<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 July 31, 1998
--------------
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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 36-3144515
_____________________________________________ ____________________________________
(State or other jurisdiction of incorporation (IRS Employer Identification Number)
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
------------------------------------
</TABLE>
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 September 4, 1998, there were 47,593,892 and 10,000 shares outstanding of
the Company's Common ($.0033 par value) and Redeemable Series A Preferred ($.01
par value) Stock, respectively.
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 12
--
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
Part I Financial information
<C> <S> <C>
Consolidated Balance Sheets - 3 - 4
July 31, 1998 and October 31, 1997
Consolidated Statements of Operations 5
three and nine months ended July 31, 1998 and 1997
Consolidated Statements of Cash Flows - 6
nine months ended July 31, 1998 and 1997
Notes to Consolidated Financial Statements 7 - 8
Management's Discussion and Analysis of Financial Condition 8 - 11
and Results of Operations
Part II Other information 11
Signature Page 12
</TABLE>
2
<PAGE>
Part I - Financial Information
Item I - Financial Statements
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
<TABLE>
<CAPTION>
July 31, October 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 62.5 $ 83.3
Accounts receivable, less allowance for doubtful accounts of $16.5 and $16.5 157.2 198.3
Income taxes receivable 6.3 1.5
Deferred income taxes 22.6 11.3
Prepaid expenses and other current assets 27.8 27.5
----------- -----------
Total current assets 276.4 321.9
----------- -----------
PROPERTY and EQUIPMENT:
Data processing equipment 42.0 42.0
Furniture and office equipment 15.9 17.5
Leasehold improvements 8.2 10.3
Transportation equipment 1.9 1.3
----------- -----------
68.0 71.1
Less - Accumulated depreciation and amortization 47.8 46.0
----------- -----------
Total property and equipment 20.2 25.1
----------- -----------
OTHER ASSETS:
Software costs, less accumulated amortization of $39.5 and $89.3 40.9 99.4
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $11.9 and $11.8 22.2 19.7
Deferred income taxes 19.4 3.9
Investments in associated companies 1.0 1.6
Miscellaneous 5.0 3.8
----------- -----------
Total other assets 88.5 128.4
----------- -----------
TOTAL ASSETS $ 385.1 $ 475.4
=========== ===========
</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>
July 31, October 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accrued commissions and royalties $ 25.2 $ 25.8
Accounts payable and other accrued liabilities 91.5 60.6
Accrued compensation and related benefits 24.8 24.7
Deferred revenue 42.6 49.3
----------- -----------
Total current liabilities 184.1 160.4
----------- -----------
LONG-TERM OBLIGATIONS:
Convertible subordinated notes 137.3 149.1
Other 9.3 1.7
----------- -----------
Total long-term obligations 146.6 150.8
----------- -----------
DEFERRED REVENUE 29.7 32.4
----------- -----------
DEFERRED INCOME TAXES -- 0.8
----------- -----------
REDEEMABLE SERIES A PREFERRED STOCK, $.01 par value, convertible, 10,000
shares issued and outstanding (liquidation preference of $10.0 million) 9.3 9.2
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 100,000 shares authorized,
10,000 shares issued as Series A Preferred Stock -- --
Common stock, $.0033 par value, 250,000,000 shares authorized,
47,557,000 and 42,868,000 shares issued 0.2 0.1
Capital in excess of par value 72.0 48.5
Retained earnings (deficit) (49.3) 77.1
Cumulative translation adjustment (7.5) (3.9)
----------- -----------
Total stockholders' equity 15.4 121.8
----------- -----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 385.1 $ 475.4
=========== ===========
</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 Nine Months Ended
July 31, July 31,
-------------------------------- ----------------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 50.6 $ 83.2 $ 161.1 $ 213.4
Client services and other 56.3 31.5 147.2 91.6
---------- --------- ---------- ---------
Total revenues 106.9 114.7 308.3 305.0
---------- --------- ---------- ---------
Costs and Expenses:
Cost of license fees 16.0 19.4 56.1 52.4
Cost of client services and other 39.5 24.7 102.8 71.8
Sales and marketing 20.9 22.3 63.0 66.2
Research and development 17.4 12.1 43.2 39.0
General and administrative 24.3 24.7 65.4 64.8
Special charges -- 1.7 1.1 1.7
Restructuring and other 122.5 -- 122.5 --
---------- --------- ---------- ---------
Total costs and expenses 240.6 104.9 454.1 295.9
---------- --------- ---------- ---------
Operating income (loss) (133.7) 9.8 (145.8) 9.1
Non-operating income (expense), net (2.6) (4.6) (7.2) (11.6)
---------- --------- ---------- ---------
Income (loss) before income taxes (136.3) 5.2 (153.0) (2.5)
Provision (benefit) for income taxes (21.6) 1.9 (27.6) (0.9)
---------- --------- ---------- ---------
Net income (loss) (114.7) 3.3 (125.4) (1.6)
Preferred dividends 0.3 -- 1.0 --
---------- --------- ---------- ---------
Net income (loss) available for common
stockholders $ (115.0) $ 3.3 $ (126.4) $ (1.6)
========== ========= ========== =========
Basic earnings (loss) per share of common stock $ (2.42) $ 0.08 $ (2.74) $ (0.04)
========== ========= ========== =========
Diluted earnings (loss) per share of common stock $ (2.42) $ 0.08 $ (2.74) $ (0.04)
========== ========= ========== =========
Weighted average common shares outstanding 47.5 43.6 46.2 43.7
========== ========= ========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (125.4) $ (1.6)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net assets written off due to restructuring 76.3 -
Depreciation and amortization of property and equipment 6.8 6.8
Amortization of other assets 22.5 26.0
Provision for doubtful accounts 0.8 3.3
Deferred income taxes (27.6) (1.2)
Deferred revenue (7.9) 2.5
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 27.6 (14.1)
Prepaid expenses and other current assets 2.1 2.7
Miscellaneous assets 0.6 1.0
Accrued commissions and royalties - (1.7)
Accounts payable and other accrued liabilities 36.4 0.3
Accrued compensation and related benefits 0.9 (3.2)
Income taxes (4.8) 0.6
---------- ----------
Net cash provided by operating activities 8.3 21.4
---------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment (2.0) (2.9)
Software costs (21.4) (33.7)
Investments and acquisitions, net of cash acquired (2.0) -
---------- ----------
Net cash flows used in investing activities (25.4) (36.6)
---------- ----------
Cash Flows From Financing Activities:
Amount borrowed (repaid) under bank line of credit - (0.4)
Principal payments under financing obligations (2.5) (1.8)
Proceeds from stock option and stock purchase plans 2.0 0.2
Net proceeds from convertible subordinated promissory note - 12.0
Dividends paid (1.0) -
---------- ----------
Net cash provided by (used in) financing activities (1.5) 10.0
---------- ----------
Effect of exchange rate changes on cash (2.2) (0.8)
---------- ----------
Net decrease in cash and equivalents (20.8) (6.0)
Cash and equivalents:
Beginning of year 83.3 38.1
---------- ----------
End of period $ 62.5 $ 32.1
========== ==========
</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, 1997, the financial
information included herein is unaudited. However, such information reflects
all adjustments (consisting of normal recurring adjustments and restructuring
charges) 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, 1997.
Note 2 -- Restructuring and other
The Company announced a restructuring and other charge of $122.5 million in the
third quarter ending July 31, 1998. The charge includes a write-down of
capitalized and locally developed software products, a write-down of goodwill
and equipment, certain warranty commitments, a 25% reduction in office space,
and severance benefits for approximately 300 employees. The reduction in
workforce represents approximately 12% of June 30, 1998 world-wide employees.
Note 3 -- Long-Term Obligations and Capital Issuances
Private Convertible Subordinated Note
In March 1997, the Company issued a private convertible subordinated note to a
strategic investor in the amount of $12.0 million. On January 12, 1998, the
$12.0 million private convertible subordinated note was converted into 3.6
million shares of common stock.
Issuance of Financial Advisor Warrants
In January 1998, in consideration of certain long-term financial advisory
services, the Company agreed to sell to a financial advisor for a nominal
amount, warrants to purchase from the Company up to 1,325,000 shares of Common
Stock (the "Financial Advisor Warrants"). The Financial Advisor Warrants are
initially exercisable at $9.6875 per share, the fair market value at the date of
the issuance and may be exercised at any time or from time to time within a ten
year period, commencing on the warrant issue date. The fair value of the
warrants of $2.8 million was recorded as an increase to capital in excess of par
value and other assets and is being amortized over the term of the advisory
services to be rendered.
7
<PAGE>
Note 4 -- Legal Proceedings
In January 1998, the Company settled the Bain Investors' lawsuit. Pursuant to
the settlement, the Company paid the Bain Investors approximately $3.65 million
and issued to certain of the Bain Investors warrants to purchase an aggregate of
300,000 shares of the Company's Common Stock, which warrants are exercisable at
$9.6875 per share, the fair market value as of the date of settlement.
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, 1998
to the Three Months Ended July 31, 1997
---------------------------------------
Total revenues decreased 6.8% to $106.9 million during the third quarter of 1998
versus total revenues of $114.7 million recorded during the third quarter of
1997. License fees were $50.6 million, a 39.2% decline when compared to the
same period of 1997. Client services revenues for the quarter were $56.3
million, an increase of 78.7% when compared to the same prior year period. The
increase in services revenues is attributable to an increase in the number of
billable services personnel in response to continuing demand for implementation
services.
Cost of license fees as a percentage of related revenues was 31.6% for the third
quarter of 1998, up from 23.3% for the corresponding prior year period. Cost of
license fees increased as a percentage of related revenues primarily due to a
significant decline in license fees sold directly resulting in a greater
proportion of third quarter 1998 revenues being generated by the Company's
Affiliate sales channel as well as hardware.
Cost of client services and other as a percentage of related revenues was 70.2%
and 78.4% for the third quarter of 1998 and 1997, respectively. The improvement
is primarily due to increased productivity of client services personnel.
Sales and marketing expenses decreased $1.4 million in the third quarter of 1998
to $20.9 million versus $22.3 million in the third quarter of 1997. The
decrease in the current quarter was primarily due to a reduction of direct sales
incentives as a result of lower direct license fee revenues, and the positive
impact of restructuring, partially offset by an increase in marketing
expenditures.
8
<PAGE>
Gross research and development (R&D) expenditures in the third quarter of 1998
decreased $2.8 million or 12.7% when compared to the third quarter of 1997. The
reduction is due, primarily, to reduced development activities related to BPCS
Client/Server Version 6.0 as well as the positive impact of restructuring.
The Company capitalizes software development costs once technological
feasibility is established, in accordance with Statement of Financial Accounting
Standard (SFAS) No. 86. In connection with a restructuring of operations, the
Company determined that it was more appropriate to begin capitalization of
software development costs subsequent to a working model being developed.
Accordingly, the Company capitalized $1.8 million of software development costs
in the third quarter of 1998 compared to $9.9 million in the third quarter of
1997. The capitalization ratio (capitalized software as a percentage of gross
R&D) in the third quarters of 1998 and 1997 was 9% and 45%, respectively.
The following table sets forth R&D expenditures and related capitalized amounts
for the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in millions) Percentage
Quarter Ended July 31, Change
- --------------------------------------------------------------------------------
1998 vs.
1998 1997 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $19.2 $22.0 (12.7%)
Less amount capitalized (1.8) (9.9) (81.8%)
- --------------------------------------------------------------------------------
Net R&D expenses $17.4 $12.1 43.8%
- --------------------------------------------------------------------------------
</TABLE>
General and administrative expenses were $24.3 million and $24.7 million in the
third quarter of 1998 and 1997 respectively.
Operating loss in the third quarter of 1998, before the restructuring and other
charges (see Notes to Consolidated Financial Statements - Note 2) was ($11.2)
million, a decrease of $21.0 million when compared to operating income of $9.8
million recorded in the corresponding quarter of the previous year. The major
reason for the decline was lower license fee revenues. Operating loss in the
third quarter of 1998 after restructuring and other charges of $122.5 million
was ($133.7) million.
Non-operating expense of $2.6 million in the current quarter decreased $2.0
million from the prior year quarter of $4.6 million and represents a reduction
in interest expense.
The tax benefit rate for the third quarter 1998 decreased to 15.8% from
approximately 36% in the third quarter 1997. The reduction is primarily due to
timing of the recognition of the full tax benefit related to the $122.5 million
restructuring and other charge.
9
<PAGE>
Comparison of the Nine Months Ended July 31, 1998
to the Nine Months Ended July 31, 1997
--------------------------------------
The principle variations for the nine months ended July 31, 1998, when
supplemented with the following comments, are relatively consistent with the
discussion of the third quarter results.
Total revenues increased 1.1% to $308.3 million for the first nine months of
1998 over total revenues of $305.0 million recorded during the first nine months
of 1997. The revenue increase was attributable to client services revenues which
were up 60.7% when compared to the prior year, however, offset by a decline in
license fees revenues of 24.5%.
Cost of license fees as a percentage of related revenues increased to 34.8% in
1998 as compared to 24.6% for the first nine months of 1997.
Cost of client services as a percentage of related revenues was 69.8% and 78.4%
for the first nine months of 1998 and 1997, respectively.
The following table sets forth R&D expenditures and related capitalized amounts
for the first nine months of 1998 and 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(in millions) Percentage
Nine Months Ended July 31, Change
- --------------------------------------------------------------------------
1998 vs.
1998 1997 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D
expenditures $ 62.7 $ 70.8 (11.4%)
Less amount
capitalized (19.5) (31.8) (38.7%)
- --------------------------------------------------------------------------
Net R&D expenses $ 43.2 $ 39.0 10.8%
- --------------------------------------------------------------------------
</TABLE>
The special charge of $1.1 million in the first nine months of 1998 relates to
the final settlement of the Bain Investors' lawsuit. The $1.7 million charge in
the first nine months of 1997 relates to the settlement of the Company's class
action lawsuits.
10
<PAGE>
Liquidity and Capital Resources
Cash and equivalents stood at $62.5 million at July 31, 1998, a decrease of
$20.8 million when compared to October 31, 1997 cash balances. Cash usage was
primarily due to the acquisition of the remaining 81% of the Company's UK
affiliate, payment of certain warranty costs, $4.9 million of interest payments
on the Company's subordinated notes and payments related to the third quarter
1998 restructuring activities.
On January 12, 1998, the holder of the Company's $12.0 million convertible
subordinated three year promissory note elected to exercise its conversion
right. The financial impact of that conversion was to reduce Long-Term
Obligations by $12.0 million and increase Stockholders' Equity by the same
amount. The number of newly issued shares of Common Stock resulting from the
conversion was 3.6 million shares.
In May 1998, the Company announced that it had strengthened its management team,
reorganized its operations, and had taken initial steps to stabilize its
financial performance. It also announced that it would implement further steps
to restructure and resize its business. The Company announced a restructuring
and other charge of $122.5 million to be taken in the third quarter ending July
31, 1998. The charge includes a reduction in the Company's work force and office
space and a write- down of software, goodwill and equipment (see Notes to
Consolidated Financial Statements - Note 2). These measures are aimed at
significantly reducing the Company's cost and expense structure and improving
future profitability.
Management believes that based upon its anticipated operating results, cash
generated from operations, combined with current working capital, will provide
sufficient liquidity to meet the Company's capital requirements for the
foreseeable future.
<TABLE>
<CAPTION>
Part II - Other Information
<S> <C> <C>
Item 1. Legal Proceeding 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 8-K None
</TABLE>
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 September 14, 1998
------------------
System Software Associates, Inc.
/s/ William M. Stuek
--------------------------------
William M. Stuek
Chief Executive Officer and
President
/s/ Lawrence A. Zimmerman
--------------------------------
Lawrence A. Zimmerman
Executive Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 62,500
<SECURITIES> 0
<RECEIVABLES> 173,700
<ALLOWANCES> 16,500
<INVENTORY> 0
<CURRENT-ASSETS> 276,400
<PP&E> 68,000
<DEPRECIATION> 47,800
<TOTAL-ASSETS> 385,100
<CURRENT-LIABILITIES> 184,100
<BONDS> 137,300
<COMMON> 200
9,300
0
<OTHER-SE> 15,200
<TOTAL-LIABILITY-AND-EQUITY> 385,100
<SALES> 106,900
<TOTAL-REVENUES> 106,900
<CGS> 0
<TOTAL-COSTS> 240,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,600
<INCOME-PRETAX> (136,300)
<INCOME-TAX> (21,600)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,000)
<EPS-PRIMARY> (2.42)
<EPS-DILUTED> (2.42)
</TABLE>
