<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JANUARY 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
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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 (ZIP CODE)
OFFICES)
(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 12, 1998, there were 47,390,453 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: 9
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<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Part I--Financial information
Consolidated Balance Sheets--January 31, 1998 and October 31, 1997...... 3
Consolidated Statements of Operations--three months ended January 31,
1998 and 1997.......................................................... 4
Consolidated Statements of Cash Flows--three months ended January 31,
1998 and 1997.......................................................... 5
Notes to Consolidated Financial Statements.............................. 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 7
Part II--Other information................................................ 8
Signature Page............................................................ 9
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM I-- FINANCIAL STATEMENTS
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
ASSETS 1998 1997
------ ----------- -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and equivalents................................ $ 60.6 $ 83.3
Accounts receivable, less allowance for doubtful
accounts of $16.5 and $16.5........................ 197.9 198.3
Income taxes receivable............................. 1.2 1.5
Deferred income taxes............................... 11.3 11.3
Prepaid expenses and other current assets........... 25.7 27.5
------ ------
Total current assets............................... 296.7 321.9
------ ------
Property and Equipment:
Data processing equipment........................... 43.3 42.0
Furniture and office equipment...................... 17.6 17.5
Leasehold improvements.............................. 10.1 10.3
Transportation equipment............................ 1.9 1.3
------ ------
72.9 71.1
Less--Accumulated depreciation and amortization..... 48.8 46.0
------ ------
Total property and equipment....................... 24.1 25.1
------ ------
Other Assets:
Software costs, less accumulated amortization of
$97.5 and $89.3.................................... 101.5 99.4
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $12.5 and $11.8... 26.8 19.7
Deferred income taxes............................... 5.2 3.9
Investments in associated companies................. 1.0 1.6
Miscellaneous....................................... 5.1 3.8
------ ------
Total other assets................................. 139.6 128.4
------ ------
Total Assets.......................................... $460.4 $475.4
====== ======
Current Liabilities:
Accrued commissions and royalties................... $ 24.4 $ 25.8
Accounts payable and other accrued liabilities...... 51.4 60.6
Accrued compensation and related benefits........... 19.6 24.7
Deferred revenue.................................... 44.8 49.3
------ ------
Total Current Liabilities.......................... 140.2 160.4
------ ------
Long-Term Obligations:
Convertible subordinated notes...................... 137.2 149.1
Other............................................... 1.5 1.7
------ ------
Total long-term obligations........................ 138.7 150.8
------ ------
Deferred Revenue...................................... 31.3 32.4
------ ------
Deferred Income Taxes................................. 0.8 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, none issued or outstanding; 10,000 shares
issued as Series A Preferred Stock................... -- --
Common stock, $.0033 par value, 250,000,000 shares
authorized, 47,366,000 and 42,868,000 shares issued.. 0.2 0.1
Capital in excess of par value........................ 70.6 48.5
Retained earnings..................................... 75.5 77.1
Cumulative translation adjustment..................... (6.2) (3.9)
------ ------
Total stockholders' equity............................ 140.1 121.8
------ ------
Total Liabilities and Stockholders' Equity............ $460.4 $475.4
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
License fees........................................... $ 60.9 $ 65.1
Client services and other.............................. 38.1 27.1
--------- ---------
Total revenues....................................... 99.0 92.2
--------- ---------
Costs and Expenses:......................................
Cost of license fees................................... 18.2 15.9
Cost of client services and other...................... 26.8 23.5
Sales and marketing.................................... 20.1 22.9
Research and development............................... 12.3 14.1
General and administrative............................. 20.2 20.4
Special charges........................................ 1.1 --
--------- ---------
Total costs and expenses............................. 98.7 96.8
--------- ---------
Operating income (loss).................................. 0.3 (4.6)
Non-operating income (expense), net...................... (2.3) (2.1)
--------- ---------
Income (loss) before income taxes........................ (2.0) (6.7)
Provision (benefit) for income taxes..................... (0.7) (2.4)
--------- ---------
Net income (loss)........................................ (1.3) (4.3)
Preferred dividends...................................... 0.3 --
--------- ---------
Net income (loss) available for common stockholders...... $ (1.6) $ (4.3)
========= =========
Basic earnings (loss) per share of common stock.......... $(0.04) $(0.10)
========= =========
Diluted earnings (loss) per share of common stock........ $(0.04) $(0.10)
========= =========
Weighted average common shares outstanding............... 43.7 42.6
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)...................................... $ (1.3) $(4.3)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment........................................... 2.3 2.3
Amortization of other assets......................... 9.1 7.0
Provision for doubtful accounts...................... 0.2 --
Deferred income taxes................................ (1.3) (2.5)
Deferred revenue..................................... (5.0) (2.9)
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable................................ 2.0 14.3
Prepaid expenses and other current assets.......... 4.5 (1.2)
Miscellaneous assets............................... 0.5 0.1
Accrued commissions and royalties.................. (1.1) (1.9)
Accounts payable and other accrued liabilities..... (14.6) (5.7)
Accrued compensation and related benefits.......... (5.1) (6.6)
Income taxes....................................... 0.3 2.5
--------- ---------
Net cash provided by (used in) operating
activities...................................... (9.5) 1.1
--------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment.................... -- (0.5)
Software costs......................................... (10.3) (11.7)
Investments and acquisitions, net of cash acquired..... (2.0) --
--------- ---------
Net cash flows used in investing activities...... (12.3) (12.2)
--------- ---------
Cash Flows From Financing Activities:
Principal payments under financing obligations......... (0.6) (0.7)
Proceeds from exercise of stock options................ 0.6 0.1
Dividends paid......................................... (0.3) --
--------- ---------
Net cash used in financing activities............ (0.3) (0.6)
--------- ---------
Effect of exchange rate changes on cash.................. (0.6) (0.6)
--------- ---------
Net decrease in cash and equivalents............. (22.7) (12.3)
Cash and equivalents:
Beginning of year...................................... 83.3 38.1
--------- ---------
End of period.......................................... $ 60.6 $ 25.8
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<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 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, 1997.
NOTE 2--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.
NOTE 3--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.
6
<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, 1998 to the Three Months
Ended January 31, 1997
Total revenues increased 7.4% to $99.0 million during the first quarter of
1998 over total revenues of $92.2 million recorded during the first quarter of
1997. License fees were $60.9 million in the first quarter of 1998, a 6.5%
decline when compared to the same period of 1997. Geographically, license fee
revenue growth was strong in North America. International results were
impacted by exchange rate changes during the quarter and weaker than expected
sales in Europe. Client services revenues for the quarter were $38.1 million,
an increase of 40.6% 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 following significant investments in open systems and
object skills accompanying the development and release of BPCS Client/Server
Version 6.0.
Cost of license fees as a percentage of related revenues was 29.9% for the
first quarter of 1998, up from 24.4% for the corresponding prior year period.
Cost of license fees increased as a percentage of related revenues primarily
due to increased capitalized software amortization and increased hardware
costs.
Cost of client services and other as a percentage of related revenues was
70.3% and 86.7% for the first quarter of 1998 and 1997, respectively. The
decrease is primarily attributable to increased productivity of client
services personnel and a reduction in warranty work in fiscal 1998.
Sales and marketing expenses as a percentage of license fee revenues were
33.0% and 35.2% in the first quarters of 1998 and 1997, respectively. The
decrease in the current quarter was primarily due to increased productivity of
the Company's direct sales organization.
Gross research and development (R&D) expenditures in the first quarter of
1998 decreased $3.6 million or 14% when compared to the first quarter of 1997.
R&D spending related to the Company's development of its new product line
based upon distributed object computing technology peaked during the last half
of 1996 and has been declining since, as was reflected in the current
quarter, as various projects related to such development wind down.
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 $9.5 million of
software development costs in the first quarter of 1998 as compared to $11.3
million in the first quarter of 1997. The capitalization ratio (capitalized
software as a percentage of gross R&D) in the first quarters of 1998 and 1997
was 43.6% and 44.5%, respectively.
The following table sets forth R&D expenditures and related capitalized
amounts for the periods indicated.
<TABLE>
<CAPTION>
QUARTER
ENDED PERCENTAGE
JANUARY 31, CHANGE
------------ ----------
1998 VS.
1998 1997 1997
----- ----- ----------
(IN
MILLIONS)
<S> <C> <C> <C>
Gross R&D expenditures........................... $21.8 $25.4 (14%)
Less amount capitalized.......................... (9.5) (11.3) (16%)
----- ----- -----
Net R&D expenses................................. $12.3 $14.1 (13%)
===== ===== =====
</TABLE>
General and administrative expenses of $20.2 million decreased $0.2 million
over the prior year primarily due to a decrease in occupancy costs partially
offset by foreign exchange losses.
7
<PAGE>
The special charge of $1.1 million in the current quarter relates to the
final settlement of Bain Investors lawsuit.
Operating income in the first quarter of 1998 was $0.3 million an increase
of $4.9 million from the operating loss of ($4.6) million in the corresponding
quarter of the previous year primarily due to increased revenues, client
services gross profit margin improvements and lower sales and marketing
expenses.
Non-operating expense of $2.3 million in the current quarter increased $.2
million over the prior year quarter balance of $2.1 million and represents,
primarily, net interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents stood at $60.6 million at January 31, 1998 a decrease
of $22.7 million from October 31, 1997. Cash usage was primarily due to one
time factors including the acquisition of the remaining 81% of the Company's
U.K. affiliate, SSA Acclaim, payment of the costs related to the Bain
Investors settlement, and the payment of certain warranty costs, as well as a
general reduction in the level of accounts payable.
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.
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.
PART II--OTHER INFORMATION
<TABLE>
<C> <S> <C>
Item 1. Legal Proceedings........................................... 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............................
</TABLE>
(a) On January 6, 1998, the Company issued a press release announcing the
appointment of its new chief operating officer, president and director,
William M. Stuek.
(b) On January 6, 1998, the Company issued a press release announcing, inter
alia, the settlement of the suit brought by Bain Capital.
8
<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.
March 17, 1998
Date __________________________
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
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 60,600
<SECURITIES> 0
<RECEIVABLES> 214,400
<ALLOWANCES> 16,500
<INVENTORY> 0
<CURRENT-ASSETS> 296,700
<PP&E> 72,900
<DEPRECIATION> 48,800
<TOTAL-ASSETS> 460,400
<CURRENT-LIABILITIES> 140,200
<BONDS> 137,200
9,300
0
<COMMON> 200
<OTHER-SE> 139,900
<TOTAL-LIABILITY-AND-EQUITY> 460,400
<SALES> 99,000
<TOTAL-REVENUES> 99,000
<CGS> 0
<TOTAL-COSTS> 98,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,300
<INCOME-PRETAX> (2,000)
<INCOME-TAX> (700)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,600)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
