<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, 1999
-----------------
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>
<S> <C>
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 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 March 12, 1999, there were 48,072,055 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: 13
----
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C> <C>
Part I Financial information
Consolidated Balance Sheets - 3-4
January 31, 1999 and October 31, 1998
Consolidated Statements of Operations - 5
three months ended January 31, 1999 and 1998
Consolidated Statements of Cash Flows - 6
three months ended January 31, 1999 and 1998
Notes to Consolidated Financial Statements 7-8
Management's Discussion and Analysis of Financial Condition 9-11
and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk 11
Part II Other information 12
Signature Page 13
</TABLE>
2
<PAGE>
Part I - Financial Information
Item I - Financial Statements
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(in millions)
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
----------- -----------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $44.9 $52.4
Accounts receivable, less allowance for doubtful accounts of 135.2 144.4
$16.5 and $16.5
Income taxes receivable 5.0 3.9
Deferred income taxes 34.0 31.2
Prepaid expenses and other current assets 27.8 27.6
--------- ---------
Total current assets 246.9 259.5
--------- ---------
PROPERTY and EQUIPMENT:
Data processing equipment 41.9 41.5
Furniture and office equipment 16.1 16.3
Leasehold improvements 8.4 8.4
Transportation equipment 1.8 1.7
--------- ---------
68.2 67.9
Less - Accumulated depreciation and amortization 50.5 48.8
--------- ---------
Total property and equipment 17.7 19.1
--------- ---------
OTHER ASSETS:
Software costs, less accumulated amortization of $46.3 and $42.9 37.5 39.5
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $14.0 and $13.0 20.1 21.1
Deferred income taxes 17.3 16.6
Investments in associated companies - 1.0
Miscellaneous 3.3 4.0
--------- ---------
Total other assets 78.2 82.2
--------- ---------
TOTAL ASSETS $342.8 $360.8
========= =========
</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,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accrued commissions and royalties $ 18.7 $ 20.3
Accounts payable and other accrued liabilities 77.7 77.9
Accrued compensation and related benefits 19.9 23.1
Deferred revenue 41.1 44.3
---------- -----------
Total current liabilities 157.4 165.6
---------- -----------
LONG-TERM OBLIGATIONS:
Convertible subordinated notes 137.4 137.3
Other 4.5 4.6
---------- -----------
Total long-term obligations 141.9 141.9
---------- -----------
DEFERRED REVENUE 24.7 29.9
---------- -----------
REDEEMABLE SERIES A PREFERRED STOCK, $.01 par value, convertible, 10,000
shares issued and outstanding (liquidation preference of $10.0 million) 9.4 9.3
---------- -----------
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,
47,762,000 and 47,621,000 shares issued 0.2 0.2
Capital in excess of par value 73.0 72.5
Retained earnings (deficit) (58.3) (52.9)
Accumulated other comprehensive income - cumulative
translation adjustment (5.5) (5.7)
---------- -----------
Total stockholders' equity 9.4 14.1
---------- -----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $342.8 $360.8
========== ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
----------- -----------
1999 1998
----------- ------------
<S> <C> <C>
Revenues:
License fees $ 31.6 $ 60.9
Client services and other 58.1 38.1
----------- -----------
Total revenues 89.7 99.0
----------- ------------
Costs and Expenses:
Cost of license fees 13.2 18.2
Cost of client services and other 35.1 26.8
Sales and marketing 17.1 20.1
Research and development 12.6 12.3
General and administrative 19.5 20.2
Special charges - 1.1
----------- -----------
Total costs and expenses 97.5 98.7
----------- ------------
Operating income (loss) (7.8) 0.3
Non-operating income (expense), net (2.9) (2.3)
Gain on sale of investment 2.8 -
----------- -----------
Income (loss) before income taxes (7.9) (2.0)
Provision (benefit) for income taxes (2.8) (0.7)
----------- -----------
Net income (loss) (5.1) (1.3)
Preferred dividends 0.3 0.3
----------- ------------
Net income (loss) available for common stockholders $ (5.4) $ (1.6)
========== ===========
Basic and diluted earnings (loss) per share of
common stock $ (0.11) $ (0.04)
========== ===========
Weighted average common shares outstanding 47.7 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>
Three Months Ended
January 31,
----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (5.1) $(1.3)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization of property and equipment 1.9 2.3
Amortization of other assets 4.6 9.1
Provision for doubtful accounts - 0.2
Gain on sale of investment (2.8) -
Deferred income taxes (3.5) (1.3)
Deferred revenue (7.7) (5.0)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 8.3 2.0
Prepaid expenses and other current assets (0.3) 4.5
Miscellaneous assets 0.7 0.5
Accrued commissions and royalties (1.3) (1.1)
Accounts payable and other accrued liabilities - (14.6)
Accrued compensation and related benefits (3.0) (5.1)
Income taxes (1.1) 0.3
----------- ----------
Net cash used in operating activities (9.3) (9.5)
----------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment (0.1) -
Software costs (1.4) (10.3)
Acquisition, net of cash acquired - (2.0)
Proceeds from sale of investment 3.8 -
----------- ----------
Net cash provided by (used in) investing activities 2.3 (12.3)
----------- ----------
Cash Flows From Financing Activities:
Principal payments under financing obligations (0.5) (0.6)
Proceeds from stock option and stock purchase plans 0.5 0.6
Dividends paid (0.3) (0.3)
----------- ----------
Net cash used in financing activities (0.3) (0.3)
----------- ----------
Effect of exchange rate changes on cash (0.2) (0.6)
----------- ----------
Net decrease in cash and equivalents (7.5) (22.7)
Cash and equivalents:
Beginning of year 52.4 83.3
----------- ----------
End of period $ 44.9 $60.6
========== =========
Non-cash investing and financing activities:
Leases capitalized $ 0.5 $ 0.2
Shares issued in business combination $ - $ 5.9
Issuance of common stock purchase warrants $ - $ 3.5
Conversion of private convertible subordinated note $ - $12.0
Cash paid during the period for:
Interest $ 0.1 $ 0.3
Income taxes $ 1.9 $ -
</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, 1998, the financial
information included herein is unaudited. However, such information reflects
all adjustments (consisting 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, 1998.
Note 2 -- Revenue Recognition Policy
American Institute of Certified Public Accountants Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2) was issued in October 1997 and is
effective for transactions entered into in fiscal years beginning after December
15, 1997. SOP 97-2 addresses various aspects of the recognition of revenues on
software transactions and supersedes SOP 91-1, the policy previously followed by
the Company. SOP 97-2 provides guidance on software arrangements consisting of
multiple elements, evidence of fair value, delivery of elements, accounting for
service elements, and software arrangements requiring significant production,
modification, or customization of software. The Company adopted this statement
in fiscal year 1999, beginning November 1, 1998. The adoption of this statement
has not resulted in a material impact on the Company's financial statements.
Note 3 -- Comprehensive Income
As of November 1, 1998, the Company adopted Financial Accounting Standards Board
Statement 130 (FAS 130), "Reporting Comprehensive Income." FAS 130 establishes
new standards for the reporting and display of comprehensive income and its
components. However, it has no impact on the Company's net income/(loss) or
stockholders' equity. FAS 130 requires foreign currency translation adjustments
and changes in fair value for available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income. The components of comprehensive net income (loss), are as
follows:
7
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three Months Ended
January 31, 1999 January 31, 1998
- --------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Net income (loss) $(5.1) $(1.3)
Change in cumulative translation
adjustment 0.2 (2.3)
- --------------------------------------------------------------------------------------------
Comprehensive net income (loss) $(4.9) $(3.6)
=============================================================================================
</TABLE>
Note 4 -- 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 of office space and
severance benefits for approximately 300 employees. The reduction in workforce
represents approximately 12% of June 30, 1998 world-wide employees.
Restructuring costs incurred in the first quarter of 1999 total $6.7 million.
The following table summarizes the significant components of the restructuring
reserve at January 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Restructuring Restructuring Remaining Balance
Accrual Balance Costs at January 31,
at October 31, 1998 Incurred 1999
- ---------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Severance and benefits $ 1.8 $0.3 $ 1.5
Write-down of assets 0.7 - 0.7
Office space 8.4 0.7 7.7
Warranty 28.0 5.6 22.4
Other 0.1 0.1 -
- ---------------------------------------------------------------------------------------------------------
$39.0 $6.7 $32.3
=========================================================================================================
</TABLE>
The Company expects to pay a significant amount of the remaining $32.3 million
of accrued restructuring costs during fiscal 1999.
8
<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, 1999
to the Three Months Ended January 31, 1998
------------------------------------------
Total revenues decreased 9.4% to $89.7 million during the first quarter of 1999
versus total revenues of $99.0 million recorded during the first quarter of
1998. License fees were $31.6 million, a 48.1% decline when compared to the
same period of 1998. The decrease in license fee revenues was due, in part, to
slowness in the overall ERP market as clients temporarily postponed contract
decisions due to a variety of factors, including final remediation of year 2000
issues, as well as other sales execution issues. Client services revenues for
the quarter were $58.1 million, an increase of 52.5% 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 as well as an increase in productivity of
services personnel.
Cost of license fees as a percentage of related revenues was 41.8% for the first
quarter of 1999, up from 29.9% for the corresponding prior year period. The
increase is due to a significant decline in license fees sold directly,
resulting in a greater proportion of first quarter 1999 revenues being generated
by the Company's affiliate sales channel, the sale of third party products and
hardware. In addition, a significant fixed component of cost of license fee
revenues is amortization of capitalized software.
Cost of client services and other as a percentage of related revenues was 60.4%
and 70.3% for the first quarter of 1999 and 1998, respectively. The improvement
is primarily due to increased productivity of client services personnel.
Sales and marketing expenses decreased $3.0 million in the first quarter of 1999
to $17.1 million from $20.1 million in the first quarter of 1998. 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 partially offset by
an increase in marketing expenditures, as well as the positive impact of the
third quarter 1998 restructuring initiatives.
Gross research and development (R&D) expenditures in the first quarter of 1999
decreased $7.8 million or 35.8% when compared to the first quarter of 1998. The
reduction is due, primarily, to reduced development activities related to BPCS
Client/Server Version 6.0 as well as the positive impact of the third quarter
1998 restructuring initiatives.
9
<PAGE>
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 $1.4 million of software development costs
in the first quarter of 1999 compared to $9.5 million in the first quarter of
1998. The capitalization ratio (capitalized software as a percentage of gross
R&D) in the first quarters of 1999 and 1998 was 10% and 44%, respectively.
The following table sets forth R&D expenditures and related capitalized amounts
for the periods indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(in millions) Percentage
Quarter Ended January 31, Change
- ------------------------------------------------------------------------------------------------------
1999 vs.
1999 1998 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross R&D expenditures $14.0 $21.8 (36%)
Less amount capitalized (1.4) (9.5) (85%)
- ------------------------------------------------------------------------------------------------------
Net R&D expenses $12.6 $12.3 2%
- ------------------------------------------------------------------------------------------------------
</TABLE>
General and administrative expenses were $19.5 million and $20.2 million in the
first quarter of 1999 and 1998, respectively.
The special charge of $1.1 million in the first quarter of 1998 related to the
final settlement of the Bain Investors lawsuit.
Operating loss in the first quarter of 1999 was ($7.8) million compared to
operating income of $0.3 million recorded in the corresponding quarter of the
previous year. The major reason for the decline was lower license fee revenues.
Non-operating expenses, which primarily represents interest expense, were $2.9
million and $2.3 million in the first quarter of 1999 and 1998, respectively.
The gain on sale of investment of $2.8 million in the first quarter of 1999
resulted from the sale of the Company's 25% ownership of CS Controlling Software
Systeme. The cash proceeds were $3.8 million.
The tax benefit rate of approximately 35% is consistent with the prior year
quarter.
10
<PAGE>
Year 2000
BPCS product line - The Company offers comprehensive services, education,
project management and migration strategies to ready clients for the Year 2000.
Century date options include BPCS Client/Server Version 6.0, BPCS ("CD") Century
Dated, or BPCS Millennium Toolset. All versions of BPCS Client/Server V6.0 are
Year 2000 compliant, BPCS CD century dates V4.05 and the BPCS Millennium
Toolset will century date client's current version of BPCS Client/Server,
modifications and related applications.
Third parties - Identification of areas of third party risk is currently in
process and should be completed by the first calendar quarter. Plans to
mitigate risk when identified should be developed and implemented by the second
calendar quarter of 1999.
Internal systems - The Company is in the process of identifying all affected
information technology and non-information technology systems. Remediation
plans will target the successful development, implementation, and testing of
each affected system. Identification should be completed by the end of the
first calendar quarter of 1999 and plans to remediate should be developed and
implemented by the second calendar quarter of 1999.
In addition, the remediation plan will identify areas of risk to the Company if
the Year 2000 plan fails and will identify contingency plans for critical
processes. Risk assessment and contingency plans should be completed in the
second calendar quarter of 1999.
At this time, the Company believes that there will be no significant cost
associated with ensuring Year 2000 compliance of its internal systems.
Liquidity and Capital Resources
Cash and equivalents at January 31, 1999 totaled $44.9 million, a decrease of
$7.5 million when compared to October 31, 1998 cash balance of $52.4 million.
Cash usage was primarily due to operating losses and payments related to the
Company's third quarter 1998 restructuring activities.
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 the Company's capital
requirements for the foreseeable future.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk during the
three month period ended January 31, 1999. For additional information refer to
Item 7A in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1998.
11
<PAGE>
Part II - Other Information
Item 1. Legal Proceeding None
Item 2. Changes in Securities
(a) On February 1, 1999, the Board of Directors of the Company
declared a dividend distribution of one common stock purchase right (a "Right")
for each outstanding share of Common Stock, $.0033 par value (the "Common
Stock"), of the Company to the stockholders of record at the close of business
on February 12, 1999. Each Right entitles the registered holder to purchase
from the Company one share of Common Stock at a Purchase Price of $50.00 per
share (the "Purchase Price"), subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and First Chicago Trust Company of New York, as Rights Agent
(the "Rights Agent"). The Rights and the Rights Agreement are more fully
described in the Company's Current Report on Form 8-K, and Registration
Statement on Form 8-A, both filed with the Commission on February 12, 1999. The
Rights Agreement is included as an exhibit to both filings, and both such
filings are incorporated by reference in this Form 10-Q.
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
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
(a) 4.1 Rights Agreement, dated as of February 11, 1999, between
System Software Associates, Inc. and First Chicago Trust Company of New York
Incorporated (incorporated by reference to Exhibit 1 to the Company's Current
Report on Form 8-K, filed February 12, 1999).
(b) Not Applicable
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 March 17, 1999
---------------
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
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-1999
<CASH> 44,900
<SECURITIES> 0
<RECEIVABLES> 151,700
<ALLOWANCES> 16,500
<INVENTORY> 0
<CURRENT-ASSETS> 246,900
<PP&E> 68,200
<DEPRECIATION> 50,500
<TOTAL-ASSETS> 342,800
<CURRENT-LIABILITIES> 157,400
<BONDS> 137,400
9,400
0
<COMMON> 200
<OTHER-SE> 9,200
<TOTAL-LIABILITY-AND-EQUITY> 342,800
<SALES> 89,700
<TOTAL-REVENUES> 89,700
<CGS> 0
<TOTAL-COSTS> 97,500
<OTHER-EXPENSES> (2,800)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,900
<INCOME-PRETAX> (7,900)
<INCOME-TAX> (2,800)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,400)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
