<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, 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)
Delaware
- ----------------------------------------------
(State or other jurisdiction of incorporation
or organization)
36-3144515
--------------------------------------------
(IRS Employer Identification 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 10, 1998, there were 47,487,251 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
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SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
<TABLE>
Page
No.
<S> <C> <C>
Part I Financial information
Consolidated Balance Sheets-- 3-4
April 30, 1998 and October 31, 1997
Consolidated Statements of Operations-- 5
three and six months ended April 30, 1998 and 1997
Consolidated Statements of Cash Flows-- 6
six months ended April 30, 1998 and 1997
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition 8 - 10
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>
April 30, October 31,
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 65.5 $ 83.3
Accounts receivable, less allowance for doubtful accounts of $16.5 and $16.5 182.3 198.3
Income taxes receivable 3.0 1.5
Deferred income taxes 11.8 11.3
Prepaid expenses and other current assets 28.4 27.5
------ ------
Total current assets 291.0 321.9
------ ------
PROPERTY and EQUIPMENT:
Data processing equipment 44.8 42.0
Furniture and office equipment 17.6 17.5
Leasehold improvements 10.3 10.3
Transportation equipment 1.9 1.3
------ ------
74.6 71.1
Less - Accumulated depreciation and amortization 51.5 46.0
------ ------
Total property and equipment 23.1 25.1
------ ------
OTHER ASSETS:
Software costs, less accumulated amortization of $106.0 and $89.3 102.2 99.4
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $13.8 and $11.8 25.5 19.7
Deferred income taxes 8.6 3.9
Investments in associated companies 1.0 1.6
Miscellaneous 5.4 3.8
------ ------
Total other assets 142.7 128.4
------ ------
TOTAL ASSETS $456.8 $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>
April 30, October 31,
1998 1997
----------- ----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accrued commissions and royalties $ 24.1 $ 25.8
Accounts payable and other accrued liabilities 55.6 60.6
Accrued compensation and related benefits 20.7 24.7
Deferred revenue 46.4 49.3
------ ------
Total current liabilities 146.8 160.4
------ ------
LONG-TERM OBLIGATIONS:
Convertible subordinated notes 137.2 149.1
Other 1.6 1.7
------ ------
Total long-term obligations 138.8 150.8
------ ------
DEFERRED REVENUE 31.6 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,
47,451,000 and 42,868,000 shares issued 0.2 0.1
Capital in excess of par value 71.5 48.5
Retained earnings 65.7 77.1
Cumulative translation adjustment (7.1) (3.9)
------ ------
Total stockholders equity 130.3 121.8
------ ------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $456.8 $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 Six Months Ended
April 30, April 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 49.7 $ 65.1 $110.5 $130.2
Client services and other 52.7 33.0 90.8 60.0
------ ------ ------ ------
Total revenues 102.4 98.1 201.3 190.2
------ ------ ------ ------
Costs and Expenses:
Cost of license fees 22.0 17.2 40.1 33.0
Cost of client services and other 36.4 23.6 63.3 47.1
Sales and marketing 22.0 21.0 42.1 43.9
Research and development 13.5 12.8 25.8 26.9
General and administrative 20.9 19.6 41.1 40.1
Special charges - - 1.1 -
------ ------ ------ ------
Total costs and expenses 114.8 94.2 213.5 191.0
------ ------ ------ ------
Operating income (loss) (12.4) 3.9 (12.2) (0.8)
Non-operating income (expense), net (2.3) (4.9) (4.6) (7.0)
------ ------ ------ ------
Income (loss) before income taxes (14.7) (1.0) (16.8) (7.8)
Provision (benefit) for income taxes (5.3) (0.4) (6.0) (2.8)
------ ------ ------ ------
Net income (loss) (9.4) (0.6) (10.8) (5.0)
Preferred dividends 0.3 - 0.6 -
------ ------ ------ ------
Net income (loss) to common stockholders $ (9.7) $ (0.6) $(11.4) $ (5.0)
====== ====== ====== ======
Basic earnings (loss) per share of common stock $(0.20) $(0.01) $(0.25) $(0.12)
====== ====== ====== ======
Diluted earnings (loss) per share of common stock $(0.20) $(0.01) $(0.25) $(0.12)
====== ====== ====== ======
Weighted average common shares outstanding 47.4 42.6 45.5 42.6
====== ====== ====== ======
</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,
----------------------
1998 1997
------ ------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(10.8) $ (5.0)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 4.6 4.5
Amortization of other assets 18.8 15.6
Provision for doubtful accounts 0.2 -
Deferred income taxes (6.0) (2.7)
Deferred revenue (3.1) (5.3)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 16.6 (4.1)
Prepaid expenses and other current assets 1.5 (0.3)
Miscellaneous assets 0.2 0.9
Accrued commissions and royalties (1.4) (0.3)
Accounts payable and other accrued liabilities (9.7) (1.8)
Accrued compensation and related benefits (3.5) (5.1)
Income taxes (1.5) 1.1
------ ------
Net cash provided by (used in) operating activities 5.9 (2.5)
------ ------
Cash Flows From Investing Activities:
Purchases of property and equipment (0.5) (1.5)
Software costs (19.5) (23.6)
Investments and acquisitions, net of cash acquired (2.0) -
------ ------
Net cash flows used in investing activities (22.0) (25.1)
------ ------
Cash Flows From Financing Activities:
Amount borrowed (repaid) under bank line of credit - (0.4)
Principal payments under financing obligations (1.6) (1.2)
Proceeds from stock option and stock purchase plans 1.5 0.2
Net proceeds from convertible subordinated promissory note - 12.0
Dividends paid (0.6) -
------ ------
Net cash provided by (used in) financing activities (0.7) 10.6
------ ------
Effect of exchange rate changes on cash (1.0) (0.7)
------ ------
Net decrease in cash and equivalents (17.8) (17.7)
Cash and equivalents:
Beginning of year 83.3 38.1
------ ------
End of period $ 65.5 $ 20.4
====== ======
</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 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 exerciseable at
$9.6875 per share, the fair market value as of the date of settlement.
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, 1998
to the Three Months Ended April 30, 1997
----------------------------------------
Total revenues increased 4.4% to $102.4 million during the second quarter of
1998 over total revenues of $98.1 million recorded during the second quarter of
1997. License fees were $49.7 million, a 23.7% decline when compared to the same
period of 1997. Client services revenues for the quarter were $52.7 million, an
increase of 59.7% 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 following significant investments in open systems and object
skills.
Cost of license fees as a percentage of related revenues was 44.3% for the
second quarter of 1998, up from 26.4% 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 costs related to
warranty.
Cost of client services and other as a percentage of related revenues was 69.1%
and 71.5% for the second quarter of 1998 and 1997, respectively. The improvement
is primarily due to increased productivity of client services personnel.
Sales and marketing expenses increased $1.0 million in the second quarter of
1998 to $22.0 million versus $21.0 million in the second quarter of 1997. The
increase in the current quarter was primarily due to increased expenditures in
marketing programs.
Gross research and development (R&D) expenditures in the second quarter of 1998
decreased $1.7 million or 7.3% when compared to the second quarter of 1997. R&D
spending related to the Company's development of its new product line, BPCS
Client/Server Version 6.0 peaked during the last half of 1996.
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 $8.2 million of software development
costs in the second quarter of 1998 compared to $10.6 million in the second
quarter of 1997. The capitalization ratio (capitalized software as a percentage
of gross R&D) in the second quarters of 1998 and 1997 was 37.8% and 45.3%
respectively.
8
<PAGE>
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
- ------------------------------------------------------------------------
1998 vs.
1998 1997 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $21.7 $ 23.4 (7%)
Less amount capitalized (8.2) (10.6) (23%)
- ------------------------------------------------------------------------
Net R&D expenses $13.5 $ 12.8 5%
- ------------------------------------------------------------------------
</TABLE>
General and administrative expenses increased $1.3 million to $20.9 million
versus $19.6 million in the second quarter of 1997. The majority of the increase
is due to the acquisition of the Company's U.K. affiliate, SSA Acclaim, in
January 1998.
Operating loss in the second quarter of 1998 was ($12.4) million, a decrease of
$16.3 million when compared to operating income of $3.9 million recorded in the
corresponding quarter of the previous year. The major reason for the unfavorable
change was lower license fees revenues.
Non-operating expense of $2.3 million in the current quarter decreased $2.6
million from the prior year quarter of $4.9 million and represents, primarily,
reduced interest expense.
The tax benefit rate of approximately 36% in the current quarter is consistent
with the prior year quarter.
Comparison of the Six Months Ended April 30, 1998
to the Six Months Ended April 30, 1997
--------------------------------------
The principle variations for the six months ended April 30, 1998, when
supplemented with the following comments, are relatively consistent with the
discussion of the second quarter results.
Total revenues increased 5.8% to $201.3 million for the first six months over
total revenues of $190.2 million recorded during the first six months of 1997.
The revenue increase was attributable to client services revenues which were up
51% when compared to the prior year, however offset by a decline in license fees
revenues of 15.1%.
9
<PAGE>
Cost of license fees as a percentage of related revenues increased to 36.3% in
1998 when compared to 25.3% for the first six months of 1997.
Cost of client services as a percentage of related revenues was 69.7% and 78.5%
for the first six months of 1998 and 1997, respectively.
The following table sets forth R&D expenditures and related capitalized amounts
for the first six months of 1998 and 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(in millions)
Six Months Ended Percentage
April 30, Change
- --------------------------------------------------------------------------
1998 vs.
1998 1997 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $ 43.5 $ 48.8 (11%)
Less amount capitalized (17.7) (21.9) (19%)
- --------------------------------------------------------------------------
Net R&D expenses $ 25.8 $ 26.9 (4%)
- --------------------------------------------------------------------------
</TABLE>
The special charge of $1.1 million in the first six months of 1998 relates to
the final settlement of the Bain Investors' lawsuit.
Liquidity and Capital Resources
Cash and equivalents stood at $65.5 million at April 30, 1998, a decrease of
$17.8 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, and payment of certain warranty costs, as well as interest payments
on the Company's subordinated notes and 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.
On May 27, 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. 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.
10
<PAGE>
Part II - Other Information
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
(a) On April 14, 1998, the Company held its annual meeting of
stockholders
(b) Stockholders of the Company voted in favor of the re-election of
Casey Cowell, Andrew Filipowski, Douglas Smith, William Stuek and William
Weaver, Jr. to the Company's board of directors. As to each nominee, at least
94.0% of the votes cast were in favor of election.
(c) In addition, the stockholders approved the adoption of the
Company's Qualified Employee Stock Purchase Plan. The vote regarding the plan
was 96.9% votes in favor of the proposal, 2.9% votes against and .2% votes
abstained.
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K 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 June 15, 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> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 65,500
<SECURITIES> 0
<RECEIVABLES> 198,800
<ALLOWANCES> 16,500
<INVENTORY> 0
<CURRENT-ASSETS> 291,000
<PP&E> 74,600
<DEPRECIATION> 51,500
<TOTAL-ASSETS> 456,800
<CURRENT-LIABILITIES> 146,800
<BONDS> 137,200
9,300
0
<COMMON> 200
<OTHER-SE> 130,100
<TOTAL-LIABILITY-AND-EQUITY> 456,800
<SALES> 102,400
<TOTAL-REVENUES> 102,400
<CGS> 0
<TOTAL-COSTS> 114,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,300
<INCOME-PRETAX> (14,700)
<INCOME-TAX> (5,300)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,700)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
