-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gvk5bYI10SjIEqUfJKH2NGQ3q35KtD7VnEpatQKTjGOoErhXwv1EnG8mSznksc+P O6KrTxzSAdvohBR7LbdaSQ== 0000950131-96-004556.txt : 19960917 0000950131-96-004556.hdr.sgml : 19960917 ACCESSION NUMBER: 0000950131-96-004556 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19960916 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSTEM SOFTWARE ASSOCIATES INC CENTRAL INDEX KEY: 0000808207 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 363144515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15322 FILM NUMBER: 96630914 BUSINESS ADDRESS: STREET 1: 500 W MADISON ST 32ND FLR CITY: CHICAGO STATE: IL ZIP: 60661 BUSINESS PHONE: 3126412900 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1996 ------------- 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 incorporation (IRS Employer Identification or organization 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 September 9, 1996, there were 42,568,353 and zero shares outstanding of the Company's Common ($.0033 par value) and Preferred ($.01 par value) Stock, respectively. TOTAL OF SEQUENTIALLY NUMBERED PAGES: 13 -- SYSTEM SOFTWARE ASSOCIATES, INC. INDEX
Page Part I Financial information No. Consolidated Balance Sheets - 3-4 July 31, 1996 and October 31, 1995 Consolidated Statements of Income - 5 three and nine months ended July 31, 1996 and 1995 Consolidated Statements of Cash Flows - 6 nine months ended July 31, 1996 and 1995 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of 8-11 Financial Condition and Results of Operations Part II Other information 12 Signature Page 13
2 Part I - Financial Information Item 1 - Financial Statements SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS ASSETS (in millions)
July 31, October 31, 1996 1995 ----------- ----------- (unaudited) CURRENT ASSETS: Cash and equivalents $ 19.2 $ 57.1 Accounts receivable, less allowance for doubtful accounts of $12.7 and $12.5 235.4 199.7 Deferred income taxes 7.7 7.0 Prepaid expenses and other current assets 28.2 21.3 ----------- ----------- Total current assets 290.5 285.1 ----------- ----------- PROPERTY and EQUIPMENT: Data processing equipment 35.3 30.9 Furniture and office equipment 18.4 14.1 Leasehold improvements 8.6 7.8 Transportation equipment 2.3 2.8 ----------- ----------- 64.6 55.6 Less - Accumulated depreciation and amortization 37.0 31.3 ----------- ----------- Total property and equipment 27.6 24.3 ----------- ----------- OTHER ASSETS: Software costs, less accumulated amortization of $56.0 and $41.1 75.2 59.0 Cost in excess of net assets of acquired businesses, less accumulated amortization of $7.7 and $6.0 23.6 18.2 Investments in associated companies 15.0 16.5 Miscellaneous 9.7 8.1 ----------- ----------- Total other assets 123.5 101.8 ----------- ----------- TOTAL ASSETS $441.6 $411.2 =========== ===========
The accompanying notes are an integral part of these financial statements. 3 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (in millions, except share data)
July 31, October 31, 1996 1995 ------------ ----------- (unaudited) CURRENT LIABILITIES: Short term borrowings and current maturities of senior notes payable $ 50.4 $ 4.0 Accrued commissions and royalties 55.6 36.6 Accounts payable and other accrued liabilities 49.2 46.9 Accrued compensation and related benefits 19.6 24.4 Deferred revenue 49.8 51.0 Income taxes payable 4.6 19.9 ------ ------ Total current liabilities 229.2 182.8 ------ ------ LONG-TERM OBLIGATIONS 27.9 33.9 ------ ------ DEFERRED REVENUE 31.1 27.3 ------ ------ DEFERRED INCOME TAXES 9.9 9.9 ------ ------ MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES -- 1.0 ------ ------ STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 100,000 shares authorized, none issued or outstanding - - Common stock, $.0033 par value, 60,000,000 shares authorized, 42,565,053 and 42,094,500 shares issued 0.1 0.1 Capital in excess of par value 31.5 26.1 Retained earnings 108.3 128.4 Unrealized gain on available-for-sale securities 5.2 2.5 Cumulative translation adjustment (1.6) (0.8) ------ ------ Total stockholders' equity 143.5 156.3 ------ ------ TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $441.6 $411.2 ====== ======
The accompanying notes are an integral part of these financial statements. 4 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share data) (unaudited)
Three Months Ended Nine Months Ended July 31, July 31, ----------------------- --------------------- 1996 1995 1996 1995 ----------- ---------- ---------- ---------- Revenues: License fees $ 48.2 $ 72.3 $ 179.0 $ 173.4 Client services and other 27.1 32.7 86.2 93.3 ----------- ---------- ---------- ---------- Total revenues 75.3 105.0 265.2 266.7 ----------- ---------- ---------- ---------- Costs and Expenses: Cost of license fees 19.2 21.0 59.2 51.9 Cost of client services and other 23.4 21.3 64.8 56.3 Sales and marketing 26.1 20.7 71.9 58.8 Research and development 14.9 10.0 38.2 29.0 General and administrative 24.0 14.6 57.7 43.9 ----------- ---------- ---------- ---------- Total costs and expenses 107.6 87.6 291.8 239.9 ----------- ---------- ---------- ---------- Operating income (loss) (32.3) 17.4 (26.6) 26.8 Gain on sale of available-for-sale securities 3.6 - 3.6 - Other non-operating income (expense), net (1.2) (0.1) (2.0) (0.1) ----------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest (29.9) 17.3 (25.0) 26.7 Provision (benefit) for income taxes (10.8) 6.1 (9.1) 9.4 ----------- ---------- ---------- ---------- Income (loss) before minority interest (19.1) 11.2 (15.9) 17.3 Minority interest - - - (0.1) ----------- ---------- ---------- ---------- Net income (loss) $ (19.1) $ 11.2 $ (15.9) $ 17.2 ========== ========= ========= ========= Earnings (loss) per share $ (0.44) $ 0.27 $ (0.37) $ 0.42 ========== ========= ========= ========= Dividends per share $ - $ - $ 0.10 $ 0.08 ========== ========= ========= ========= Weighted average common and equivalent shares outstanding 43.0 42.0 43.1 41.7 ========== ========= ========= =========
The accompanying notes are an integral part of these financial statements. 5 SYSTEM SOFTWARE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions, unaudited)
Nine Months Ended July 31, ------------------------------------- 1996 1995 --------- ---------- Cash Flows From Operating Activities: Net income (loss) $(15.9) $17.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 6.5 5.9 Amortization of other assets 16.8 12.0 Provision for doubtful accounts 3.5 1.0 Gain on sale of available-for-sale securities (3.6) - Deferred income taxes (0.3) (2.6) Deferred revenue 3.0 (7.5) Minority interest - 0.1 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (38.8) (0.4) Prepaid expenses and other current assets (4.8) (3.7) Miscellaneous assets 1.5 (7.4) Accrued commissions and royalties 8.9 3.2 Accounts payable and other accrued liabilities (0.4) (3.8) Accrued compensation and related benefits (5.1) (6.5) Income taxes payable (16.7) 7.5 --------- ---------- Net cash provided by (used in) operating activities (45.4) 15.0 --------- ---------- Cash Flows From Investing Activities: Purchases of property and equipment (8.5) (3.0) Software costs (31.1) (17.9) Investments and acquisitions, net of cash acquired (4.5) (3.8) Proceeds from sale of available-for-sale securities 9.0 - Proceeds from sales of assets - 1.7 --------- ---------- Net cash flows used in investing activities (35.1) (23.0) --------- ---------- Cash Flows From Financing Activities: Principal payments under financing obligations (1.5) (3.1) Amount borrowed under line of credit 48.4 - Repayment of amount borrowed under line of credit (2.0) - Proceeds from exercise of stock options 2.0 3.3 Dividends paid (4.2) (3.2) --------- ---------- Net cash provided by (used in) financing activities 42.7 (3.0) --------- ---------- Effect of exchange rate changes on cash (0.1) (0.7) --------- ---------- Net decrease in cash and equivalents (37.9) (11.7) Cash and equivalents: Beginning of year 57.1 60.2 --------- ---------- End of period $ 19.2 $48.5 ========= ==========
The accompanying notes are an integral part of these financial statements. 6 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 for the fiscal year ended October 31, 1995, 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, 1995. Note 2 -- Borrowing Arrangements Based on the financial results for the current quarter, the Company was in technical default of certain financial covenants contained in its $50.0 million bank line of credit agreement (the Bank Line) and its $30.0 million Senior Notes (the Notes). The Company has obtained waivers of the technical default, and in connection therewith has amended certain terms and conditions of both the Bank Line and the Notes. The banks and the note holders have also agreed to use their best efforts to negotiate with the Company with a view towards revising the Company's financial covenants in the respective agreements in light of the Company's recent results of operations and to negotiate a definitive inter-creditor agreement. Pursuant to the agreements as amended, borrowings under the Bank Line will bear interest at the banks' reference rate (prime) plus 1%, and the Senior Notes will bear interest at rates ranging from 7.32% to 8.19%. In addition, the Company will grant the banks and the note holders a collateral security interest in all of its assets located in the United States, and will also pledge 100% of the stock of its domestic subsidiaries and 65% of the stock of its foreign subsidiaries. 7 Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. RESULTS OF OPERATIONS Comparison of the Three Months Ended July 31, 1996 to the Three Months Ended July 31, 1995 --------------------------------------- Total revenues recorded during the third quarter of 1996 decreased 28% to $75.3 million from third quarter 1995 total revenues of $105.0 million. Revenue increased in North America while declines were reported in the Company's other geographic regions. License fees declined 33% to $48.2 million from the prior year quarter due to the postponement of clients' decisions on licensing software in order to more fully evaluate the Company's software. The Company has entered into partnerships with major computer manufacturers and other system integrators as an important indirect source of software distribution, primarily in developing economies of the world where a totally integrated client/server solution is required. These partners are granted a non-exclusive right to sub- license a fixed amount of SSA software to end users in a designated territory in return for a fixed fee. Revenue generated in the third quarter of 1996 from these arrangements were lower than in the same quarter last year both in dollar volume and as a percentage of total license fee revenues. Client Services revenues in the most recent quarter declined 17% when compared to the same quarter in 1995 primarily due to decreased productivity caused in part by allocation of resources to perform warranty work and continuing training of Client Services professionals. Cost of license fees as a percentage of related revenues was 40% in the third quarter of 1996, up from 29% for the corresponding prior year period. The increase is primarily attributable to $1.4 million increased amortization expense of capitalized software development costs, $1.3 million increased warranty expense as well as increased software royalties on revenues related to Unix database products. Cost of client services as a percentage of related revenues was 86% for the third quarter of 1996 compared to 65 % during the corresponding prior year period. Lower productivity related to newly hired technical professionals around the world, in particular those with open systems and object skills, allocation of resources to perform warranty work and investments in training resulted in an increase in cost of client services as a percentage of related revenues. Sales and marketing as a percentage of license fee revenues was 54% and 29% in the third quarters of 1996 and 1995, respectively, primarily due to decreased revenues as described above and increased expenditures to develop vertical industry groups in support of its continuing move into the Unix open systems client/server market. 8 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Gross (total) research and development (R&D) expenditures in the third quarter of 1996 increased $11.6 million or 76% over the third quarter of 1995. The increase is due to the Company's continuing development of its distributed object computing technology and enhancements of its existing products. 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 $12.0 million of software development costs in the third quarter of 1996 as compared to $5.3 million in the third quarter of 1995. The capitalization ratio (capitalized software as a percentage of gross R&D) in the third quarters of 1996 and 1995 was 45% and 35%, respectively. The increase was due in part to construction and testing activities related to the Company's distributed object computing architecture. The following table sets forth R&D expenditures and related capitalized amounts for the periods indicated.
- -------------------------------------------------------------------------------- (in millions) Percentage Quarter Ended July 31, Change - -------------------------------------------------------------------------------- 1996 vs. 1996 1995 1995 - -------------------------------------------------------------------------------- Gross R&D expenditures $ 26.9 $15.3 76% Less amount capitalized (12.0) (5.3) 126% - -------------------------------------------------------------------------------- Net R&D costs $ 14.9 $10.0 49% - --------------------------------------------------------------------------------
General and administrative expenses of $24.0 million increased $9.4 million over the prior year primarily due to new facilities to support the Company's worldwide expansion, increased computer equipment rent, and $4.1 million of combined additional provision for doubtful accounts and write-off of bad debts dating back to 1994 and prior periods. 9 The gain on sale of available-for-sale securities of $3.6 million in the current quarter resulted from the sale of a portion of the Company's stock holdings of Harbinger Corporation. Other nonoperating expense increased $1.1 million in the current quarter as compared to the prior year quarter primarily due to borrowings under the Company's bank line of credit. The tax benefit on the pretax loss resulted in an effective rate of 36%, representing the estimated annual rate on the total year's results. Comparison of the Nine Months Ended July 31, 1996 to the Nine Months Ended July 31, 1995 -------------------------------------- The principal variations for the nine months ended July 31, 1996, when supplemented with the following comments, are relatively consistent with the discussion of the third quarter results. Total revenues of $265.2 million for the first nine months of 1996 declined $1.5 million from the first nine months of 1995. License fees increased 3% as the growth in the first two quarters was partially offset by the third quarter decline. Indirect channel licence fee revenues (consisting of affiliate and system integration partner revenues) were up 39% during the first nine months of 1996 when compared to the same period last year due primarily to the first systems integrator distribution agreement being recorded in the Company's third quarter of 1995. Client services revenues declined 8%. Cost of license fees as a percentage of related revenues increased for the first nine months of the year to 33% from 30% in the prior year. Increased commissions resulting from a higher mix of indirect sales channel revenues and $3.0 million increased warranty expenses were offset by decreased third party software royalties due to the Company's acquisition of certain of these software products. 10 The following table sets forth R & D expenditures and related capitalized amounts for the first nine months of 1996 and 1995.
- -------------------------------------------------------------------------------- (in millions) Percentage Nine Months Ended July 31, Change - -------------------------------------------------------------------------------- 1996 vs. 1996 1995 1995 - -------------------------------------------------------------------------------- Gross R&D expenditures $67.0 $44.6 50% Less amount capitalized (28.8) (15.6) 85% - -------------------------------------------------------------------------------- Net R&D costs $38.2 $29.0 32% - --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES At July 31, 1996, cash and equivalents totaled $19.2 million. During the first nine months of the current year, cash and equivalents declined $37.9 million and borrowing under the Company's bank line of credit increased by $46.4 million due to continued investment in product development, pay down of prior year-end accruals which reflect the relatively high level of activity in the Company's fourth quarter, payment of the Company's annual dividend which increased 25% over the prior year ($.10 per share versus $.08 in the prior year), tax payments related to the Company's record profitability in fiscal 1995, acquisitions of products and affiliates and increased operating expenses in support of the Company's strategic move into the Unix open systems client/server market. In addition, the Company experienced an increase of 34 Days Sales Outstanding (DSO) in accounts receivable from 196 at October 31, 1995 to 230 at July 31, 1996 primarily due to the increasingly competitive environment for ERP software which have caused payment terms to be extended beyond those experienced by the Company in the past, slowness in collections in the Company's third quarter, and a decrease in the mix of client services receivables which have shorter terms. However, in the first month of its fourth quarter 1996 collections were $30.0 million and exceeded the same month in 1995 by over 50% setting a record for August, traditionally a slow collections month. At July 31, 1996, $46.4 million was borrowed and $1.2 million was utilized to collateralize outstanding letters of credit under the Company's $50.0 multi-bank line of credit. At October 31, 1995, there were no amounts outstanding. Based on the financial results for the current quarter, the Company was in technical default of certain financial covenants contained in its $50.0 million bank line of credit agreement (the Bank Line) and its $30.0 million Senior Notes (the Notes). The Company has obtained waivers of the technical default, and in connection therewith has amended certain terms and conditions of both the Bank Line and the Notes. The banks and the note holders have also agreed to use their best efforts to negotiate with the Company with a view towards revising the Company's financial covenants in the respective agreements in light of the Company's recent results of operations and to negotiate a definitive inter-creditor agreement. Pursuant to the agreements as amended, borrowings under the Bank Line will bear interest at the banks' reference rate (prime) plus 1%, and the Senior Notes will bear interest at rates ranging from 7.32% to 8.19%. In addition, the Company will grant the banks and the note holders a collateral security interest in all of its assets located in the United States, and will also pledge 100% of the stock of its domestic subsidiaries and 65% of the stock of its foreign subsidiaries. Assuming the successful negotiations of new financial covenants with the Company's lenders, management anticipates that cash generated from operations combined with current working capital will provide sufficient liquidity to meet ordinary capital requirements for the foreseeable future. The Company is presently exploring the possibility of a public or private sale of equity securities to reduce debt and fund an accelerated growth strategy for the Company's new version of its client/server software product. 11 Part II - Other Information Item 1. Legal Proceedings The Company is not currently subject to any material pending legal proceedings. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities See Note 2 to Notes to Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8K None 12 Signature Page Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date September 16, 1996 ------------------ 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 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS OCT-31-1996 MAY-31-1996 JUL-31-1996 19,200,000 0 248,100,000 12,700,000 0 290,500,000 64,600,000 37,000,000 441,600,000 229,200,000 0 100,000 0 0 143,400,000 441,600,000 265,200,000 265,200,000 124,000,000 291,800,000 (1,600,000) 0 0 (25,000,000) (9,100,000) (15,900,000) 0 0 0 (15,900,000) (0.37) (0.37)
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