties 7.1 (1.4)
Accounts payable and other accrued liabilities (11.1) (6.0)
Accrued compensation and related benefits (4.7) (6.6)
Income taxes payable (6.0) (0.3)
-------- --------
Net cash provided by (used in) operating activities (24.6) 6.6
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (5.3) (1.6)
Software costs (18.5) (10.5)
Investments and acquisitions, net of cash acquired (3.6) (0.8)
Proceeds from sales of assets - 1.4
-------- --------
Net cash flows used in investing activities (27.4) (11.5)
-------- --------
Cash Flows From Financing Activities:
Principal payments under financing obligations (1.5) (2.7)
Amount borrowed under line of credit 22.3 -
Repayment of amount borrowed under line of credit (2.0) -
Proceeds from exercise of stock options 2.0 2.4
Dividends paid (4.2) (3.2)
-------- --------
Net cash provided by (used in) financing activities 16.6 (3.5)
-------- --------
Effect of exchange rate changes on cash (0.1) (1.6)
-------- --------
Net decrease in cash and equivalents (35.5) (10.0)
Cash and equivalents:
Beginning of year 57.1 60.2
-------- --------
End of period $21.6 $50.2
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<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.
7
<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 April 30, 1996
to the Three Months Ended April 30, 1995
----------------------------------------
Total revenues recorded during the second quarter of 1996 increased 21% to
$102.1 million over second quarter 1995 total revenues of $84.3 million.
Revenue increases were reported in all of the Company's geographic regions.
License fees grew 37% to $71.5 million over the prior year quarter reflecting
continuing strength of the Company's product line. Client Services revenues in
the most recent quarter declined 5% when compared to the same quarter in 1995
primarily due to a significant amount of training time required of newly hired
Client Services professionals.
Cost of license fees as a percentage of related revenues was 35% for the second
quarter of 1996, up from 31% for the corresponding prior year period. The
increase is primarily attributable to commissions resulting from a higher mix of
license fees from the Company's indirect sales channels, and increased warranty
expense, partially offset by declining Alliance partner/third party software
royalties. Recently the Company has entered into partnerships with the major
computer hardware manufacturers as an important indirect source of software
distribution, primarily in the developing economies of the world where a totally
integrated open architecture client/server solution is required. Under such
partnerships, SSA normally grants the manufacturers a non-exclusive right to
sub-license a fixed amount of SSA software to end users in a designated
territory in return for a fixed fee.
Cost of client services as a percentage of related revenues was 72% for the
second quarter of 1996 compared to 58% 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,
combined with investments in training resulted in an increase in cost of client
services.
Sales and marketing as a percentage of license fee revenues was 35% and 38% in
the second quarters of 1996 and 1995, respectively. The decrease was primarily
due to a lower mix of direct channel revenues and increased productivity of the
Company's direct sales organization.
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Gross (total) research and development (R&D) expenditures in the second quarter
of 1996 increased $7.1 million or 49% over the second 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 $9.9 million of software development
costs in the second quarter of 1996 as compared to $5.1 million in the second
quarter of 1995. The capitalization ratio (capitalized software as a percentage
of gross R&D) in the first quarters of 1996 and 1995 was 46% 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(in millions) Percentage
Quarter Ended April 30, Change
- ----------------------------------------------------------------
1996 vs.
1996 1995 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $21.5 $14.4 49%
Less amount capitalized (9.9) (5.1) 94%
- ----------------------------------------------------------------
Net R&D costs $11.6 $ 9.3 25%
- ----------------------------------------------------------------
</TABLE>
General and administrative expenses of $17.4 million increased $3.1 million, or
22%, 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.
9
<PAGE>
Comparison of the Six Months Ended April 30, 1996
to the Six Months Ended April 30, 1995
--------------------------------------
The principal variations for the six months ended April 30, 1996, when
supplemented with the following comments, are relatively consistent with the
discussion of the second quarter results.
Total revenues increased 17% to $189.9 million for the first six months of 1996
over total revenues of $161.7 million recorded during the first six months of
1995. The revenue increase was attributable to higher license fees, which were
up 29% compared to the prior year, partially offset by a 2% decline in client
services revenues.
Cost of license fees as a percentage of related revenues remained constant at
31% for the first six months of 1996 and 1995. Increased commissions resulting
from a higher mix of indirect sales channel revenues and increased warranty
costs were offset by decreased Alliance partner/third party software royalties
due to the Company's acquisition of certain of these software products.
The following table sets forth R & D expenditures and related capitalized
amounts for the first six months of 1996 and 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(in millions) Percentage
Six Months Ended April 30, Change
- -------------------------------------------------------------------
1996 vs.
1996 1995 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $ 40.1 $ 29.3 37%
Less amount capitalized (16.8) (10.3) 63%
- -------------------------------------------------------------------
Net R&D costs $ 23.3 $ 19.0 23%
- -------------------------------------------------------------------
</TABLE>
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents declined from $57.1 million at October 31, 1995 to $21.6
million at April 30, 1996 due to the pay down of year-end accruals which reflect
the relatively high level of activity in the Company's fourth quarter, payment
of the Company's annual dividend which increased 25% over the prior year ($.10
per share versus $.08 in the prior year), tax payments related to the Company's
record profitability in fiscal 1995, acquisitions of products and affiliates and
increased operating expenses in support of the Company's strategic move into the
Unix open systems market. The Company experienced an increase of three Days
Sales Outstanding (DSO) in accounts receivable from 196 at October 31, 1995 to
199 at April 30, 1996 due to the increasingly competitive environment of ERP
software. At April 30, 1996, $20.3 million was outstanding under the Company's
$50.0 multi-bank line of credit. At October 31, 1995, there was no outstanding
balance.
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. The Company is
presently exploring the possibility of a public or private sale of debt or
equity securities to finance increased sales and marketing and product
development of the Company's new version of its client/server software product.
11
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The Company is not currently subject to any material pending 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. 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. On April 18, 1996, the Company and Owens jointly announced that they
had settled the lawsuits and, as a result, both lawsuits were dismissed. Terms
of the settlement were not disclosed.
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
12
<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 June 14, 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
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 21,600,000
<SECURITIES> 0
<RECEIVABLES> 230,900,000
<ALLOWANCES> 11,800,000
<INVENTORY> 0
<CURRENT-ASSETS> 272,700,000
<PP&E> 60,200,000
<DEPRECIATION> 34,200,000
<TOTAL-ASSETS> 417,700,000
<CURRENT-LIABILITIES> 189,700,000
<BONDS> 0
<COMMON> 100,000
0
0
<OTHER-SE> 161,000,000
<TOTAL-LIABILITY-AND-EQUITY> 417,700,000
<SALES> 189,900,000
<TOTAL-REVENUES> 189,900,000
<CGS> 81,400,000
<TOTAL-COSTS> 184,200,000
<OTHER-EXPENSES> 800,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,900,000
<INCOME-TAX> 1,700,000
<INCOME-CONTINUING> 3,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,200,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
