<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, 1997
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 June 6, 1997, there were 42,640,600 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
Page
Part I Financial information No.
Consolidated Balance Sheets - 3 - 4
April 30, 1997 and October 31, 1996
Consolidated Statements of Operations - 5
three and six months ended April 30, 1997 and 1996
Consolidated Statements of Cash Flows - 6
six months ended April 30, 1997 and 1996
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition 8 - 11
and Results of Operations
Part II Other information 12
Signature Page 13
2
<PAGE>
Part I - Financial Information
Item I - Financial Statements
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
--------- ----------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 20.4 $ 38.1
Accounts receivable, less allowance for doubtful accounts of $16.5 and $16.5 163.6 163.6
Income taxes receivable 3.3 4.4
Deferred income taxes 12.5 10.1
Prepaid expenses and other current assets 34.6 25.5
-------- ---------
Total current assets 234.4 241.7
-------- ---------
PROPERTY and EQUIPMENT:
Data processing equipment 39.0 37.3
Furniture and office equipment 17.5 18.7
Leasehold improvements 9.6 9.0
Transportation equipment 1.7 2.3
-------- ---------
67.8 67.3
Less - Accumulated depreciation and amortization 42.3 39.5
-------- ---------
Total property and equipment 25.5 27.8
-------- ---------
OTHER ASSETS:
Software costs, less accumulated amortization of $74.3 and $61.1 93.2 82.8
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $10.3 and $8.7 21.3 22.8
Deferred income taxes 1.5 1.2
Investments in associated companies 1.5 2.2
Miscellaneous 5.0 5.9
-------- ---------
Total other assets 122.5 114.9
-------- ---------
TOTAL ASSETS $382.4 $384.4
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(in millions, except share data)
<TABLE>
<CAPTION>
Apri1 30, October 31,
1997 1996
--------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities of senior notes payable $ 71.8 $ -
Accrued commissions and royalties 25.7 26.3
Accounts payable and other accrued liabilities 60.2 62.5
Accrued compensation and related benefits 17.9 23.8
Deferred revenue 50.3 58.8
--------- ---------
Total current liabilities 225.9 171.4
--------- ---------
LONG-TERM OBLIGATIONS 14.1 75.1
--------- ---------
DEFERRED REVENUE 28.7 27.7
--------- ---------
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,
42,633,000 and 42,577,000 shares issued 0.1 0.1
Capital in excess of par value 42.8 32.8
Retained earnings 73.5 78.5
Cumulative translation adjustment (2.7) (1.2)
--------- ---------
Total stockholders' equity 113.7 110.2
--------- ---------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $382.4 $384.4
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 65.1 $ 51.9 $ 130.2 $ 100.0
Client services and other 33.0 30.6 60.0 59.1
--------- --------- ---------- ---------
Total revenues 98.1 82.5 190.2 159.1
--------- --------- ---------- ---------
Costs and Expenses:
Cost of license fees 17.2 16.4 33.0 25.6
Cost of client services and other 23.6 22.0 47.1 41.4
Sales and marketing 21.0 24.7 43.9 45.2
Research and development 12.8 11.7 26.9 23.4
General and administrative 19.6 17.3 40.1 33.6
--------- --------- ---------- ---------
Total costs and expenses 94.2 92.1 191.0 169.2
--------- --------- ---------- ---------
Operating income (loss) 3.9 (9.6) (0.8) (10.1)
Non-operating income (expense), net (4.9) (0.5) (7.0) (0.8)
--------- --------- ---------- ---------
Income (loss) before income taxes (1.0) (10.1) (7.8) (10.9)
Provision (benefit) for income taxes (0.4) (3.7) (2.8) (4.0)
--------- --------- ---------- ---------
Net income (loss) $ (0.6) $ (6.4) $ (5.0) $ (6.9)
========= ======== ========= =========
Earnings (loss) per share $ (0.01) $(0.15) $ (0.12) $ (0.16)
========= ======== ========= =========
Dividends per share $ - $ - $ - $ 0.10
========= ======== ========= ========
Weighted average common shares outstanding 42.6 43.0 42.6 43.1
========= ======== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (5.0) $ (6.9)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of property and equipment 4.5 4.1
Amortization of other assets 15.6 10.7
Provision for doubtful accounts - (0.7)
Deferred income taxes (2.7) (0.4)
Deferred revenue (5.3) (2.8)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (4.1) 9.3
Prepaid expenses and other current assets (0.3) (3.6)
Miscellaneous assets 0.9 1.1
Accrued commissions and royalties (0.3) (7.4)
Accounts payable and other accrued liabilities (1.8) (11.6)
Accrued compensation and related benefits (5.1) (4.7)
Income taxes 1.1 (11.7)
-------- -------
Net cash used in operating activities (2.5) (24.6)
-------- -------
Cash Flows From Investing Activities:
Purchases of property and equipment (1.5) (5.3)
Software costs (23.6) (18.5)
Investments and acquisitions, net of cash acquired - (3.6)
-------- ------
Net cash flows used in investing activities (25.1) (27.4)
-------- --------
Cash Flows From Financing Activities:
Amount borrowed (repaid) under bank line of credit, net (0.4) 20.3
Principal payments under other financing obligations (1.2) (1.5)
Proceeds from exercise of stock options 0.2 2.0
Net proceeds from convertible subordinated promissory note 12.0 -
Dividends paid - (4.2)
------- --------
Net cash provided by financing activities 10.6 16.6
------- --------
Effect of exchange rate changes on cash (0.7) (0.1)
------- -------
Net decrease in cash and equivalents (17.7) (35.5)
Cash and equivalents:
Beginning of year 38.1 57.1
------- -------
End of period $20.4 $21.6
======= =======
</TABLE>
See accompanying Notes to Consolidated 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 at October 31, 1996, 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, 1996.
Note 2 -- Long-Term Obligations
On March 27, 1997, the Company issued a convertible subordinated promissory note
to a strategic investor in the amount of $12 million, bearing interest at the
prime rate plus 1% and convertible into common stock of the Company at the
lesser of $3.33 per share or 80% of the fair market value of the stock at the
time of conversion. The loan is due in three years and is not convertible during
the first year, except in the event of prepayment. The convertible subordinated
promissory note has a beneficial conversion feature because the fair market
value of the Company's stock was in excess of its per share conversion price at
the issuance date. The value of the beneficial conversion feature of $8.9
million was reflected as an increase in additional paid in capital and other
current assets and will be amortized as interest expense over the one year
period beginning the date of issuance.
Note 3 -- Legal Proceedings
In January 1997, class action lawsuits were filed in state court in Illinois and
in the federal court in Chicago, Illinois against the Company and certain of its
officers. The federal actions allege damages to persons who purchased the
Company's common stock during the period August 22, 1994 through January 7, 1997
arising from alleged violations of the federal securities laws and associated
common laws. The state court action alleges damages to persons who purchased the
Company's common stock during the period November 21, 1994 through January 7,
1997 arising from alleged violations of the Illinois securities laws and
associated common and statutory law. Although the outcome of these proceedings
cannot be determined with certainty, management intends to defend the actions
vigorously, and, in consultation with its legal counsel, believes that the
allegations are without merit and that the final outcomes should not have a
material adverse effect on the Company's operations or financial position.
7
<PAGE>
The Company is also subject to other legal proceedings and claims which arise in
the normal course of business. Although the outcome of these proceedings cannot
be determined with certainty, management believes that the final outcomes of
these proceedings should not have a material adverse effect on the Company's
operations or financial position.
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, 1997
to the Three Months Ended April 30, 1996
----------------------------------------
Total revenues increased 19% to $98.1 million during the second quarter of 1997
over total revenues of $82.5 million during the second quarter of 1996. All
regions of the world recorded higher revenues: the Americas, Europe/Middle
East/Africa and Asia/Pacific. License fees of $65.1 million grew 25% over the
same prior year quarter which reflected increasing market acceptance of the
Company's client/server product line. Client Services revenues for the quarter
of $33.0 million increased 8% compared to the prior year period and 22%
sequentially over the prior quarter.
Cost of license fees as a percentage of related revenues was 26% for the second
quarter of 1997, down from 32% for the corresponding prior year period. The
decrease is primarily attributable to decreased affiliate commissions partially
offset by increased amortization expense of capitalized software development
costs.
Cost of client services as a percentage of related revenues remained constant at
72% for the second quarter of 1997 and 1996.
Sales and marketing as a percentage of license fee revenues was 32% and 48% in
the second quarters of 1997 and 1996, respectively. The decrease in the current
quarter was due to increased productivity of the Company's direct sales
organization and decreased marketing expenditures.
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 1997 increased $1.8 million or 8% over the second quarter of 1996. 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 $10.6 million of software development
costs in the second quarter of 1997 as compared to $9.9 million in the second
quarter of 1996. The capitalization ratio (capitalized software as a percentage
of gross R&D) in the second quarters of 1997 and 1996 was 45% and 46%,
respectively.
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
- ------------------------------------------------------------------------------
1997 vs.
1997 1996 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $23.4 $21.6 8%
Less amount capitalized (10.6) (9.9) 7%
- ------------------------------------------------------------------------------
Net R&D costs $12.8 $11.7 9%
- ------------------------------------------------------------------------------
</TABLE>
General and administrative expenses of $19.6 million increased $2.3 million over
the prior year to support the Company's growth and include increased costs for
computer equipment.
Non-operating expense of $4.9 million in the current quarter increased $4.4
million over the prior year quarter due to higher borrowing levels under the
Company's bank line of credit, interest on the Company's convertible
subordinated promissory note issued in March, 1997 and reduced interest income
related to lower cash balances.
9
<PAGE>
Operating income in the current quarter of $3.9 million increased $13.5 million
from the operating loss of ($9.6) million in the corresponding quarter of the
previous year due to both increased revenue and reduced expenses.
The tax benefit rate of approximately 36% in the current quarter is relatively
constant with the prior year quarter of 37%.
Comparison of the Six Months Ended April 30, 1997
to the Six Months Ended April 30, 1996
--------------------------------------
The principal variations for the six months ended April 30, 1997, when
supplemented with the following comments, are relatively consistent with the
discussion of the second quarter results.
Total revenues increased 20% to $190.2 million for the first six months over
total revenues of $159.1 million recorded during the first six months of 1996.
The revenue increase was attributable to higher license fees which were up 30%
when compared to the prior year, combined with a 2% increase in client services
revenues.
Cost of license fees as a percentage of related revenues remained relatively
constant at 25% and 26% for the first six months of 1997 and 1996, respectively.
Cost of client services as a percentage of related revenues was 79% for the
first six months of 1997 compared to 70% during the corresponding prior year
period. The higher costs in the current year period resulted from lower
productivity related to newly hired technical professionals around the world, in
particular those with open systems and object skills, and allocation of
resources to perform warranty work.
The following table sets forth R&D expenditures and related capitalized amounts
for the first six months of 1997 and 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(in millions) Percentage
Six Months Ended April 30, Change
- ---------------------------------------------------------------------------
1997 vs.
1997 1996 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $48.8 $40.2 21%
Less amount capitalized (21.9) (16.8) 30%
- ---------------------------------------------------------------------------
Net R&D costs $26.9 $23.4 15%
- ---------------------------------------------------------------------------
</TABLE>
10
<PAGE>
The operating loss in the first six months of the current year of ($0.8) million
improved $9.3 million from the operating loss of ($10.1) million in the
corresponding period of the previous year due to increased revenue and decreased
expenses.
Liquidity and Capital Resources - Subsequent Events
Cash and equivalents of $20.4 million at April 30, 1997 decreased $17.7 million
from October 31, 1996 and borrowings increased by $11.4 million on a net basis
during the same period. Cash usage was primarily due to continued significant
investment in product development, an operating loss for the first six months of
1997 and interest payments. At April 30, 1997, $46.0 million was outstanding
under the Company's multi-bank line of credit and $25.8 million was outstanding
on the Company's Senior Notes payable. On March 27, 1997, the Company issued a
$12 million convertible subordinated three year promissory note to a strategic
investor to meet anticipated cash requirements in the near term. At October 31,
1996, $46.4 million was outstanding under the Company's multi-bank line of
credit and $26.0 million was outstanding on the Company's Senior Notes payable.
Outstanding letters of credit issued against the bank line were $.7 million and
$1.2 million at April 30, 1997 and October 31, 1996, respectively.
Management believes that, with an anticipated return to profitability within the
current fiscal year, cash generated from operations combined with current
working capital will provide sufficient liquidity to meet ordinary capital
requirements through the end of the 1997 fiscal year. The Company's outstanding
balance under its multi-bank line of credit and its Senior Notes of $71.8
million is due November 1, 1997. The Company is presently exploring the
possibility of a public or private sale of additional debt or equity securities
to refinance existing debt and provide needed working capital to fund an
accelerated growth strategy for the Company's new version of its client/server
software product. In connection with these possible offerings, the stockholders
voted on May 28, 1997 to amend Article Fourth of the Company's Certificate of
Incorporation to increase the Company's authorized shares of Common Stock to 250
million shares.
11
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In January 1997, class action lawsuits were filed in state court in Illinois and
in the federal court in Chicago, Illinois against the Company and certain of its
officers. The federal actions allege damages to persons who purchased the
Company's common stock during the period August 22, 1994 through January 7, 1997
arising from alleged violations of the federal securities laws and associated
common laws. The state court action alleges damages to persons who purchased
the Company's common stock during the period November 21, 1994 through January
7, 1997 arising from alleged violations of the Illinois securities laws and
associated common and statutory law. Although the outcome of these proceedings
cannot be determined with certainty, management intends to defend the actions
vigorously, and, in consultation with its legal counsel, believes that the
allegations are without merit and that the final outcomes should not have a
material adverse effect on the Company's operations or financial position.
The Company is also subject to other legal proceedings and claims which arise in
the normal course of business. Although the outcome of these proceedings cannot
be determined with certainty, management believes that the final outcomes of
these proceedings should not have a material adverse effect on the Company's
operations or financial position.
Item 2. Changes in Securities
(a) At their 1997 Annual Meeting, the Company's stockholders approved
an amendment to the Company's Certificate of Incorporation which increased
the Company's authorized number of shares of Common Stock to 250,000,000.
See also Item 4, below.
(b) Not Applicable
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on May 28, 1997.
(b) At that meeting, Roger E. Covey, Andrew J. Filipowski, John W. Puth and
William N. Weaver, Jr were elected as Directors.
(c) Each candidate for the Board of Directors received the vote of at least
36,755,667 (or 86%) of the outstanding shares of Common Stock.
At the meeting, the Company's stockholders also approved two other
proposals. First, by a vote of 28,134,964 in favor to 9,829,610 against, with
79,431 shares abstaining, the stockholders approved the amendment of Article
Fourth of the Company's Certificate of Incorporation to increase the Company's
authorized shares of Common Stock to 250 million shares. Second, by a vote of
19,015,463 shares in favor to 13,135,784 shares against, with 160,259 shares
abstaining and 5,732,499 non-votes, the stockholders approved an amendment to
the Company's Long-Term Incentive Plan to increase the number of shares of
Common Stock available for grants thereunder by 2,700,000.
(d) Not Applicable.
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3(a) to this report sets forth the Amendment to the Company's
Certificate of Incorporation.
(b) On April 30, 1997, the Company filed a Report on Form 8-K listing as an
"Other Event" its announcement of a $12 million investment by a private investor
in a convertible subordinated note of the Company. No financial statements were
filed with the Report.
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 13, 1997
-------------
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
<PAGE>
Exhibit 3(a)
Amendment of the Certificate of Incorporation
The Certificate of Incorporation of the Corporation is hereby further amended by
striking Article FOURTH and substituting in lieu of said Article FOURTH the
following:
Article FOURTH is hereby amended to read in its entirety as follows:
FOURTH: The total number of shares of capital stock which the Corporation shall
have authority to issue is 250,100,000 shares, which shall be classified as
follows:
(i) 250,000,000 shares of Common Stock, $0.0033 par value per share
(hereinafter called the "Common Stock");
(ii) 100,000 shares of Preferred Stock $0.01 par value per share (hereinafter
called the "Preferred Stock"), which may be issued from time to time in one or
more series. The number of shares, the stated value and the dividend or interest
rate, if any, of each such series and the preferences and relative,
participating and special rights and the qualifications, limitations or
restrictions shall be fixed in the case of each series by resolution of the
Board of Directors at the time of issuance, subject in all cases to the laws of
the State of Delaware applicable thereto, and set forth in a certificate of
designation filed and recorded with respect to each series in accordance with
the laws of the State of Delaware.
Any and all such shares issued, and for which the full consideration has been
paid or delivered, shall be deemed fully paid stock and the holder of such
shares shall not be liable for any further call or assessment or any other
payment thereon.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 20,400
<SECURITIES> 0
<RECEIVABLES> 180,100
<ALLOWANCES> 16,500
<INVENTORY> 0
<CURRENT-ASSETS> 234,400
<PP&E> 67,800
<DEPRECIATION> 42,300
<TOTAL-ASSETS> 382,400
<CURRENT-LIABILITIES> 225,900
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 113,600
<TOTAL-LIABILITY-AND-EQUITY> 382,400
<SALES> 98,100
<TOTAL-REVENUES> 98,100
<CGS> 0
<TOTAL-COSTS> 94,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,900
<INCOME-PRETAX> (1,000)
<INCOME-TAX> 400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (600)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
</TABLE>
