<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, 2000
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 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
____________________________
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 9, 2000, there were 12,037,499 and 10,609 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: 20
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
INDEX
<TABLE>
<CAPTION>
Page
No.
<C> <S> <C>
Part I Financial information
Consolidated Balance Sheets - 3-4
April 30, 2000 and October 31, 1999
Consolidated Statements of Operations - 5
three and six months ended April 30, 2000 and 1999
Consolidated Statements of Comprehensive Income - 6
three and six months ended April 30, 2000 and 1999
Consolidated Statements of Cash Flows - 7
six months ended April 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 8 - 13
Management's Discussion and Analysis of Financial Condition 13 - 17
and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk 17
Part II Other information 18-19
Signature Page 20
</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,
2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $10.4 $24.6
Accounts receivable, less allowance for doubtful accounts of $7.8 and $7.8 81.7 99.1
Deferred income taxes - 4.4
Prepaid expenses 17.2 18.0
Other current assets 5.8 6.8
---------- -----------
Total current assets 115.1 152.9
---------- -----------
PROPERTY and EQUIPMENT:
Data processing equipment 38.2 39.5
Furniture and office equipment 13.7 14.6
Leasehold improvements 7.0 7.2
Transportation equipment 1.7 1.8
---------- -----------
60.6 63.1
Less - Accumulated depreciation and amortization 51.3 51.0
---------- -----------
Total property and equipment 9.3 12.1
---------- -----------
OTHER ASSETS:
Software costs, less accumulated amortization of $ - and $56.5 1.7 30.6
Cost in excess of net assets of acquired businesses,
less accumulated amortization of $ - and $8.9 - 8.1
Deferred income taxes - 17.6
Miscellaneous - 8.7
---------- -----------
Total other assets 1.7 65.0
---------- -----------
TOTAL ASSETS $126.1 $230.0
========== ===========
</TABLE>
See accompanying Notes to Condensed 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,
2000 1999
--------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt $ 32.2 $ -
Accrued commissions and royalties 11.5 11.4
Accounts payable and other accrued liabilities 44.8 46.1
Accrued compensation and related benefits 9.2 14.8
Deferred revenue 36.0 34.9
--------- -----------
Total current liabilities 133.7 107.2
--------- -----------
LONG-TERM OBLIGATIONS:
Long-term debt - 25.6
Convertible subordinated notes 137.6 137.5
Other 2.1 3.9
--------- -----------
Total long-term obligations 139.7 167.0
--------- -----------
DEFERRED REVENUE 11.5 20.3
--------- -----------
REDEEMABLE SERIES A PREFERRED STOCK, $.01 par
value, convertible, 10,609 and 10,000 shares
issued and outstanding (liquidation preference
of $10.6 million) 9.9 9.1
--------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 100,000 shares
authorized, 10,609 and 10,000 shares issued as
Series A Preferred Stock - -
Common stock, $.0033 par value, 62,500,000 shares
authorized, 12,038,000 and 11,995,000 shares
issued - -
Capital in excess of par value 75.4 75.4
Retained earnings (deficit) (234.7) (142.4)
Accumulated other comprehensive income -
cumulative translation adjustment (9.4) (6.6)
--------- -----------
Total stockholders' equity (deficit) (168.7) (73.6)
--------- -----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $126.1 $230.0
========= ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
--------------------- --------------------
2000 1999 2000 1999
----- ---- ----- ----
<S> <C> <C> <C> <C>
Revenues:
License fees $ 23.5 $ 28.3 $ 43.2 $ 59.9
Client services and other 28.6 58.4 61.0 116.5
------- ------- ------- -------
Total revenues 52.1 86.7 104.2 176.4
------- ------- ------- -------
Costs and Expenses:
Cost of license fees 6.7 13.0 13.9 26.1
Cost of client services and other 17.6 33.5 39.1 68.6
Sales and marketing 11.5 16.8 23.0 33.8
Research and development 8.3 12.7 16.3 25.4
General and administrative 14.3 19.3 27.4 38.2
------- ------- ------- -------
Total costs and expenses 58.4 95.3 119.7 192.1
------- ------- ------- -------
Operating income (loss) (6.3) (8.6) (15.5) (15.7)
Non-operating income (expense), net (6.3) (3.0) (11.7) (6.6)
Non-operating provision for write-down of assets held for sale (32.0) - (32.0) -
Gain on sale of investment - - - 2.8
------- ------- ------- -------
Income (loss) before income taxes (44.6) (11.6) (59.2) (19.5)
Provision (benefit) for income taxes 32.4 (4.2) 32.4 (7.0)
------- --------- ------- -------
Net income (loss) (77.0) (7.4) (91.6) (12.5)
Preferred dividends 0.4 0.3 0.7 0.6
------- ------- ------- -------
Net income (loss) available for common stockholders $ (77.4) $ (7.7) $ (92.3) $ (13.1)
======= ======= ======= =======
Basic and diluted earnings (loss) per share of common stock $ (6.43) $ (0.64) $ (7.68) $ (1.10)
======= ======= ======= =======
Weighted average common shares outstanding 12.0 12.0 12.0 11.9
======= ======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
---------------------------- --------------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (77.0) $ (7.4) $ (91.6) $ (12.5)
Change in cumulative translation adjustment (1.4) (1.1) (2.8) (0.9)
-------- --------- -------- --------
Comprehensive net income (loss) $ (78.4) $ (8.5) $ (94.4) $ (13.4)
======== ========= ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
SYSTEM SOFTWARE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (91.6) $ (12.5)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Write-off of assets held for sale 42.2 -
Depreciation of property and equipment 2.6 3.8
Amortization of other assets 7.2 9.1
Gain on sale of investment - (2.8)
Deferred tax valuation allowance 22.2 -
Deferred income taxes (0.2) (8.2)
Deferred revenue (5.8) (12.6)
Interest and fee payments on short-term debt paid-in-kind 1.0 -
Changes in operating assets and liabilities:
Accounts receivable 12.3 18.3
Prepaid expenses 0.1 0.1
Other current assets 0.9 (0.9)
Miscellaneous assets (1.6) -
Accrued commissions and royalties 0.4 (1.6)
Accounts payable and other accrued liabilities (1.4) (8.6)
Accrued compensation and related benefits (5.2) (3.9)
---------- ----------
Net cash used in operating activities (16.9) (19.8)
---------- ----------
Cash Flows From Investing Activities:
(Sales) Purchases of property and equipment, net 0.1 (0.1)
Software costs (2.0) (2.8)
Proceeds from sale of investment - 3.8
---------- ----------
Net cash provided by (used in) investing activities (1.9) 0.9
---------- ----------
Cash Flows From Financing Activities:
Proceeds from short-term debt 6.0 -
Principal payments under short-term debt (0.4) -
Principal payments under other financing obligations (0.7) (1.0)
Proceeds from stock option and stock purchase plans - 0.9
Dividends paid - (0.6)
---------- ----------
Net cash provided by (used in) financing activities 4.9 (0.7)
---------- ----------
Effect of exchange rate changes on cash (0.3) (0.7)
---------- ----------
Net decrease in cash and equivalents (14.2) (20.3)
Cash and equivalents:
Beginning of year 24.6 52.4
---------- ----------
End of period $ 10.4 $ 32.1
========== ==========
Non-cash investing and financing activities:
Leases capitalized $ 0.2 $ 0.7
Stock dividends paid on preferred stock $ 0.6 $ -
Cash paid during the period for:
Interest $ 2.3 $ 5.0
Income taxes $ 1.6 $ 3.1
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The condensed 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, 1999, 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 condensed 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, 1999.
Certain amounts in the condensed consolidated financial statements have been
reclassified to conform to the 2000 presentation.
Note 2 -- Restructuring and Other
In the third quarter ended July 31, 1999, the Company announced a restructuring
and other charge of $22.8 million. This restructuring was a part of a series of
actions aimed at completing the Company's transition to a portfolio solutions
provider. The charge included severance, reduction of office space in the United
States and Canada, assets and equipment leases related to workforce and office
space reductions and a write-down of goodwill and assets relating to
partnerships no longer essential to the Company's new solutions strategy. The
workforce reduction represented approximately 320 employees or 16% of June 30,
1999 world-wide employees. The realignment and reorganization of the Company
affected all functional areas: field sales, services and support operations,
marketing, research and development and general and administrative.
Restructuring costs incurred in the second quarter ended April 30, 2000 totaled
$0.3 million. The following table summarizes the significant components of the
restructuring reserve at April 30, 2000.
--------------------------------------------------------------------------------
Restructuring
Balance Costs Incurred Balance
at October 31, Non- Cash at April 30,
1999 Cash Payments 2000
--------------------------------------------------------------------------------
(in millions)
Office space $ 3.2 $ - $ 0.3 $ 2.9
Equipment rent 0.5 - 0.4 0.1
--------------------------------------------------------------------------------
$ 3.7 $ - $ 0.7 $ 3.0
================================================================================
8
<PAGE>
The ultimate settlement of amounts reserved is currently uncertain due to the
Company's recent bankruptcy filing (see Note 6).
The Company announced a restructuring and other charge of $122.5 million in the
third quarter ended July 31, 1998. The Company decided that it would no longer
add functionality or performance to four BPCS application software versions.
The restructuring charge included 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 affecting North America,
Latin America, Europe and Asia/Pacific and severance benefits for approximately
300 employees. The reduction in workforce represented approximately 12% of June
30, 1998 worldwide employees and affected all functional areas and employee
groups within the Company. The other charge represented $2.5 million in payments
under termination agreements with former executives of the Company and $0.8
million in future rentals for leased equipment which would no longer be used as
a result of the restructuring plan. Restructuring costs incurred in the second
quarter ended April 30, 2000 totaled $1.3 million. The following table
summarizes the significant components of the restructuring reserve at April 30,
2000.
--------------------------------------------------------------------------------
Restructuring
Balance Costs Incurred Balance
at October 31, Non- Cash at April 30,
1999 Cash Payments Adjustments 2000
--------------------------------------------------------------------------------
(in millions)
Office space $ 2.5 $ - $ 0.9 $ (0.8) $ 0.8
Warranty 2.6 0.5 0.8 0.8 2.1
$ 5.1 $ 0.5 $ 1.7 $ - $ 2.9
================================================================================
The ultimate settlement of amounts reserved is currently uncertain due to the
Company's recent bankruptcy filing (see Note 6).
Note 3 --Short-Term Debt
On August 11, 1999 the Company closed a $41.0 million loan and security
agreement with a group of lenders headed by Foothill Capital Corporation, a
Wells Fargo Company. The agreement provided for (i) a maximum revolving loan of
$30.0 million which initially included a term loan of $15.0 million ("Term Loan
A"), (ii) a term loan of $8.5 million ("Term Loan B") and (iii) a term loan of
$2.5 million ("Term Loan C"). On December 23, 1999 the Company closed the first
amendment to the agreement, which provided for an additional term loan of $6.0
million ("Term Loan D"), accelerated the original maturity date of the loans
from August 31, 2002 to June 30, 2000 and amended certain other provisions of
the agreement. On January 28, 2000, the Company entered into a second amendment
to the loan agreement which extended the maturity date of the loans from June
30, 2000 to November 1, 2000 and amended certain other provisions of the
agreement. On May 3, 2000, the Company entered into a third amendment to the
loan agreement, which provides for a revolving credit facility of up to $5.0
million.
9
<PAGE>
Borrowing availability under the $30.0 million revolving loan is not available
after May 3, 2000.
The Company received proceeds of $32.0 million from Term Loans A, B, C, and D,
$31.6 million of which was outstanding at January 31, 2000. The proceeds were
used to retire the Company's line of credit and to provide working capital for
general corporate purposes. A $1.0 million Term Loan D fee was paid at the
closing of the first amendment, and a $0.3 million waiver fee was added to the
outstanding principal upon execution of the second amendment. A facility usage
fee of 0.5% per month, which is added to the outstanding principal, is charged
on Term Loans A, B, and C as of the first amendment date.
Outstanding principal under Term Loan A (originally $15.0 million) was repaid
monthly beginning October 1, 1999 until the first amendment date. The remaining
principal is due at maturity, November 1, 2000. The rate of interest charged on
Term Loan A is 15.0% per annum, 2.5% of which is being added to the outstanding
principal at the option of the Company starting February 1, 2000 through May 3,
2000.
Outstanding principal under Term Loan B ($8.5 million), Term Loan C ($2.5
million) and Term Loan D ($6.0 million) is due at maturity, November 1, 2000.
Term Loan C is convertible, at the option of the lender, into common stock of
the Company. The rate of interest charged on Term Loans B, C, and D is 15.0%
per annum, 2.5% of which is being added to the outstanding principal at the
option of the Company starting February 1, 2000 through May 3, 2000. A maturity
fee of $0.9 million is due at maturity. Other fees that apply to the agreement
include an unused line fee and a float fee based on collections. A servicing
fee is applicable effective May 3, 2000.
The loan agreement is secured by a first priority interest in substantially all
of the Company's assets, including, but not limited to accounts receivable,
general intangibles, and fixed assets.
The Company's loan and security agreement was amended on May 3, 2000, to a
Debtor-In-Possession Loan and Security Agreement ("DIP") (see Note 6). The
amended loan agreement contains financial covenants including management of
receipts and disbursements and minimum revenues to the DIP budget. A commitment
fee of $0.4 million was paid at the closing and another $0.4 million is payable
at the termination of the DIP agreement, payable potentially by the buyer. The
original maturity date was May 26, 2000 and has been subsequently extended to
June 16, 2000.
10
<PAGE>
Note 4 -- Redeemable Series A Preferred Stock
The Company's Series A Preferred Stock Agreement provides for a cash dividend
payment of approximately $0.3 million per quarter. The Company and the Series A
Preferred Stock holder agreed that the dividend due on February 29, 2000 would
be paid in additional shares of Series A Preferred Stock. The May 31, 2000
dividend is not required to be paid due to the bankruptcy filing (see Note 6).
The Company is not required to maintain compliance with the covenants under the
preferred stockholder agreement subsequent to the bankruptcy filing.
Note 5 -- Business Segments
The Company has identified license fees and client services as its reportable
operating segments. The Company does not identify or allocate depreciation
expense, interest income and expense, or taxes to operating segments. The Other
segment column includes corporate expenses which are not allocated to the
reportable segments. Information on reportable segments for the quarters ended
April 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
License Client
Fees Services Other Total
------- -------- ------- -------
(in millions)
Three Months Ended April 30, 2000
<S> <C> <C> <C> <C>
Revenues $ 23.5 $ 28.6 $ - $ 52.1
Cost of license fees 6.7 - - 6.7
Cost of client services and - 17.6 - 17.6
other
Sales and marketing 0.7 0.4 10.4 11.5
Research and development - - 8.3 8.3
General and administrative - - 14.3 14.3
Operating income (loss) 16.1 10.6 (33.0) (6.3)
Accounts receivable, net 43.7 37.4 0.6 81.7
Three Months Ended April 30, 1999
Revenues $ 28.3 $ 58.4 $ - $ 86.7
Cost of license fees 13.0 - - 13.0
Cost of client services and other - 33.5 - 33.5
Sales and marketing 1.9 - 14.9 16.8
Research and development - - 12.7 12.7
General and administrative - - 19.3 19.3
Operating income (loss) 13.4 24.9 (46.9) (8.6)
Accounts receivable, net 63.8 58.3 0.8 122.9
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
License Client
Fees Services Other Total
------- -------- ------- -------
(in millions)
Six Months Ended April 30, 2000
<S> <C> <C> <C> <C>
Revenues $ 43.2 $ 61.0 $ - $ 104.2
Cost of license fees 13.9 - - 13.9
Cost of client services and other - 39.1 - 39.1
Sales and marketing 1.5 0.9 20.6 23.0
Research and development - - 16.3 16.3
General and administrative - - 27.4 27.4
Operating income (loss) 27.8 21.0 (64.3) (15.5)
Accounts receivable, net 43.7 37.4 0.6 81.7
Six Months Ended April 30, 1999
Revenues $ 59.9 $ 116.5 $ - $ 176.4
Cost of license fees 26.1 - - 26.1
Cost of client services and other - 68.6 - 68.6
Sales and marketing 4.1 - 29.7 33.8
Research and development - - 25.4 25.4
General and administrative - - 38.2 38.2
Operating income (loss) 29.7 47.9 (93.3) (15.7)
Accounts receivable, net 63.8 58.3 0.8 122.9
</TABLE>
Note 6 -- Asset Purchase Agreement and Bankruptcy Filing
On May 3, 2000, the Company entered into a definitive Asset Purchase Agreement
with Gores Technology Group ("Gores") providing for the sale by the Company of
substantially all of its assets to a newly-formed subsidiary of Gores for cash
and 25% of the common stock of the newly-formed subsidiary.
Also on May 3, 2000, the Company reached agreement with its senior secured
lenders on the terms of a debtor-in-possession loan facility and filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware. The
Chapter 11 proceeding is intended to, among other things, allow the Company to
complete the sale of its assets in an expeditious manner pursuant to Section 363
of the Bankruptcy Code. The debtor-in-possession facility provides the Company
with up to $5 million of new funding for operations subject to approval of the
senior secured lender of an acceptable budget.
Completion of the Gores transaction is subject to bankruptcy court approval,
among other things. If the Gores transaction is completed, the Company expects
all of the cash received upon closing of the sale will be used to pay the senior
secured lenders and administrative claims in bankruptcy, leaving 25% of the
common stock of the newly-formed subsidiary available for claims of unsecured
creditors of the Company in bankruptcy. The Company does not expect any
distribution to be made to holders of its equity securities.
12
<PAGE>
As a result of the proposed Gores transaction, the Company has established a
full valuation allowance for its net deferred tax asset, written off certain
other tax-related assets that it no longer expects to recover, and written down
assets held for sale. The write-down of assets held for sale of $32.0 million
at April 30, 2000 consists of the write-off of cost in excess of net assets
acquired of $7.3 million and a write-down of capitalized software costs of $24.7
million.
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, 2000
to the Three Months Ended April 30, 1999
----------------------------------------
Total revenues decreased 39.9% to $52.1 million during the second quarter of
2000 versus total revenues of $86.7 million recorded during the second quarter
of 1999. License fees were $23.5 million during the second quarter of 2000, a
17.0% decline when compared to the second quarter of 1999. The sequential
decrease in license fee revenues was due to a $4.6 million decline in hardware
revenue. When compared to the first quarter of 2000, license fees increased
19%. Client services revenues for the quarter were $28.6 million, a decrease of
51.0% when compared to the same prior year period. The lower volume of
available service work in the second quarter of 2000 is directly related to low
software license revenues recorded in 1999.
Cost of license fees as a percentage of related revenues was 28.5% for the
second quarter of 2000, down from 45.9% for the corresponding prior year period.
The decrease is primarily due to the decline in lower margin hardware revenues,
and lower affiliate commissions.
Cost of client services and other as a percentage of related revenues was 61.5%
and 57.4% for the second quarter of 2000 and 1999, respectively. The increase
resulted from lower productivity levels experienced as revenues declined. The
Company has initiated actions to improve future productivity levels.
Sales and marketing expenses decreased $5.3 million in the second quarter of
2000 to $11.5 million from $16.8 million in the second quarter of 1999. The
decrease in the current quarter was primarily due to the benefits realized as a
result of 1999 restructuring activities and a decrease in marketing
expenditures.
13
<PAGE>
Gross research and development (R&D) expenditures in the second quarter of 2000
decreased $4.8 million or 34.0% when compared to the second quarter of 1999.
The reduction is due, primarily, to reduced development activities related to
BPCS Client/Server Version 6.0 and the Company's efforts to control expenses.
The Company capitalizes software development costs once technological
feasibility is established, in accordance with Statement of Financial Accounting
Standard (SFAS) No. 86. The Company begins capitalization of software
development costs subsequent to a working model being developed. The Company
capitalized $1.0 million of software development costs in the second quarter of
2000 compared to $1.4 million in the second quarter of 1999. The capitalization
ratio (capitalized software as a percentage of gross R&D) in the second quarters
of 2000 and 1999 was 11% and 10%, respectively.
The following table sets forth R&D expenditures and related capitalized amounts
for the periods indicated.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Three Months Ended Percentage
April 30, Change
2000 1999 2000 vs 1999
---------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Gross R&D expenditures $ 9.3 $ 14.1 (34%)
Less amount capitalized (1.0) (1.4) (29%)
---------------------------------------------------------------------------------------------------
Net R&D expenses $ 8.3 $ 12.7 (35%)
===================================================================================================
</TABLE>
General and administrative expenses were $14.3 million and $19.3 million in the
second quarter of 2000 and 1999, respectively. The $5.0 million decline
resulted from the positive impact of the third quarter 1999 restructuring
initiatives and the Company's efforts to reduce overhead expenses.
Operating loss in the second quarter of 2000 was $6.3 million compared to an
operating loss of $8.6 million recorded in the corresponding quarter of the
previous year. The decline in total revenues of $34.6 million was offset by a
$36.9 million reduction in costs and expenses, including a $14.7 million
reduction in sales and marketing, research and development and general and
administrative expenses.
Non-operating expenses, which primarily represents interest expense and
amortization of financing fees, were $6.3 million and $3.0 million in the second
quarter of 2000 and 1999, respectively. The increase is primarily due to
interest expense and amortization of financing fees related to borrowings under
a loan and security agreement entered into in August 1999. The non-operating
provision for write down of assets held for sale of $32.0 million consists of
the write-down of cost in excess of net assets and capitalized software costs
(see Note 6 of Notes to the Condensed Consolidated Financial Statements).
14
<PAGE>
The Company did not record a tax benefit for the second quarter 2000 loss. The
$32.4 million reflects a full valuation allowance of the net deferred tax asset
and the write-off of certain other tax-related assets (see Note 6 of Notes to
the Condensed Consolidated Financial Statements). The tax benefit rate was
approximately 36% in the second quarter of 1999.
Comparison of the Six Months Ended April 30, 2000
to the Six Months Ended April 30, 1999
--------------------------------------
The principle variations for the six months ended April 30, 2000, when
supplemented with the following comments, are relatively consistent with the
discussion of the second quarter results.
Total revenues decreased 40.9% to $104.2 million for the first six months of
2000 over total revenues of $176.4 million recorded during the first six months
of 1999. The revenue decrease was attributable to a decline in license fees
revenues of 27.9%, a decrease in client services revenues of 47.6% when compared
to the prior year.
Cost of license fees as a percentage of related revenues decreased to 32.2% in
2000 as compared to 43.6% for the first six months of 1999.
Cost of client services and other as a percentage of related revenues was 64.1%
and 58.9% for the first six months of 2000 and 1999, respectively.
The following table sets forth R&D expenditures and related capitalized amounts
for the first six months of 2000 and 1999.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Percentage
Six Months Ended Change
April 30, 2000 April 30, 1999 2000 vs. 1999
---------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Gross R&D expenditures $ 18.3 $ 28.2 (35%)
Less amount capitalized (2.0) (2.8) (29%)
---------------------------------------------------------------------------------------------------
Net R&D expenses $ 16.3 $ 25.4 (36%)
===================================================================================================
</TABLE>
Operating loss in the first six months of 2000 was $15.5 million compared to an
operating loss of $15.7 million recorded in the first six months of 1999. The
reason for the slight improvement was attributable to a 40.9% total revenue
decrease which was more than offset by a 37.7% decrease of total cost &
expenses.
15
<PAGE>
Non-operating expenses, which primarily represents interest expense and
amortization of financing fees, were $11.7 million and $6.6 million in the
second quarter of 2000 and 1999, respectively. The increase is primarily due to
interest expense and amortization of financing fees related to borrowings under
a loan and security agreement entered into in August 1999. The non-operating
provision for write down of assets held for sale of $32.0 million consists of
the write-down of cost in excess of net assets and capitalized software costs
(see Note 6 of Notes to the Condensed Consolidated Financial Statements).
The gain on sale of investment of $2.8 million in the first six months 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 $32.4 million reflects a full valuation allowance of the net deferred tax
asset and the write-off of certain other tax-related assets (see Note 6 of Notes
to the Condensed Consolidated Financial Statements).
Liquidity and Capital Resources
Cash and equivalents at April 30, 2000 totaled $10.4 million, a decrease of
$14.2 million when compared to October 31, 1999 cash and equivalents of $24.6
million. The decrease was primarily due to operating losses, partially offset
by borrowings under an amended loan and security agreement with Foothill Capital
which provided additional funds of $5.0 million (see Note 3 in Notes to
Consolidated Financial Statements).
Operating cash flows. During the six months ended, April 30, 2000, the Company
used $16.9 million for operating activities. The decrease in cash was due to
the net loss adjusted for non-cash charges of $22.4 million, an increase in
accrued commissions and royalties of $.4 million, a decrease in accounts payable
and other accrued liabilities of $1.4 million and a decrease in accrued
compensation and related benefits of $5.2 million offset by a decrease in
accounts receivable of $12.3 million.
Investing cash flows. Investing activities decreased cash by $1.9 million in
the first six months of 2000 due to the capitalization of software development
costs.
Financing cash flows. Financing activities generated cash of $4.9 million in
the first six months of 2000. The cash increase was primarily due to net
proceeds of $5.0 million borrowed under an amended loan and security agreement
with Foothill Capital.
Outlook
The Company's primary cash needs consist of operating expenses, interest expense
on the $31.6 million principal amount of its term loans due November 1, 2000 and
interest expense
16
<PAGE>
on the $137.5 million principal amount of its 7% Convertible Subordinated Notes
due September 15, 2002.
As of March 10, 2000 (being the end of the quarter's sixth week), cash and cash
equivalents totaled $11.0 million, a decrease of $12.4 million when compared to
January 31, 2000. Cash usage was primarily the result of normal intra-quarter
cash flow patterns. In addition, the Company's cash position was negatively
impacted by lower than anticipated first quarter revenues resulting in
receivables being lower than anticipated at January 31, 2000.
The Company's loan and security agreement provides for a revolving line of
credit, with borrowing availability based on eligible accounts receivable
balances. The reporting issues referred to in the Company's Annual Report on
Form 10K for the fiscal year ended October 31, 1999 have been resolved.
Currently, availability under the Company's revolving line of credit is
approximately $4.0 million. However, since available borrowings are based on
eligible accounts receivable balances reported to the Company's lender on a
weekly basis, there can be no assurance that there will continue to be
availability under the revolving line of credit.
In order to preserve liquidity, the Company has elected not to make the
scheduled March 15, 2000 interest payment of $4.83 million on its Subordinated
Notes while it continues to explore strategic alternatives. The Subordinated
Notes provide for a grace period of 30 days in which to make payment. There can
be no assurance, however, that the Company will make the interest payment during
the grace period.
The Company's loan and security agreement requires the Company to obtain, by
March 31, 2000 a letter of intent with respect to a strategic transaction that
is acceptable to its senior lenders, failing which the senior lenders have the
right to accelerate the $31.6 million of term loans currently outstanding.
The Company and its financial advisors, Houlihan Lokey Howard & Zukin, are
actively negotiating with a number of parties, including significant holders of
the Subordinated Notes, regarding a potential strategic transaction to address
the Company's capital requirements. All alternatives, including a possible sale
of assets, debt restructuring, recapitalization and voluntary bankruptcy filing,
are being considered. There can be no assurance, however, that the Company will
be able to deliver an acceptable letter of intent to its senior lenders by March
31, 2000 or that any strategic transaction or debt restructuring will be
completed.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk during the six
month period ended April 30, 2000. For additional information refer to Item 7A
in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999.
17
<PAGE>
Part II - Other Information
Item 1. Legal Proceeding
In January 1997, class action lawsuits against the Company and certain of its
officers were filed in state court in Illinois and in the federal court in
Chicago, Illinois. The Company executed a settlement agreement with the class
plaintiffs in the Illinois state court action. The presiding judge in the
Illinois case approved the settlement on September 30, 1997. Certain individual
objectors to the settlement appealed the fairness of the settlement. On June 18,
1999, the Illinois Appellate Court affirmed the settlement of the state court
class action. Plaintiffs did not seek leave to appeal to the Illinois Supreme
Court. Accordingly, the state court action has concluded.
The Company filed a motion to dismiss in the federal action, arguing that the
claims in federal court had already been settled in state court and were barred
by the doctrine of res judicata. On March 8, 2000, the federal court ruled that
the claims of a significant portion of the class plaintiffs were barred by the
doctrine of res judicata, but that the claims of the remaining portion of the
class plaintiffs were not barred. The Company continues to defend itself
against the claims of the remaining class plaintiffs.
Item 2. Changes in Securities
(a) N/A
(b) N/A
(c) 309 shares of Series A Preferred Stock were issued on March 14,
2000 in lieu of a $309,000 cash dividend payable on February 29,
2000. The issuance of these shares was exempt from registration
under Section 4 (2) of the Securities Act because the securities
were offered only to H&Q SSA Investors, L.P. Each share of Series
A Preferred Stock is convertible into 20.1 shares of the
Company's Common Stock.
(d) N/A
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) No exhibits are required to be filed with this report.
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<PAGE>
(b) The Company filed a report on Form 8-K on April 3, 2000,
containing the following items as exhibits: Third Amendment dated
as of March 31, 2000, to the Loan and Security Agreement dated as
of August 11, 1999 by and among System Software Associates, SSA-
Acclaim Limited, SSA Softwright Limited, SSA Canada Corporation
and Foothill Capital Corporation, as amended by the First
Amendment dated as of December 22, 1999 and the Second Amendment
dated as of January 28, 2000.
The Company filed a report on Form 8-K on April 10, 2000,
containing the following items as exhibits: Press Release of the
Registrant dated April 7, 2000; Letter of Intent between the
Registrant and Gores Technology Group dated April 6, 2000.
19
<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 14, 2000
--------------
System Software Associates, Inc.
/s/ Robert R. Carpenter
---------------------------------
Robert R. Carpenter
Chief Executive Officer and
President
/s/ Joseph J. Skadra
-----------------------------
Joseph J. Skadra
VP Finance and Controller
20
