<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, 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 (IRS Employer Identification Number)
of 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 March 7, 1997, there were 42,613,825 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
<TABLE>
<CAPTION>
Page
No.
<S> <C> <C>
Part I Financial information
Consolidated Balance Sheets -
January 31, 1997 and October 31, 1996 3 - 4
Consolidated Statements of Operations -
three months ended January 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
three months ended January 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 10
Part II Other information 11
Signature Page 12
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Part I - Financial Information
Item I - Financial Statements
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
January 31, October 31,
1997 1996
--------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 25.8 $ 38.1
Accounts receivable, less allowance for doubtful
accounts of $16.5 and $16.5 145.8 163.6
Income taxes receivable 1.9 4.4
Deferred income taxes 12.6 10.1
Prepaid expenses and other current assets 26.1 25.5
--------- ---------
Total current assets 212.2 241.7
--------- ---------
PROPERTY and EQUIPMENT:
Data processing equipment 38.4 37.3
Furniture and office equipment 17.5 18.7
Leasehold improvements 9.4 9.0
Transportation equipment 1.8 2.3
--------- ---------
67.1 67.3
Less - Accumulated depreciation and amortization 40.8 39.5
--------- ---------
Total property and equipment 26.3 27.8
--------- ---------
OTHER ASSETS:
Software costs, less accumulated amortization of
$67.4 and $61.1 88.2 82.8
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $9.4 and $8.7 22.1 22.8
Deferred income taxes 1.2 1.2
Investments in associated companies 2.2 2.2
Miscellaneous 5.8 5.9
--------- ---------
Total other assets 119.5 114.9
--------- ---------
TOTAL ASSETS $ 358.0 $ 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>
January 31, October 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current maturities
of senior notes payable $ 72.4 $ -
Accrued commissions and royalties 24.2 26.3
Accounts payable and other accrued liabilities 55.5 62.5
Accrued compensation and related benefits 16.9 23.8
Deferred revenue 56.7 58.8
--------- ----------
Total current liabilities 225.7 171.4
--------- ----------
LONG-TERM OBLIGATIONS 2.4 75.1
--------- ----------
DEFERRED REVENUE 25.4 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, 42,604,000 and 42,577,000
shares issued 0.1 0.1
Capital in excess of par value 32.9 32.8
Retained earnings 74.2 78.5
Cumulative translation adjustment (2.7) (1.2)
--------- ----------
Total stockholders' equity 104.5 110.2
--------- ----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 358.0 $ 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
January 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
License fees $ 65.1 $ 48.1
Client services and other 27.1 28.5
--------- --------
Total revenues 92.2 76.6
--------- --------
Costs and Expenses:
Cost of license fees 15.9 9.1
Cost of client services and other 23.5 19.4
Sales and marketing 22.9 20.5
Research and development 14.1 11.7
General and administrative 20.4 16.3
--------- --------
Total costs and expenses 96.8 77.0
--------- --------
Operating income (loss) (4.6) (0.4)
Non-operating income (expense), net (2.1) (0.3)
--------- --------
Income (loss) before income taxes (6.7) (0.7)
Provision (benefit) for income taxes (2.4) (0.3)
--------- --------
Net income (loss) $ (4.3) $ (0.4)
========= ========
Earnings (loss) per share $ (0.10) $ (0.01)
========= ========
Dividends per share $ - $ 0.10
========= ========
Weighted average common shares outstanding 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>
Three Months Ended
January 31,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (4.3) $ (0.4)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment 2.3 2.0
Amortization of other assets 7.0 4.8
Provision for doubtful accounts - (0.7)
Deferred income taxes (2.5) (0.2)
Deferred revenue (2.9) (1.8)
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable 14.3 16.9
Prepaid expenses and other current assets (1.2) (0.3)
Miscellaneous assets 0.1 0.6
Accrued commissions and royalties (1.9) (7.8)
Accounts payable and other accrued liabilities (5.7) (15.7)
Accrued compensation and related benefits (6.6) (5.7)
Income taxes 2.5 (7.2)
--------- ---------
Net cash provided by (used in) operating
activities 1.1 (15.5)
--------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment (0.5) (1.5)
Software costs (11.7) (7.6)
Investments and acquisitions, net of cash acquired - (2.0)
--------- ---------
Net cash flows used in investing activities (12.2) (11.1)
--------- ---------
Cash Flows From Financing Activities:
Principal payments under financing obligations (0.7) (1.5)
Proceeds from exercise of stock options 0.1 0.9
Dividends paid - (4.2)
--------- ---------
Net cash used in financing activities (0.6) (4.8)
--------- ---------
Effect of exchange rate changes on cash (0.6) (0.5)
--------- ---------
Net decrease in cash and equivalents (12.3) (31.9)
Cash and equivalents:
Beginning of year 38.1 57.1
--------- ---------
End of period $ 25.8 $ 25.2
========= =========
</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 for the fiscal year ended 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 -- 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.
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 January 31, 1997
to the Three Months Ended January 31, 1996
------------------------------------------
Total revenues increased 20% to $92.2 million during the first quarter of 1997
over total revenues of $76.6 million during the first quarter of 1996. The
revenue increase was due to particularly strong results in Europe and
Asia/Pacific. License fees of $65.1 million grew 35% over the prior year quarter
reflecting improving market acceptance of the Company's client/server product
line. Client Services revenues for the quarter of $27.1 million declined 5% when
compared to the prior year period due to lower productivity caused, in part, by
allocation of resources to perform warranty work and investments in training
client services professionals.
Cost of license fees as a percentage of related revenues was 24% for the first
quarter of 1997, up from 19% for the corresponding prior year period. The
increase is primarily attributable to increased amortization expense of
capitalized software development costs and increased affiliate commissions.
Cost of client services as a percentage of related revenues was 87% for the
first quarter of 1997 compared to 68% during the corresponding prior year
period. Lower productivity of technical professionals around the world, in
particular those with open systems and object skills, allocation of resources to
perform warranty work and investments in training resulted in the increase.
Sales and marketing as a percentage of license fee revenues was 35% and 43% in
the first quarters of 1997 and 1996, respectively. The decrease was primarily
due to 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 first quarter
of 1997 increased $6.9 million or 37% over the first 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 $11.3 million of software development
costs in the first quarter of 1997 as compared to $6.9 million in the first
quarter of 1996. The capitalization ratio (capitalized software as a percentage
of gross R&D) in the first quarters of 1997 and 1996 was 44% and 37%,
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)
Quarter Ended Percentage
January 31, Change
- ------------------------------------------------------------------------------
1997 vs.
1997 1996 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $ 25.4 $18.6 37%
Less amount capitalized (11.3) (6.9) 64%
- ------------------------------------------------------------------------------
Net R&D costs $ 14.1 $11.7 21%
- ------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
General and administrative expenses of $20.4 million increased $4.1 million over
the prior year to support the Company's growth, including increased facilities
costs related to acquisitions and increased costs for computer equipment.
Liquidity and Capital Resources
At January 31, 1997, cash and equivalents totaled $25.8 million, down $12.3
million from October 31,1996. The decrease was primarily due to the operating
loss in the current quarter, continued significant investment in product
development and interest payments. At January 31, 1997 and 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 $0.8 million and $1.2
million at January 31, 1997 and October 31, 1996, respectively. The maturity
date of the multi-bank line of credit and the Senior Notes is November 1, 1997.
The Company is presently exploring the possibility of a public or private sale
of debt or equity securities to refinance existing debt and fund an accelerated
growth strategy for the Company's new version of its client/server software
product. Management believes that with an anticipated return to profitability
within the fiscal year, cash generated from operations, combined with current
working capital and proceeds of a financing arrangement, will provide sufficient
liquidity to meet the Company's capital requirements for the foreseeable future.
10
<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 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
11
<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 March 17, 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
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 25,800
<SECURITIES> 0
<RECEIVABLES> 162,300
<ALLOWANCES> 16,500
<INVENTORY> 0
<CURRENT-ASSETS> 212,200
<PP&E> 67,100
<DEPRECIATION> 40,800
<TOTAL-ASSETS> 358,000
<CURRENT-LIABILITIES> 225,700
<BONDS> 0
<COMMON> 100
0
0
<OTHER-SE> 104,400
<TOTAL-LIABILITY-AND-EQUITY> 358,000
<SALES> 92,200
<TOTAL-REVENUES> 92,200
<CGS> 0
<TOTAL-COSTS> 96,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,100
<INCOME-PRETAX> (6,700)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,300)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> 0
</TABLE>
